FINANCE AND ADMINISTRATIVE COMMITTEE

 

 

 

 

 

TO:

Mayor and Members of Council

 

 

 

 

FROM:

Andy Taylor, Commissioner of Corporate Services

 

 

 

 

PREPARED BY:

Mark Visser, Manager of Strategy, Innovation & Investments, Corporate Services

 

 

 

 

DATE OF MEETING:

2004-Aug-30

 

 

 

 

SUBJECT:

2004 Second Quarter Investment Performance Review

 

 

 

 

 

 

RECOMMENDATION:

 

THAT the report dated August 30, 2004 entitled “2004 Second Quarter Investment Performance Review” be received.

 

PURPOSE:

 

Pursuant to Regulation 74/97 Section 8, the Municipal Act requires the Treasurer to “prepare and provide to the Council, each year or more frequently as specified by Council, an investment report”.

 

The investment report shall contain,

 

(a) a statement about the performance of the portfolio of investments of the municipality during the period covered by the report;

 

(b) a description of the estimated portion of the total investments of a municipality that are invested in its own long-term and short-term securities to the total investment of the municipality and a description of the change, if any, in that estimated proportion since the previous year’s report;

 

(c) a statement by the Treasurer as to whether or not, in her opinion, all investments were made in accordance with the investment policies and goals adopted by the municipality;

 

 (d) a record of the date of each transaction in or disposal of its own securities, including a statement of the purchase and sale price of each security;

 

(e) such other information that the Council may require or that, in the opinion of the Treasurer, should be included.

 

BACKGROUND:

 

For the six months ending June 30, 2004, the Town of Markham’s Income Earned on Investments was $3.58 million, compared to a budget of $3.30 million, representing a $278,000 favourable variance. 

 

The 2004 budget assumes an average general fund portfolio balance of $180 million to be invested at an average rate of return of 3.70%. The actual average portfolio balance was above budgeted levels, while the rate of return was on target.  The details of these two factors will be discussed below.

 

Interest Rate

 

At the beginning of 2004, the Canadian Bank Rate was 3.00%.  By mid-April, it had dropped to 2.25% and remained at that level for the rest of the first half of the year.  During the first half of 2004, the Town’s investments had an average interest rate of 3.55%, 15 basis points lower than budget.  However, through active bond trading, the Town realized $157,000 of Capital Gains in the half, thereby increasing the actual rate of return to 3.71%; virtually right on line with the 3.70% budgeted rate.  The difference in the rate of return accounts for just $18,000 of the $278,000 favourable variance. 

 

Portfolio Balance

 

The budgeted average portfolio balance for 2004 is $180 million (an increase of $30 million over the 2003 budgeted levels).  The actual average general fund portfolio balance for the first half of 2004 was $194.7 million, resulting in an additional $14.7 million that was available for investment purposes throughout the first quarter.  The higher portfolio balance accounts for $260,000 of the $278,000 favourable variance

 

Portfolio Composition

 

All investments made in the first half of 2004 adhered to the Town of Markham investment policy.  At June 30, 2004, 41% of the Town’s portfolio was comprised of government issued securities.  The remaining 59% of the portfolio was made up of instruments issued by Banks, with Schedule A Banks and Schedule B Banks representing 50% and 9% of the portfolio, respectively.   All of these levels are within the targets established in the Town’s Investment Policy (Exhibit 1).

 

The June 30, 2004 investment portfolio was comprised of the following instruments:  Banker’s Acceptances 48%, Bonds 47%, and Banker’s Deposit Notes 5% (Exhibit 2).

 

 

 

At June 30, 2004, the Town’s portfolio balance for all funds was $284.6 million.  DCA investments represented $81.1 million of this amount.  The Town’s portfolio (all funds excluding DCA) of $203.5 million was broken down into the following investment terms (Exhibit 3):

 

Under 1 month                                                 17.6%

1 month to 3 months                                                     21.3%

3 months to 1 year                                                        17.3%

Over 1 year                                                                  43.8%

 

            Weighted average investment term                                996.7 days

Weighted average days to maturity                                691.6 days

 

Money Market Performance

 

The Town of Markham uses the 3-month T-bill rates to gauge the performance of investments in the money market.  The average 3-month T-bill rate for the first half of 2004 was 2.13% (source: Bank of Canada).   Non-DCA Fund money market investments held by the Town of Markham during the first half of 2002 had an average return of 2.30%.  Therefore, the Town’s money market investments outperformed 3-month T-Bills by 17 basis points.  See Exhibit 4 for all Money Market securities held by the Town of Markham in the first half of 2004.

 

Bond Market Performance

 

2004 marks the third year of the bond trading strategy.  The 2004 YTD highlights of the program are as follows:

 

  • 20 bonds were purchased with a face value of $46.6 million
  • 6 bonds were sold with a combined face value of $14.5 million
  • $157,000 of Capital Gains were realized

 

The strategy for 2004 has been to increase the Town’s bond holdings.  During the first half of 2004, bond yields increased while money market return decreased.  As a result, the strategy for 2004 has been to increase bond holdings to take advantage of the significant rate differential.  Since the end of 2003, the weighted average investment length has increased from 732 days to 997 days.

 

As bond prices have not been as volatile as they were last year, there have been fewer opportunities to earn capital gains.  As a result, the $157,000 in gains is off the pace of what was achieved in the previous two years.  

 

 

FINANCIAL CONSIDERATIONS:

 

In the first half of 2004, the Bank Rate dropped from 3.00% to 2.25%.  It is expected that rates will slowly increase in the second half of 2004.  It is forecasted that the 2004 average return on investments during the remaining two quarters will be similar to what was realized in the first half of the year.  The forecasted year-end variance is expected to be approximately $600,000 and will be a result of the positive portfolio balance variance and more active bond trading in the second half.  The forecast will be reviewed and updated at the end of the 3rd quarter. 

 

 

 

ATTACHMENTS:

 

Exhibit 1 – Investment Portfolio by Issuer

Exhibit 2 – Investment Portfolio by Instrument

Exhibit 3 – Investment Terms

Exhibit 4 – 2004 Q2 Money Market Investments

Exhibit 5 – 2004 Q2 Bond Market Investments

 

 

 

 

 

 

 

 

Barb Cribbett,

Treasurer

 

Andy Taylor,

Commissioner of Corporate Services

 

 

 

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