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TO: |
Mayor and Members of Council |
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FROM: |
Andy Taylor,
Commissioner of Corporate Services |
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PREPARED BY: |
Mark Visser,
Manager of Strategy, Innovation & Investments, Corporate Services |
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DATE OF MEETING: |
February 16, 2004 |
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SUBJECT: |
2003 Investment
Performance Review |
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RECOMMENDATION:
THAT the report dated
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 year ending
The 2003 budget assumed an average general fund portfolio balance of $150 million to be invested at an average rate of return of 3.80%. A higher than anticipated average portfolio balance contributed to $1.04 million of the variance, while a higher realized rate return accounted for the remaining $0.84 million. The details of these two factors will be discussed below.
At the beginning of 2003, the Bank Rate
was 3.00%. It rose to a high of 3.50 in
July before dropping back down to 3.00% in September, where it remained for the
remainder of the year. During 2003, the Town’s investments had an
average interest rate of 3.92%; 12 basis points higher than budget. Additionally, through active bond trading,
the Town realized $621,000 of Capital Gains, thereby increasing the actual rate
of return to 4.27%; 47 basis points higher than budgeted. The higher rates of return/capital gains
account for a favourable variance of $0.84 million.
The budgeted
portfolio balance for 2003 was $150 million (an increase of $15 million over
2002 budgeted levels). The actual
average general fund portfolio balance in 2003 was $177.3 million, resulting in
an additional average of $27.3 million that was available for investment
purposes throughout the year. The higher
portfolio balance accounts for a favourable variance of $1.04 million.
Portfolio Composition
All
investments made in the year 2003 adhered to the Town of
The year-end general investment portfolio was comprised of the following instruments: Banker’s Acceptances 42%, Bonds 40%, T-Bills 6%, and Banker’s Deposit Notes 12% (Exhibit 2).
The
Town’s year-end portfolio (all funds excluding DCA) of $184.5 million was
broken down into the following investment terms (Exhibit 3):
1 month to 3 months 20.5%
3 months to 1 year 16.7%
Over 1 year 37.0%
Weighted average days to maturity 447.4 days
Money Market Performance
The Town of
2003 marked the second year of an aggressive bond trading
strategy. The 2003 highlights of the
program are as follows:
At
The strategy for 2003 was to increase the Town’s bond holdings. The Town was able to take advantage of the brief rise in interest rates over the summer months by focusing on increasing the average duration of the portfolio during this period. The year-end weighted average investment length increased from 637 days in 2002 to 732 days in 2003.
Since the fluctuations in
the bond market were not as dramatic as in 2003, the bond trading strategy for
the year focused on higher denomination trades with longer-term bonds. As a result, the Town realized $621,000 in
capital gains (a $20,000 increase from 2002) with only 16 trades (19 less than
were carried out in 2002).
FINANCIAL CONSIDERATIONS:
At the beginning of 2003, the Bank Rate was 3.00%. In March and April, the Bank of Canada raised rates by 25 basis points in two consecutive meetings to raise the Bank Rate to 3.50%. Within a short time thereafter, the Bank of Canada realized their moves were premature and by September, the rate was back down to 3.00%. While these low interest rates were predicted for 2003, it was expected that there would start to be a rise in rates later in the year, thereby allowing for higher 2004 interest revenue. Unfortunately, with the strong Canadian dollar, the long-term outlook of the economy is beginning to be negatively impacted. As a result, the Bank of Canada has already cut rates by 25 more basis points in January 2004, with yet another cut looming in March.
For the year 2004, it is forecasted that the general funds portfolio balance will average $180 million (an increase of $30 million from 2003 budgeted levels). It is also forecasted that the average rate of return on investments will be 3.70% due to the desire for the Bank of Canada to lower interest rates to decrease the value of the Canadian dollar. Therefore, it is recommended that the Town budget $6.66m for 2004 Income Earned on Investments, an increase of $966,000 from the 2003 budget amount.
ATTACHMENTS:
Exhibit
1 – Investment Portfolio by Issuer
Exhibit
2 – Investment Portfolio by Instrument
Exhibit
3 – Investment Terms
Exhibit
4 – 2003 Money Market Investments
Exhibit
5 – 2003 Bond Market Investments
Exhibit
6 – 2003 Bond Market Investments
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Barb Cribbett, Treasurer |
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Andy Taylor, Commissioner, Corporate Services |
Q:\Finance and Administration\Finance\SHARED\2004FinAdminCtteeReports\2003 Year End Investment Report.doc
