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Home My WebLink About4D Money Manager for Invest AGENDA #: PREPARED BY: SUBJECT: DATE: INTRODUCTION: DISCUSSION: ALTERNATIVES: STAFF AGENDA REPORT 4D ~~\; FRANK BOYLES, CITY MANAGER -1 "I ' CONSIDER UTILIZATION OF MO. . MANAGER TO ENHANCE THE CITY'S INVESTMENT PORTFOLIO RETURN. JUNE 3,1996 At the Council's special May 29th meeting it deferred consideration of a staff report proposing utilization of a money manager to enhance the City's investment portfolio return pending receipt and review of additional information. That information was provided to the three councilmembers present at the May 29th meeting, and for councilmembers who were not present, is included together with this agenda packet. The City Council directed that this item be placed on the Consent Agenda for the June 3rd meeting so that the Council could determine whether or not it desires to pursue one of three alternatives. I have attached for Council information a copy of Finance Director Teschner's report which was provided as part of the May 29th agenda packet. There are three alternatives: 1. Continue current investment program. 2. Authorize that the money manager be responsible for the investment of $500,000. 3. Authorize that the money manager be responsible for $1,000,000. RECOMMENDATION: Alternative #3. Steve Matson of Juran and Moody recommends that the City consider utilization of C.H. Brown on the basis of their greater than average investment return on their portfolio. The performance of C.H. Brown will be monitored and reported to the Council in the quarterly investment reports. ACTION REQUIRED: If the staff recommendation is acceptable, move and second approval of Alternate #3 as part of the Consent Agenda. Att~chment AG60603C.DOC 16200 Eagle Creek Ave. S.E., Prior Lake, Minnesota 55372-1714 / Ph. (612) 447-4230 / Fax (612) 447-4245 AN EQUAL OPPORTUNITY EMPLOYER \.i.~' -" '"' .' ~t~:.< '. ~ '. ". i~,~.,..; ~~, '- .,;~'>~., ~S':. , .,,~ - - --~,,;."..., ...... ".S.~ . . 's....... ;~:: . .~t~ ;'.~ '; . ~~.! . 11:~~.... 't, . . . J': . :.:~ .. . "'.',;", ~~;'.~ i: ~.., ~.g::Y: . ~~... .::. :~~~;-:.'.": :" '.:iIi.," . ~~"" . _;~::;,i;: ~l.-""'" " . I~;:;.~: :. ~~... , ~~";::2'~':.'; .'. '. :~'~~" ~~:~~~c;~~.--:..::. ~; ~~-;~~-.::.:.: "f_~:::- ~, ~ ~>;,:;':;'\.~.. .' -; .' . ~it.0.~: \ ;-( '. AGENDA #: PREPARED BY: SUBJECT: DATE: INTRODUCTION: . DISCUSSION: . '., STAFF AGENDA REPORT 3 RALPH TESCHNER, FINANCE DIRECTOR CONSIDER UTILIZATION OF A MONEY MANAGER TO ENHANCE THE CITY'S INVESTMENT PORTFOLIO RETURN MAY 29, 1996 The purpose for this agenda item is to request Council authorization to engage the services of C.H. Brown Company to invest city funds in the short term government market. The City of Prior Lake has a current investment portfolio exceeding 11 million dollars. As Finance Director it has been' my responsibility to invest these funds in market instruments that are permissible under Minnesota State Statutes. These securities are typically Certificates of Deposits (guaranteed by FDIC up - to, ':;,- $100,000 and 110% collaterlized by government securities for amounts above $100,000), Commercial Paper, (highest rated A-lor P-l Rated i.e. GE Capital), Treasury Bills, Government Notes 'and Short Term Government Bonds. We accomplish this by investing' with a number of local financial institutions and broker dealers including Juran & Moody, Inc. Generally we have invested principal in such securities according to the following general time periods: Money Market Funds Commercial Paper Certificates of Deposits Treasury Bills TreaSury NotesIBonds 30 days or less 270 days maximum 3 mos. - 24 mos. I year or less I yr. - 30 yrs. , ~. +, . \ \ . . ..:~..~/~~~~.) :~:' ....g;f-l~. .. ". . '.:_'. ',' ~ 'J' .,:.,~ ~. . - . ~; ,<;~~.~.;'-<<~~~' '. . .. ~ '.. .. ~. .. , .~. '..- ,.. ... "." .. ';: "--t,' :.;~'-. . .. . ."",'." ..' .: t"f.. 1 Our investment strategy has been to invest principal., over a . relatively sho'rt time period, thus ensuring that movements in ... .. interest rates will not dramatically affect the principal that was invested. On .average approximately 40% of the city's portfol.io is invested over a time period of 3 to 7 years with the remaining 60%. two years or under for cash flow purposes. .We have been ~ . conservative in this philosophy while returning yields lately in the . - 4.50% to 6.0% range. . .. . .~.:~.~~. Steve MattSon of Juran & Moody recently brought to my attention .......,..that a local. money manager (C.H. Brown & Co. of Bloomington) :.,' . .,~.:. has been rated number one in the Country in short term government '~:.' 16200 Eagle Creek Ave. S.E., Prior Lake, Minnesota 55372-1714 / Ph. (612) 447-4230 / Fax (612) 447-4245 AN EQUAL OPPORTUNITY E.~LOYER ...-." , backed securities returns over the last 1, 3 and 5 year periods. C.H. Brown's philosophy of investing is to take advantage of the movement in overall interest rates and take a total return approach to investing, instead of the traditional way of investing in governments which is to buy and hold to maturity. C.H. Brown & Co. has developed a computer model that has been very successful in predicting short term interest rate directions. They invest client's money in the 3-month T Bill when the model tells them that rates are likely to rise. When _the computer model tells that short term rates are about to go lower, they sell the T -Bills _ and invest all the client's money in a five year government bond. ;f'" f...\".y,~. '. ., ~';.~,..' ~ .;,-':.t~': .. l~;~" . r!:':-:~- ';.;-:-~, - - !.. ....,..,.-. ft~~'i-' Assuming that this philosophy is correct, they not only capture the coupon yield of the 5 year government bond, but also the principal appreciation on the government bond as interest rates trend lower. This philosophy has, as mentioned, rated C.H. Brown & Co. number one in the United States for investment returns in the short term government markets. ~:'~~:.-- ~J~;~- ":f:- ~ -!~..; ~~'4 ,,',.,.. -" 't"/. ~.;.... (;. .~ ~t:.- - C.H. Brown & Co. invests funds for other metropolitan area public entities. Currently, the cities of Blaine and Edina have placed over $1,000,000 each with C.H. Brown & Co. Other clients include the Science Museum of Minnesota at $4,400,000 and NAFCO Insurance Co. (The Carlson Companies) with approximately $7,000,000. The City of Edina also has indicated that they will . commit an additional $10,000,000 based upon the continued performance outcome of their initial investment return. ~;::-~ ~~t---_'-, .",1"-;" ~rtli,',r ~ ' , ~.;.-~ ~. " ~ I, ", #. .' ~r .'." l' ;;",' " . .... /:~:" :;!~. .~.: The cost to have C.H. Brown & Co. invest the City funds is 10 basis points per quarter, or 4/10ths of 1% per year. Over the past ~ve years (through December 31, 1995) they have returned an average annual return of 8.38% to their clients. (See attached. . - graph). The government securities are actually purchased and held - in our name at Juran & Moody. While there is a minimum purchase requirement of $1,000,000, they have indicated that they would . lower this threshold in our case to $500,000. Our: money is liquid _ so we can take our funds - back _ if desired or needed by - simply _ 'selling our T Bills or 5-year government. ji:;..~' ~: It~""" ' ~~.~. - ~L: I~..,.. - ~~>.> .~-,...:-..-. j!DC;. tl~,,:.. " .,',' ,.,"; I''::~, ..,. ;~~~~f~'~' _ . ,-1...::-" '.., "'." "" ~:',~' .... . ,;, '.,~, t; ,i$~'::;.;' . .,~~ '.~. ~~:~~..-c: ~':- ~~;.E:'-"" , ;~;:.,~. ~fi(:', . . .:. , ~ .. '. The downside risk of such a venture we believe is minimal, but must be considered and discussed. The risk to the City under C.H. , .-.::; Brown's approach to this type of investing is that C.H. Bro~'s .- :," computer analysis is wrong and we are in the S-year government . ". bond at the wrong time when interest rates go up. (Just the opposite .~ of what C.H. Brown is trying to do.) A 1% movement in the S-year - . interest rates could cause a loss of principal in the 4% to 5% range. '~ .' . We believe that history bas shown us that C.H. Brown and their computer' model should be on the correct side of any interest rate movement, but 100% accuracy is not reality. A9602.00c I ~ .' "~ . .f. ; -' !~~.c~ . :~;'.> -\'. ~1~;~- ~ ~;L... ~j -, .j~:"'. ~-".:, , ~: ~,' .:;. i,l .~ ' )fr","~ ~,,' '.. , '~F-~.:-:- .~~;~. ";f\~.'~ ',- ~f--:: t~; "~...,.: /'-" ~ '~:~::.' . :~,-- ~;..,.. 1l,1t'",... t,.....~..~ ~~.,/.., .. ir..: . :~;~..:;~...' "-' ~i-?~.~;~.-. . .~'. ;' I~,/:.:;~L.. ~;,::, ::. ~~: - ~..'~'..;':-: .'. ~:._-... ~ ~t.... It.,.::' .' ~::s'x' ~~~:~ . ~f'"."""'''.k .'. -. . ~>'/ ~~;~:., r.~~;..- : eJI:t." ... i1i.L:'~ ' . ~~<,~<.' .' ~"..",.,'-.~ ~</;;'2" '. . ~~:f~,': , . '.' . i""I'" . ~,"F"""" ~'~~::f: ~~'~,~ - ALTERNATIVES: The Council has the following alternatives: 1. Approve the use of C.H. Brown as money manager and to invest a maximum principal amount not to exceed $500,000. 2. Approve the use of C.H. Brown as money manager and to invest a maximum principal amount not to exceed $1,000,000. '3. Do not authorize the utilization ofC.H. Brown &. Co. as money - . manager of city funds. . RECOMMENDATION: . , Staff would recommend that the City of Prior Lake engage the . services of C.H. Brown as money manager for an investment principal amount not to exceed $1,000,000. (Alternative #2). This amount would represent approximately 9% of the City's entire investment portfolio. The intent would be to invest this amount for an ongoing period of time, unless cash flow requirements would dictate othe~ise or if performance was determined to be unsatisfactory. In discussing how to evaluate the performance of C.H. Brown with our financial advisor, Steve Mattson suggests that continuation should depend upon if they can maintain their ranking among the top 10% of money managers, based upon yield, within . the Nelson Publication report "The World's Best Money Managers" (a survey ranking of 56 money managers within the short term cash government classification). . If the Council concurs with this recommendation it is important that the City Council be comfortable with the money manager concept. Steve Mattson of Juran & Moody will be present to discuss this request with you immediately after the bond sale. . MOTION REQ~D: Motion and second to authorize the Finance Director to enter into a contract with C.H. Brown & Co. for money manager services of City . not to exceed $1,000,000. 1] Appr~ved by: \' . ~. ~"'-'" '. (~~:~~. " A9602.DOC , ~' \ , ' .- t.: