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HomeMy WebLinkAboutItem 3j - Investment Management ServicesG�IIFOgnt9`y� * a ' —d AuBUSt i, IY03 C ° --Aq°n;ty°t ° ee � STAFF REPORT Administrative Services Department DATE: June 3, 2014 TO: Mayor and City Council FROM: Hue C. Quach, Administrative Services Director Shannon Huang, Financial Services Manager /City Treasurer SUBJECT: EXTENSION TO THE PURCHASE ORDER WITH CUTWATER ASSET MANAGEMENT FOR INVESTMENT MANAGEMENT SERVICES IN AN AMOUNT NOT TO EXCEED $48,000 Recommendation: Approve SUMMARY Cutwater Asset Management Group has provided investment advisory services to the City since 2007. As it has met the City's expectations over the past year, it is recommended that the City extend the investment management services purchase order with Cutwater Asset Management for the period of July 2014 through June 2015. DISCUSSION The City selected Cutwater Asset Management from among five proposals in April 2007. The purpose of this purchase order was to utilize Cutwater's investment expertise to improve the overall rate of return on the City's portfolio; Cutwater oversees assets available for longer term investment, while City staff retains control over assets requiring greater liquidity. The purchase order with Cutwater is subject to review annually. Staff and at least one Council Member conduct an annual review of the firm's performance. After each review, a formal recommendation is made to the City Council for direction either to continue service with Cutwater or to consider other alternatives. The City has the ability to terminate the purchase order for any reason by providing a written notice to Cutwater no less than thirty (30) days prior to the requested termination date. Purchase Order Extension For Investment Management Services June 3, 2014 Page 2 of 3 On May 4, 2014, Mayor John Wuo, City Manager Dominic Lazzaretto, Administrative Services Director Hue Quach, and Financial Services Manager /City Treasurer Shannon Huang met with Cutwater's representatives to review the past year's performance, and it has been determined that the firm has met the expectations and followed all the requirements of its agreement with the City. Benchmarkin There are various common indexes available for measuring the performance of a fixed income portfolio, but none match the City's investment portfolio exactly. A benchmark needs to exhibit similar risk characteristics and the same method of calculation as the portfolio in order to be useful. As the principal preservation is the top priority for public fund investment, the City's portfolio usually maintains shorter duration to avoid excessive market risk. The City has been using the twelve -month moving average of the two -year Treasury yield as the benchmark for the performance measurement. Its 2 year duration is close to the City's portfolio, which is currently at 2.3 years, and the yield is publicly available. The City's investment portfolio has outperformed its benchmark as "o °r° demonstrated on the right. As of the 0.9% end of March 2014, the City's 0.8% investment portfolio totaled $83.9 million, with an overall rate of return of 07 °r° 0.74 %, while LAIF — the Local Agency 0.6% Investment Fund, the State's 0.5% investment pool, which cities tend to use as a default investment o.4 °% ° mechanism — earning was at 0.24% 0.3% and the yield of Two -Year Treasury o 2 °r INVESTMENT RETURN Ci Average Rate of Return 12 Month Average /two- vearTreasur Yi Note was 0.40 %. Cutwater managed February 13 to March 14 assets had a total rate of return equal to 0.75% after accounting for management fees. The City Council approved an increase of the maximum allowable allocation for Cutwater's managed portfolio from $50 to $60 million on June 18, 2013. However, this additional $10 million would only be allocated to Cutwater's management portfolio if the remaining available funds were sufficient for operational needs, in addition to the criteria that Cutwater would be able to generate a higher yield than the City's managed investments. At this point in time, both conditions have not been met, as such, Cutwater currently manages approximately $50 million of the City's investment portfolio. Purchase Order Extension For Investment Management Services June 3, 2014 Page 3 of 3 FISCAL IMPACT Cutwater's fee for services is based on the amount of assets under management. The rate of 0.10% is charged for the initial $20 million and reduces to 0.07% on any amount above that. The annual cost is not to exceed $48,000. This amount has been included in the proposed Fiscal Year 2014 -15 budget. Once fees are factored in, the current rate of return for Cutwater- managed funds is approaching twice the City's benchmark and three times the current LAIF rate. RECOMMENDATION It is recommended that the City Council approve a one year extension to the Purchase Order with Cutwater Asset Management for investment management services in an amount not to exceed $48,000. Approved: Dominic Lazzar City Manager