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° --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