Item No. 8d_attach_4
Meeting Date: May 8, 2018

Annual Investment Portfolio Report
for 2017
March 12, 2018

Background
Authorized investments are made in
accordance with and subject to
restrictions of the Revised Code of
Washington (RCW) 36.29.020.
Commission resolution approved Port
investment policy, adopted as of June 11,
2002.
State laws limits the types of investments the portfolio can invest in.
Highlights of the Port's investment policy in appendix; full policy attached.
2

Investment Policy Overview
 Emphasis on preservation of principal
 Priority of policy objectives
• 1) Safety
• 2) Liquidity
• 3) Yield

 Covers all capital and operating funds
 Limits the types and maturities of investments and
establishes management parameters
 Establishes performance standards and independent
review
 Does not cover funds held separately in trust, e.g. deferred
compensation plans and pension trusts
3

Investment Policy Changes
 The investment policy is reviewed periodically,
and amended as appropriate to address
changes in law, market conditions or follow
best practices.
 Last amendment: June 5, 2012.
 Staff recommends adding the State's Local
Government Investment Pool (LGIP), and plans
to request Commission approval in April 2018.

4

Portfolio Composition
12/31/2017
MORTGAGEBACKED
SECURITIES - HIGH
GRADE
6.4%

TREASURY NOTES
38.3%

REPURCHASE
AGREEMENTS
5.1%

FEDERAL
AGENCIES
44.3%

FEDERAL
AGENCIES
DISCOUNT NOTES
6.0%

High quality and diversified portfolio.
5

Interest Rates Trends
By year-end 2017 interest rates across most
(e.g. short/medium) of the yield curve were
higher than the previous year. Rates at the
long end were lower; the yield curve flattened.
The Federal Reserve had three 0.25%
increases in the federal funds target rate
range, 0.75% in total, to 1.25% - 1.50% by
December 2017, and may make additional
increases during 2018.
Rising interest rate environment: higher short to medium terms but lower in longer
term; resulting in flattened yield curve.
6

Effect of Interest Rate Trends
Staff monitors market conditions but does
not time the market.
Following
the
portfolio
parameters
established in the Port's investment policy
results in the portfolio
outperforming the market when short-term
rates are declining and
underperforming when rates are rising
7

Treasury Yield Curve
12/31/2017

12/31/2016

3.5%

3.06%
3.0%
2.5%
2.0%
1.5%

1.28%

1.39%

1.0%
0.5%
0.0%

0.44%

0.51%

1 Month

3 Months

1.53%

1.76%

1.89%

1.98%
1.47%

2.20%
1.93%

2.33%
2.25%

2.45%
2.74%
2.40%

1.20%
0.62%

6 Months

0.85%

1 Year

2 Years

3 Years

5 Years

7 Years

10 Years

30 Years

Source: U.S. Department of the Treasury

Interest rates mostly higher, and the curve is flatter than the previous year end
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2017 Select Interest Rates
2-Yr Agencies

3.00

5-Yr Agencies

10-Yr Agencies

Fed Funds Target Rate maximum

2.75
2.50

Yield (%)

2.25
2.00
1.75
1.50
1.25
1.00
0.75

Jan-17

Feb-17 Mar-17

Apr-17

May-17

Jun-17

Jul-17

Aug-17

Sep-17

Oct-17

Nov-17

Dec-17

Sources: Bloomberg; Federal Reserve

Interest rates (short/medium term) trended upwards; longer term rates lower.
Spreads narrowed, yield curve flattened.

9

2017 Yield Comparison
Q1 2017
Q2 2017
Q3 2017
Q4 2017
Annual

Benchmark
1.28%
1.41%
1.49%
1.90%
1.52%

Port's Pool
1.34%
1.42%
1.43%
1.51%
1.42%

Port's Pool underperformed the Benchmark by 0.10%, as anticipated, in a rising
interest rate environment
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Yield History

•
•

Year(s)
2002 - 2006
2007 - 2011
2012 - 2016
2012
2013
2014
2015
2016
2017

Benchmark
3.13%
1.73%
0.56%
0.31%
0.35%
0.55%
0.73%
0.84%
1.50%

Port's Pool
3.69%
3.08%
0.89%
1.02%
0.69%
0.86%
0.94%
1.17%
1.42%

16 years

1.79%

2.50%

Port's Pool has outperformed the Benchmark by 0.71% over the long term.
During certain time periods, e.g., a rising interest rate environment, the Port's Pool may
underperform.
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Yield History
Benchmark
5.0%
4.0%
3.0%

4.45%
4.08%

0.0%

4.07%

3.72%4.33%

4.04%
2.76%
2.17%

2.50%

2.0%
1.0%

5.00%
4.78%

2.64%
3.57%

2.50%

2.01%
1.58%

Port's Pool

1.67%

1.52%
1.17%
1.02%
0.94%
1.42%
0.86%
0.69%
1.12%
0.84%
0.73%
0.72%0.48%
0.55%
0.31%0.35%

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Port's Pool outperforms, on aggregate , over the long term, but may underperform
during a rising interest rate environment.
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Portfolio Earnings 2011 - 2017
2017

1.42%

2016

1.17%

2015
Y
e
a
r

2014
2013
2012

0.94%
0.86%
0.69%

$18,253,665
$14,232,834

$9,995,976

$8,241,675

$6,555,606
1.02% $9,547,173

2011

1.67%

$15,069,955

Interest Earnings - % Yield and $

The annual earnings rate is increasing.
13

Investment Portfolio Size Fluctuates
$1.45 billion as of 12/31/2017 versus $1.06
billion at prior year's end
Over the most recent 5 years, the size has
ranged from $900 million to $1.57 billion
Fluctuations are mostly tied to capital
funding and spending:
 bond issues to fund projects increase the
portfolio
 capital project spending reduces the portfolio
size
More than half of the portfolio represents funds for special and restricted uses.
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Investment Pool Participating Funds
as of 12/31/2017

Reserves &
Security
12%
Special Use
16%

Bond Funds
27%

Minimum
Operating
Fund Balance
23%
Operating
Cash
Programmed
for Capital
22%

Examples:
•
Minimum Operating Fund Balance: General & Airport Development Funds = 9 months O&M expense
•
Operating Funds for Capital: General, Airport, Tax Levy funds programmed to be spent over the next
few years.
•
Bond Funds: Capital projects
•
Reserves & Security: Bond reserves, customer lease security
•
Special Use (primarily for capital projects): Passenger & Customer Facility Charges, Transportation &
Infrastructure

More than half of the pool's funds are for special and restricted uses.
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Appendix:
Investment Policy Highlights

The complete Investment Policy is attached.
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Investment Policy Highlights
 Port's CFO and appointed Treasurer is
responsible for managing the Port's
investment program
 Authorizes Treasurer to delegate day-to-day
duties and responsibilities related to
investment program
 Establishes prudence, ethics, conflict of
interest and disclosure requirements for
investment officials
 Provides for safekeeping and custody of
portfolio securities
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Investment Policy Highlights
 To meet the policy's primary investment objectives, additional
risk controls are included that impose further restrictions on the
types of securities. These include:
- limit maturity date - no more than 10 years from settlement date,
and
- portfolio target modified duration of 2.0 plus or minus 0.5%

 Benchmark - Bank of America Merrill Lynch Treasury/Agency 1-3
Years Index
 Long term strategy: do not forecast interest rates; balance
RETURN and RISK over cycles
 this strategy outperforms the market when rates are falling and
underperforms when rates are rising

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Investment Policy Highlights
Establishes criteria for eligible depositories
and broker/dealers
Sets out allowed investment instruments;
subject to State law
Establishes portfolio diversification
parameters
Establishes maturity restrictions

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Investment Policy Highlights
Sets portfolio performance standards
Allows for independent review of the
investment program
State Auditor
External Auditors
Internal Auditor

 Establishes reporting standards

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