HomeMy WebLinkAbout04.a. Review and provide input on highmark capital management Government Accounting Standards Board (GASB 45) other Post-employee Benefits (OPEB) Sub-Trust Quarterly report (Second quarter 2017)Page 1 of 9
Item 4.a.
Central Contra Costa Sanitary District
August 29, 2017
TO: FINANCE COMMITTEE
FROM: THEAVASSALLO, FINANCE MANAGER
REVIEWED BY: PHIL LEI BER, DIRECTOR OF FINANCE AND ADMINISTRATION
ANN SASAKI, DEPUTY GENERAL MANAGER
ROGER S. BAILEY, GENERAL MANAGER
SUBJECT: REVIEW AND PROVIDE INPUT ON HIGHMARK CAPITAL MANAGEMENT
GOVERNMENT ACCOUNTING STANDARDS BOARD (GASB 45) OTHER
POST -EMPLOYMENT BENEFITS (OPEB) SUB -TRUST QUARTERLY
REPORT (SECOND QUARTER 2017)
Attached for review is the most recent Highmark overview and GASB 45 OPEB Sub -trust Report.
Strategic Plan re -In
GOAL THREE: Be a Fiscally Sound and Effective Water Sector Utility
Strategy 1 - Conduct Long -Range Financial Planning
ATTACHMENTS:
1. Highmark Overview of 2nd Quarter 2017 GASB 45 OPEB Sub -trust Report
2. PARS: Highmark 2nd Quarter 2017 GASB 45 OPEB Sub -trust Report
August 29, 2017 Regular Committee Meeting Agenda Packet - Page 124 of 158
Page 2 of 9
HIGHMARfS.-
wo
CAPITAL MANAGEMENT
July 21, 2017
Thea Vassallo
Finance Manager
Central Contra Costa Sanitary District
5019 Imhoff Place
Martinez, CA 94553-4392
RE: 2Q 2017 OPEB Report
Dear Thea,
The second quarter witnessed another strong gain for most broad U.S. Stock market
indices, though this quarter's returns were not as strong as the first quarter. The
S&P500 returned 3.1 %. Health Care (+7.2%) Technology (+4.2%), and Industrials
(+4.3%) were the leading sectors. Supported by the strength of these sectors, growth
oriented investments outperformed value benchmarks in the quarter. The economy
grew by 1.4% (U.S. GDP Bureau of Economic Analysis) in the quarter, but is expected to
post a much stronger print in the second quarter of the year. Employment markets held
steady with the unemployment rate leveling off at a 4.4% rate in June. June gains in
non-farm payrolls climbed to 222,000, which was the strongest reading since January of
this year. Energy markets retreated, and entered into bear market territory in June as
U.S. production and inventories rose. After reaching a 12 -month high of $54.45 in the
first quarter, West Texas Intermediate Crude Oil traded below $43 per barrel, its lowest
level since August 2016. Corporate earnings, represented by S&P500 firms beat
expectations, growing by 13.9%. Inflation though, continues to confound and confuse.
May CPI measured at 1.9%, only to be followed by June's reading of 1.6%. These
levels are considerably less than the 2.7% reading registered in February. Excluding
food and energy, prices rose by a modest 1.7% in June, giving the Fed some
consternation as it seeks to normalize its monetary policy.
During the second quarter the yield curve continued to flatten as long term interest rates
declined 18 basis points while short term rates increased 25 basis points. The yield
curve flattened as a result of slower inflation and investors' fears that continued Federal
Reserve rate hikes could slow the economy. As a result, the Bloomberg Barclays U.S.
Aggregate Bond Index returned 1.5%, the best quarterly return in a year. Longer
duration bonds outperformed shorter duration, as the two-year Treasury gained 0.1
while ten-year and thirty-year bonds returned 1.3% and 4.3%, respectively. Credit risk
was also rewarded as investment-grade corporate bonds outperformed similar duration
Treasuries by 112 basis points. Lower credit quality outperformed higher quality as
bonds rated AA and above returned 1.8%, while BBB rated bonds gained 2.7%, and
high yield bonds returned 2.2%. Among investment-grade corporate bonds, the best
performing industries included Refining, Life Insurance, Paper, Pharmaceuticals, and
Communications. Industry laggards included Oil Field Services, Integrated Energy,
Automotive, Diversified Manufacturing, and REIT's.
Once again the Fed finds itself advocating more monetary tightening than the market is
currently willing to accept. While the Fed argues for another rate hike this year and
three more next year, investors believe there is closer to a 50% chance of another hike
August 29, 2017 Regular Committee Meeting Agenda Packet - Page 125 of 158
Page 3of9
this year and expect only one rate hike next year. This difference in expectations seems
to revolve around the outlook for inflation. While the Fed's inflation target is 2%, their
preferred measure of inflation, the PCE, has been below 2% for the past five years. The
only exception has been February of this year when it reached 2.1%, but since then has
declined to only 1.4%. While the Fed has attributed the decline to temporary factors,
such as lower prices for wireless phone service and prescription drugs, investors remain
convinced that inflation is under control. Meanwhile, believing that inflation will rebound
soon, the Fed continues to warn investors of additional rate hikes and that they will soon
begin to shrink the Federal Reserve Bank's balance sheet. While the Fed hasn't
announced a specific time frame, they have outlined a plan to reduce the current $4.5
trillion balance sheet by $10 billion a month, increasing each quarter until reaching a cap
of $50 billion per month.
The Central Contra Costa Sanitary District's OPEB Plan returned 2.80% for the quarter.
Fixed income investments in the quarter posted a 1.60% return, which outperformed the
Bloomberg Barclays Aggregate return of 1.45%. The fixed income markets rallied as the
yield curve flattened and investors felt that the Fed might potentially not raise rates as
quickly as previously thought. Manager highlights in the quarter came from the Pimco
Total Return Fund (+1.8%) and the Prudential Total Return Bond Fund (+2.21%).
In the quarter, we migrated from an `Active Management' approach within the Plan's
large cap equity segment, towards a passive equity approach. This transition was
implemented over the course of the quarter, and hence the equity return in large cap
matched the benchmark target (3.07% Plan return vs. 3.09% S&P500). The strongest
contribution came from the international equity segment, where the Plan's overweight
and manager outperformance aided returns. Small cap equities outperformed,
supported by the strong performance of the T. Rowe Price New Horizons Fund
(+7.04%). Outperformance in the REIT sector, combined with an underweight to this
`relatively' underperforming category, also aided performance in the quarter.
Our target asset allocation at quarter -end was: equities 50%, bonds 47% and
cash/money market 3%.
Andrew Brown
August 29, 2017 Regular Committee Meeting Agenda Packet - Page 126 of 158
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