CHANDLER ASSET MANAGEMENT, INC. | 800.317.4747 | www.chandlerasset.com
INVESTMENT REPORT
Period Ending June 30, 2023
City of South San Francisco
SECTION 1 Economic Update
SECTION 2 Account Profile
Table of Contents As of June 30, 2023
1 SECTION | Section 1 | Economic Update
2 Economic Update
Recent economic data continues to suggest positive but below trend growth this year. Although the pace of job growth is moderating, labor markets remain solid, and the U.S. consumer has demonstrated resiliency. Inflationary trends are subsiding, but core levels remain well above the Fed’s target. Given the cumulative effects of restrictive monetary policy and tighter financial conditions, we believe the economy will gradually soften and the Fed will remain data dependent as they tread cautiously going forward.
At the June meeting, the Federal Open Market Committee paused in their rate hiking campaign after ten straight rate increases and left the target Federal Funds rate in the current range of 5.00 - 5.25%. Market participants viewed the FOMC’s decision as a ‘hawkish’ pause, expecting further tightening in the future, primarily based on the updated release of the FOMC’s Summary of Economic Projections (SEP) forecast which reflected a stronger economic outlook and higher rates compared to the March forecast. We believe the resiliency of future economic data will determine if the Federal Reserve can stay on hold for a period of time or will be forced to tighten policy further to bring inflation back down towards their 2% policy objective.
The yield curve remained inverted in June. The 2-year Treasury yield surged 50 basis points to 4.90%, the 5-year Treasury yield rose 40 basis points to 4.16%, and the 10-year Treasury yield increased 19 basis points to 3.84%. The inversion between the 2-year Treasury yield and 10-year Treasury yield widened to -106 basis points at June month-end versus -76 basis points at May month-end. The spread between the 2-year Treasury and 10-year Treasury yield one year ago was +6 basis points.
The inversion between 3-month and 10-year Treasuries narrowed to -146 basis points in June from -176 basis points in May.
The shape of the yield curve indicates that the probability of recession is increasing. 3 Source: US Department of Labor Source: US Department of Labor Employment
The U.S. economy added 209,000 jobs in June, falling short of consensus expectations, and the last two months were revised downward by 110,000 jobs. Although decelerating, the pace of job growth remains healthy with the three-month moving average payrolls at 244,000 and the six-month moving average at 278,000. The unemployment rate declined to 3.6% in June from 3.7% in May, while the labor force participation rate remained at 62.6%. The U-6 underemployment rate, which includes those who are marginally attached to the labor force and employed part time for economic reasons, increased to 6.9% from the prior month at 6.7%. Average hourly earnings remained at 4.4% year-over-year in June, unchanged from an upwardly revised 4.4% increase in May. While the longer-term trend of hiring is slowing, levels remain consistent with a solid labor market.
0 100
200
300
400
500
600
700
800
900
1,000
MOM Change In (000's)
Nonfarm Payroll (000's)
Non-farm Payroll (000's)
3 month average (000's)
0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
12.0%
Unemployment Rate
Underemployment Rate (U6)
Unemployment Rate (U3)
Rate (%)
4 Source: US Department of Labor Source: US Department of Commerce Inflation
The Consumer Price Index (CPI) increased in May by 0.1% month-over-month and 4.0% year-over-year, down from 4.9% in April. The Core CPI, which excludes volatile food and energy components, remained firm at 0.4% month-over-month and 5.3% year-over-year, decelerating modestly from 5.5% in April. The Personal Consumption Expenditures (PCE) index rose 3.8% year-over-year in May, down from a 4.3% gain in April. Core PCE, the Federal Reserve’s preferred inflation gauge, increased 4.6% year-over-year in May, down slightly from a 4.7% increase in April. Core inflation remains stubbornly elevated above the Fed's 2% target, with service-sector inflation and strong wage growth as headwinds.
0.0%
1.0%
2.0%
3.0%
4.0%
5.0%
6.0%
7.0%
8.0%
9.0%
10.0%
Personal Consumption Expenditures (PCE)
PCE Price Deflator YOY % Change
PCE Core Deflator YOY % Change
YOY( %) Change
0.0%
1.0%
2.0%
3.0%
4.0%
5.0%
6.0%
7.0%
8.0%
9.0%
10.0%
Consumer Price Index (CPI)
CPI YOY % Change
Core CPI YOY % Change
YOY( %) Change
5 Federal Reserve
Source: Federal Reserve Source: Bloomberg
At the June meeting, the Federal Open Market Committee paused in their rate hiking campaign after ten straight rate increases and left the target Federal Funds rate in the current range of 5.00 - 5.25%. Market participants viewed the FOMC’s decision as a ‘hawkish’ pause, expecting further tightening in the future, primarily based on the updated release of the FOMC’s Summary of Economic Projections (SEP) forecast. The SEP is forecasting higher GDP, a lower unemployment rate, and higher PCE inflation compared to the March 2023 forecast. The median forecast for the Fed Funds rate was also increased to 5.6% in June, compared to the prior forecast of 5.1% in March, suggesting another 50 basis points of tightening in 2023. We believe the resiliency of future economic data will determine if the Federal Reserve can stay on hold for a period of time or will be forced to tighten policy further to bring inflation back down towards their 2% policy objective.
0.00%
0.50%
1.00%
1.50%
2.00%
2.50%
3.00%
3.50%
4.00%
4.50%
5.00%
5.50%
Effective Federal Funds Rate
Yield (%)
2,000,000
3,000,000
4,000,000
5,000,000
6,000,000
7,000,000
8,000,000
9,000,000
10,000,000
Federal Reserve Balance Sheet Assets
In $ millions
6 Source: Bloomberg Source: Bloomberg
0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
3.0%
3.5%
4.0%
4.5%
5.0%
US Treasury Note Yields
2-Year
5-Year
10-Year
Yield (%)
0.0%
1.0%
2.0%
3.0%
4.0%
5.0%
6.0%
US Treasury Yield Curve
Jun-23
Mar-23
Jun-22
Yield (%)
Bond Yields
At the end of June, the 2-year Treasury yield was 194 basis points higher, and the 10-Year Treasury yield was about 82 basis points higher, yearover-year. The inversion between the 2-year Treasury yield and 10-year Treasury yield widened to -106 basis points at June month-end versus - 76 basis points at May month-end. The average historical spread (since 2003) is about +130 basis points. The inversion between 3-month and 10-year Treasuries narrowed to -146 basis points in June from -176 basis points in May. The shape of the yield curve indicates that the probability of recession is increasing.
7 Section 2| SECTION | Section 2 | Account Profile
8 City of South San Francisco Investment Program Milestones for FY 2022-23 Action
• Launched a new strategy for
City funds to be maintained
liquid in January 2023
• Launched an additional new
strategy for the City’s pension
reserve fund
• Navigated a rising rate
environment that has devalued
investments
• Updated City’s Investment
Policy with updates to California
Government Code
Benefit
• Starting YTM: 4.68% vs. LAIF’s 2.42%
Current YTM: 5.19% vs. LAIF’s 3.25%
• City funded $5.5 million on 11/30/2022;
portfolio returned 1.75% through FY End,
with earnings of over $153,000
• Though valuations are lower, interest
income continues to be competitive
• Updated language addressing final
maturity and decreased call risk
associated with securities that may be
called back early by the issuer
9 Objectives
Chandler Asset Management Performance Objective
The performance objective for the portfolio is to earn a total rate of return through a market cycle that is equal to or above the return on the benchmark index.
Investment Objectives
The City of South San Francisco’s investment objectives, in order of priority, are to provide safety to ensure the preservation of capital in the overall portfolio, provide sufficient liquidity for cash needs and a market rate of return consistent with the investment program.
Strategy
In order to achieve these objectives, the portfolio invests in high quality fixed income securities consistent with the investment policy and California Government Code.
As of June 30, 2023
10 Compliance As of June 30, 2023
Category Standard Comment
U.S. Treasuries No limit; 5 years max maturity Complies Federal Agencies 25% max per issuer; 5 years max maturity Complies Supranational Obligations "AA" rating category or higher by a NRSRO; 30% max; 10% max per issuer; 5 years max maturity; USD denominated senior unsecured unsubordinated obligations; Issued by IBRD, IFC, or IADB Complies Corporate Medium Term Notes
"A" rating category or better by a NRSRO; 30% max; 5% max per issuer; 5 years max maturity; Issued by corporation organized and operating within the U.S. or by depository institutions licensed by U.S. or any state and operating within the U.S.
Complies
Asset-Backed, Mortgage-Backed,
Mortgage Pass-Through Securities,
Collateralized Mortgage Obligations
"AA" rating category or better by a NRSRO; 20% max (combined); 5% max per issuer; Excluding issuers of U.S. Government and its agencies; 5 years max maturity Complies
Negotiable Certificates of Deposit (NCDs)
The amount of NCD insured up to the FDIC limit does not require any credit ratings; Any amount above FDIC insured limit must be issued by institutions with "A-1" short-term debt rating or better by a NRSRO; or "A" long-term rating category or better by a NRSRO; 30% max; 5% max per issuer; 5 years max maturity Complies
Commercial Paper A-1 and P-1 by S&P and Moody's; 25% max; 5% max per issuer; 270 days max maturity; Eligible paper is limited to corporations organized and operating within the U.S. and having total assets of at least $500 million. Complies Mutual Funds and Money Market
Mutual Funds
Highest rating or AAA rated by two NRSROs or SEC registered with AUM >$500 million; 20% max; 10% per institution; Strive to maintain NAV of $1.00 per share at all times Complies Local Agency Investment Fund (LAIF) No maximum limit for LAIF is set by the investment policy Complies Repurchase Agreements
"AA" rating category or better by a NRSRO (S&P and Moody's); Purchased agreement executed with a bank in which the underlying security with market value of at least 102% for U.S. Treasuries or 105% for U.S. Agencies of the funds borrowed; Issuing counterparty shall be "AA" rating category or better by a NRSRO; Not used by Investment Adviser Complies
Maximum Per Issuer 5% max per issuer, except US Treasuries, LAIF (no limit), US Agencies (25% max per issuer), Supranational (10% max per issuer), and Money Market Mutual Fund (10% max per issuer) Complies Maximum Maturity 5 years Complies
City of South San Francisco Consolidated
This portfolio is a consolidation of assets managed by Chandler Asset Management and assets managed internally by Client. Chandler relies on Client to provide accurate information for reporting assets and producing this compliance statement. 11 Portfolio Characteristics
So. San Francisco Consolidated Portfolio
06/30/23 06/30/22
Portfolio Portfolio
Average Maturity (yrs) 1.67 1.82
Modified Duration 1.47 1.64
Average Purchase Yield 2.96% 1.18%
Average Market Yield 4.60% 2.37%
Average Quality* AA+/Aa1 AA/Aa1
Total Market Value 321,927,925 269,211,317
* Portfolio is S&P and Moody’s respectively.
As of June 30, 2023
12 So. San Francisco Consolidated Portfolio
Sector Distribution
ABS
4.5%
Agency
16.7%
Cash
2.3%
CMO
1.2%
Corporate
17.1%
LAIF
15.4%
Money Market
Fund
0.4%
Negotiable CD
1.3%
Supranational
1.9%
US Treasury
39.2%
June 30, 2023 June 30, 2022
ABS
6.1%
Agency
15.8%
Cash
3.9%
CMO
2.4%
Corporate
17.4%
LAIF
27.9%
Money Market
Fund
2.2%
Negotiable CD
1.5%
Supranational
2.5%
US Treasury
20.4%
As of June 30, 2023
13 Purchase Yield as of 06/30/23 = 2.96%
0.00 0.50
1.00 1.50
2.00 2.50
3.00 3.50
Percent (%)
Historical Average Purchase Yield
So. San Francisco Consolidated Portfolio
As of June 30, 2023
14 Portfolio Characteristics
So San Francisco Mid-Term (Chandler) Portfolio
06/30/23 06/30/22
Benchmark* Portfolio Portfolio
Average Maturity (yrs) 2.64 2.67 2.67
Average Modified Duration 2.49 2.34 2.40
Average Purchase Yield n/a 2.21% 1.34%
Average Market Yield 4.74% 4.92% 3.08%
Average Quality** AAA AA/Aa1 AA/Aa1
Total Market Value 192,030,756 183,843,285
*ICE BofA 1-5 Yr US Treasury & Agency Index
**Benchmark is a blended rating of S&P, Moody’s, and Fitch. Portfolio is S&P and Moody’s respectively.
As of June 30, 2023
15 So San Francisco Mid-Term (Chandler) Portfolio
Sector Distribution
ABS
7.6%
Agency
27.1%
CMO
1.9%
Corporate
28.0%
Money Market
Fund
0.6%
Negotiable CD
2.2%
Supranational
3.2%
US Treasury
29.5%
June 30, 2023 June 30, 2022
ABS
9.0%
Agency
23.2%
CMO
3.5%
Corporate
25.5%
Money Market
Fund
3.2%
Negotiable CD
2.2%
Supranational
3.6%
US Treasury
29.8%
As of June 30, 2023
16 -3.00%
-2.50%
-2.00%
-1.50%
-1.00%
-0.50%
0.00%
0.50%
1.00%
1.50%
2.00%
12 months 2 years 3 years 5 years 10 years Since Inception So San Francisco Mid-Term (Chandler) Portfolio ICE BofA 1-5 Yr US Treasury & Agency Index Total Rate of Return Annualized Since Inception March 31, 2009 Annualized
TOTAL RATE OF RETURN 3 months 12 months 2 years 3 years 5 years 10 years Since Inception
So San Francisco Mid-Term (Chandler) Portfolio -0.34% 0.38% -2.07% -1.30% 1.19% 1.13% 1.40% ICE BofA 1-5 Yr US Treasury & Agency Index -0.85% -0.42% -2.53% -1.78% 0.89% 0.86% 1.15% Total rate of return: A measure of a portfolio’s performance over time. It is the internal rate of return, which equates the beginning value of the portfolio with the ending value; it includes interest earnings, realized and unrealized gains and losses in the portfolio.
Investment Performance
So San Francisco Mid-Term (Chandler) Portfolio
As of June 30, 2023
17 Purchase Yield as of 06/30/23 = 2.21%
0.00 0.50
1.00 1.50
2.00 2.50
Percent (%)
Historical Average Purchase Yield
So San Francisco Mid-Term (Chandler) Portfolio
As of June 30, 2023
18 Portfolio Characteristics
So San Francisco Limited Maturity
06/30/23 01/31/23
Benchmark* Portfolio Portfolio
Average Maturity (yrs) 1.83 0.14 0.27
Average Modified Duration 1.75 0.13 0.26
Average Purchase Yield n/a 5.19% 4.68%
Average Market Yield 5.02% 5.19% 4.68%
Average Quality** AAA AAA/Aaa AAA/Aaa
Total Market Value 67,429,567 36,101,348
*ICE BofA 1-3 Yr US Treasury & Agency Index
**Benchmark is a blended rating of S&P, Moody’s, and Fitch. Portfolio is S&P and Moody’s respectively.
As of June 30, 2023
19 Purchase Yield as of 06/30/23 = 5.19%
4.40 4.50
4.60 4.70
4.80 4.90
5.00 5.10
5.20 5.30
Percent (%)
Historical Average Purchase Yield
So San Francisco Limited Maturity
As of June 30, 2023
20 Portfolio Characteristics
City of South San Fran Pen Res
06/30/23 12/31/22
Benchmark* Portfolio Portfolio
Average Maturity (yrs) 2.64 2.76 0.88
Average Modified Duration 2.49 2.49 0.83
Average Purchase Yield n/a 4.43% 4.00%
Average Market Yield 4.74% 4.85% 4.01%
Average Quality** AAA AA/Aa1 AAA/Aaa
Total Market Value 5,596,397 5,500,340
*ICE BofA 1-5 Yr US Treasury & Agency Index
**Benchmark is a blended rating of S&P, Moody’s, and Fitch. Portfolio is S&P and Moody’s respectively.
As of June 30, 2023
21 -1.00%
-0.50%
0.00%
0.50%
1.00%
1.50%
2.00%
3 months Since Inception
City of South San Fran Pen Res ICE BofA 1-5 Yr US Treasury & Agency Index Total Rate of Return Since Inception December 31, 2022
TOTAL RATE OF RETURN Latest 3 months Since Inception
City of South San Fran Pen Res -0.21% 1.75%
ICE BofA 1-5 Yr US Treasury & Agency Index -0.85% 0.95% Investment Performance
City of South San Fran Pen Res
Total rate of return: A measure of a portfolio’s performance over time. It is the internal rate of return, which equates the beginning value of the portfolio with the ending value; it includes interest earnings, realized and unrealized gains and losses in the portfolio.
As of June 30, 2023
22 Portfolio Characteristics
So San Francisco Liquidity Portfolio
06/30/23 06/30/22
Benchmark* Portfolio Portfolio
Average Maturity (yrs) 0.40 0.00 0.00
Average Modified Duration 0.40 0.00 0.00
Average Purchase Yield n/a 2.83% 0.83%
Average Market Yield 5.22% 2.83% 0.83%
Average Quality** AAA AAA/Aaa NR/NR
Total Market Value 56,871,204 85,368,032
*ICE BofA 6-Month US Treasury Bill Index
**Benchmark is a blended rating of S&P, Moody’s, and Fitch. Portfolio is S&P and Moody’s respectively.
As of June 30, 2023
23 City’s Chandler-Managed Portfolios Interest Income
Interest Income Profile
Inception Market Value as
of June 30, 2023
FY 2021-22
Interest Income
FY 2022-23
Interest Income
Mid-Term
Portfolio March 31, 2009 $192,030,756 $2,239,563 $3,386,338 Limited Maturity
Portfolio January 31, 2023 $67,429,567 N/A $1,229,567
Pension Reserve
Portfolio
December 31,
2022 $5,596,397 N/A $153,259
Source: Chandler Asset Management. Does not include realized nor unrealized gains and losses. 24 Important Disclosures
2023 Chandler Asset Management, Inc, An Independent Registered Investment Adviser.
Information contained herein is confidential. Prices are provided by ICE Data Services Inc (“IDS”), an independent pricing source. In the event IDS does not provide a price or if the price provided is not reflective of fair market value, Chandler will obtain pricing from an alternative approved third party pricing source in accordance with our written valuation policy and procedures. Our valuation procedures are also disclosed in Item 5 of our Form ADV Part 2A.
Performance results are presented gross-of-advisory fees and represent the client’s Total Return. The deduction of advisory fees lowers performance results. These results include the reinvestment of dividends and other earnings. Past performance may not be indicative of future results. Therefore, clients should not assume that future performance of any specific investment or investment strategy will be profitable or equal to past performance levels. All investment strategies have the potential for profit or loss. Economic factors, market conditions or changes in investment strategies, contributions or withdrawals may materially alter the performance and results of your portfolio.
Index returns assume reinvestment of all distributions. Historical performance results for investment indexes generally do not reflect the deduction of transaction and/or custodial charges or the deduction of an investment management fee, the incurrence of which would have the effect of decreasing historical performance results. It is not possible to invest directly in an index.
Source ICE Data Indices, LLC ("ICE"), used with permission. ICE permits use of the ICE indices and related data on an "as is" basis; ICE, its affiliates and their respective third party suppliers disclaim any and all warranties and representations, express and/or implied, including any warranties of merchantability or fitness for a particular purpose or use, including the indices, index data and any data included in, related to, or derived therefrom. Neither ICE data, its affiliates or their respective third party providers guarantee the quality, adequacy, accuracy, timeliness or completeness of the indices or the index data or any component thereof, and the indices and index data and all components thereof are provided on an "as is" basis and licensee's use it at licensee's own risk. ICE data, its affiliates and their respective third party do not sponsor, endorse, or recommend chandler asset management, or any of its products or services.
This report is provided for informational purposes only and should not be construed as a specific investment or legal advice. The information contained herein was obtained from sources believed to be reliable as of the date of publication, but may become outdated or superseded at any time without notice. Any opinions or views expressed are based on current market conditions and are subject to change. This report may contain forecasts and forward-looking statements which are inherently limited and should not be relied upon as indicator of future results. Past performance is not indicative of future results. This report is not intended to constitute an offer, solicitation, recommendation or advice regarding any securities or investment strategy and should not be regarded by recipients as a substitute for the exercise of their own judgment.
Fixed income investments are subject to interest, credit and market risk. Interest rate risk: the value of fixed income investments will decline as interest rates rise. Credit risk: the possibility that the borrower may not be able to repay interest and principal. Low rated bonds generally have to pay higher interest rates to attract investors willing to take on greater risk. Market risk: the bond market in general could decline due to economic conditions, especially during periods of rising interest rates.
Ratings information have been provided by Moody’s, S&P and Fitch through data feeds we believe to be reliable as of the date of this statement, however we cannot guarantee its accuracy.
Security level ratings for U.S. Agency issued mortgage-backed securities (“MBS”) reflect the issuer rating because the securities themselves are not rated. The issuing U.S. Agency guarantees the full and timely payment of both principal and interest and carries a AA+/Aaa/AAA by S&P, Moody’s and Fitch respectively.
Your qualified custodian bank maintains control of all assets reflected in this statement and we urge you to compare this statement to the one you receive from your qualified custodian. Chandler does not have any authority to withdraw or deposit funds from/to the custodian account.
As of June 30, 2023
25 Benchmark Disclosures
ICE BofA 6-Month US Treasury Bill Index
The ICE BofA US 6-Month Treasury Bill Index is comprised of a single issue purchased at the beginning of the month and held for a full month. At the end of the month that issue is sold and rolled into a newly selected issue. The issue selected at each month-end rebalancing is the outstanding Treasury Bill that matures closest to, but not beyond,six months from the rebalancing date.
ICE BofA 1-5 Yr US Treasury & Agency Index
The ICE BofA 1-5 Year US Treasury & Agency Index tracks the performance of US dollar denominated US Treasury and nonsubordinated US agency debt issued in the US domestic market. Qualifying securities must have an investment grade rating (based on an average of Moody’s, S&P and Fitch). Qualifying securities must have at least one year remaining term to final maturity and less than five years remaining term to final maturity, at least 18 months to maturity at time of issuance, a fixed coupon schedule, and a minimum amount outstanding of $1 billion for sovereigns and $250 million for agencies.
ICE BofA 1-3 Yr US Treasury & Agency Index
The ICE BofA 1-3 Year US Treasury & Agency Index tracks the performance of US dollar denominated US Treasury and nonsubordinated US agency debt issued in the US domestic market. Qualifying securities must have an investment grade rating (based on an average of Moody’s, S&P and Fitch). Qualifying securities must have at least one year remaining term to final maturity and less than three years remaining term to final maturity, at least 18 months to maturity at time of issuance, a fixed coupon schedule, and a minimum amount outstanding of $1 billion for sovereigns and $250 million for agencies.
As of June 30, 2023
26