Presented by Nancy Jones, Managing Director Sarah Meacham, Consultant PFM Asset Management LLC Pam Milliron, LAIF Administrator California State Treasurer’s Office

PFM Investment Advisors to the Public Sector Advantages and Disadvantages of Pools © 2010 PFM Asset Management LLC 1 Advantages/Purpose Efficiency Liquidity Diversification Simplified accounting for investors No out-of-pocket fees Minimal transactions costs Disadvantages/ Risks Inability to customize investment strategy Little control over investment approach Actions by other investors can be detrimental Varying credit risk

PFM Investment Advisors to the Public Sector© 2010 PFM Asset Management LLC 2 Why thinking about which investment pool you are going to invest in is important?

PFM Investment Advisors to the Public Sector Swim At Your Own Risk State of Arizona LGIP City of Bullhead Town of Chino Valley City of Douglas City of El Mirage City of Flagstaff City of Florence City of Glendale City of Goodyear City of Kingman Lake Havasu City City of Maricopa City of Sedona City of Sahuarita City of Tempe County of Mohave County of Pima County of Santa Cruz © 2010 PFM Asset Management LLC 3 Florida SBA Pool City of Port St. Lucie State of Minnesota Board of Investment State of Oregon Investment Pool Washington State Investment Board Reserve Primary Fund County of San Mateo, CA City of Daly City City of Redwood City City of San Bruno Bay Area Air Quality Management District Peninsula Corridor Joint Powers Board San Mateo County Transportation Authority San Mateo CCCD Sequoia Union High SD County Alameda, CA County of Madera, CA County of Monterey, CA County of Placer, CA County of Plumas, CA County of Sacramento, CA County of Santa Clara, CA County of San Diego, CA County of Tehama, CA County of Toulomne, CA County of Mohave, AZ County of Sarasota, FL Sources: “Lehman Bros. bust hit San Mateo County hard,” SFGate.com, October 18, 2008 Website of Congresswoman Jackie Speier ( %20Group%20Loss%20Exposure%20listing1.doc)

PFM Investment Advisors to the Public Sector 4 © 2010 PFM Asset Management LLC Do Your Own Due Diligence Investment policy Permitted investments Credit quality Liquidity Management Market price exposure Sensitivity analysis

PFM Investment Advisors to the Public Sector Association of Public Treasurers Due Diligence Standards for Use of Pools List of eligible investments –Maximum percentage allowed for each type of security –Credit requirements –Maximum allowable dollar-weighted average maturity –Policy on repos, reverse repos, variable rate notes, structured notes, and derivatives –Does the pool contain only the types of securities that are permitted by your investment policy? © 2010 PFM Asset Management LLC 5

PFM Investment Advisors to the Public Sector Association of Public Treasurers Due Diligence Standards for Use of Pools List of eligible investments –Treasuries? –Federal Agencies? –Commercial paper? –CDs? –Asset-backed securities? –Corporate notes? © 2010 PFM Asset Management LLC 6

PFM Investment Advisors to the Public Sector Association of Public Treasurers Due Diligence Standards for Use of Pools List of eligible investments –Maximum percentage allowed for each type of security –Credit requirements –Maximum allowable dollar-weighted average maturity –Policy on repos, reverse repos, variable rate notes, structured notes, and derivatives –Does the pool contain only the types of securities that are permitted by your investment policy? © 2010 PFM Asset Management LLC 7

PFM Investment Advisors to the Public Sector Association of Public Treasurers Due Diligence Standards for Use of Pools List of eligible investments –Maximum percentage allowed for each type of security 2% 5% 10% © 2010 PFM Asset Management LLC 8

PFM Investment Advisors to the Public Sector Association of Public Treasurers Due Diligence Standards for Use of Pools List of eligible investments –Maximum percentage allowed for each type of security –Credit requirements –Maximum allowable dollar-weighted average maturity –Policy on repos, reverse repos, variable rate notes, structured notes, and derivatives –Does the pool contain only the types of securities that are permitted by your investment policy? © 2010 PFM Asset Management LLC 9

PFM Investment Advisors to the Public Sector Association of Public Treasurers Due Diligence Standards for Use of Pools List of eligible investments –Maximum percentage allowed for each type of security –Credit requirements for securities in the pool A-1+ A-1 AAA AA A One rating agency or two © 2010 PFM Asset Management LLC 10

PFM Investment Advisors to the Public Sector Association of Public Treasurers Due Diligence Standards for Use of Pools List of eligible investments –Maximum percentage allowed for each type of security –Credit requirements –Maximum allowable dollar-weighted average maturity –Policy on repos, reverse repos, variable rate notes, structured notes, and derivatives –Does the pool contain only the types of securities that are permitted by your investment policy? © 2010 PFM Asset Management LLC 11

PFM Investment Advisors to the Public Sector Association of Public Treasurers Due Diligence Standards for Use of Pools List of eligible investments –Maximum percentage allowed for each type of security –Credit requirements for securities in the pool –Maximum allowable dollar-weighted average maturity (WAM) 60 days 90 days 180 days 1 year 2 years © 2010 PFM Asset Management LLC 12

PFM Investment Advisors to the Public Sector Association of Public Treasurers Due Diligence Standards for Use of Pools List of eligible investments –Maximum percentage allowed for each type of security –Credit requirements –Maximum allowable dollar-weighted average maturity –Policy on repos, reverse repos, variable rate notes, structured notes, and derivatives –Does the pool contain only the types of securities that are permitted by your investment policy? © 2010 PFM Asset Management LLC 13

PFM Investment Advisors to the Public Sector Association of Public Treasurers Due Diligence Standards for Use of Pools Interest calculations –Methodology used to calculate interest –Frequency of interest payments –Options for payment of interest –How gains and losses are reported © 2010 PFM Asset Management LLC 14

PFM Investment Advisors to the Public Sector Association of Public Treasurers Due Diligence Standards for Use of Pools Interest calculations –Methodology used to calculate interest Amortized cost vs. mark-to-market Daily interest factor vs. average monthly yield © 2010 PFM Asset Management LLC 15

PFM Investment Advisors to the Public Sector Association of Public Treasurers Due Diligence Standards for Use of Pools Interest calculations –Methodology used to calculate interest –Frequency of interest payments Monthly Quarterly © 2010 PFM Asset Management LLC 16

PFM Investment Advisors to the Public Sector Association of Public Treasurers Due Diligence Standards for Use of Pools Interest calculations –Methodology used to calculate interest –Frequency of interest payments –Options for payment of interest Reinvest into shares Cash payment Transfer to another account © 2010 PFM Asset Management LLC 17

PFM Investment Advisors to the Public Sector Association of Public Treasurers Due Diligence Standards for Use of Pools Interest calculations –Methodology used to calculate interest –Frequency of interest payments –Options for payment of interest –How gains and losses are reported Day of trade At the discretion of pool manager © 2010 PFM Asset Management LLC 18

PFM Investment Advisors to the Public Sector Association of Public Treasurers Due Diligence Standards for Use of Pools Safeguarding securities –How often are securities priced? –Source of prices? –Who monitors the treasurer or investment advisor? –How often do they get together to review? –Who conducts the audit? –What are the safekeeping arrangements? © 2010 PFM Asset Management LLC 19

PFM Investment Advisors to the Public Sector Association of Public Treasurers Due Diligence Standards for Use of Pools Safeguarding securities –How often are securities priced? Daily Weekly Monthly Before every deposit or withdrawal © 2010 PFM Asset Management LLC 20

PFM Investment Advisors to the Public Sector Association of Public Treasurers Due Diligence Standards for Use of Pools Safeguarding securities –How often are securities priced? –Source of prices? Pricing service Bank Broker © 2010 PFM Asset Management LLC 21

PFM Investment Advisors to the Public Sector Association of Public Treasurers Due Diligence Standards for Use of Pools Safeguarding securities –How often are securities priced? –Source of prices? –Who monitors the treasurer or investment advisor? City Council Treasury Oversight Committee Finance Director Auditor © 2010 PFM Asset Management LLC 22

PFM Investment Advisors to the Public Sector Association of Public Treasurers Due Diligence Standards for Use of Pools Safeguarding securities –How often are securities priced? –Source of prices? –Who monitors the treasurer or investment advisor? –How often do they get together to review? Monthly Quarterly Annually Ad hoc © 2010 PFM Asset Management LLC 23

PFM Investment Advisors to the Public Sector Association of Public Treasurers Due Diligence Standards for Use of Pools Safeguarding securities –How often are securities priced? –Source of prices? –Who monitors the treasurer or investment advisor? – How often do they get together to review? –Who conducts the audit? Internal auditor Independent firm © 2010 PFM Asset Management LLC 24

PFM Investment Advisors to the Public Sector Association of Public Treasurers Due Diligence Standards for Use of Pools Safeguarding securities –How often are securities priced? –Source of prices? –Who monitors the treasurer or investment advisor? – How often do they get together to review? –Who conducts the audit? –What are the safekeeping arrangements? Third party-custodial bank Broker © 2010 PFM Asset Management LLC 25

PFM Investment Advisors to the Public Sector Association of Public Treasurers Due Diligence Standards for Use of Pools Deposits and withdrawals –Is there a minimum or maximum account size? –Does the pool limit the number of transactions each month? –Is there a limit on transaction amounts for deposits and withdrawals? –Are the funds 100% withdrawable at any time? –Notice of withdrawal requirement? –Are voluntary investors allowed? © 2010 PFM Asset Management LLC 26

PFM Investment Advisors to the Public Sector Association of Public Treasurers Due Diligence Standards for Use of Pools Statements –Do statements show transactions and yields in addition to balances? –Are month-end holdings reports available? © 2010 PFM Asset Management LLC 27

PFM Investment Advisors to the Public Sector Association of Public Treasurers Due Diligence Standards for Use of Pools Fees –What are the fees? –How often are they assessed? –How are they paid? –Are expenses deducted before quoting the yield? –Are there additional expenses for wire transfers? –Are fees paid to a sponsoring organization? © 2010 PFM Asset Management LLC 28

PFM Investment Advisors to the Public Sector Additional Due Diligence Experience of the pool manager –Experience of the treasurer or investment advisor –Track record Preservation of principal Performance © 2010 PFM Asset Management LLC 29

PFM Investment Advisors to the Public Sector Types of Investment Risks Interest rate risk Credit/default risk Liquidity risk Volatility risk Reinvestment risk Call/prepayment risk Inflation risk Exchange-rate risk © 2010 PFM Asset Management LLC 30

PFM Investment Advisors to the Public Sector Types of Investment Pools Local Government Investment Pools (LGIPs) –State pool (LAIF) –County pools –JPAs (CAMP, CalTrust) Money market funds Mutual funds © 2010 PFM Asset Management LLC 31

PFM Investment Advisors to the Public Sector Money Market Funds and Mutual Funds Mutual Funds –Value of shares fluctuates –WAM: greater than 90 days –20% maximum portfolio allocation, 10% per fund maximum –Loss of principal is acceptable –NOT generally recommended for public entities Money Market Funds –Seeks to maintain a constant NAV of $1.00 –WAM: 90 days or less –20% maximum portfolio allocation © 2010 PFM Asset Management LLC 32

PFM Investment Advisors to the Public Sector Money Market Funds and Mutual Funds Variable NAV Funds –Fidelity Government Bond Fund –JP Morgan Government Bond Fund –Wells Fargo Advantage Municipal Bond Fund –Federated U.S. Government Bond Fund –CalTRUST Short-Term Fund –CalTRUST Medium-Term Fund –CalTRUST Long-Term Fund Stable $1 NAV Funds* –Dreyfus Institutional Reserves Treasury Money Market Fund –Federated Government Obligations Money Market Fund –Fidelity Institutional Treasury Money Market Fund –HighMark U.S. Government Money Market Fund –CAMP Pool –Wells Fargo Advantage Heritage Money Market Fund (CalTRUST) © 2010 PFM Asset Management LLC 33 *These funds strive to keep a constant net asset value of $1.

PFM Investment Advisors to the Public Sector Money Market Funds and Pools 2a-72a-7 like Pool manager registered under Investment Advisers Act of 1940 Yes Registered under the Investment Company Act of 1940 YesNo Follows SEC rule 2a-7Yes Section of CGC53601 (l)(2)53601 (p) Maximum portfolio allocation by CGC 20%100% Example Dreyfus Institutional Reserves Treasury Money Market Fund CAMP Pool © 2010 PFM Asset Management LLC 34

PFM Investment Advisors to the Public Sector Amendments to 2a-7 Rules Effective January 2010 Rules are intended to increase a money market fund's ability to withstand economic stresses and reduce the risk of runs on a fund. Highlights of the new rules include –Maturity restrictions –Liquidity requirements –Credit quality –"Know your investor" procedures –Periodic stress tests –Rating agencies –Repurchase agreements –Disclosure enhancements –Processing of transactions –Suspensions of redemptions –Purchases by affiliates © 2010 PFM Asset Management LLC 35

PFM Investment Advisors to the Public Sector Importance of Weighted Average Maturity © 2010 PFM Asset Management LLC Days Net Asset Value at Market Change in Net Asset Value % -2.00% % -1.00% +.50% -.50% Days Net Asset Value at Market Change in Net Asset Value % -2.00% % -1.00% +.50% -.50% Money market funds have maximum WAM of 90 days

PFM Investment Advisors to the Public Sector Breaking the Buck © 2010 PFM Asset Management LLC 37

PFM Investment Advisors to the Public Sector Importance of Weighted Average Maturity (WAM) Weighted Average Maturity If Rates Rise 3% If Rates Rise 2% If Rates Rise 1% If Rates Rise 0.5% If Rates Unchanged If Rates Fall 0.5% If Rates Fall 1% If Rates Fall 2% If Rates Fall 3% 30 Days60 Days90 Days180 Days1 Year1.5 Years Value of a $1.00 Investment © 2010 PFM Asset Management LLC 38 Money Market FundMutual Fund

PFM Investment Advisors to the Public Sector Changing Market Conditions October 1998 – December 1998 (+0.86%) January 1994 – May 1994 (+2.07%) September 1994 – December 1994 (+1.74%) February 1996 – July 1996 (+1.17%) © 2010 PFM Asset Management LLC 39 1-Year United States Treasury Bill Yields

PFM Investment Advisors to the Public Sector Changing Market Conditions 1-Year United States Treasury Bill Yields January 1999 – March 1999 (+0.50%) July 1999 – August 1999 (+0.40%) April 1999 – June 1999 (+0.52%) September 1999 – January 2000 (+0.96%) © 2010 PFM Asset Management LLC 40

PFM Investment Advisors to the Public Sector Standard & Poor’s Money Market Fund Ratings © 2010 PFM Asset Management LLC 41 RatingDefinitions AAAm Extremely strong capacity to maintain principal value and limit exposure to principal losses due to credit, market, and/or liquidity risks AAm Very strong capacity to maintain principal value and limit exposure to principal losses due to credit, market, and/or liquidity risks. Am Strong capacity to maintain principal value and limit exposure to principal losses due to credit, market and/or liquidity risks. BBBm Adequate capacity to maintain principal value and limit exposure to principal losses due to credit, market, and/or liquidity risks.

PFM Investment Advisors to the Public Sector Proposed Changes to Standard & Poor’s Fund Rating Credit Criteria 42 *Investments rated A-1 maturing in 7 days or less can be counted toward the A-1+ percentage. Rating Min* A-1+ Max A-1 Max A-2 CurrentProposedCurrentProposedCurrentProposed AAAm50% 0% AAm20% 80% 5% overnight 0% Am0% 100% 10% overnight 0% BBBm0% 100% 25% overnight 0%

PFM Investment Advisors to the Public Sector Proposed Changes to Standard & Poor’s Fund Rating Maturity Criteria 43 1.Max WAM is now “WAM to reset” or “WAM (R)” 2.May be adjusted upward by 30 days (e.g. AAAm 120 days) if a fund invests only in government floating rate notes. 3.“Spread to final” or “WAM (F)” will be introduce Rating Max WAM (R) 1 (days) Max WAM (F) 2,3 (days) CurrentProposedCurrentProposed AAAm60 N/A90 AAm7570N/A100 Am9080N/A110 BBBm90 N/A120

PFM Investment Advisors to the Public Sector Pools in California Pool Type of FundNAVRatingWAM Sponsorship Fees Withdrawal Restrictions LAIF HybridHybrid: Withdrawals at $1, market value factor Not rated 120 days to 1.5 years No15 transactions per month County Pools Varies 47 days to 2.9 years NoVaries CAMP Money market pool (2a-7 like) Stable NAV of $1AAAm90 daysNoNone CalTRUST Short Term Medium Term Long Term Mutual fund structure Variable Aaf Not rated 0 to 2 years 1.5 to 3.5 yrs 5 to 7 years Yes Yes Yes 1-day notice 5-day notice, monthly CalTRUST Money Market Fund Wells Fargo Advantage Heritage Money Market Fund Stable NAV of $1AAAm/ Aaa 90 daysYesNone © 2010 PFM Asset Management LLC 44 Sources:“LAIF website, Standard & Poor’s 2009 County Pool Survey, CalTRUST website

PFM Investment Advisors to the Public Sector Tips for Staying Afloat © 2010 PFM Asset Management LLC 45 Diversify Read Understand Monitor Select funds that meet your investment objectives

2009 California Municipal Treasurer's Association April 21, 2010 Sacramento, California LAIF – An Alternative Investment Pool Presented by Pam Milliron LAIF Administrator California State Treasurer’s Office

Pam Milliron LAIF Administrator

Benefits of Using Pools and Portfolios Together

PFM Investment Advisors to the Public Sector When Interest Rates Are Rising... Monthly Yields March 2000 – March 2010 Source: Bloomberg © 2010 PFM Asset Management LLC 54

PFM Investment Advisors to the Public Sector... Pools Outperform December 31, 2004 –LAIF: 1.50% –2-Year Treasury: 3.07% (1.57% more than LAIF) December 31, 2006 –LAIF yield had risen to 5.13% December 31, 2004 to December 31, 2006 –Average yield for LAIF: 3.83% –2-Year Treasury yield: 3.07% Advantage: LAIF +0.76% © 2010 PFM Asset Management LLC 55

PFM Investment Advisors to the Public Sector When Interest Rates Are Falling... Monthly Yields March 2000 – March 2010 Source: Bloomberg © 2010 PFM Asset Management LLC 56

PFM Investment Advisors to the Public Sector... Treasuries Outperform September 30, 2007 –LAIF: 5.23% –2-Year Treasury: 3.29% (1.24% less than LAIF) September 30, 2009 –LAIF yield had fallen to 0.75% September 30, 2007 to September 30, 2009 –Average yield for LAIF: 2.73% –2-Year Treasury: 3.29% Advantage: Treasury +1.26% © 2010 PFM Asset Management LLC 57

PFM Investment Advisors to the Public Sector Understanding the Pool Performance Cycle 2-Year U.S. Treasury Yields and LAIF Monthly Yields Compared to 24-Month of Difference in Returns Source: Bloomberg *Difference in return calculated as purchase yield of 2-year U.S. Treasury less LAIF’s average yield over next 24 months. © 2010 PFM Asset Management LLC 58

PFM Investment Advisors to the Public Sector© 2010 PFM Asset Management LLC 59 $38.6 Million Source: Bloomberg $34.6 Million Cumulative Value Growth of $25 Million Over Past 10 Years Ended March 31, 2010 Portfolios Perform Better than Pools Over an Interest Rate Cycle

PFM Investment Advisors to the Public Sector Portfolios Perform Better than Pools Over an Interest Rate Cycle © 2010 PFM Asset Management LLC 60 Difference in Annualized Past 10 Year Return 1.14% Difference in Investment Income Per Year (on $25 Million) $402,000 Difference in Investment Income Over Past 10 Years (on $25 Million) $4.02 million

PFM Investment Advisors to the Public Sector Longer-Duration Portfolios Generally Perform Better than Shorter-Duration Portfolios and Pools © 2010 PFM Asset Management LLC 61 Total Returns Periods Ended March 31, 2010 Sector Duration (years) Past 5 Years Past 10 Years LAIF0.58*3.34%3.40% 1-3 Year Treasury %4.56% 1-5 Year Treasury %5.10% 3-5 Year Treasury %5.96% Source: Bloomberg and LAIF website * Weighted average maturity

PFM Investment Advisors to the Public Sector Conclusion Not all pools are the same Know what you are investing in Diversify your investments –Use more than one pool –Consider buying specific securities –Combine a pool, for liquidity, with a portfolio to stabilize earnings © 2010 PFM Asset Management LLC 62

PFM Investment Advisors to the Public Sector Online Resources LAIF CAMP CalTRUST GFOA APT US&C Standard & Poors California County Pools: www2.standardandpoors.com/portal/site/sp/en/eu/page.article/2,1,6,4, html LGIPs: www2.standardandpoors.com/portal/site/sp/en/eu/page.topic/ratings_fr_gip/2,1,6,4,0,0,0,0,0,0,0,0,0,0,0,0.html © 2010 PFM Asset Management LLC 63

PFM Investment Advisors to the Public Sector© 2010 PFM Asset Management LLC 64 Thank you!