1. Portfolio Benchmarking
Government Investment Officers Association March 17, 2011
Rick Phillips
President & Chief Investment Officer
Municipal Investment Managers

2. Municipal Investment Managers
Disclosure
The views expressed herein are those of the speaker and do not necessarily represent the views of Main Street Capital Advisors. Views are based on data available at the time of this presentation and are subject to change based on market and other conditions. Main Street cannot guarantee the accuracy or completeness of any statements or data. The information provided does not constitute investment advice and it should not be relied upon as such. It is not a solicitation to buy and/or an offer to sell securities. It does not take into account any investor’s particular investment objectives, strategies, tax status, or investment horizons. All material has been obtained from sources believed to be reliable, but we make no representation or warranty as to its accuracy and you should not place any reliance on this information. Past performance is no guarantee of future results.
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3. GFOA Model Investment Policy Municipal Investment Managers
Safety: Safety of principal is the foremost objective of the investment program. Investments shall be undertaken in a manner that seeks to ensure the preservation of capital in the overall portfolio. The objective will be to mitigate credit risk and interest rate risk.
Liquidity: The investment portfolio shall remain sufficiently liquid to meet all operating requirements that may be reasonably anticipated. This is accomplished by structuring the portfolio so that securities mature concurrent with cash needs to meet anticipated demands (static liquidity). Furthermore, since all possible cash demands cannot be anticipated, the portfolio should consist largely of securities with active secondary or resale markets (dynamic liquidity). A portion of the portfolio may be placed in money market mutual funds or local government investment pools, which offer sameday liquidity for short-term funds.
Yield: The investment portfolio shall be designed with the objective of attaining a market rate of return throughout budgetary and economic cycles, taking into account the investment risk constraints and liquidity needs. Return on investment is of secondary importance compared to the safety and liquidity objectives described above. The core of investments are limited to relatively low risk securities in anticipation of earning a fair return, relative to the risk being assumed. Securities shall generally be held until maturity, with the following exceptions:
• A security with declining credit may be sold early to minimize loss of principal.
• A security swap would improve the quality, yield, or target duration in the portfolio.
• Liquidity needs of the portfolio require that the security be sold.
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4. Presentation Summary
Discuss Pros and Cons and the Mechanics of each method of benchmarking:
So you can determine which type of benchmarking is appropriate and suitable for your entity.
Main Takeaways
You Should Benchmark the Portfolio
The Benchmark Needs to be Relevant
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5. Primary Factors to Consider Municipal Investment Managers
To Be Relevant, Benchmarks Should Reflect the General Characteristics of a Portfolio’s:
Sector Allocations
Duration/Maturity
Turnover
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6. Municipal Portfolio Structure: Typical Allocation
Investment Portfolio
Liquidity Portfolio
(Target: 20%-30%)
Primary Liquidity
(1-90 Days)
Secondary Liquidity
( Days)
Core Portfolio
(Target 70%-80%)
Sector
Target Allocation %
Money Markets
20%
Treasuries
10%
Agencies
Bullets (non-call)
40%
Callables
30%
Total
100%
Operating fund, not bond proceeds
More than One Benchmark Component is Usually Needed--Customize
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7. Keeping Score of Your Portfolio Municipal Investment Managers
Yield Return
Book Return
Total Return
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8. Municipal Investment Managers
Yield Return
Portfolio’s Month End Average Weighted Book/Purchase Yield
Security
Maturity
Duration
Wgt Dur
Par Value
% of Portfolio
Book Yld
Wgt Yld
LGIP
3/1/2011
0.00
5,000,000
4.00%
0.15%
0.01%
Agency
3/31/2011
0.08
0.01
10,000,000
8.00%
0.20%
0.02%
Treasury
4/30/2011
0.17
0.25%
5/31/2011
0.25
0.02
6/30/2011
0.33
0.03
0.30%
7/31/2011
0.42
8/31/2011
0.50
0.04
0.35%
0.03%
9/30/2011
0.59
0.05
10/31/2011
0.67
11/30/2011
0.75
0.06
12/31/2011
0.84
0.07
0.40%
1/31/2012
0.92
2/29/2012
1.00
Total
0.52
125,000,000
100.00%
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9. Yield Return - Custom Benchmark Municipal Investment Managers
Sector Weight
LGIP %
Treasury* %
Agency# %
Total %
Month-End Yields:
*GB1=1 Yr T-Bill
#AGDN360Y= 1Yr Agency
1.14% 12 Month Moving Avg
Jun 08 to May 09
Yld
Mar-10
Apr-10
May-10
Jun-10
Jul-10
Aug-10
Sep-10
Oct-10
Nov-10
Dec-10
Jan-11
Feb-11
LGIP Yld
0.19
0.18
0.20
0.22
0.23
0.21
Tsy Yld
0.38
0.32
0.31
0.28
0.25
0.26
0.27
0.24
Agy Yld
0.48
0.50
0.49
0.44
0.34
0.30
0.29
Wgt 4%
Tsy
48%
Agy
Wgt Yld
0.42
0.43
0.40
0.37
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10. Yield Return: Pros and Cons Municipal Investment Managers
Ease of Calculation
Ease of Understanding (presenting to governing boards)
Helpful for Budgeting Interest Income
Cons:
Does Not Account for Realized Capital Gains or Losses
Subject to Yield To Maturity Assumptions
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11. Yield to Maturity Assumption What is the YTM? 1% or 3% or %?
Step-Up Example: 5 Year Maturity, Annual 1% Steps, Purchased at Par
Coupons:
Yr %
Yr %
Yr %
Yr %
Yr %
Avg %
Future Coupon Payments Are Reinvested at the Purchase Yield
What is the YTM?
1% or 3% or %?
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12. Municipal Investment Managers
Book Return
+ Accrued/Received Interest
+/- Amortization or Premiums/Discounts
+/- Realized Gains/Losses
Average Daily Book Balance for the Period
= Book Return
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13. Municipal Investment Managers
Total Return
+ Accrued/Received Interest
+/- Amortization or Premiums/Discounts
+/- Realized Gains/Losses
+/- Unrealized Gains/Losses
Time Weighted Invested Value for the Period
(Market Value Based)
= Total Return
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14. Interest Rates Decline 50 Basis Points for the Month
Calculation of Return
Book Return vs Total Return
Interest Collected
300,000
Plus Accrued Interest at End of Period
150,000
Less Accrued Interest at Beginning of Period
(100,000)
Less Accrued Interest at Purchase During Period
(50,000)
Interest Earned During Period
Adjusted by Premiums and Discounts
50,000
Adjusted by Realized Capital Gains or Losses
100,000
Adjusted by Mark-to-Market
N/A
Earnings During Period
450,000
Daily Weighted Balance for Period
100,000,000
Book Rate of Return - Period
0.45%
Book Rate of Return - Annualized
5.40%
Interest Collected
300,000
Plus Accrued Interest at End of Period
150,000
Less Accrued Interest at Beginning of Period
(100,000)
Less Accrued Interest at Purchase During Period
(50,000)
Interest Earned During Period
Adjusted by Premiums and Discounts
N/A
Adjusted by Realized Capital Gains or Losses
100,000
Adjusted by Mark-to-Market
750,000
Earnings During Period
1,050,000
Daily Weighted Balance for Period
100,000,000
Total Rate of Return - Period
1.05%
Total Rate of Return - Annualized
12.60%
Mark-to-Market: $100,000,000 x 1.5 duration x .50%= $750,000
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15. Book Return – Under the Hood Municipal Investment Managers
Sample Benchmark Composition:
(Combined Liquidity and Core Portfolio)
Sector
Maturity
Index
Bberg Ticker
Moving Average
LGIP
1 Day
N/A
Monthly Distb. Rate
Agy Discount Notes
0-6 Months
3 Mon Discount Notes
AGDN090Y
6 Month
Commercial Paper
0-3 Months
A1/P1 45 Day Dealer CP
DCPB045Y
3 Month
CDs
A1/P1 45 Day CDs
DCDB45D
Agy Bullets
1-3 Years
1-3 Yr Agency Bullets
G1PB
12 Month
Agy Callables
1-3 Yr Agency Callables
G1PC
T-Notes
1-3 Yr Treasuries
G102
Corporate Notes
1-3 Yr Corp Notes A-AAA
C1A1
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16. Yield & Book Return Benchmark Municipal Investment Managers
The views
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17. Moving Average Benchmarks Municipal Investment Managers
Date
12 MMA
24 MMA
Var
Dec-01
3.70
4.95
-1.25
Dec-02
2.55
3.12
-0.58
Dec-03
1.64
2.09
-0.45
Dec-04
2.41
2.02
0.38
Dec-05
3.89
3.15
0.74
Dec-06
4.80
4.35
0.45
Dec-07
4.26
4.53
-0.27
Dec-08
1.91
3.09
-1.17
Dec-09
0.95
1.43
-0.48
Dec-10
0.65
0.80
-0.15
Avg
2.68
2.95
-0.28
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18. Book Return: Pros and Cons Municipal Investment Managers
Matches Budgeting Process
Closely Matches Actual Cash Flows
Cons:
Subject to Manipulation of Realized Gains/Losses
May Not Reflect Portfolio’s Market Volatility Changes
(The Primary Reason for GASB 31)
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19. Total Return Parameters/Rules
Bank of America/Merrill Lynch 1-3 Year Treasury and Agency Index
(Ticker: G1A0)
Issue Size: $250 Million and Up (Agy*), $1 Billion and Up (Tsy*)
Monthly Rebalanced
Index “Buys” all Tsy and Agy Fixed Rate Securities Between 1-3 Yrs
Index “Sells” all Tsy and Agy Fixed Rate Securities Less Than 1 Yr
“Buys” Newly Added Securities at the Bid Side – Worth about 12’ish Basis Points Annually
*Non-Subordinated # Non-TIPS
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20. 1-3 Yr Govt Index Sector Allocation Municipal Investment Managers
Percent
Tsy
76.2%
FNMA
7.4%
FHLMC
6.6%
FHLB
4.7%
FFCB
0.8%
TVA
0.2%
Corp FDIC
4.1%
Total
100%
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21. Municipal Investment Managers 21

22. Municipal Investment Managers
% of Mkt Val
Bullets 95.2%
Calls %
# of Issues
Bullets
Calls
Total
% of Issues
Bullets 53%
Calls %
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23. 1-3 YR Govt Index Duration Municipal Investment Managers
Month-Start
1.82
Duration
1.74
Month-End
Jan 2011
Mar 2010
Oct 2010
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24. 1-3 YR Govt Callable Index Duration Municipal Investment Managers
Mar 2010
Oct 2010
Jan 2011
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25. Municipal Investment Managers
*Book Return= 12 Mon Moving Avg of Index Month-End Yield
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26. 1-3 Yr Govt Index Components of Return Municipal Investment Managers 26

27. Price* vs Coupon Return Municipal Investment Managers
1-3 Govt Index:
Price* vs Coupon Return
1991 to 2010
Year 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10
Avg
Price
3.2
-0.9
-5.4
4.1
-1.2
0.2
0.6
-2.8
1.7
2.6
1.2
-1.7
-2.2
-1.8
0.0
2.5
-1.6
0.02
Coupon
8.5
7.2
6.4
6.0
6.9
6.2
5.9
5.8
4.7
3.7
3.5
4.2
4.6
2.8
2.2
5.25
Total
11.7
6.3
5.4
11.0
5.0
6.7
7.0
3.1
8.1
8.4
2.0
1.0
7.1
2.3
5.27
Price Return*: % = %
Coupon Return: % = %
Total Return: % = %
Price Return=Mark-to-Market Change
Book Return (Coupon) and Total Return are basically the same over the long run
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28. Total Return Implications Municipal Investment Managers
“The total rate of return implies that a dollar of wealth is equally meaningful to the investor, whether that wealth is generated by the secure income from a 90-day Treasury bill or by the unrealized appreciation in the price of a share of common stock (or bond).” (CFA Institute curriculum)
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29. Municipal Investment Managers
Conclusions
To Adhere To the 3rd Object of Your Investment Policy-You Need to Benchmark Your Portfolio to See if it’s Earning a “Market Rate of Return”
It’s Okay to Use All Three Measures
Book Return and Total Return Are More Sophisticated Measures and Capture More Information
Book Return Is Generally More Congruent With Most Municipalities’ Budgeting Programs
Total Return Captures the Mark-to-Market Volatility of a Portfolio
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