O FFICE OF THE A RIZONA S TATE T REASURER January 16, 2015 GFOAz - January 2015

ARIZONA STATE TREASURER JEFF DEWIT AGENDA  What the State Treasurer does.  Controls in place.  Investing in funds like the LGIP.  Advantages of the LGIP.  LGIP Performance.  Interest rate outlook.  Questions?

ARIZONA STATE TREASURER JEFF DEWIT STATE TREASURER DUTIES  One of six statewide elected officials  Serves a term of 4 years, and can be re-elected once for a total of 8 years in office  Third in line in succession to the Governor  Manages Arizona’s $13 billion investment portfolio  Fiduciary of taxpayer money  Directs the state’s banking services  Serves as: - Chairman of Arizona’s State Board of Investment - Chairman of Arizona’s State Loan Commission - Arizona’s Surveyor General - Member of the State Land Selection Board

ARIZONA STATE TREASURER JEFF DEWIT INVESTMENTS  More than $12.9 Billion in 25 different investment pools spread across 1,300 separate accounts broken into three major sources: 1. Over $5 Billion in State Agency Funds (generated from taxes, fees and other revenues) 2. Over $5 Billion in State Land Endowment Funds 3. Over $2 Billion Local Government Investment Pools (LGIP)

ARIZONA STATE TREASURER JEFF DEWIT GOVERNANCE  Arizona Constitution  Arizona Revised Statutes  Arizona Board of Investment (BOI)  Investment Risk Management Committee (IRMC)  Investment Policy (approved by IRMC and BOI)  Pre/Post Trade Compliance  Internal Compliance

ARIZONA STATE TREASURER JEFF DEWIT FUND RISK  What should I know about investing in funds like the LGIP?  Credit Risk – Can impact share price  Interest Rate Risk – Can impact share price  Duration  Neither your principal nor interest are guaranteed  Generally there are two ways a fund manager can get higher yield:  Cut expenses  Take on more risk

ARIZONA STATE TREASURER JEFF DEWIT CHANGES IN INTEREST RATES  Changes in the value of a bond are inversely related to changes in the rate of return. Rates up = Price down.  Long-term bonds have greater interest rate risk than short-term bonds.  Low coupon (Yield) bonds have greater interest rate sensitivity than high coupon (Yield) bonds. (Longer Duration)  Generally; Bad news makes US Treasury bonds more valuable, (prices higher, yield lower) and interest rates go down.  Generally; Good news makes US Treasury bond prices fall and yields rise, and interest rates rise.  The NAV (net asset value) or Market Value of a fund is impacted by the interest volatility of each bond it holds.

ARIZONA STATE TREASURER JEFF DEWIT 2 YEAR NOTES EXAMPLE  What if the LGIP held all 2y notes?  Today I buy a new issue 2 year note that market yield to me 1.00%; T 1.00% 100 (Par)  Tomorrow the FOMC expectantly announces it will raise rates. And the interest rate on the 2Y moves to 1.50%  What is my bond worth?  $ 

ARIZONA STATE TREASURER JEFF DEWIT DURATION  Duration is a measure of risk quoted in years.  Duration is the approximate “percentage change” in price for a 100 basis point change in rates. – Then why is it reported as years?  Short definition: The weighted average life of all of the cash flows based on the market price. Duration of a fund can and will change.  As the fund (bond) yield/coupon increases, its duration decreases and the fund becomes less sensitive to interest rate changes.

ARIZONA STATE TREASURER JEFF DEWIT 10 YEAR DURATION EXAMPLE  10 year note with a 5% coupon at Par (100 dollar price)  Duration = years at purchase.  10 year note with a 1% coupon at Par (100 dollar price)  Duration is years at purchase.  Because the pre maturity cash flows (semi quarterly interest payments) are less.

ARIZONA STATE TREASURER JEFF DEWIT ADVANTAGES OF THE LGIP  Convenience and Compliance - Participants own shares of a diversified portfolio managed in compliance with Arizona’s statutes as well as required Governmental Accounting Standards Board reporting standards.  Cash Management - Same day liquidity (10:30AM) permits flexibility and fine-tuning of cash management needs in pools 5 and 7.  Costs – All administrative and management fees are deducted from the LGIP earnings accrual each day prior to distribution of the earnings to participants; therefore, fees are totally transparent to participants. Fees are currently 5.5bps, and those fees stay here in Arizona.  Online access to Account Information – Account information can be viewed 24/7 through a secure online web site.  Statements - Monthly statements include all transactions, the earnings rate, and the monthly dividend.  Competitiveness – The LGIP offers a competitive rate of return, which should enhance the rates offered to you on alternative investments.  Experience – The Treasurer’s Office has run the LGIP since 1980.

ARIZONA STATE TREASURER JEFF DEWIT INVESTMENT TEAM  Jeff DeWit – State Treasurer - 22 years Investment Industry Experience - 14 years as CEO of an Investment Company  Patricia Humbert – Chief Investment Officer - 30 years Investment Industry Experience - 15 years at the State Treasurer’s Office - LGIP Manager  Tim White – Senior Portfolio Manager - 23 years at the State Treasurer's Office - Former LGIP Manager  Dale Stomberg – Manager of Investment Accounting - 22 years at the State Treasurer’s Office

ARIZONA STATE TREASURER JEFF DEWIT LGIP  Pool 5:Similar to a money market fund – rated AAAf by Standard & Poor’s. Same day liquidity.  Pool 7:Similar to a money market fund – invests only in assets with the full faith and credit of the United States. Same day liquidity.  Pool 500: Medium-term bond fund used for longer- term investing. Monthly liquidity.  Pool 700:Medium-term bond fund used for longer- term investing. Invests only in assets with the full faith and credit of the United States. Monthly liquidity.

ARIZONA STATE TREASURER JEFF DEWIT Pool 5 – LGIP SAFETY: Distribution of Holdings (Moody's Ratings) LIQUIDITY: 83% of Assets Mature Within 90 DaysYIELD:.10% (November 2014)  Rated AAAf (Highest Rating Available)  $1.2 Billion in Assets as of 11/30/2014  100% Duration Inside 1 year  Diversified Highly Rated Investments Including Repurchase Agreements, Commercial Paper, and Government Securities  83% of the Assets are Cash Equivalent Securities

ARIZONA STATE TREASURER JEFF DEWIT Pool 7 – Gov’t LGIP SAFETY: Distribution of Holdings (Moody's Ratings) LIQUIDITY: 92% of Assets Mature Within 90 DaysYIELD:.07% (November 2014)  $1 Billion in Assets as of 11/30/2014  100% Duration Inside 1 year  100% of the Assets are Guaranteed by the Full Faith and Credit of the United States of America  92% of the Assets are Cash Equivalent Securities

ARIZONA STATE TREASURER JEFF DEWIT Pool 500 – Medium Term LGIP SAFETY: Distribution of Holdings (Moody's Ratings) LIQUIDITY: 30% of Assets Mature Within 90 DaysYIELD:.93% (November 2014)  $257 Million in Assets as of 11/30/2014  Net Asset Value (share price) of $ as of 11/30/2014  Over 55% Duration Inside 1 year  100% of the Assets are Investment Grade or Better (60% are rated AAA)  Well Diversified Portfolio of Assets With No More Than 2.5% Exposure to Any Single Corporate Asset

ARIZONA STATE TREASURER JEFF DEWIT Pool 700 – Gov’t Medium Term LGIP SAFETY: Distribution of Holdings (Moody's Ratings) LIQUIDITY: 28% of Assets Mature Within 90 DaysYIELD: (November) 1.02%  $145 Million in Assets as of 11/30/2014  Net Asset Value (Share Price) of $ as of 11/30/2014  26% Duration Inside 1 year  100% of the Assets are Guaranteed by the Full Faith and Credit of the United State of America  Well Diversified Portfolio of Assets Across All available U.S. Full Faith and Credit Securities

ARIZONA STATE TREASURER JEFF DEWIT INTEREST RATE OUTLOOK  FOMC – When will FOMC raise rates?  “When the Committee decides to begin to remove policy accommodation, it will take a balanced approach consistent with its longer-run goals of maximum employment and inflation of 2 percent. The Committee currently anticipates that, even after employment and inflation are near mandate-consistent levels, economic conditions may, for some time, warrant keeping the target federal funds rate below levels the Committee views as normal in the longer run.” SOURCE: Federal Reserve Board December 17, 2014 Minutes.

O FFICE OF THE A RIZONA S TATE T REASURER QUESTIONS?