9255 Towne Centre Drive | Suite 350 San Diego, CA Phone | Fax Developing A Plan: Preliminary Inputs To The Investment Program February 2006 CSMFO Annual ConferenceKay Chandler, CFA

©2006. Chandler Asset Management, Inc. 2 The Cycle of Portfolio Management Establish Policy Objectives, Constraints Evaluate Plan and Execution, Changes Execute the Plan Identify Strategies, Benchmarks

©2006. Chandler Asset Management, Inc. 3 Objectives + Constraints = Policy Establish Policy Objectives, Constraints Evaluate Plan and Execution, Changes Execute the Plan Identify Strategies, Benchmarks

©2006. Chandler Asset Management, Inc. 4 Establishing Objectives ■Safety—maintain appropriate level of exposure to risk ■Liquidity ■Sufficient short-term investments ■Marketable securities ■Targeted maturities ■Extra layer ■Yield (Return,Growth) ■Income ■Long-term growth

©2006. Chandler Asset Management, Inc. 5 Safety: The Relationship Between Risk and Return Market Risk

©2006. Chandler Asset Management, Inc. 6 Safety: The Relationship Between Risk and Return Higher Duration Portfolios Have Greater Volatility of Return Market Risk

©2006. Chandler Asset Management, Inc. 7 Safety: Assuming Credit Risk Can Improve Returns ■Treasuries are the safest, considered to have ZERO credit risk ■Federal agency securities considered next safest ■AAA and AA ■A■A ■No credit research necessary ■Monitor agency news, rating agency actions ■Understand the business—risks and opportunities; monitor news and rating agency watch lists ■With greater diligence--understand the business—risks and opportunities; monitor news and rating agency watch lists. Be quick to act on credit changes …When resources are available to monitor credit quality appropriately.

©2006. Chandler Asset Management, Inc. 8 ■Liquidity risk (I) 1. The risk that the portfolio won’t provide adequate cashflow for the agency ■Match maturities to known cash needs ■Prepare cash flow forecasts ■LAIF ■Readily marketable securities ■Extra layer of short-term investments Liquidity: Having cash when you need it.

©2006. Chandler Asset Management, Inc. 9 ■Liquidity risk (II) 2. The risk that a security is not readily marketable, that is, can’t be sold, if necessary, at a good price ■Often measured by the difference between the price at which you can buy (offer or ask) and the price at which you can sell (bid) ■Treasuries, large agency issues, large corporate issues are most liquid ■Small issue sizes, securities with unusual features, are least liquid Liquidity: Having cash when you need it.

©2006. Chandler Asset Management, Inc. 10 Yield: Developing Investment Strategies Establish Policy Objectives, Constraints Evaluate Plan and Execution, Change Execute the Plan Identify Strategies, Benchmarks

©2006. Chandler Asset Management, Inc. 11 Total Portfolio Liquidity Growth Yield Strategy: Two components for Liquidity and Growth ■Liquidity Component ■Meets specific liquidity needs ■Invests in short-term securities ■Average maturity short ■Very low volatility ■Cash flow matching ■LAIF ■Growth Component ■Targeted to highest suitable duration ■Longer-term securities ■Normally not used for liquidity, but invested in highly marketable securities, in case ■Greater volatility

©2006. Chandler Asset Management, Inc. 12 Passive Management ■ Buy and Hold ■Money is invested when it is available to a date when cash is needed. ■There is no further activity with that investment, except for reinvestment of income ■Maturity Ladder ■Funds are invested in equal amounts to staggered maturity dates ■When securities reach maturity, the funds are reinvested into the longest permitted maturity

©2006. Chandler Asset Management, Inc. 13 Active Portfolio Management ■Creating and maintaining a portfolio structure with acceptable exposure to risk. ■Striving to achieve a “better” return using one or more of the following strategies: ■Duration management ■Yield curve placement ■Sector weighting decisions ■Individual security selection ■Timing ■Relative to a chosen market benchmark, or to some other comparative measure

©2006. Chandler Asset Management, Inc. 14 Resource for Public Fund Investing in California CALIFORNIA PUBLIC FUND INVESTMENT PRIMER Published by the State Treasurer California Debt and Investment Advisory Commission

©2006. Chandler Asset Management, Inc. 15 On to Plan Execution and Evaluation Establish Policy Objectives, Constraints Evaluate Plan and Execution, Change Execute the Plan Identify Strategies, Benchmarks