1. NCLGIA 2019 Summer Conference Investment Options & Strategies
Lee Carter
John Frye
NCCMT

2. General Requirements (G.S. 159)
Finance Officer manages investments
Subject to governing board restrictions
These are usually in investment policies
Managed so that cash is available when needed

3. Basic Guidelines Safety Liquidity Yield Governments should evaluate:
Eligibility under G.S (c)
Appropriateness

4. U. S. Treasuries & U.S. Government-Guaranteed
U.S. Treasuries – bills, notes, and bonds
U.S Government Guaranteed
GNMA
REFCORP (from S&L bailout)
FDIC-guaranteed corporate notes (from 2008)
Other securities possible
Must be specifically guaranteed as to principal and interest

5. Government Agencies and Instrumentalities
Agency must be specifically listed in G.S
“Direct” obligations or direct debt only – not agency-guaranteed
Fannie Mae & Freddie Mac under U.S. conservatorship – form may change

6. State and Local Obligations
State of North Carolina and NC local governments and public authorities only
Bonds and notes only – not COPs
Notes being rolled into bonds or notes are eligible, notes being rolled into COPs – NOT eligible

7. Commercial Paper
Unsecured short-term promissory note
A1 / P1 / F1 only
No split ratings
“+” ratings for S&P

8. Bankers Acceptances
Short-term corporate note
No specific rating on the security
Issuer must be either of the following:
Long-term rating is “AAA”
Bank or holding company headquartered in NC

9. NCCMT SEC-registered funds (both Government and Term Portfolios)
Certified by LGC
Government Portfolio
2a7 Fund
Investments limited to US Treasuries and US government agencies
Stable principal
Maturity 60 days or less
Term Portfolio
Investments limited to G.S
Ultra-short bond fund – principal can fluctuate
day target duration

10. Other Investments Repurchase agreements Third-party safekeeping
Collateral must be Treasuries or U.S. government guaranteed
Counterparty must be a primary dealer or bank
Marked to market daily (at least 100% of value)
Other mutual funds
Bond proceeds only – subject to arbitrage provisions
Fundamental investment limitations limited to G.S
Ratings, arbitrage tracking – check with bond attorney
Local special investment legislation

11. AGPIP FUND Authorized under G.S. 159-30.1(b) and 30.2(b)
Government must establish irrevocable trust by local resolution
Investment options:
BIF
EIF
STIF
Forms available on State Treasurer’s website

12. Not Authorized Corporate notes Brokered CDs
Foreign securities – only domestic subsidiaries are allowed
Bonds and notes from other states
“Retail” repos
Annuities

13. Investment Strategy Development
Investment Statutes (G.S )
What is allowed under law in NC?
Investment Policy
What are the governing body’s investment directives?
Which investments are available to me at the local level?
Investment Strategy
Within the parameters of state statute and policy, how should I invest based on current conditions?
Investment Program
How will I implement my strategy and evaluate it?
Lee will review what is allowed under N.C. General Statutes
This is the basic continuum in a well developed investment program. Law-Policy-Strategy-Program
We will spend the majority of our time discussing investment Strategy Development
Will not be giving you a specific strategy. That will vary widely based on market and local conditions and factors.

14. Investment Strategy Development
NC Statutes
Policy
Strategy
Investment strategy development starts with NC General Statutes
Next, local policies add additional restrictions, guidance, and procedures
Finally, an investment strategy is developed within these parameters based on market, financial, and other local conditions.

15. Investment Statutes
N.C. General Statute contains everything that is available to local governments for investing public funds.
NC Statutes
The statutes spell out all of the options available to us for investing public funds under law.
However, the fact that an investment option is allowable under law, does not mean it is appropriate for your situation

16. Investment Policy
“An investment policy describes the parameters for investing government funds and identifies the investment objectives, preferences or tolerance for risk, constraints on the investment portfolio, and how the investment program will be managed and monitored.” GFOA Best Practices

17. Investment Policy
Local investment restrictions and guidance beyond what is provided under general statutes
Provides governing body’s general investing philosophy and expectations
Allows Finance Officer some latitude to respond to market and financial conditions
Policy

18. Investment Policy Investment Policy Considerations:
Investment objectives
Governing body preferences
Risk tolerance guidance
Allowed investments
Maximum investment term or target duration
Diversification requirements or portfolio mix targets
Authorized financial institutions and broker dealers
Reporting requirements
Investment custody and internal controls

19. Policy vs. Strategy Policy Strategy All allowable investments
Maximum concentration by issuer
Maximum maturities
Strategy
Best choices among available investments
Best allocation based on current market conditions
Duration matched to current liquidity needs
May be more restrictive than state statute
Greater diversification that the required minimum may better serve the unit
Just because a 5-year maturity is allowed in your policy does not mean it is prudent

20. Investment Strategy Investment Strategy Development Process
Review Investment Program
Review Investment Risk Profiles
Review Market Conditions
Review Portfolio Considerations
Review Local Issues
Strategy

21. Investment Strategy Review Investment Program
Review policy goals and objectives
Consider other board and management expectations
Assess current liquidity needs
“Within the parameters of what is allowed under law and our investment policy, how should I be investing based on current liquidity needs and market conditions?”

22. Investment Strategy Review Risk Profile of Various Investments
Credit risk
Liquidity risk
Interest rate risk
Reinvestment risk
In order of Safety, Liquidity, and Yield
Review each of the investment vehicles available to you and assess the risk profile of each
Consider if the risks of a particular investment can be mitigated through diversification

23. Investment Strategy Commercial Paper - Risk Profile Example
Credit risk
Medium-relies on a single corporate entity for repayment that is highly rated
Liquidity risk
Low-currently there is an active market for CP
Interest rate risk
Medium-the investment’s value may fluctuate with interest rate changes
Reinvestment risk
Low-short term, non-callable investment
Here is an example risk profile using commercial paper
These are my thoughts on this. You may place more or less value on a specific risk
Once risks are evaluated, compare the yield differences to see if an investment is worth the additional risk to you

24. Investment Strategy Review Market Conditions
Are we most likely in a rising or falling interest rate environment?
Where do economists say we are in the economic cycle?
Has an investment option changed over time?

25. Investment Strategy Has an investment option changed over time?
U. S. Treasuries
inverted yield curve; fed policy changes
U. S. Agencies
credit quality; public acceptance; availability; investment feature changes/calls
Money Market Funds
fund composition changes; rising market or falling rates
Commercial Paper
credit risk; economic forecast for corporate profits; availability
Bank CDs
rate changes over time; bank appetite for collateralized deposits; CD size limitations
The one thing that remains constant is CHANGE
Each of these investment options have changed over time
Review how each investment has changed since the recession

26. Investment Strategy Review Portfolio Considerations
Establishing portfolio liquidity allocations
Operating funds
Intermediate reserve funds
Longer-term investments
Duration targets
Consider tolerance for price volatility
Consider effect calls have on duration
How into which “liquidity buckets” should you allocate the funds you have on hand? What investments fit with your cash requirements profile? May or may not be specifically spelled out in the Investment Policy.
How far out should I go under current conditions? Longer maturity investments have more price volatility. Gains and losses have to hit interest earnings revenues as well as the balance sheet. This caused some units issues at June 30, 2018 when rates were rising and longer term investments had valuation markdowns at June 30. In some cases, it completely wiped out their investment earnings for the year.

27. Investment Strategy Review Local Issues
Upcoming liquidity requirements
Fund balance policy considerations
Changes in fund balance levels
Governing body or management changes
Assessing staff resources for investing
All of these issues can affect your investment strategy.
Are there upcoming liquidity requirements?
Where are you in your fund balance target range? Minimum, maximum, middle? Over target or under the target?
Is fund balance rising or falling?
Has the governing body or management changed in regard to financial management?
What staffing resources do I have to commit to investing activities? This has a bearing on how robust the investment program can be.

28. Investment Strategy How will the investment strategy be implemented?
How will I make sure strategy is being adhered to?
Are policy, statute, and strategy being followed?
Are funds fully invested at all times?
What outcome metrics will be used to measure performance?
Caution should be exercised with these
May encourage yield chasing
If you are able to stick to your investment strategy, it will not be by accident!
How will I evaluate that I or my staff is adhering to the strategy?
Remember you could be doing everything right and miss an outcome metric. Markets change!

29. Investment Strategy Development
Local governments have a duty to the public to appropriately invest the funds that have been entrusted to them.
Each unit must develop an investment program that is right for them. This will vary widely from unit to unit. What is appropriate for one unit may not be for another.
“Everything Starts with Why” book. Why? - We have a duty to invest the funds entrusted to us.
You must develop a strategy and program that is right for your unit. This will vary widely based on many factors and conditions.

30. Investment Strategy Development
Strategy must be developed, implemented and reviewed over time
Plan – developing policy and strategy
Do – putting your plans into action
Review – evaluating your policy and strategy over time
What specific actions do you need to take to elevate your investment program to the next level?
Thank you!

31. What specific actions do you need to take to elevate your investment program to the next level?
Thank you!