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FIN 12-15
C` 00 Report to = - Executive Committee PICKERING Report Number: FIN 12-15 Date: May 11, 2015 From: Paul Bigioni Director, Corporate Services & City Solicitor Subject: Investment Portfolio Activity for the Year Ended December 31, 2014 Ontario Regulation 438/97 under the Municipal Act, 2001 Recommendation: It is recommended that Report FIN 12-15 of the Director, Corporate Services & City Solicitor regarding Investment Portfolio Activity for the Year Ended December 31, 2014 be received for information. Executive Summary: The following report and attachments represent a summary of the investment activity and year end balance in the portfolio. Investment activity for the year 2014 totaled approximately $260.4 million with a year end balance in the portfolio of approximately $102.7 million. Current Fund investments are limited to one year or less and Reserve Funds to 10 years or less under the Council approved policy. As discussed below, overall returns on the City's portfolio remain low due to continued low interest rates during 2014, however, the returns still compare favourably to market benchmarks. Over the last decade, the City's returns have generally exceeded comparative benchmarks. Financial Implications: Total investment income, including bank account interest for 2014 was $1.45 million (2013 - $1.37M) of which $530,000 (2013 - $222,000) was for Current (Operating) Funds. The balance of the income was allocated to the various reserve funds. Discussion: The City's investment portfolio is comprised of two main components: (i) Reserve Funds; and (ii) Balances available in the Current Fund, when not required to meet current operating expenditures. This latter balance can vary greatly depending upon many factors including the timing of the receipt of property taxes and levy payments to the School Boards and the Region. • 82 • FIN 12-15 May 11, 2015 Subject: Investment Portfolio Activity for the Year Ended December 31, 2014 Page 2 Ontario Regulation 438/97 under the Municipal Act, 2001 Investments are undertaken as one consolidated pool of funds and interest earned is credited back to the appropriate funds. The Treasurer of the City of Pickering is required under Provincial Regulation 438/97 to report certain information and opinions to Council. The schedules to this report are included as part of that Regulation's information requirements. The portfolio balance at December 31, 2014 of$102.7 million (2013 - $86.4M) is higher than the prior year. Sale of land in Duffin Heights at end of October, debt proceeds in July and supplementary tax due dates at the end of November and the end of December all contributed to the increase in the investment portfolio balance over 2013. This led to a short-term investment balance at the end of 2014 of$49.5 million (2013 - $47.2M) and an increased long-term investment balance of$49.2 million (2013 - $36.2M). The portion of the investment portfolio invested with TD Wealth primarily consists of Guaranteed Investment Certificates (GIC). The interest rates ranged from 1.25% to 1.71% which is higher than the interest rates for Banker's Acceptances or Deposit Notes, however, GIC's are less liquid than these other investment instruments. The net performance on TD Wealth's portion of the portfolio is 1.45% The return on the portfolio maintained with Nesbitt Burns increased slightly in 2014 with a weighted yearly rate of return of 1.51% (2013— 1.23%) on the combined short-term and long-term investments. This was primarily a result of a slight increase in rates from the beginning to the end of the year combined with a larger amount of funds available to invest in the portfolio from the land sale and debt proceeds. Investment parameters are much narrower for the City than permitted for money market funds due to the Municipal Act and Regulations limiting the selection of qualified investments for municipal entities. Furthermore, staffs approach tends to be conservative, given that they are investing public money. Notwithstanding these restrictions, the annual returns from both Nesbitt Burns and TD Wealth outperformed the annual returns for the CIBC World Markets 91-Day T-Bill Index (0.91%) and the Morningstar Canadian Money Market Mutual Fund Index (0.57%). These indices are deemed to be comparative benchmarks for reviewing the portfolio's performance and are considered the standard for analysis of investment funds in the industry. The average return on interfund investments (internal loans) was 2.7% (2013- 2.7%). At year end 2014, the total portfolio of approximately $102.7 million, consisted of . approximately $49.2 million or 47.9% in external long-term investments and approximately $4.0 million or 3.9% in Interfund Investments (Internal Loans). The balance of approximately $49.5 million is short-term investments of 90 days or less. All investments were made in accordance with the Investment Policy approved by Council. 83 FIN 12-15 May 11, 2015 Subject: Investment Portfolio Activity for the Year Ended December 31, 2014 Page 3 Ontario Regulation 438/97 under the Municipal Act, .2001 Attachments: 1. Investment Activities for 2014 2. Outstanding Investments as at December 31, 2014 3. Portfolio Performance- Correspondence from TD Wealth 4. ' Portfolio Performance Review- Correspondence from BMO Nesbitt Burns Prepared By Approved/Endorsed By: Kristine Senior Stan Karwowski Manager, Accounting Services Divis'a Head, Finance &Treasurer Paul Bi•,.: Direcisr, or.irate Services & City Solicitor Recommended for the consideration _ of Pickering City Council diji 2.3 20 is Tony Prevedel, P.Eng. 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Ko-m • mom cD ID • CD Doom rF 897 ATTACHMENT lit 4 TO REPORT# 1 Ia-IS BMO 0Nesbitt Burns - Private Client Division • Mr.Stan Karwowski April 10,2015 Division Head,Finance and Treasurer Corporate Services Department,City of Pickering 1 The Esplanade,Pickering ON L1V 6K7 Dear Stan, • Account Reference: The Corporation of the City of Pickering (A/C#365-13206-10) • The following is an overview of City of Pickering Account at BMO Nesbitt Burns.The review includes the rates of return for the account for Calendar 2014 as well as historical annual rates of return for the previous 9 years dating back to 2004.Additionally I have also included both Economic and Capital Markets commentary for 2014 and comments and discussion looking forward in 2015 from some of BMO Nesbitt Burns top analysts and strategists. 5 Big Surprises from 2014 and 5 Big Trends for 2015 Douglas Porter CFA-Chief Economist 19 Dec 2014 This year saw a swirling assortment of financial market concerns,culminating in mildly disappointing global growth yet again.We started the year with the Canadian dollar tumbling out of the gate,repeating that act late in 2014,and posting one of its deepest annual declines on record.Sliding global bond yields, largely dragged down by persistent Euro Area woes and Russia's belligerence,dominated the late winter and spring.Then,a resurgent U.S.dollar, led by divergence between the U.S.economy and the rest of the world, prompted a new set of global concerns.Through the Fall,the dramatic plunge in oil looked to be the story for the year,and the most important development heading into 2015. Russia's turmoil had the final say,with the steep drop in the ruble threatening not just its economy but some temporary spillover to other emerging markets.Amid those many moving parts, here are what could be considered the five biggest surprises,or most unusual economic stats,for an interesting year. 1. Oil prices suffered one of their largest annual declines on record, after holding up surprisingly well in the first half of the year.WTI and Brent plunged more than 40%,with only 2008 posting a deeper full-year drop(Chart 1). Everyone seems to have their favourite theory as to why prices fell so fast.But, abundant North American supplies, Libya's export resumption,the end of QE,growth concerns in Europe,Japan and China,and OPEC's blatant unwillingness to support the market all fit the bill. In other words,a bit of demand weakness,and a lot of supply strength.Another commodity surprise:gold managed to hold almost steady in a year of broad resource price weakness, US$strength,and concerns over low inflation. 90 Oil Plite-Svkilti West Texas Intermediate (yly chs r ng) Crude Oil Prices 167 OPEC =_ Asian naradal Market Crisis Wreck -Crisis 123 Share I J War 53 I i I -43 "-al- , latest -y5 90 95 00 05 10 15 Shading indicates p-aric s of U.5_recession 2..Ten-year U.S.Treasury yields fell more than 80 basis points for the year,almost the opposite of what the consensus expected.This took yields back to levels before the taper tantrum in May 2013—even as tapering unfolded exactly on schedule(Chart 2).The gravitational pull from sliding European yields was probably the biggest surprise,and easily offset a stronger U.S.economy. By year's end,Germany was paying just 0.6%for 10-year money,France 0.9%,Spain 1.7%and Italy 1.9%,all making the U.S.offer of 2.2%look good by comparison.Canada's outmatched the Treasury yield drop which,itself,was a mild surprise,and reflected a persistently dovish Bank of Canada stance.Greece was the outlier(of course)as its yields rose on late-year political uncertainty. than Up then,.�€i3R(1l = — - (percent) 10-year(iovernment Band Yields 325 • 4 3.03 2.75 2 50 7 Canada az 2.00 F' 7.75 Taper Tantrum begins latest 150 13 14 91 3. Defying ongoing calls of an imminent correction (or worse), Canadian housing surprised to the high side,yet again.Perhaps the strangest stat of the year is that Canadian home prices rose—from what were already widely seen as overvalued levels— by more than U.S. home prices in 2014. Perhaps most surprising,Toronto posted the largest annual increase in average transaction prices(+8%)among the largest 26 cities in Canada.Thus,the city that was often cited as being the most overbuilt and the most vulnerable was,in fact,the hottest market in the country. Notably,its condo vacancy rate fell to 1.3%and rents picked up while starts eased further,suggesting a correction is not around the corner in the closely watched market.Calgary may be another story... 4. Canada went from one of the lowest inflation rates in the world in 2013,to one of the highest among industrial economies in 2014. BoC Governor Stephen Poloz suggested at the start of the year that too-low inflation was his biggest concern,after a year when CPI rose just 0.9%.But,a tumbling loonie,solid consumer activity and some special factors quickly drove Canadian headline and core inflation above the 2% target by late 2014.This is not a bad thing,as most major central banks are grappling with inflation that's too low for comfort(notably the ECB)and would love to have Canada's current 2%inflation rate.The emerging markets had the opposite problem,(outside of China),as Russia,Turkey, Brazil, India and South Africa are all running with inflation of between 5%and 10%.Thus,for the oil importers,the slide in crude prices is a windfall. 5.The strongest significant stock market in the world was...Argentina,despite its second default since 2002.Aside from that inflation juiced oddity,most major markets more or less followed the lead from their domestic economy(surprisingly).The strongest growing economies,China and India,also had two of the best performing markets,while the two BRICs in or on the verge of recession, Russia and Brazil,were the weakest markets(Chart 3).Within industrial economies, most stuck close to home in 2014,with the S&P 500 near the top amid a solid U.S.recovery. For the TSX,it was a tale of two halves—Toronto was a world leader in the first half of the year,and then was just hanging on to a small annual gain by year's end,skewered by the 40% plunge in oil. Eight of the 10 TSX sectors were in the green for the year, but heavyweights materials and energy were not, largely offsetting healthy gains almost everywhere else. Major Equity Markets (year-to-date+fa change) China __== 45_7 inara 793 Nasdaq 14.0 5U 500 _= 110' Japan =- 83 DJIA =: 7 A - 1s = 58 Germany = 26 Australia -ti_ UK 3_© <; &a?il -43 Russia -4Ez8 4_ _ -60 -40 -20 .0 20 40 60 Scp o we Blca_rrtherg 'as cf 11:00 am, IlEcc-.raivar 19,201.9 92 Given those surprises,one would be forgiven for taking any forecast with a hefty dose of salt. But, here are five major trends we see developing over the course of the next year: 1.The U.S.will be the fastest growing major economy in the world in 2015. While that seems to be a safe call, note that we(and many others)made a similar declaration last year,only to see Canada at least match the U.S. pace,and Britain outdo it. But we look for the U.K.to cool a tad next year,and Canada to be weighed down by the slide in oil(and oil production is four times more important to the economy in Canada than in the U.S.).In fact,we expect Canada's economy to cool slightly to around a 2%growth rate in 2015 even as the U.S. accelerates to a 3%pace—its best in a decade. Not coincidentally,we also look for the widest U.S.-Canada growth gap since 2003,and quite possibly 1996 if Canada weakens a touch further. It's all about oil. 2.The Fed will raise rates in 2015,the first rate move in Obama's presidency and the first hike in more than nine years.Even with much of the rest of the world in flux,we expect the U.S.economy to forge ahead, prompting the Fed to finally move away from the emergency low setting for overnight rates. However, the tightening will be gradual,"as we are calling for a quarter-point hike per calendar quarter through the second half of 2015 and into 2016.If industrial world central banks make a mistake,it's that they will stay too long at the party. In a similar vein,the Bank of Canada may very well do nothing yet again in 2015. 3.The US$will be the strongest currency in the world,again. One would be hard-pressed to find any major or emerging market currency that managed to rise against the mighty greenback in 2014,and that may be the case again next year(Chart 4).The U.S.economy is diverging from much of the rest of the world,and the Fed looks set to diverge from most other major central banks,and the dollar will see the effects. Meantime,we look for some further sag in the Canadian dollar,even after it fell more than 8%in 2014,challenging for its one of the weaker years on record (but doubtful anything will match the 23%drop seen in 2008).Sagging commodity prices and a resurgent US$are all the reasons one would need to look for a lower loonie,but the added weight of perceptions that the Bank of Canada favours a weaker currency is also playing a role. lit - Aazffig Race to the Bono if Major Currencies vs. US$ (year-to-date change) Chinese Yuan 2.7 .._w Soh Korean Wan 7 British Pound -5.6 Canadian Dollar -B.4 .. Australian Dollar -8.6 Swiss Franc South African Rant, -9.4 Mexican Peso 10] Euro 10.8 Brans ian Real -109 japane5e Yen 11.5 :°"":"" s` 5s dash Krona Russian Ruble-445 1 �r -50 -25 -20 -15 -10 -5 0 Sainte Bloomberg(as of 11:00 am_.0ecemer•19,2014) 4.The U.S.jobless rate will drop below Germany's and may push below 5%.While the drop in the U.S. jobless rate from its 10%peak in late 2009 was driven by a declining participation rate early on,that was much less the case recently.In fact,this year's job growth has been the strongest by some measures since 2000.And, over the past four years,the unemployment rate has dropped at a steady pace of 1 percentage point per year— if that's maintained in 2015,which is no stretch with GDP growth picking up to 3%,we could see an • 93 unemployment rate with a 4-handle by late next year.That would be back close to pre-recession lows,and Y Y p , would take it below Germany's rate(Chart 5).The headline rate is already below Canada's,and the similarly measured rates are now almost on top of each other. (percent) Unemployment Rates 12 ice? s� U.5. .Pug. \'\\, Canada Germany 4 'I i 1 ..I......,..' r 1 1 i DS 0- 07 03 09 10 11 12 13 14 Shi di o ia-la cites period of US.r_cessfGrt 5. Regional growth in Canada will shift, possibly dramatically.After a decade of outperformance by Western Canada,the plunge in oil has levelled the playing field, if not even tilted it in Central Canada's favour. Stronger U.S.growth,a weaker loonie,and lower oil prices are all helpful for Ontario and Quebec.We look for Ontario to outpace the national average growth rate for the first time since 2002(when the loonie first started its long ascent).On the flip side,Alberta will see a rare spell of below-average growth.We look for B.C.to quietly climb to the top of the growth ladder, largely unaffected by lower oil prices,and supported by a sound fiscal backdrop.The U.S.will also witness a big switch in regional growth,with the previously piping hot oil-producing states(North Dakota,Texas,Colorado)all coming down to Earth,while the industrial belt benefits from lower oil prices, reviving auto sales and a firming housing market. Bonus call:Same as last year—somebody,somewhere will call for a crash in the Canadian housing market,and they will be disappointed. Canadian Outlook Hinges on U.S. Economy and Oil Benjamin Reitzes-Senior Economist 12 Dec 2014 The Canadian economy performed admirably in 2014,surprisingly outperforming the U.S.with an expected 2.4% expansion.The rotation to exports solidified,with net trade consistently adding to GDP growth.The other parts of the rotation didn't quite turn out as expected. Business investment was weak and is poised to contract after a relatively soft 2013.And,don't look for a near-term turnaround,as the steep drop in oil and base metal prices will weigh heavily on investment—those sectors account for about 30%of private-sector investment. Indeed, while a weaker loonie and stronger U.S.demand(resulting in firmer exports)are significant offsets to the drop in commodity prices,they take time to evolve,and the fall in capital spending is likely to be more immediate. The other half of the rotation is a shift away from consumption and housing. Both sectors were much stronger than anticipated in 2014.Consumption zoomed about 2.7%,driven by record auto sales.We're looking for auto sales to stay near record levels,but that means modest growth in durables spending.And, broader consumer 94 demand will likely grow in line with incomes,as elevated debt burdens will restrain borrowing.Tax cuts from the federal government and lower gasoline prices will provide some spending fuel,allowing consumption growth to keep pace with overall economic growth.The housing market was surprisingly strong again in 2014,continuing to defy calls for a crash or at least a slowdown.Sales activity is on pace for the best year since 2007,and prices keep marching higher.The housing story has been driven by Vancouver,Toronto and Calgary.The latter will see some deceleration in 2015,as the big drop in oil prices cools momentum.With interest rates expected to trend modestly higher through next year,and BoC tightening expected to start late in 2015,housing will likely slow somewhat. On the inflation front,look for some deceleration in early 2015 due to lower energy prices and favourable comparables. However,the projected weakness in the Canadian dollar will provide some offset, pushing import prices higher.That will likely keep core inflation above the Bank of Canada's 2%target early in the year before underlying price pressures ease modestly.Given the economic backdrop,inflation isn't likely to push the BoC into moving earlier. Overall,the Canadian economy will face a significant challenge.in 2015 from the sharp decline in oil prices,with the risks to our call for 2.2%GDP growth tilted to the downside.Growth prospects are dependent on a firming U.S.economy and some upturn in oil prices.The financial backdrop should remain supportive,with only modest policy tightening expected near the end of the year. Lower oil Prices +e 0,'0141rawth Canada phi dho) Real GDP Quarter/ Quartes (LE) y 3 Ft' g E 3 F Year/ Year -O 07 03 C..,9 10 11 12 13 14 15 Chart 4 Provincial GDP Real GDP Growth (permit) Ix4msRdiand Canada 2013 20 and tabradar E R 2@13::.33 • 4 1013 72 2014 '10 2015'- 2013 1.9 r 'Cl!. 23 rn 3 q v J S 2013 2.4 u-3il6e'rm ?97ja!' a a Pri CE Edward 2013 -.- Vµ 2013 21 0 -@34 Wand 2013 2_0 1 X615 �3 c'073 4xx {hit3no -- asmaanwan M Z 2013 13 y 2 013 a0 L�-�, ;:ZD'34 �7-:z ..- New Nava 201 3 .s `-2015 Bainswirk Sorta 2013 -0.5 2013 03 S:T `=2014=-,13 2014 - 1. 2014-2015 from BM0 Capital k ar s Er.on6nlirs torP_nss c'� 3@15::°'1.E 2015:?'=21_:z 95 Commodities Earl Sweet—Senior Economist 12 Dec 2014 Resource markets have reeled in the face of the rising U.S.dollar and investor concerns about the global recovery. BMO Capital Markets'Commodity Price Index has fallen 32%from its post-recession peak in the spring of 2011,led by crude oil(-41%) but also weighed down by metals&minerals(-29%) and agricultural products (-28%). Forest products bucked the trend,rising 7%over that period, bolstered by rising U.S. housing starts. Unless OPEC cuts production,the global oil market will likely continue to face excess supply through 2015,even given our macro outlook that Europe and Japan avoid recession,China's economic expansion remains around 7%, and U.S.economic momentum strengthens to 3%. Investor selling of long positions in oil will keep downward pressure on pricing through the first half of 2015. Low prices will eventually slow the growth of oil output,though this process will be delayed while hedges remain in place and due to the lag between capital expenditures and production.We now expect U.S. benchmark WTI prices to average $63jbarrel in 2015.With the price impacts on supply and demand taking fuller effect by 2016 and global growth maintaining its momentum,we project WTI to rise into the$70 range. Natural gas will face opposing forces over the next year. Some refocusing of drilling by oil and gas companies on natural gas could accelerate supply. However,the boost to U.S.economic growth from lower oil prices will raise the demand for natural gas by industry and power generation.Overall,our projection for U.S.benchmark Henry Hub is largely unchanged in the mid-US$4 range. Precious metals are likely to face further downward pressure from a rising U.S.dollar.Although copper has already fallen significantly,it will likely have to decline further to inhibit supply growth and balance the market, particularly with infrastructure construction moderating in China. Industrial metals should receive support from stronger global economic growth due to lower oil prices.Aluminum and zinc have already rallied in 2014 and should be able to consolidate those gains in 2015. Nickel saw moderate gains through much of 2014,with a setback during the fourth quarter.Stronger global growth and the ban on exports of ore by Indonesia should see nickel register a more meaningful advance in 2015. Crop prices are.expected to pull away from current lows,assuming a return to more normal growing conditions and yields.However,the upswing will unfold gradually,as excess stockpiles from two consecutive bumper crops will take time to work down.Cattle prices should hold near current records during the first half of 2015, but could subsequently lose ground as herd expansion begins to yield animals mature enough to market.Hog prices have already returned to more moderate levels after soaring to record highs in response to the PED virus earlier in 2014. Market conditions look more constructive for wood products in 2015,after a year of false starts,as rising employment and still-accommodative interest rates reinforce the upturn in U.S.housing construction. meanwhile,pulp has outperformed on robust demand and capacity reductions. Newsprint could see some upward pressure as capacity shutdowns outpace the structural decline in demand. Portfolio Performance Review For comparison purposes we have included the following benchmarks that provide the closest representative return data.There are three separate issues that should be taken into consideration when comparing the representative rates of return. First,the guidelines set out in the Municipal Finance Statutes governing your investment policy prohibit you from owning any fixed income investments that are not either government guaranteed or issued by a major Canadian Chartered Bank.Canadian money market funds used to construct the Morningstar Canadian Money Market Index contain a high percentage of higher yielding money market products including investments such as asset backed securities,some of which your investment policy prohibits you from holding.Secondly,your portfolio has a smaller percentage of qualified fixed income investments that are slightly longer than the 1 year maturity period that typically defines money market investments. 96 Finally,in a lower interest rate environment,the portfolio may hold"Step-up Bond"investments which are laddered coupon bonds that have an annual maturity, but are both extendible,and redeemable at the issuer's option on the annual anniversary date.As such these investments can be classified as short term or longer term using the longest final maturity date as the determinant. Annual.Account Return Benchmark Comparisons* nurBMO-NesbittBurns =CIBCWorid Marke#s : 1Vlom�ngstarCanad�an 3 CalendarVear = lcioun3 Return44 B1Day Bill r dex** honey 1til9arke3 lVlutua7 2014 1.51%::.::::::: 0.91% 0.57% 2013 1.23% 0.97% 0.56% 2012 1.37% 0.93% 0.59% 2011 2.49% 0.96% 0.63% 2010 1.25% 037% 0.28% 2009 1.54%::: 0.52% 0.50% 2008 4.92% 3.13% 2.81% 2007 . :::::. 4.27%;: : : ; 4.29% 3.80% 2006 3.81% 3.84% 3.21% 2005 2.51%.: 2.48% 1.87% 2004 4.39%. : 2.27% 1.51% * Return Comparisons are derived from separate third party sources which are believed to be accurate but are not guaranteed by BMO Nesbitt Burns Inc. **Comparative benchmarks have been selected that are most reasonable to use for comparison purposes but are not 100%specific to the investment guidelines followed by the representative account in question. ***The Morningstar Fund Indices are the best available representation of the performance of aggregate dollars actually invested,currently and historically,in Canadian money market mutual funds and/or segregated funds. The indices measure the dollar weighted return of assets in Canadian funds.The return calculation does not suffer from survivorship bias,as the impact of returns with funds that are no longer active are retained. Funds that report returns before fees are excluded from Morningstar Fund Indices.Returns are rounded to 2 decimal places. Sincerely, Amor-reint R. aedof es, Andrew R.Geddes PM,CIM,FCSI Vice President,Portfolio Manager BMO Nesbitt Burns Inc.,Private Client Division 97