LGIP Q4 FY 2012

LGIP QUARTERLY MEETING &
CONFERENCE CALL
7.26.2012

OFFICE OF THE ARIZONA STATE TREASURER

AGENDA

LGIP Performance
Endowment Performance
Endowment Distribution Formula
State Cash Flow
Guest Presentation: Jim Palmer, CFA,
Head of Investments for U.S. Bancorp
Asset Management
Q&A

ARIZONA STATE TREASURER DOUG DUCEY

INVESTMENT PHILOSOPHY

SAFETY
before

LIQUIDITY
before

YIELD

EARNINGS FOR FY 2012 YTD

$134,833,364


LGIP PERFORMANCE
Q4 FY2012

POOL 5


POOL 7


POOL 500


POOL 700


Separately Managed Accounts (SMAs)
Designed for those seeking a customized
investing solution based on your risk
tolerance, liquidity needs and duration target.
Monthly Liquidity
Requires $100 million minimum deposit
Pre-Meeting with Portfolio Manager to set up
Account and determine investing needs.
Costs: Standard 6 basis points, plus yearly
accounting charges of $20,000 out of
earnings (equivalent to 2 basis points.)
Contact Deputy Treasurer Mark Swenson


OPERATING UPDATES
Starting Monday, July 30, 2012 new
key phone numbers:

Main number 602-542-7800
LGIP Line 602-542-7834
Mark Swenson 602-542-7877
Dale Stomberg 602-542-7833


ENDOWMENT
PERFORMANCE
Q4 FY2012


Billions

$0.00
$0.50
$1.00
$1.50
$2.00
$2.50
$3.00
$3.50
$4.00
December 2006
February 2007
April 2007
June 2007
August 2007
October 2007
December 2007
February 2008
April 2008
June 2008

August 2008
October 2008
December 2008
February 2009
April 2009
June 2009
August 2009
October 2009
December 2009
February 2010
Endowment Market Value

April 2010
June 2010
August 2010
October 2010
December 2010
February 2011
April 2011
ENDOWMENT MARKET VALUE

June 2011
$3.52
Billion

August 2011
October 2011
December 2011
February 2012
April 2012
June 2012

Millions

-$200.00
$0.00
$200.00
$400.00
$600.00
$800.00
$1,000.00
$1,200.00
December 2006
March 2007
June 2007
September 2007
December 2007
March 2008

June 2008
September 2008
December 2008
March 2009
June 2009
September 2009
December 2009
March 2010
June 2010
September 2010
December 2010
March 2011
June 2011
ENDOWMENT UNREALIZED GAINS

September 2011
December 2011
$911

March 2012
million

June 2012

ENDOWMENT ASSET ALLOCATION

8.6%
$3.52 Billion
Fixed Income
$1,549.4 million
$542.2 million
$1,600.04M $502.79M
14.7% 41.5% S&P 500

S&P 400
35.2% $1,122.1 million
$1,052.42M
S&P 600

As of 6/30/2012

PROPOSED ENDOWMENT
DISTRIBUTION
FORMULA

SMOOTHER, CONSISTENT DISTRIBUTIONS

5-Year
Average
Market Value

X
2.5%

Annual
Distribution

Takes 2.5% of the average monthly market value from
each of the previous five years

STATE CASH FLOW


STATE CASH FLOW
TOTAL OPERATING ACCOUNT AVERAGE MONTHLY BALANCE

Up 58% YOY in F Y 2012
$3,000 Mar'01-Nov '01 Dec'07-June '09
Jul '90-Mar '91
Recession Recession Recession
$2,500 $2.3
billion in
$2,000 June

$1,500

$1,000

$500
Millions

$0

-$500

-$1,000


-$1,000
-$500
$0
$500
$1,000
$1,500
$2,000
$2,500
Jul-06 $3,000
Oct-06
Jan-07
Apr-07
Jul-07
Oct-07
Jan-08
Apr-08

Jul-08
Oct-08
Jan-09
STATE CASH FLOW

Apr-09
Jul-09
Oct-09
Jan-10
Apr-10
Jul-10
Oct-10
Jan-11
Apr-11
Jul-11
Oct-11
State Operating Balance FY 2007 - FY 2012

Jan-12
Apr-12

STATE CASH FLOW
$3,000,000
YTD FY 2012 Cash Flow vs. FY 2011
$2,500,000

$2,000,000

$1,500,000

$1,000,000

$500,000

FY 2011 FY 2012 Actual
$-
1-Jul 1-Aug 1-Sep 1-Oct 1-Nov 1-Dec 1-Jan 1-Feb1-Mar 1-Apr 1-May 1-Jun


AZ NON-FARM EMPLOYMENT
3000
Dec '07-Jun 09
Recession
2750 Mar'01-Nov '01
Recession
2500

2250
AZ Job growth returning
Jul '90-Mar '91
2000 Recession

1750 Jul '81-Nov '82
Recession
1500

1250

1000

750
Feb-82
Feb-83
Feb-84
Feb-85
Feb-86
Feb-87
Feb-88
Feb-89
Feb-90
Feb-91
Feb-92
Feb-93
Feb-94
Feb-95
Feb-96
Feb-97
Feb-98
Feb-99
Feb-00
Feb-01
Feb-02
Feb-03
Feb-04
Feb-05
Feb-06
Feb-07
Feb-08
Feb-09
Feb-10

Feb-12
Feb-11
Source:
Bloomberg
2012 L.P.


AZ UNEMPLOYMENT AT 8.2%
12% Jul '81-Nov '82
Jul '90-Mar '91
Mar'01-Nov '01 Dec'07-June 09
Recession Recession Recession
Recession
11%
Jan '80-Jul '80 AZ Rate at 8.2%
10% Recession

9%
National rate of 8.2%
8%
7%
6%
5%
4%
3%
2%
Feb-76
Feb-77
Feb-78
Feb-79
Feb-80
Feb-81
Feb-82
Feb-83
Feb-84
Feb-85
Feb-86
Feb-87
Feb-88
Feb-89
Feb-90
Feb-91
Feb-92
Feb-93
Feb-94
Feb-95
Feb-96
Feb-97
Feb-98
Feb-99
Feb-00
Feb-01
Feb-02
Feb-03
Feb-04
Feb-05
Feb-06
Feb-07
Feb-08
Feb-09
Feb-10
Feb-11
Feb-12
Source:
Bloomberg
2012 L.P.


AZ HOUSING PRICES
S & P/Case Schiller Housing Price Index for Phoenix
250

200

150

100

50

Source: Bloomberg 2012 L.P.

0


Guest Presentation:
James Palmer, CFA: Head of Investments for
U.S. Bancorp Asset Management


Arizona State Treasurer’s Office
LGIP Quarterly Meeting and
Q4 2012 Conference Call

Presentation By:

Jim Palmer, CFA
Head of Investments
612.303.3434

NOT FDIC INSURED NO BANK GUARANTEE MAY LOSE VALUE

For Institutional Investor or Investment Professional Use Only – This material is not for inspection by, distribution to, or quotation to the general public.


Market Conditions
Fed/Central Bank Policy
• Current policy indication is to keep the federal funds rate “exceptionally low” at
least through late 2014

• Operation Twist – supportive of short-term yields
• Risk is skewed toward implementing additional monetary stimulus. All would
be negative for short-term yields
− Additional Asset Purchases, aka: Quantitative Easing 3
− Extending language to keep Federal Funds Rate “exceptionally low”
− Reducing the “Interest on Excess Reserves” rate
• ECB has taken aggressive actions
− 3-year LTROs
− Reduced key refinancing rate to 0.75%
− Reduced interest rate on overnight deposits to 0.00%

For Institutional Investor or Investment Professional Use Only –
This material is not for inspection by, distribution to, or quotation to the general public. 27

Market Conditions
Economic Growth
• Recent U.S. economic data has been disappointing
− Employment, manufacturing, retail sales
• Global growth is slowing
• Policymakers view inflation as relatively contained

This material is not for inspection by, distribution to, or quotation to the general public.

Market Conditions
Credit Market Challenges
• European sovereign and bank debt crisis continues and represents
the largest tail risk to the financial markets

• Rating agency risk remains, but has diminished after Moody’s
completed its reviews of global financial institutions in the second
quarter

• U.S. has significant policy making uncertainties
− “Fiscal Cliff”
− U.S. fiscal debt ceiling


Strategies
Yield Curve
• Fed policy supports 2- to-3-year and under bond prices
• Risk is skewed toward steeper yield curve, favoring a bullet
strategy
• LIBOR remains attractive in the mid-40 bps range

Duration Management
• Fed policy argues for extending portfolio duration to maximize yield
for shorter portfolios
• Long-run view suggests risks are skewed toward higher interest
rates

This material is not for inspection by, distribution to, or quotation to the general public. 30

Strategies
Sectors
• Treasuries – current yield curve relatively low
• Agencies
− Spreads have tightened
− Callable spreads have tightened but select securities can still offer value
• Corporates
− Industrial companies have built strong balance sheets and cash positions
− U.S. banks have built strong capital and liquidity positions
− Spreads have tightened in past six months
• Asset-Backed Securities (ABS)
− At current spreads, ABS offer more value as a portfolio diversifier than as a yield
enhancement strategy
• Agency MBS
− Favor CMOs with tighter pre-pay speed bands over pass-throughs
− Recent bump in pre-pay speeds has limited opportunities
− Additional Fed policy actions could increase risk of faster pre-payments


QUESTIONS?


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