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 Palme...
INVESTMENT PHILOSOPHY                        SAFETY                                      before                   LIQUIDIT...
EARNINGS FOR FY 2012 YTD$134,833,364  ARIZONA STATE TREASURER DOUG DUCEY
LGIP PERFORMANCE      Q4 FY2012
POOL 5  ARIZONA STATE TREASURER DOUG DUCEY
POOL 7  ARIZONA STATE TREASURER DOUG DUCEY
POOL 500  ARIZONA STATE TREASURER DOUG DUCEY
POOL 700  ARIZONA STATE TREASURER DOUG DUCEY
Separately Managed Accounts (SMAs)  Designed for those seeking a customized  investing solution based on your risk  tolera...
OPERATING UPDATESStarting Monday, July 30, 2012 newkey phone numbers:  Main number                         602-542-7800  L...
ENDOWMENTPERFORMANCE          Q4 FY2012  OFFICE OF THE ARIZONA STATE TREASURER
Billions                                                       $0.00                                                      ...
Millions                                                      -$200.00                                                    ...
ENDOWMENT ASSET ALLOCATION                 8.6%                                      $3.52 Billion                        ...
PROPOSED ENDOWMENT    DISTRIBUTION      FORMULA      OFFICE OF THE ARIZONA STATE TREASURER
SMOOTHER, CONSISTENT DISTRIBUTIONS                                        5-Year                                        Av...
STATE CASH FLOW    OFFICE OF THE ARIZONA STATE TREASURER
STATE CASH FLOW TOTAL OPERATING ACCOUNT AVERAGE MONTHLY BALANCE                                    Up 58% YOY in F Y 2012 ...
-$1,000                                                    -$500                                                          ...
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 $5...
AZ NON-FARM EMPLOYMENT3000                                                                    Dec 07-Jun 09               ...
AZ UNEMPLOYMENT AT 8.2%12%                  Jul 81-Nov 82                                           Jul 90-Mar 91         ...
AZ HOUSING PRICES                              S & P/Case Schiller Housing Price Index for Phoenix250200150100 50        S...
Guest Presentation:James Palmer, CFA: Head of Investments for    U.S. Bancorp Asset Management             OFFICE OF THE A...
Arizona State Treasurer’s Office               LGIP Quarterly Meeting and               Q4 2012 Conference Call           ...
Market ConditionsFed/Central Bank Policy • Current policy indication is to keep the federal funds rate “exceptionally low”...
Market ConditionsEconomic Growth • Recent U.S. economic data has been disappointing   − Employment, manufacturing, retail ...
Market ConditionsCredit Market Challenges • European sovereign and bank debt crisis continues and represents   the largest...
StrategiesYield Curve • Fed policy supports 2- to-3-year and under bond prices • Risk is skewed toward steeper yield curve...
StrategiesSectors • Treasuries – current yield curve relatively low • Agencies   − Spreads have tightened   − Callable spr...
QUESTIONS? OFFICE OF THE ARIZONA STATE TREASURER
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LGIP Q4 FY 2012

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Includes a guest presentation from Jim Palmer, Head of Investments for U.S. Bancorp Asset Management

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LGIP Q4 FY 2012

  1. 1. LGIP QUARTERLY MEETING & CONFERENCE CALL 7.26.2012 OFFICE OF THE ARIZONA STATE TREASURER
  2. 2. 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
  3. 3. INVESTMENT PHILOSOPHY SAFETY before LIQUIDITY before YIELD ARIZONA STATE TREASURER DOUG DUCEY
  4. 4. EARNINGS FOR FY 2012 YTD$134,833,364 ARIZONA STATE TREASURER DOUG DUCEY
  5. 5. LGIP PERFORMANCE Q4 FY2012
  6. 6. POOL 5 ARIZONA STATE TREASURER DOUG DUCEY
  7. 7. POOL 7 ARIZONA STATE TREASURER DOUG DUCEY
  8. 8. POOL 500 ARIZONA STATE TREASURER DOUG DUCEY
  9. 9. POOL 700 ARIZONA STATE TREASURER DOUG DUCEY
  10. 10. 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 ARIZONA STATE TREASURER DOUG DUCEY
  11. 11. OPERATING UPDATESStarting Monday, July 30, 2012 newkey phone numbers: Main number 602-542-7800 LGIP Line 602-542-7834 Mark Swenson 602-542-7877 Dale Stomberg 602-542-7833 ARIZONA STATE TREASURER DOUG DUCEY
  12. 12. ENDOWMENTPERFORMANCE Q4 FY2012 OFFICE OF THE ARIZONA STATE TREASURER
  13. 13. 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 2008ARIZONA STATE TREASURER DOUG DUCEY 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
  14. 14. 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 2008ARIZONA STATE TREASURER DOUG DUCEY 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
  15. 15. 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 ARIZONA STATE TREASURER DOUG DUCEY
  16. 16. PROPOSED ENDOWMENT DISTRIBUTION FORMULA OFFICE OF THE ARIZONA STATE TREASURER
  17. 17. 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 ARIZONA STATE TREASURER DOUG DUCEY
  18. 18. STATE CASH FLOW OFFICE OF THE ARIZONA STATE TREASURER
  19. 19. STATE CASH FLOW TOTAL OPERATING ACCOUNT AVERAGE MONTHLY BALANCE Up 58% YOY in F Y 2012 $3,000 Mar01-Nov 01 Dec07-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 ARIZONA STATE TREASURER DOUG DUCEY
  20. 20. -$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-08ARIZONA STATE TREASURER DOUG DUCEY 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
  21. 21. 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 ARIZONA STATE TREASURER DOUG DUCEY
  22. 22. AZ NON-FARM EMPLOYMENT3000 Dec 07-Jun 09 Recession2750 Mar01-Nov 01 Recession25002250 AZ Job growth returning Jul 90-Mar 912000 Recession1750 Jul 81-Nov 82 Recession150012501000 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-11Source:Bloomberg2012 L.P. ARIZONA STATE TREASURER DOUG DUCEY
  23. 23. AZ UNEMPLOYMENT AT 8.2%12% Jul 81-Nov 82 Jul 90-Mar 91 Mar01-Nov 01 Dec07-June 09 Recession Recession Recession Recession11% 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-12Source:Bloomberg2012 L.P. ARIZONA STATE TREASURER DOUG DUCEY
  24. 24. AZ HOUSING PRICES S & P/Case Schiller Housing Price Index for Phoenix250200150100 50 Source: Bloomberg 2012 L.P. 0 ARIZONA STATE TREASURER DOUG DUCEY
  25. 25. Guest Presentation:James Palmer, CFA: Head of Investments for U.S. Bancorp Asset Management OFFICE OF THE ARIZONA STATE TREASURER
  26. 26. 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.ARIZONA STATE TREASURER DOUG DUCEY
  27. 27. Market ConditionsFed/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
  28. 28. Market ConditionsEconomic Growth • Recent U.S. economic data has been disappointing − Employment, manufacturing, retail sales • Global growth is slowing • Policymakers view inflation as relatively contained For Institutional Investor or Investment Professional Use Only – This material is not for inspection by, distribution to, or quotation to the general public.
  29. 29. Market ConditionsCredit 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 For Institutional Investor or Investment Professional Use Only – This material is not for inspection by, distribution to, or quotation to the general public.
  30. 30. StrategiesYield 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 rangeDuration 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 For Institutional Investor or Investment Professional Use Only – This material is not for inspection by, distribution to, or quotation to the general public. 30
  31. 31. StrategiesSectors • 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 For Institutional Investor or Investment Professional Use Only – This material is not for inspection by, distribution to, or quotation to the general public.
  32. 32. QUESTIONS? OFFICE OF THE ARIZONA STATE TREASURER

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