LGIP QUARTERLY MEETING & CONFERENCE CALL
OFFICE OF THE ARIZONA STATE TREASURER
7.26.2012
CONFERENCE CALL
AGENDA
� LGIP Performance
� Endowment Performance
� Endowment Distribution Formula
State Cash Flow
ARIZONA STATE TREASURER DOUG DUCEY
� State Cash Flow
� Guest Presentation: Jim Palmer, CFA, Head of Investments for U.S. Bancorp Asset Management
� Q & A
INVESTMENT PHILOSOPHY
SAFETYbefore
LIQUIDITY
ARIZONA STATE TREASURER DOUG DUCEY
LIQUIDITYbefore
YIELD
EARNINGS FOR FY 2012 YTD
$134,833,364
ARIZONA STATE TREASURER DOUG DUCEY
$134,833,364
LGIP PERFORMANCEQ4 FY2012Q4 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 tolerance, liquidity needs and duration target.
�Monthly Liquidity
�Requires $100 million minimum deposit
�
ARIZONA STATE TREASURER DOUG DUCEY
�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 newkey phone numbers:
� Main number 602-542-7800
ARIZONA STATE TREASURER DOUG DUCEY
� LGIP Line 602-542-7834� Mark Swenson 602-542-7877� Dale Stomberg 602-542-7833
ENDOWMENT PERFORMANCE
OFFICE OF THE ARIZONA STATE TREASURER
PERFORMANCEQ4 FY2012
$2.00
$2.50
$3.00
$3.50
$4.00
Bil
lio
ns
Endowment Market Value
ENDOWMENT MARKET VALUE $3.52 Billion
ARIZONA STATE TREASURER DOUG DUCEY
$0.00
$0.50
$1.00
$1.50
$2.00
De
cem
be
r 2
00
6
Feb
rua
ry 2
00
7
Ap
ril 2
00
7
Jun
e 2
00
7
Au
gu
st 2
00
7
Oct
ob
er
20
07
De
cem
be
r 2
00
7
Feb
rua
ry 2
00
8
Ap
ril 2
00
8
Jun
e 2
00
8
Au
gu
st 2
00
8
Oct
ob
er
20
08
De
cem
be
r 2
00
8
Feb
rua
ry 2
00
9
Ap
ril 2
00
9
Jun
e 2
00
9
Au
gu
st 2
00
9
Oct
ob
er
20
09
De
cem
be
r 2
00
9
Feb
rua
ry 2
01
0
Ap
ril 2
01
0
Jun
e 2
01
0
Au
gu
st 2
01
0
Oct
ob
er
20
10
De
cem
be
r 2
01
0
Feb
rua
ry 2
01
1
Ap
ril 2
01
1
Jun
e 2
01
1
Au
gu
st 2
01
1
Oct
ob
er
20
11
De
cem
be
r 2
01
1
Feb
rua
ry 2
01
2
Ap
ril 2
01
2
Jun
e 2
01
2
$400.00
$600.00
$800.00
$1,000.00
$1,200.00
Mil
lio
ns
ENDOWMENT UNREALIZED GAINS
$911 million
ARIZONA STATE TREASURER DOUG DUCEY
-$200.00
$0.00
$200.00
$400.00
De
cem
be
r 2
00
6
Ma
rch
20
07
Jun
e 2
00
7
Se
pte
mb
er
20
07
De
cem
be
r 2
00
7
Ma
rch
20
08
Jun
e 2
00
8
Se
pte
mb
er
20
08
De
cem
be
r 2
00
8
Ma
rch
20
09
Jun
e 2
00
9
Se
pte
mb
er
20
09
De
cem
be
r 2
00
9
Ma
rch
20
10
Jun
e 2
01
0
Se
pte
mb
er
20
10
De
cem
be
r 2
01
0
Ma
rch
20
11
Jun
e 2
01
1
Se
pte
mb
er
20
11
De
cem
be
r 2
01
1
Ma
rch
20
12
Jun
e 2
01
2
ENDOWMENT ASSET ALLOCATION
$1,600.04M $502.79M$1,549.4 million
$542.2 million
41.5%14.7%
8.6%Fixed Income
S&P 500
$3.52 Billion
ARIZONA STATE TREASURER DOUG DUCEY
$1,052.42M$1,122.1 million
41.5%
35.2%
14.7% S&P 500
S&P 400
S&P 600
As of 6/30/2012
PROPOSED ENDOWMENT DISTRIBUTION
OFFICE OF THE ARIZONA STATE TREASURER
DISTRIBUTION FORMULA
SMOOTHER, CONSISTENT DISTRIBUTIONS
5-YearAverage
Market Value
X
2.5%
ARIZONA STATE TREASURER DOUG DUCEY
Takes 2.5% of the average monthly market value from each of the previous five years
Annual Distribution
STATE CASH FLOW
OFFICE OF THE ARIZONA STATE TREASURER
$2,000
$2,500
$3,000Jul '90-Mar '91
Recession
Mar'01-Nov '01
Recession
Dec'07-June '09
Recession
STATE CASH FLOWTOTAL OPERATING ACCOUNT AVERAGE MONTHLY BALANCE
Up 58% YOY in FY 2012
$2.3 billion in
June
ARIZONA STATE TREASURER DOUG DUCEY
-$1,000
-$500
$0
$500
$1,000
$1,500
Millio
ns
STATE CASH FLOW
$1,000
$1,500
$2,000
$2,500
$3,000State Operating Balance FY 2007 - FY 2012
ARIZONA STATE TREASURER DOUG DUCEY
-$1,000
-$500
$0
$500
$1,000
Ju
l-06
Oct-
06
Jan
-07
Ap
r-07
Ju
l-07
Oct-
07
Jan
-08
Ap
r-08
Ju
l-08
Oct-
08
Jan
-09
Ap
r-09
Ju
l-09
Oct-
09
Jan
-10
Ap
r-10
Ju
l-10
Oct-
10
Jan
-11
Ap
r-11
Ju
l-11
Oct-
11
Jan
-12
Ap
r-12
STATE CASH FLOW
$1,500,000
$2,000,000
$2,500,000
$3,000,000
YTD FY 2012 Cash Flow vs. FY 2011
ARIZONA STATE TREASURER DOUG DUCEY
$-
$500,000
$1,000,000
$1,500,000
1-Jul 1-Aug 1-Sep 1-Oct 1-Nov 1-Dec 1-Jan 1-Feb1-Mar 1-Apr 1-May 1-Jun
FY 2011 FY 2012 Actual
AZ NON-FARM EMPLOYMENT
1750
2000
2250
2500
2750
3000
Jul '81-Nov '82
Jul '90-Mar '91
Recession
Mar'01-Nov '01
Recession
Dec '07-Jun 09
Recession
AZ Job growth returning
ARIZONA STATE TREASURER DOUG DUCEY
750
1000
1250
1500
1750
Fe
b-8
2
Fe
b-8
3
Fe
b-8
4
Fe
b-8
5
Fe
b-8
6
Fe
b-8
7
Fe
b-8
8
Fe
b-8
9
Fe
b-9
0
Fe
b-9
1
Fe
b-9
2
Fe
b-9
3
Fe
b-9
4
Fe
b-9
5
Fe
b-9
6
Fe
b-9
7
Fe
b-9
8
Fe
b-9
9
Fe
b-0
0
Fe
b-0
1
Fe
b-0
2
Fe
b-0
3
Fe
b-0
4
Fe
b-0
5
Fe
b-0
6
Fe
b-0
7
Fe
b-0
8
Fe
b-0
9
Fe
b-1
0
Fe
b-1
1
Fe
b-1
2
Source:
Bloomberg
2012 L.P.
Jul '81-Nov '82
Recession
AZ UNEMPLOYMENT AT 8.2%
7%
8%
9%
10%
11%
12%
Jan '80-Jul '80
Recession
Jul '81-Nov '82
RecessionJul '90-Mar '91
Recession
Mar'01-Nov '01
Recession
Dec'07-June 09
Recession
National rate of 8.2%
AZ Rate at 8.2%
ARIZONA STATE TREASURER DOUG DUCEY
2%
3%
4%
5%
6%
Fe
b-7
6F
eb
-77
Fe
b-7
8F
eb
-79
Fe
b-8
0F
eb
-81
Fe
b-8
2F
eb
-83
Fe
b-8
4F
eb
-85
Fe
b-8
6F
eb
-87
Fe
b-8
8F
eb
-89
Fe
b-9
0F
eb
-91
Fe
b-9
2F
eb
-93
Fe
b-9
4F
eb
-95
Fe
b-9
6F
eb
-97
Fe
b-9
8F
eb
-99
Fe
b-0
0F
eb
-01
Fe
b-0
2F
eb
-03
Fe
b-0
4F
eb
-05
Fe
b-0
6F
eb
-07
Fe
b-0
8F
eb
-09
Fe
b-1
0F
eb
-11
Fe
b-1
2
Source:Bloomberg2012 L.P.
AZ HOUSING PRICES
150
200
250
S & P/Case Schiller Housing Price Index for Phoenix
ARIZONA STATE TREASURER DOUG DUCEY
0
50
100
Source: Bloomberg 2012 L.P.
Guest Presentation:
James Palmer, CFA: Head of Investments for
OFFICE OF THE ARIZONA STATE TREASURER
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
ARIZONA STATE TREASURER DOUG DUCEY
Presentation By:
Jim Palmer, CFAHead of Investments612.303.3434
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.
Q4 2012 Conference Call
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
For Institutional Investor or Investment Professional Use Only –This material is not for inspection by, distribution to, or quotation to the general public.
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%
27
Market Conditions
Economic Growth
• Recent U.S. economic data has been disappointing
− Employment, manufacturing, retail sales
• Global growth is slowing
For Institutional Investor or Investment Professional Use Only –This material is not for inspection by, distribution to, or quotation to the general public.
• Policymakers view inflation as relatively contained
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
For Institutional Investor or Investment Professional Use Only –This material is not for inspection by, distribution to, or quotation to the general public.
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
For Institutional Investor or Investment Professional Use Only –This material is not for inspection by, distribution to, or quotation to the general public.
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
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
−
For Institutional Investor or Investment Professional Use Only –This material is not for inspection by, distribution to, or quotation to the general public.
− 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?
OFFICE OF THE ARIZONA STATE TREASURER
QUESTIONS?