liquidity estimating gioa preconf 20160323

GIOA– PreConferencePartILiquidityEstimating

“QuantifyingYourPortfolioOpportunityCost”

BenjaminFinkelstein, CFAManagingDirectorCantorFitzgeraldbefinkelstein@cantor.comM:281.381.2740

March23,2016

Learning Outcomes

2

2. Establish a framework for determiningthe appropriate level of portfolio liquidity.

3. Create simple vocabulary for educatingstakeholders how to think about liquidity.

4. Learn technique for capturing theopportunity cost of excess liquidity.

1. Learn how to use liquidity estimating tocreate a “politically correct” portfolio.

“Prediction is very difficult,especially if it’s about the future.”

Niels Bohr

3

Challenge #1

4

Public funds are responsible for

Without having to sell a security before maturity!

Ø Preserving principle

Ø Earn a responsible rate of return for taxpayer

Ø Insuring bills are paid on a timely basis

Liquidity Estimating

6

Is having 100% of the portfolio in cash good stewardship?

Is having 100% of the portfolio invested in 5 year UST Notes all with gains good stewardship?

Moving from intuition to informed decision making

7

What’s the right amount of liquidity for your portfolio?

What Is A PC Portfolio?

8

A PC or “politically correct” portfolio candemonstrate a suitable balance has beenachieved between preserving principle, payingobligations and earning a fair rate of return.

Suitable balance has two distinct conditions.

1. No securities sold to pay obligations

2. Opportunity cost is minimized

Liquidity Estimating?

9

Is a political framework for explainingwhat amount of the portfolio was reservedfor preserving principal and insuring billsare paid without the need to sell security.

Is a economic tool designed to quantifythe opportunity cost and avoid overinsuring the portfolio (having to much inliquidity).

Vocabulary

10

Total Liquidity = Strategic + Investable

Strategic Liquidity = Primary + Secondary Ø Primary = Operating + Principle Cushion Ø Secondary = Additional Principle Cushion

Investable Liquidity = Funds to invest

Total Portfolio = Strategic + Investable + Bonds

Total Portfolio = Liquidity + Bonds

Framework

11

Liquidity estimating involves more then cashflow forecasting. It requires a frameworkthat can calibrate how much in additionalliquidity is prudently required to insure wedon’t have to sell a security to pay a bill.

A multiple of the lowest monthly net cashflow forms the foundation for how toestimate your strategic liquidity.

The past, the present, and the future walked into a bar.

12

It was tense.

Multiple

13

The multiple is determined fromconsidering three inputs.

Ø Historical Cash Flows

Ø Current Cash Flows

Ø Future Capital Projects / Revenues

Scenario

14

Two scenario’s are considered whenevaluating the multiple.

Ø Short Term / 12 month

Ø Long Term / 36 month

User Inputs

15

Ø Estimate PL Multiple – X times lowest CF balance

Ø Estimate SL Multiple – X times lowest CF balance

Ø Current Portfolio Size

Ø Historical Cash Flows – Receipts minus Disb.

Ø Estimate Secondary Liquidity – 2 days to 12mos

Ø Current Primary Liquidity – Same day

16

17

18

Scenario Long Term 36 month

19

20

Current Liquidity

Investment Plan Difference

%Chg

Primary $160,000,000 $ 61,750,000 $ 98,250,000 61.41%

Secondary $120,000,000 $ 19,500,000 $ 100,500,000 83.75%

Total $280,000,000Total Liquidity

$ 81,250,000Strategic

$198,750,000Investable

70.98%

Identifying Strategic Liquidity

Opportunity Cost

21

Scenario #1 Scenario #2Current Portfolio Par: $100,000,000 $100,000,000

Current Purchase Yield: 0.25% 0.25%Proposed Yield Pickup(bp): 35.00 65.00

Proposed New Purchase Yield: 0.60% 0.90%Additional Income Produced: $350,000 $650,000

Portfolio Additional $ Needed to Produce Proposed Income: $140,000,000 $260,000,000

5Yr Historical Spreads3mo-2yr Spread 3mo-3yr Spread

Enhanced Basis Points 35.00 65.00Enhanced Cash Flow $350,000 $650,000

Portfolio Purchase Yield0.125% 280,000,000 520,000,000 0.150% 233,333,333 433,333,333 0.200% 175,000,000 325,000,000 0.250% 140,000,000 260,000,000 0.300% 116,666,667 216,666,667 0.350% 100,000,000 185,714,286 0.400% 87,500,000 162,500,000 0.450% 77,777,778 144,444,444

POLICY ENHANCED ASSETS TABLE

Portfolio dollars needed to = Pickup

Session Take Away’s

22

Liquidity Estimating moves one from intuition to informed decision making.

Ø LE provides a public fund a metric for how toexplain to stakeholders why the existinglevel of liquidity is suitable.

Ø LE provides a public fund a training andcommunication aid for use within theportfolio management team.

Session Take Away’s

23

Liquidity Estimating provides a framework toinsure investment practice follows investmentpolicy.

Ø No purchases unless investable liquidityexceeds strategic liquidity prioritizes safetyand liquidity before income.

Ø Liquidity estimating minimizes the chance apublic fund maintains more liquidity then isnecessary to protect principal and pay bills ona timely basis.

25

This information isfordiscussion purposes. Byaccepting this information youagree nottocopy,reproduce orotherwise disclose itscontents toanythirdpartywithoutourpriorconsent. Thisinformation isillustrative anddoesnotpredictactual results,whichmaydiffersubstantially fromthosereflectedherein. Avarietyofmarket factorsandassumptions mayaffectthisanalysis; itdoesnotreflectallpossible scenarios, includingpossible loss scenarios. Historical performance, dataandother information isnotnecessarily indicativeoffutureperformance oroutcomes.

Although theinformation isobtained fromsourceswebelieve tobereliable, wecannotguarantee itisaccurateorcompleteand itmaynotberelieduponassuch. Neither theinformation noranyopinionexpressed constitutes asolicitationbyusforthepurchase orsaleofanysecurityorfinancialinstrument orisadviceoranexpression ofourviewsastowhetheraparticular investment issuitable andappropriate foryou,ormeetsyourfinancialobjectives. Weorouraffiliatesmayfromtime totimehavelongorshortpositions orbuyorsellsecurities orotherfinancial instruments thatare identical tooreconomically related toanysecurityorinvestment strategy mentioned herein orentered intowithyou.

Theinformation doesnotconstitute legal, tax,accounting, regulatory orinvestment advice,andinvestors considering thepurchase orsaleofsecurities shouldconsult theirownlegal, financial, andregulatoryadvisers withregard totheapplication ofsecurities, taxorother laws,accounting, andregulatory implications totheir investment parameters andobjectives.Anydecision topurchase orsellsecurities shouldbebaseduponconsultation withyourlegal, financial, tax,accountingandotheradvisorsas tohowsuchtransactions affectyou.