9255 towne centre drive | suite 350 san diego, ca 92121-3039 phone 800.317.4747 | fax 858.546.3741 ...

9255 Towne Centre Drive | Suite 350 San Diego, CA 92121-3039 Phone 800.317.4747 | Fax 858.546.3741 www.chandlerasset.com

CHANDLER ASSET MANAGEMENT

Developing A Plan:

Preliminary Inputs To The Investment Program

February 2006

CSMFO Annual Conference Kay Chandler, CFA

2©2006. Chandler Asset Management, Inc.

The Cycle of Portfolio Management

Establish PolicyObjectives, Constraints

Evaluate Plan andExecution, Changes

Execute the Plan

Identify Strategies,Benchmarks


Objectives + Constraints = Policy


Evaluate Plan andExecution,Changes

Execute the Plan



Establishing Objectives

■ Safety—maintain appropriate level of exposure to risk

■ Liquidity

■ Sufficient short-term investments

■ Marketable securities

■ Targeted maturities

■ Extra layer

■ Yield (Return,Growth)

■ Income

■ Long-term growth


Safety: The Relationship Between Risk and Return

Source: Index return information provided by Merrill Lynch

12/31/2005LAIF $1,525,924 4.32%

1-3 Year Treasury Benchmark $1,596,461 4.79%1-5 Year Government Benchmark $1,646,268 5.11%

Value on 12/31/2005 of $1 million invested 12/31/1995Annualized Return

Higher Duration Portfolios Offer Greater Returns Over Time

$1.00

$1.10

$1.20

$1.30

$1.40

$1.50

$1.60

$1.70

Dec-95 Jun-96 Dec-96 Jun-97 Dec-97 Jun-98 Dec-98 Jun-99 Dec-99 Jun-00 Dec-00 Jun-01 Dec-01 Jun-02 Dec-02 Jun-03 Dec-03 Jun-04 Dec-04 Jun-05 Dec-05

Growth in millions

LAIF

1-3 Year Treasury Benchmark

1-5 Year Government Benchmark

Market Risk


Safety: The Relationship Between Risk and Return

Quarterly Change in Value

-2.00%

-1.50%

-1.00%

-0.50%

0.00%

0.50%

1.00%

1.50%

2.00%

2.50%

Dec-95 Jun-96 Dec-96 Jun-97 Dec-97 Jun-98 Dec-98 Jun-99 Dec-99 Jun-00 Dec-00 Jun-01 Dec-01 Jun-02 Dec-02 Jun-03 Dec-03 Jun-04 Dec-04 Jun-05 Dec-05

Quarterly Total Rate of Return

Higher Duration Portfolios Have Greater Volatility of Return

Market Risk


Safety: Assuming Credit Risk Can Improve Returns

■ Treasuries are the safest, considered to have ZERO credit risk

■ Federal agency securities considered next safest

■ AAA and AA

■ A

■ No credit research necessary

■ Monitor agency news, rating agency actions

■ Understand the business—risks and opportunities; monitor news and rating agency watch lists

■ With greater diligence--understand the business—risks and opportunities; monitor news and rating agency watch lists. Be quick to act on credit changes

…When resources are available to monitor credit quality appropriately.


■ Liquidity risk (I)

1. The risk that the portfolio won’t provide adequate cashflow for the agency

■ Match maturities to known cash needs

■ Prepare cash flow forecasts

■ LAIF

■ Readily marketable securities

■ Extra layer of short-term investments

Liquidity: Having cash when you need it.


■ Liquidity risk (II)

2. The risk that a security is not readily marketable, that is, can’t be sold, if necessary, at a good price

■ Often measured by the difference between the price at which you can buy (offer or ask) and the price at which you can sell (bid)

■ Treasuries, large agency issues, large corporate issues are most liquid

■ Small issue sizes, securities with unusual features, are least liquid

Liquidity: Having cash when you need it.


Yield: Developing Investment Strategies


Evaluate Plan and Execution,

Change

Execute the Plan



Total Portfolio

Liquidity Growth

Yield Strategy: Two components for Liquidity and Growth

■ Liquidity Component

■ Meets specific liquidity needs

■ Invests in short-term securities

■ Average maturity short

■ Very low volatility

■ Cash flow matching

■ LAIF

■ Growth Component

■ Targeted to highest suitable duration

■ Longer-term securities

■ Normally not used for liquidity, but invested in highly marketable securities, in case

■ Greater volatility


Passive Management

■ Buy and Hold

■ Money is invested when it is available to a date when cash is needed.

■ There is no further activity with that investment, except for reinvestment of income

■ Maturity Ladder

■ Funds are invested in equal amounts to staggered maturity dates

■ When securities reach maturity, the funds are reinvested into the longest permitted maturity


Active Portfolio Management

■ Creating and maintaining a portfolio structure with acceptable exposure to risk.

■ Striving to achieve a “better” return using one or more of the following strategies:

■ Duration management

■ Yield curve placement

■ Sector weighting decisions

■ Individual security selection

■ Timing

■ Relative to a chosen market benchmark, or to some other comparative measure


Resource for Public Fund Investing in California

CALIFORNIA PUBLIC FUND

INVESTMENT PRIMER

Published by the State Treasurer

California Debt and Investment Advisory Commission

http://www.treasurer.ca.gov/cdiac/invest/primer.pdf


On to Plan Execution and Evaluation


Evaluate Plan and Execution,

Change

Execute the Plan


9255 towne centre drive | suite 350 san diego, ca 92121-3039 phone 800.317.4747 | fax 858.546.3741 ...

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