07 Staff Report - Investment Advisory ServicesSOW N 0
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DATE:
TO:
FROM:
COUNCIL AGENDA REPORT
MARCH 2, 2006
MAYOR AND TOWN COUNCIL
MEETING DATE: 3/06/06
ITEM NO. 7
LINDA LUBECK, TOWN TREASURERS
SUBJECT: INVESTMENT ADVISORY SERVICES
A. ADOPT RESOLUTION AUTHORIZING THE TOWN TREASURER
AND TOWN MANAGER TO EXECUTE AN AGREEMENT WITH
MBIA MUNICIPAL INVESTORS SERVICE CORPORATION FOR
INVESTMENT ADVISORY SERVICES WITH ESTIMATED ANNUAL
FEES OF APPROXIMATELY $38,000 TO $40,000 ANNUALLY
DEPENDING UPON TOWN PORTFOLIO SIZE
B. AUTHORIZE FY 2005/06 BUDGET ADJUSTMENT OF $13,500 IN
THE TREASURER'S OFFICE BUDGET TO PROVIDE
APPROXIMATELY FOUR MONTHS OF CURRENT FISCAL YEAR
FUNDING FOR PROFESSIONAL ADVISORY SERVICES PROVIDED
TO THE TOWN TREASURER UNDER THE PROPOSED
AGREEMENT
RECOMMENDATION:
1. Adopt resolution authorizing the Town Treasurer and Town Manager to execute an
agreement with MBIA Municipal Investors Service Corporation for investment advisory
services with estimated annual fees of approximately $38,000 to $40,000 annually depending
upon Town portfolio size.
2. Authorize FY 2005/06 budget adjustment of $13,500 in the Town Treasurer's Office budget
to provide approximately four months of current fiscal year funding for professional advisory
services provided to the Town Treasurer under the proposed agreement.
PREPARED BY: LINDA L. LUBECK
Town Treasurer
NA1\4GR\AdminWorkFiles\2006 Council Reports\IvIBIA TC Report 3-6-06.wpd
Reviewed by: Town Manager Assistant Town Manager -Az--Town Attorney
Clerk-e,Finance Community Development Revised: 3/2/06 2:48 pm
Reformatted: 5/30/02
PAGE 2
MAYOR AND TOWN COUNCIL
SUBJECT: INVESTMENT ADVISORY SERVICES
MARCH 2, 2006
DISCUSSION:
For the past two years the Town Treasurer has used an investment advisory services firm (SEI
Investments) to help manage a portion of the Town's investment portfolio. The contract with the
previous firm allowed discretionary authority to SEI, meaning SEI had control over the asset
purchases and sales of the portion of the portfolio they managed (within the parameters of the
Town's Investment Policy). SEI was originally utilized by the Town because the Town Treasurer
believed an outside firm would be able to outperform the Treasurer in making decisions about
investments. For a variety of business reasons, the SEI contract was terminated and all funds held
in custody by SEI were transferred to the Town's custodial safekeeping account with Union Bank
of California.
Because professional investment advice is very important to effectively manage and invest the
Town's portfolio, the Treasurer seeks to continue these advisory services, but change the nature of
the relationship from one that is discretionary to one that focuses on providing only investment
advisory or "non-discretionary"services. The use of professional advisory services on a contract basis
is more appropriate and cost effective than hiring additional permanent or part-time Town staff due
to the complex nature of the trading market and the changing market environments that confront the
portfolio's decision makers on a daily basis.
Two years ago the Town Treasurer interviewed four firms for investment management services,
MBIA was the Treasurer's second choice. A primary reason for their second ranking was the fact
that MBIA did not customarily provide "full discretionary" investment advisory services. Based
upon the past two years of experience, the Treasurer's office concluded that "full discretionary"
services were not the right solution for the Town. However, investment advisory services only are
very valuable to the Treasurer's office. While managing the Town's portfolio the past two years, the
Treasurer established a professional relationship with MBIA. The Treasurer became better informed
about the professional investment services delivered by MBIA to California municipalities and their
reputation in the investment community. The Treasurer now recommends that MBIA is the best
choice to provide the requested "non-discretionary" services. Since the services are advisory only,
the investment portfolio custody arrangement with Union Bank trust department would remain the
same.
The agreement will call for MBIA to provide "non-discretionary" investment advisory services for
the Town Treasurer's office. This means that MBIA will provide the Treasurer with advice on
portfolio strategy and security selection through changing market environments, and is authorized
to execute trades only upon authorization by the Treasurer. This arrangement allows the Treasurer
to maintain her fiduciary control while MBIA provides independent advice and a greater range of
access to the financial markets. The MBIA portfolio managers assigned to Los Gatos are Chartered
Financial Analysts focused full time on the markets, the economy, and the Town's portfolio. The
use of MBIA advisory services is intended to achieve more buying power than Los Gatos could
obtain on its own due to its size.
PAGE 3
MAYOR AND TOWN COUNCIL
SUBJECT: INVESTMENT ADVISORY SERVICES
MARCH 2, 2006
Services provided under the agreement also include:
• Monthly investment reports and credit monitoring
• Periodic investment policy review
• Annual broker/dealer due diligence reviews
• Safekeeping evaluation
• Face to face meetings with Town staff and Treasurer
Currently, the Town has approximately $3 8.5 million in Treasurer's funds in custody at Union Bank
which are the funds for which investment advisory services would be sought by the Treasurer. The
Treasurer also manages approximately $14.5 million invested with the Local Agency Investment
Fund (LAIF), plus cash balances at Bank of the West.
For comparison purposes, the Town expects to achieve financial performance that will consistently
beat the LAIF yield on an intermediate term basis and provide earnings that will pay for the service
annually and return higher yields for the Town than could be achieved by the Treasurer's office
alone. For the past five years, MBIA CAM has exceeded LAIF returns an average of 54 to 108 basis
points as shown below:
California Local Agency Investment Fund (LAIF)
MBIA Customized Asset Managemen Accounts (CAM)
Short-Term
Intermediate Term.
CAM Short Term minus LAIF
CAM Intermediate Term minus LAIF
YTD
2001 2002 2003 2004 2005 Aver.
4.87%
2.66%
1.74%
1.65%
2.62%
2.72%
5.51%
3.66%
2.24%
2.00%
2.53 0
3.26%
5.57%
4.39%
3.05%
2.69%
2.74F-
3.79%
10.64%1
1.0007%
0.50%
0.359/6
- • 0
0.54%
10.70%1
1.73%
1.31%
1.04%
0
1.08%
Assuming this higher yield range of 54 to 108 basis points could be achieved in future years, the
$38.5 million of the Town's investment portfolio under advisory service could potentially achieve
earnings of between $207,900 to $415,800 annually above the LAIF yield. This additional yield
would be the potential source for paying for the increased annual approximate fee of $38,000 to
$40,000 paid annually to MBIA for their services.
MBIA is an industry leader of investment advisory services to the public sector. Through their
MBIA Asset Management Group they provide non-discretionary investment advice and asset
management to many other local public sector clients including:
Cities of Campbell, Benecia, San Rafael, Menlo Park, Tracy, Newport Beach, Rancho Cordova,
Monrovia, Lancaster, Lathrop, among others, and special districts such as the East Bay Regional
Park District. MBIA also provides investment consulting advice to the City of Los Angeles and the
City of Santa Rosa. At this point in time MBIA has over $50 billion in public assets under
management.
PAGE 4
MAYOR AND TOWN COUNCIL
SUBJECT: INVESTMENT ADVISORY SERVICES
MARCH 2, 2006
The final terms of the contract are subject to negotiation. Staff is currently reviewing agreements
between MBIA and other cities to obtain the most favorable terms.
CONCLUSION:
The Town Treasurer and Town Manager should be authorized to execute an agreement with MBIA
for Investment Advisory Services.
ENVIRONMENTAL ASSESSMENT:
Is not a project defined under CEQA, and no further action is required.
FISCAL IMPACT:
The annual fees proposed by MBIA for investment advisory services are.11% (11 basis points) for
asset balances up to and including $20 million and .08% (8 basis points) for amounts over $20
million. Assuming a balance of approximately $3 8 million under contract for advisory services, the
annual fees are estimated to be $30,000 to $40,000 annually. A fiscal year 2005/06 budget
adjustment for four months or approximately $13,500 is recommended at this time. As discussed
in the report, based historical MBIA CAM performance, the Treasurer's office anticipates there will
be sufficient increases in portfolio earnings annually by the Town to provide the funding source for
this agreement.
Attachment: Resolution authorizing the Town Treasurer and Town Manager to execute an
agreement with MBIA Municipal Investors Service Corporation for investment
advisory services with estimated annual fees of approximately $38,000 to $40,000
annually depending upon Town portfolio size
RESOLUTION NO.
RESOLUTION OF THE TOWN COUNCIL OF THE TOWN OF LOS GATOS
AUTHORIZING THE TOWN TREASURER AND TOWN MANAGER
TO EXECUTE AN AGREEMENT WITH MBIA MUNICIPAL INVESTORS
SERVICE CORPORATION FOR INVESTMENT ADVISORY SERVICES
WITH ESTIMATED ANNUAL FEES OF APPROXIMATELY $38,000 TO
$40,000 ANNUALLY DEPENDING UPON TOWN PORTFOLIO SIZE
WHEREAS, the Town Treasurer is interested in hiring an outside investment management firm to help
manage a portion of the Town's portfolio; and
WHEREAS, the Town Treasurer previously solicited information and proposals from four firms
interested in providing investment management services to the Town; and
WHEREAS, the Town previously used SEI Investments Management Corporation to manage
..investments with SEI having full discretion over asset purchases and sales; and
WHEREAS, the Town Treasurer still would like to use an outside investment management firm to
advise and help manage a portion of the Town's portfolio, but with the Treasurer retaining full discretion
over the purchase and sale of assets; and
WHEREAS, the Town Treasurer feels that ofthe previous firms interviewed, MBIA Municipal Investors
Service Corporation is best qualified to advise and help manage a portion of the Town's portfolio.
RESOLVED, the Town Manager and Town Treasurer are authorized to execute a contract with MBLA
Municipal Investors Service Corporation for the management of a portion of the Town's investment
portfolio, keeping within the guidelines of the Town's Investment Policy dated August 7, 2005.
PASSED AND ADOPTED at a meeting of the Town Council of the Town of Los Gatos, California,
held on the day of , 2006 by the following vote:
COUNCIL MEMBERS:
AYES :
NAYS:
ABSENT:
,ABSTAIN:
SIGNED:
MAYOR OF THE TOWN OF LOS GATOS
LOS GATOS, CALIFORNIA
ATTEST:
CLERK ADMINISTRATOR OF THE TOWN OF LOS GATOS
LOS GATOS, CALIFORNIA
NAMGR\AdminWorkFiles\2006 Council Reports\MBIA Resolution 3-6-06.wpd