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The Comptroller's Investment Advisory Committee met to consider current investment activity and to hear updates on various state funds. 

Federal Reserve Rates

  • Rate increase expected at 1.5% over biennium vie Federal Reserve
  • Rate for locked up funds at .65%, for Federal Reserve investment to be worthwhile, lock-up rate would need to equal 1.5%
  • Only 25 basis points currently, Federal Reserve needs to back up rates for potentially 200 basis points
  • Federal Reserve rate raises would only increase market uncertainty, even if gradual

 
Unemployment

  • CPI went up to 3.8% during previous periods of high unemployment
  • Potential for serious economic bubble exits, Federal Reserve should be worried
  • While potentially damaging, Federal Reserve rate increase could confirm good status of the economy
  • Given current unemployment rates and workforce increase, Texas is set to gain 50,000 to 70,000 per annum

 
Portfolio

  • $30 billion portfolio, earning almost 0%
  • As of August 31st, yield was 52, as of today yield is 54
  • Benchmark used is a 305 day weighted average reset, benchmark “should” spur appropriate action for the portfolio
  • Texas has a unique portfolio make-up, beats MMF 80% of the time and the benchmark 20% of the time
  • Portfolio is the liquidity provider on $1.5 billion of state debt, SNP rating can threaten ability to provide liquidity
  • Due to entanglement with the federal government and the current US SNP rating of AA, Texas can invest 30-35% of its portfolio beyond one year
  • Liquidity providing costs generally 12 basis points
  • Maturity limits exist in policy for investments, agencies such as TWDB and THA participate in the program
  • 12 basis points is almost “free money,” trust has never needed to provide liquidity for agencies
  • Portfolio returns are up about 8 basis points, goal is to meet at least inflation + 5 basis points, can potentially yield 10 basis points

 
 
Economic Stabilization Fund Update

  • Portion of the state rainy day fund
  • $1.4 billion total, disbursed roughly 250 million in September, and another 265 million expected to be disbursed in October
  • Expecting another allocation of $1 billion to the fund in December

 
Emerging Technology Fund

  • Transferred on September 1st  to the trust company from the Governor’s Office
  • Used to directly invest in companies, new focus for the trust company
  • $145 million invested in companies currently, value is vague for start ups
  • Will need to procure outside assistance for investments in some companies, such as biotechnology firms
  • Companies are being closely monitored for changes that could affect value of investments

 
SWIFT Portfolio Updates and Related Matters

  • Since implementation in late 2013, equity has been added to SWIFT
  • Not done adding equity and building program, but on track according to policy
  • Designed as a draw-down fund to help subsidize local water projects through providing capital coverage for defaults on bonds
  • TWDB can also issue equity, funds such as these help to make the market less volatile
  • Trust is in compliance with asset allocation policy
  • Liquidity relies heavily on policy and shifts with policy changes, currently meeting policy requirements, but have not necessarily in the past
  • Slightly overweight compared to fixed-income and equity investments
  • Tactical investments by appointed managers have led to heavy weight in North America
  • Heavy weight in Europe is intentional decision
  • Generally risk averse, emerging markets investments have put up returns of 2.8% with risk averse strategies
  • Fixed income investments compare favorably to global standard
  • Favorable outcomes compared to investment plans like Barclay’s
  • Traded little duration risk for relatively high credit risk
  • For the private debt detail, “performing” is dramatically outperforming “distressed”
  • Equity is a low risk portfolio with associated lower returns, as designed
  • Long end hedged equity has outperformed the benchmark
  • 57% of invested capital has returned to the fund
  • Horrible performance in commodities investments
  • Real estate investment returns are slightly lower than expected, largely due to lack of entry points into markets
  • Inflation-linked and environmental bonds are the worst-performing sector
  • Portfolio is designed to be defensive, markets have been declining generally
  • $2 billion has been deployed continuously for SWIFT
  • Has been a “rough couple of months” for equity and resources
  • SWIFT has opened up new low-volatility opportunities due to possibilities of shifting risk averse investments to fund and combining funding sources for some investment opportunities