HomeMy WebLinkAboutIR 9812 INFORMAL REPORT TO CITY COUNCIL MEMBERS No. 9812
To the Mayor and Members of the City Council October 27, 2015
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Background
It is the policy of the City that the administration of cash and investments be handled in a manner
that promotes public trust. Investments shall be made in a manner which will provide the
maximum security of principal while meeting the daily cash flow needs of the City. The City's
Investment Policy defines the parameters within which funds are to be managed and outlines
reasonable standards for our investment operations.
The purpose of the Policy is to set specific investment activities and strategy guidelines. The
Policy formalizes the framework for the City's investment activities that must be exercised to
ensure effective and judicious fiscal and investment management of its funds. The guidelines are
intended to be broad enough to allow the Chief Financial Officer / Investment Officer to function
properly within the parameters of responsibility and authority, yet specific enough to adequately
safeguard the investment assets.
Standards and State Law
All investment activities are conducted in full compliance with applicable City ordinances as well
as state and federal regulations. Specific statutory regulations for the investment of public funds
in Texas are found in the Public Funds Investment Act, Chapter 2256, Texas Government Code.
Collateral requirements are established in Texas by the Public Funds Collateral Act, Chapter
2257, Texas Government Code, for all public Texas funds deposits. In accordance with this law,
the City's financial institutions must collateralize deposits at 102% of market value.
Furthermore, such activities shall be designed to adhere to guidelines, standards, and practices
promulgated by such professional organizations as the American Institute of Certified Public
Accountants (AICPA), the Governmental Accounting Standards Board (GASB), and the
Government Finance Officers Association (GFOA), whenever practicable.
The City oversees and /or manages three investment portfolios including:
1 . Operating Portfolio
2. Other Post Employee Benefit Portfolio (OPEB)
3. Gas Well Trust.
The City's retirement trust is administered by the Fort Worth Employees Retirement Fund
Board.
Details for each of these specific and individual portfolios are more fully discussed below.
ISSUED BY THE CITY MANAGER FORT WORTH, TEXAS
INFORMAL REPORT TO CITY COUNCIL MEMBERS No. 9812
To the Mayor and Members of the City Council October 27, 2015
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Operating Investment Policy, Objectives and Strategy
The policy states that the City shall manage and invest its assets with four major objectives, listed
in order of priority:
1. Safety;
2. Liquidity;
3. Diversification; and
4. Yield.
Safety of the principal is the primary objective within this portfolio. All investments are managed in
a manner responsive to maintaining the public's trust. Except for restricted or special funds, the
City maintains a Consolidated Portfolio in which its funds are pooled for investment purposes to
maximize investment earnings and to increase investment efficiencies with regard to pricing,
safekeeping, and administration. Operating within appropriately established administrative and
procedural parameters, the City balances the preservation of principal while balancing investment
returns, while simultaneously controlling our related investment expenses.
The investment strategy incorporates the specific investment considerations and the unique
characteristics of the fund groups represented in the portfolio. The City shall pursue a proactive
portfolio management strategy by placing assets in high credit quality investments. Securities
lending is used to add incremental income. The strategies utilize competitive bidding practices
and other controls as established by this Policy for all transactions.
At all times the City maintains a cash buffer to meet daily anticipated liquidity requirements and
maintains an approximate 10% of the portfolio in liquid investments. Based on historic cash flow
analysis, the City does not exceed a weighted average maturity (WAM) of two and one-half years
for the portfolio as a whole, and no security exceeds a maximum stated maturity of five years.
Investment earnings are allocated to the various funds based on each individual fund's pro rata
participation in the portfolio and in accordance with generally accepted accounting principles.
Securities may be sold before they mature if market conditions present an opportunity for the City
to benefit from the trade. The Investment Advisor continuously monitors the contents of the
portfolio, the available markets, and the relative value of competing instruments to adjust the
portfolio in response to market conditions.
Delegation of Authority — Operating Investments
Financial Management Policy Statements (FMPS) were initially adopted by the City Council on
January 15, 1994 (M&C G11199). By law, the City Council retains ultimate fiduciary responsibility
for the portfolio. The Council is required to receive quarterly reports and annually review and
ISSUED BY THE CITY MANAGER FORT WORTH, TEXAS
INFORMAL REPORT TO CITY COUNCIL MEMBERS No. 9812
To the Mayor and Members of the City Council October 27, 2015
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adopt the Investment Policy and Strategy. The FMPS is periodically updated with revisions and
refinements as deemed necessary. On September 15, 2015 the City Council adopted the most
recent version of the FMPS for the Fiscal Year 2016 (M&C G18552), which met the annual
requirement to complete a review and update.
In adopting the FMPS, the City Council continued the practice of using an Investment Committee
to provide guidance to the Investment Advisor and maintain compliance over the portfolio. In
accordance with the Act, the City Council delegated to the Committee authority to approve the
annual broker/dealer list and to authorize organizations to provide the training required under
state law. No other authority is transferred to the Committee. The Committee meets quarterly to
review and approve the investment portfolio position, to review portfolio performance, and to
discuss investment strategies. This Committee will annually review the Investment Policy and
recommend possible changes to the City Council.
The Committee is comprised of the Chief Financial Officer/Finance Director, the Assistant
Finance Directors, the Assistant Treasurer, the Investment Advisor (Patterson & Associates), a
member of the Legal department, a member of the Water department, and other appropriate
personnel as chosen by the Committee.
The City engages the services of a SEC-registered Investment Advisor, (Patterson & Associates)
to assist in the management of the investment portfolio. They are paid $60,000 per year for their
services and the contract is renewed annually in July. The Investment Advisor is not granted total
discretion in the management of funds; rather, they have been granted limited discretion to
purchase and sell investment securities in accordance with the Investment Policy and state law.
Authorized Investments under State Law— Operating Portfolio
The City shall invest only in those investments authorized below.
1. Direct obligations of the United States Treasury with a maximum stated maturity of five
(5) years.
2. Obligations of United States government agencies and instrumentalities, including
mortgage backed securities and collateralized mortgage obligations (CMO) which pass
the Federal Reserve's bank test, with a maximum maturity of five (5) years.
3. FDIC insured and/or collateralized depository certificates of deposit from banks in
Texas, with a maximum maturity of three (3) years.
4. Commercial paper rated A1/P1 or equivalent by two nationally recognized rating
agencies, with a maximum maturity of ninety (90) days.
ISSUED BY THE CITY MANAGER FORT WORTH, TEXAS
INFORMAL REPORT TO CITY COUNCIL MEMBERS No. 9812
To the Mayor and Members of the City Council October 27, 2015
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5. AAA or equivalent rated, constant dollar, Texas local government investment pools as
defined by the Act.
6. AAA-rated, SEC-registered money market mutual funds.
7. FDIC insured brokered certificates of deposit securities from a bank in any US state,
delivered versus payment to the City's safekeeping agent, not to exceed one year to
maturity. Before purchase, the Investment Officer(s) or Investment Advisor must verify
the FDIC status of the bank on www.fdic.gov to ensure that the bank is FDIC insured.
General Portfolio — Operating Investments
As of September 30, 2015, the operating portfolio consisted of a total asset allocation of
$906,644,572.37. Of that allocation, investments with agencies make up 37.58%, money market
accounts make up 11 .56%, US treasuries make up 38.42%, and the remaining 12.44% is held in
municipal bonds.
The City's performance benchmark is the 12 month moving average of the yield of the 1 -year
Treasury bill. The City has consistently outperformed the benchmark as identified in the chart
below.
• • • • to Date
Fort Worth 0.64 0.63 0.62 0.64 0.62
1 YrT-Bill 0.10 0.21 0.21 0.33 0.248
2 Yr T-Note 0.51 0.64 0.58 0.64 0.64
Other Post-Employment Benefits (OPEB) Investments
With the implementation of Government Accounting Standards Board Statement 45 (GASB 45),
the City began planning and accounting for its Other Post-Employment Benefits (OPEB), which
includes the City's retiree healthcare and death related benefits.
In October 2006, the City's unfunded actuarial accrued liability for OPEB was first identified. To
begin addressing this liability, on September 17, 2008, the City Council adopted Ordinance No.
18287-09-2008 providing that the City will not contribute to the cost of post-retirement health
benefits for employees hired on or after January 1, 2009, or their dependents.
On August 18, 2009, the City Council approved an Other Post-Employment Benefits (OPEB)
Trust as part of the City's program of benefits in order to provide a contributing funding source
for retiree healthcare benefits (M&C C-23730). After an initial installment in Fiscal Year 2009,
ISSUED BY THE CITY MANAGER FORT WORTH, TEXAS
INFORMAL REPORT TO CITY COUNCIL MEMBERS No. 9812
To the Mayor and Members of the City Council October 27, 2015
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the City adopted a 20-year funding strategy with Resolution No. 3921-09-2010 on September 21,
2010. On September 24, 2013, the City Council approved Resolution No. 4247-09-2013 to
further revise this funding strategy, modifying the overall funding target and extending the
funding period to allow for more manageable annual contributions from operating budgets
beginning in Fiscal Year 2014.
On June 2, 2015 the adopted funding strategy for OPEB was revised (M&C G-18494.) In
particular, Resolution No. 4464-06-2015 discontinued future contributions to the OPEB Trust
from the City's annual operating budgets and designates net position (fund balance) in the Group
Health and Life Insurance Fund for transfer to the OPEB trust when the fund's net position
exceeds its reserve requirements and when approved by the Mayor and Council. In addition,
Staff is required to include options in each year's proposed budget for the required annual pay-
as-you-go amount for retiree health benefits. Staff is also charged with continuing to monitor the
City's Unfunded Accrued Actuarial Liability (UAAL) for retiree healthcare and to report the UAAL
to the City Council at least annually. M&C G-18494 also appropriated the excess reserves in the
Group Health and Life Insurance Fund for transfer to the OPEB Trust and authorized the
transfer. Because the money in this fund was intended to be used for healthcare, Staff
recommended that the $10,632,231 in the fund that is in excess of the newly adopted reserve
requirement be appropriated and transferred to the OPEB Trust, which is limited to healthcare
expenditures.
Public Agency Requirement Services (PARS) acts as the Trust Administrator and Consultant.
Their duties involve recordkeeping, actuarial coordination, monitoring contributions, processing
disbursements, monitoring compliance, and providing ongoing client liaison services. U.S. Bank,
as the Trustee, safeguards the plans assets, provides oversight protection, and is the custodian
of assets. In turn, U.S. Bank delegates investment authority to HighMark Capital Management, a
SEC registered investment advisor. Highmark is authorized to purchase, sell, exchange, invest,
reinvest and manage designated assets based upon the parameters established for the Trust by
the City.
The City pays PARS an annual fee from Plan assets based on the following schedule:
For Plan Assets from: Annual Rate:
$0 to $10,000,000 .25 bps
$10,000,001 to $15,000,000 .20 bps
$15,000,001 to $50,000,000 .15 bps
$50,000,001 to above .10 bps
ISSUED BY THE CITY MANAGER FORT WORTH, TEXAS
INFORMAL REPORT TO CITY COUNCIL MEMBERS No. 9812
To the Mayor and Members of the City Council October 27, 2015
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OPEB Investment Goals & Objectives
The goal of the Plan's investment program is to generate adequate long-term returns that, when
combined with contributions, will result in sufficient assets to pay the present and future
obligations of the Plan. The Plan should earn, on a long-term average basis, a rate of return
equal to or in excess of the target rate of return of 4.10%. The Plan should also seek to earn a
return in excess of its policy benchmark over the long-term. Lastly, the Plan's assets will be
managed on a total return basis which takes into consideration both investment income and
capital appreciation. To achieve these objectives, assets are allocated with a strategic, long-term
perspective of the capital markets.
The investment strategy selected by the City is entitled Moderately Conservative, which seeks to
provide current income and moderate capital appreciation. The asset allocation ranges for this
objective are: 0-20% Cash, 50%-80% Fixed Income, and 20%-40% Equity. The major portions of
the assets are committed to income-producing securities. The current allocation is: 5% Cash,
65% Fixed Income and 30% Equity. Investment return data for the trust is provided below:
Year Inception
to Date to Date
SectDr 3 Months (9 Months) 1 Year 3 Years (5 Years)
Cash EquKelents 01 .02 02 02 02
Jlt+kineyhlet, Inc. Taxable .01 .01 .02 .02 .02
TotalFixed Income 89 .75 2.04 1.57 2.70
E,G U';,a ggregate 6d Index 1.2.3 2.94 1.71 3.10
Total Equities -9.03 -6.69 -4-13 9.38 10.15
Large Cap Funds -7.01 -6.00 -1.45 12.00 12.96
S&P 500 Composite Index -6.44 -5.29 -,61 12.40 -
Mid Cap Funds -8.08 -5.98 -_39 13.72 13.15
RgsseR hfidcap Irrdex -8.01 -5.84 -.25 13.91 43.40
Small Cap Funds -11.64 -7.86 1.27 12.10 13.51
Rgsseil2000Index -41.92 -7.73 1.25 11.02 41.73
international Equities -11.53 -7.31 -11.51 91 .57
MSCI EAFE Index -50.23 -5.26 -8.65 5.63 3.98
A.4SCI EM Free Index '7.90 -45.47 -19.26 -5.27 -3.56
Total Managed Portfolio -1.97 -125 48 3.81 4.82
Total Account Net of Fees -2.00 -1.37 32 3.62 4.60
Portfolio - OPEB Investments
The initial contribution in September 2009 was $5,000,000. Additional contributions were made in
the amount of $44,785,724 resulting in total contributions in the amount of $49,785,724. There
have been no disbursements and the account balance as of September 30, 2015 is $66,028,968.
ISSUED BY THE CITY MANAGER FORT WORTH, TEXAS
INFORMAL REPORT TO CITY COUNCIL MEMBERS No. 9812
To the Mayor and Members of the City Council October 27, 2015
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Gas Well Trust / Fort Worth Permanent Fund Policy, Objectives and Strategy
The City Council has designated that certain funds obtained from mineral rights owned by the
City be placed in a trust for benefit of the City, with such trust to be known as the Fort Worth
Permanent Fund. Those funds that have been obtained from mineral rights but not designated as
part of the Permanent Fund will be managed as part of the City portfolio under the City
Investment Policy addressed earlier in this document.
The Fort Worth Permanent Fund Investment Policy and Strategy sets specific investment and
strategy guidelines for funds placed in the Permanent Fund, and establish controls to ensure
effective and judicious fiscal and investment management. The guidelines are intended to be
broad enough to allow active investment within the Policy parameters yet specific enough to
adequately safeguard the assets.
All Permanent Fund investment activities are conducted in full compliance with applicable City
ordinances as well as state and federal regulations. Statutory regulations generally applicable to
the investment of public funds in Texas are found in the Public Funds Investment Act, (Chapter
2256, Texas Government Code) with a specific provision applicable solely to municipal funds
from management and development of mineral rights found in Sec. 2256.0202 of the Act, which
incorporates by reference The Texas Trust Code (Subtitle B, Title 9, Property Code). All
investments of monies in the Permanent Fund are made in accordance with these statutes and
this more restrictive Policy. As previously mentioned, collateral requirements are established in
Texas by the Public Funds Collateral Act, (Chapter 2257, Texas Government Code.)
The City manages and invests its assets in the Gas Well Trust with four major objectives, listed in
order of priority:
1 . Safety;
2. Liquidity;
3. Diversification; and
4. Yield.
Safety of principal is the foremost objective of the City's overall investment program, and safety of
principal is an objective with respect to the investment of the Permanent Fund as well. Investment
transactions and strategies address and consider the preservation of capital and minimization of
capital loss as well as growth. Liquidity is not critical in the Permanent Fund because these funds
are not to be used for ongoing operational liabilities. Diversification in the portfolio structure is
intended to further protect the Permanent Fund from over-concentration.
Contributions to The Permanent Fund are invested in designated sub-accounts. These sub-
accounts include: The Aviation Endowment Gas Lease Fund, The Nature Center Endowment
ISSUED BY THE CITY MANAGER FORT WORTH, TEXAS
INFORMAL REPORT TO CITY COUNCIL MEMBERS No. 9812
To the Mayor and Members of the City Council October 27, 2015
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Gas Lease Fund, The Park System Endowment Gas Lease Fund (restricted and unrestricted),
and The Water and Sewer Endowment Gas Lease Fund.
Strategies shall utilize competitive bidding where appropriate and other controls as established
for all transactions pursuant to the terms of the Trust. Securities may be sold or traded if an
opportunity exists to benefit from the transaction. Trades must be documented. The Trustee will
continuously monitor the contents of the portfolio, the available markets, and the relative value of
competing instruments to adjust the portfolio in response to market conditions.
The Fort Worth Permanent Fund Investment Policy and Strategy is reviewed by the Investment
Committee and adopted by the City Council at least annually. September 15, 2015 City Council
adopted the Permanent Fund Investment Policy and Strategy (M&C G18552) for Fiscal Year
2016.
Delegation of Authority and Responsibilities - Fort Worth Permanent Fund
City Council
By law, the City Council retains ultimate fiduciary responsibility for the Permanent Fund
regardless of management assignment. The Council receives quarterly reports and annually
reviews and adopts the Policy. The Investment Committee designated by Council is responsible
for reviewing and authorizing all broker/dealers. The same Investment Committee who oversees
the operating portfolio provides oversight to the Fort Worth Permanent Fund.
The Chief Financial Officer is responsible for monitoring the portfolio and reports submitted by the
Trustee.
Trustee
The Trustee, Wells Fargo, is responsible for monitoring and controlling the portfolio in accordance
with the terms of the Trust Agreement. Each Trustee serves a five year term. The Trustee may
continue to serve for additional periods by mutual written agreement of the Parties. The Trustee,
with approval of the City, may engage the services of a SEC-registered Investment Adviser
(registered under the Investment Advisers Act of 1940) or a National Bank exempt from
registration to provide the investment management of the Permanent Fund in a manner
consistent with the Policy. The Trustee and the selected Investment Adviser or National Bank
may be affiliated. The Trustee shall provide timely monthly and quarterly reports to the Chief
Financial Officer and Investment Committee in accordance with the Act and establish internal
procedures and controls for the investment process and financial counter-parties.
ISSUED BY THE CITY MANAGER FORT WORTH, TEXAS
INFORMAL REPORT TO CITY COUNCIL MEMBERS No. 9812
To the Mayor and Members of the City Council October 27, 2015
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Investment Committee
The City's Investment Committee performs a strategy and performance review at least semi-
annually. The Committee will review and act on any potential need for refinement or revision of
the Permanent Fund's policies or strategies. Annually the Committee approves all broker/dealers
in accordance with the Act.
Authorized Investments - Fort Worth Permanent Fund
1. Obligations of the United States Government, its agencies and instrumentalities including
mortgage backed securities and collateralized mortgage obligations (CMO) which pass the
Federal Reserve's "bank test," with a maximum stated maturity of twenty (20) years.
2. FDIC insured and/or collateralized depository certificates of deposit from banks in Texas, with
a maximum maturity of three (3) years.
3. Commercial paper rated A1/P1 or equivalent by two nationally recognized rating agencies, with
a maximum maturity of 90 days.
4. AAA or equivalent rated constant dollar, Texas local government investment pools as defined
by the Act.
5. AAA-rated SEC-registered money market mutual funds.
6. Debt obligations of any state or political subdivision of any US state, rated A or better with a
stated maturity not to exceed ten (10) years.
7. Fully collateralized, direct repurchase agreements executed through a primary government
securities dealer, with a maximum maturity of one (1) year. A Bond Market Association Master
Repurchase Agreement, 102% margin, and independent third party safekeeping are required.
(See section IX)
8. Banker's acceptances with a maximum maturity of 120 days accepted by a US registered bank
with a short term rating of not less than A1/P1 by two nationally recognized rating agencies.
9. Domestic bond mutual funds with a maximum weighted average maturity of ten (10) years with
a Morningstar rating of at least two stars.
10. International bond mutual funds with a maximum weighted average maturity of fifteen (15)
years with a Morningstar rating of at least two stars.
11 . Domestic or international equity and preferred stock mutual funds with a Morningstar rating of
at least two stars.
ISSUED BY THE CITY MANAGER FORT WORTH, TEXAS
INFORMAL REPORT TO CITY COUNCIL MEMBERS No. 9812
To the Mayor and Members of the City Council October 27, 2015
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12. US or international stocks.
13. Real assets, including real estate, commodities and real estate investment trusts (REITS).
14. Complementary strategies to include hedge funds.
15. Corporate and asset backed securities rated A or better with a stated maturity not to exceed
ten (10) years.
Diversification - Fort Worth Permanent Fund
The City as beneficial owner of the Permanent Fund recognizes that investment risks can result
from issuer defaults, market price changes, or various technical complications leading to
temporary illiquidity. Risk is controlled through portfolio diversification.
The City's target diversification is 39% in Cash and Cash Equivalents, 37% in Equities, 12% in
Real Assets, and 12% in Complementary Strategies. The City's actual diversification is right in
line with the target percentages with 36% in Cash and Cash Equivalents, 41% in Equities, 10% in
Real Assets, and 13% in Complementary Strategies.
Portfolio - Fort Worth Permanent Fund
The benchmarks for risk measurement and performance of the Permanent Fund portfolio will be
divided among the asset classes as outlined below.
- The benchmark for the fixed income portion shall be the Barclays' Five Year Index for the
comparable period.
- The benchmark for the equity portion shall be a total return equal to a composite of the
total return of S&P 500 for stocks and the EAFE for international investments
comparable to the then-current makeup of the portfolio for the comparable period.
- The benchmark for the real assets portion shall be the FTSE NAREIT All Equity REIT
Index for the comparable period.
- The benchmark for the commodities portion shall be the Dow Jones UBS Commodities
Index for the comparable period.
- The benchmark for the complementary strategies portion shall be the HFRX Global
Hedge Fund Index for the comparable period.
ISSUED BY THE CITY MANAGER FORT WORTH, TEXAS
INFORMAL REPORT TO CITY COUNCIL MEMBERS No. 9812
To the Mayor and Members of the City Council October 27, 2015
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The beginning year to date value of the Fort Worth Permanent Fund portfolio was $57,078,595.
There were net contributions of $2,563,904 and an investment loss of $2,302,657 leading to a
year to date ending value of $57,339,843. Since inception, the portfolio had a beginning value of
$35,832,362. The net contributions are $20,787,382 with an investment gain of $720,099. The
ending value as of September 30, 2015 was $57,339,843. The portfolio's performance is outlined
below:
PORTFOLIO SUMMARY LAST 3 YEAR TO LAST 12 SINCE
MONTHS DATE MONTHS INCEPTION
Beginning Value 60,191,075 57,070,595 51,168,196 35,832,362
Net Contributions R Withdrawals' 0 2,563,904 7,818,636 20,787,382
Investrnent Gain or Lass -2,851,232 -2,302,657 -1,645,991 720,099
Ending Value' 57339.843 57,339,843 57,339,843 57,339,843
PERFO R MAN C E SUMMARY
ENDING CURRENT
MARKET PORTFOLIO LAST YEAR TO LAST 12 SINCE
VALUE ALLOCATION MONTHS DATE MONTHS INCEPTION`
TOTAL PORTFOLIO(Hat of fees) 57,339.843 10000% -4.74% -3-79% -2-50% 1-40%
8afanr_ed Wealth Blend-Total -0-42% -4.33% X15% 3-41%
FIXED INCOME 11,165,546 2994% All% 0.58% 051% 135%
Barclays 1-5 Year GovVcredd 060% 1.55% 1.97% 1.67%
EQUITIES 23,536,487 4105% -947% -652% -530% 534%
Standard&PooYs WO Stock index -0-43% -0.27% -0-62% f0.51%
MSCI EAFE Gross Index -10.19% -4.9f% -0-27% 3-f4%
REALASSETS 5,837,881 10-18% -2-72% -5-98°% 018% 2-30%
FTSE NAREIT AN Equity REPT Index 0.99% -4.51% 7.64% 7-96%
Bloomberg Commodity Total Rehm Index 44.47% -15.80% -25.90% -14.33%
COMPLEMENTARY STRATEGIES 7,263,447 12.67% -3-44% -1-41% 0-07% 1-59%"
NFRX Global Hedge Fund Index d17% -3.05% -4-74% -0.13%
CASH 3 EQUIVALENTS 3,536,482 6.17% 0-00% 0-H% 0-00% 0-00%
Lipper Money Market Index 000% 0-01% 001% 0-01%
If you have any questions, please call Aaron Bovos, Chief Financial Officer, at 817-392-8517.
David Cooke
City Manager
ISSUED BY THE CITY MANAGER FORT WORTH, TEXAS