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<br />Below is a table summarizing the City’s portfolio performance compared to the <br />benchmark, for first quarter 20181. <br /> <br /> <br />Portfolio/Benchmark <br />Total Return <br />Past Quarter <br />Total Return <br />Since Inception <br />(12/31/16) <br />Effective <br />Duration <br />Yield at <br />Market <br />Average <br />Maturity <br />Redwood City (0.42%) 0.37% 2.46 2.49% 2.60 years <br /> BofA ML 1-5 year U.S. <br />Treasury Index <br />(0.38%) 0.22% 2.59 2.37% 2.78 years <br /> <br />Due to the increase in interest rates during the quarter, both the City’s market-based <br />benchmark and the City’s portfolio had a negative total return for the quarter, reflecting <br />unrealized market value losses that were greater than realized earnings. <br /> <br />While performance of the City’s portfolio has benefited from increased credit allocations <br />over the past several years, some of that benefit was reversed in the quarter. The <br />combined effects of less predictable U.S. politics and policy have created an <br />environment of heightened volatility. The “risk off” sentiment triggered wider credit <br />spreads, causing corporate-related investments to underperform for the quarter. As <br />interest rates continue to increase, PFM strategically positioned the portfolio with a <br />defensive duration bias (keeping the duration at 95% of the benchmark) to help insulate <br />market values in a raising interest rate environment. The underperformance of credit <br />sectors due to widening spreads overwhelmed the benefit of this strategy and others, <br />and led to overall underperformance vs. the benchmark for the period. Performance <br />remains strongly above the benchmark since inception. <br /> <br />Economic data in the first quarter was generally favorable: the unemployment rate <br />hovered near a 17-year low, jobs growth continues to strengthen, inflation remained <br />controlled, and the Federal Reserve raised interest rates by a quarter percent in March. <br />Additionally, the new Federal Chairman, Mr. Jerome Powell, made his first public <br />address, acknowledging that the “economic outlook remains strong” and the expectation <br />for inflation to increase and closely approach the Federal Reserve’s 2 percent inflation <br />target. <br /> <br />Looking ahead, the Federal Reserve has indicated an expectation for two more interest <br />rate hikes in 2018. Rising volatility has increased some market risks but has created <br />investment opportunities in some sectors. In the corporate sector, PFM will be looking to <br />selectively add to allocations at higher yields. Municipal market issuance is down <br />significantly year-to-date, but offers positive diversification to the portfolio. As a result, <br />PFM will continue to look for opportunities in the new and secondary markets. Last <br />quarter a high supply of supranationals become available, and this quarter as the <br /> <br />1 Returns for periods under one year are periodic; all other returns are annualized. Performance <br />excludes funds invested in the San Mateo County Treasurer’s investment pool and State Treasurer’s <br />investment pool. <br />6.1.B. - Page 2