AgdaPkt 2018-09-24 Joint SA PFA - Laserfiche WebLink

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For the Quarter Ended June 30, 2018 REDWOOD CITY Portfolio Review rn Portfolio Recap n • In what we viewed as a well -choreographed interest rate environment, we continued to strategically position the portfolio with a modestly defen:cn CD duration bias relative to the benchmark. However, with rates near multi-year highs, there were also opportunities to selectively capture higher yi in some parts of the yield curve when rebalancing the portfolio or participating in new issues. • Most investment-grade sectors contributed positive excess returns (returns in excess of similar -duration Treasuries) to fixed income portfolios for the quarter: Federal agency yield spreads remained very narrow throughout the quarter. Limited incremental yield, in combination with ligh t issuance and diminishing supply, influenced our continued preference to reduce the portfolio's allocation to agencies. Supranationals continued to offer an attractive yield advantage over comparable maturity U.S. Treasuries and, although issuance was down during the quarter, we found an opportunity to add to the portfolio's allocation. The portfolio's holding of supranationals benefited from modest spread tightening in the second quarter. In the corporate sector, ourfundamental outlook remained favorable as corporate profits surged in the first half of the year, in part due to the 2017 tax cuts. When yield spreads widened in the first quarter, a result of global issues rather than any fundamental credit concerns, we viewed the wider spreads as an opportunity to increase allocations to credit sectors. However, we are being more selective gi ven balance sheet weakening in certain industries as companies return capital to shareholders through dividends and share buybacks. In sh ort- and intermediate-term maturities, corporate allocations contributed to incremental performance forthe quarter. Similarly, asset-backed securities (ABS) generated attractive excess returns forthe quarter, while simultaneously providing a level of downside protection given the sector's strong structural protections and AAA ratings. During the second quarter, we continued to purchase ABS for the portfolio as we viewed the sector as providing a high-quality tactical diversifier to credit allocations. • Short-term, high-quality commercial paper and negotiable certificates of deposit continued to offer considerable value relative to not only similar -maturity government securities but also somewhat longer Treasury maturities. The combination of incremental income and the interest rate risk protection offered by these sectors' shorter durations continue to benefit the portfolio. PFM Asset Management LLC