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6.F. - Page 2 of 39 The portion of the City's portfolio that is managed by PFM has a total market value at quarter end of $142,357,884. As of December 31, the portfolio was earning an annual yield at cost of 2.24%, and the yield at market was 2.71%. The average maturity of the portfolio was 2.65 years. The market benchmark, selected with consultation from the Council Finance/Audit Subcommittee, is the Bank of America Merrill Lynch (BofA ML) 1-5 year U.S. Treasury Index. Below is a table summarizing the City's portfolio performance compared to the benchmark, for the period ending December 31, 2018. For the past several quarters, PFM positioned the portfolio with a duration less than that of the benchmark to insulate market values in a rising interest rate environment. However, in the fourth quarter, sudden shifts in the market sentiment caused interest rates to fall. This eroded some of those benefits, negatively affecting portfolio performance versus the benchmark. At the same time, the declines in longer-term yields positively affected the portfolio's absolute performance. Fourth quarter performance was led by the US Treasury sector, as the flight to quality amid widespread market de -risking led to outperformance relative to most other non-government investment grade fixed income alternatives. Corporates felt the pressure of wider spreads across all industries. As a result, the sector underperformed most fixed income alternatives in the quarter, while still returning positive performance. Federal agency sector, supranationals, and asset -back securities generated positive returns for the quarter. Spreads on negotiable bank certificates of deposit and commercial paper issuers rebounded in the fourth quarter, and the portfolio benefited from additional allocations to these high quality, short-term credit instruments at attractive yields. Looking ahead, the Federal Reserve is now favoring more modest tightening of rates in 2019, instead of three to four increases as they had previously indicated. Political gridlock adds additional uncertainty, and as a result, PFM will seek to increase portfolio duration to be in line with the benchmark. PFM will seek to take advantage of attractively priced new supranationals through the first several months of the year. Significant sell-off in the corporate sector presents an opportunity to selectively add high quality, defensive issuers with a focus on one to three year maturities; PFM will continue to prefer domestic financial issuers, and remain selective on industrial issuers. Negotiable certificates of deposits and commercial paper have normalized, following very narrow yield difference at year-end, and once again provide an attractive, high-quality source of incremental income. The portfolio's strategy of broad diversification, a drag in the fourth quarter where longer term US Treasuries outperformed most fixed income asset classes, has benefited the portfolio over the longer-term and should continue to produce strong returns and benchmark outperformance going forward. City of Redwood City 1017 Middlefield Road, Redwood City, CA. 94063 Tel: 650-780-7000 www.redwoodcity.ore 130