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6.F. - Page 6 of 39 <br />REDWOOD CITY <br />Portfolio Recap <br />For the Quarter Ended December 31, 2018 <br />Portfolio Review <br />For the past several quarters we have positioned the portfolio with a duration less than that of the benchmark. This benefited the <br />portfolio for most of 2018 as the Federal Reserve raised rates, and yields across the curve increased. However, in the fourth <br />quarter, sudden shifts in market sentiment caused interest rates to fall, which eroded some of those benefits, negatively impacting <br />portfolio performance versus the benchmark. At the same time, the declines in longer-term yields positively impacted the portfolio's <br />absolute performance. <br />Absolute total returns were strong across the board in the quarter as lower yields pushed prices higher. But while <br />diversification boosted returns for most of 2018, Q4 performance was led by the US Treasury sector, as the flight to quality <br />amid widespread market de -risking led to outperformance relative to most other non-government investment grade fixed <br />income alternatives. <br />The federal agency sector generated positive returns for the fourth quarter, adding to the overall performance of the portfolio, <br />while underperforming comparable U.S. Treasuries. <br />Incremental income from supranationals contributed to positive performance for the quarter. <br />Corporates felt the pressure of wider spreads across all industries. As a result, the sector underperformed most fixed income <br />alternatives in the quarter. <br />After actively adding asset-backed securities (ABS) in prior quarters, the portfolio's allocation was maintained in the quarter. <br />We continue to view ABS as a favorable sector that offers incremental income and enhanced credit quality. Although the <br />sector generated returns that were less than those of similar -duration Treasuries, in the fourth quarter the AAA -rated ABS <br />sector generated attractive relative performance compared to corporates. <br />After yields narrowed to 12 -month lows in the third quarter, spreads on negotiable bank certificates of deposit and <br />commercial paper issuers rebounded in the fourth quarter. As a result, the portfolio benefited from additional allocations to <br />these high-quality, short-term credit instruments at attractive yields. <br />PFM Asset Management LLC 134 <br />