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6.F. - Page 13 of 39 <br />REDWOOD CITY <br />Investment Strategy Outlook <br />For the Quarter Ended December 31, 2018 <br />Outlook <br />While the path of future Fed rate hikes is less clear than in recent years, we expect future tightening (additional Fed rate hikes) to <br />be modest. Further, political gridlock adds additional uncertainty. As a result, we will seek to increase portfolio duration to be more <br />in line with (neutral to) the benchmark. <br />Our outlooks for the major investment-grade fixed income sectors are as follows: <br />Federal agency spreads (incremental yield) remain very narrow as most maturities offer less than five basis points (0.05%) <br />of incremental yield relative to U.S. Treasuries. We will continue to moderate use of agencies where yield differences are <br />narrow, seeking better relative value in either Treasuries or other sectors. Callable agencies will continue to be evaluated, <br />and, where analyses indicate strong value, we will seek to utilize these securities as portfolio diversifiers. <br />Supranational issuance is expected to increase during the first quarter of 2019. We will seek to take advantage of attractively <br />priced new issues through the first several months of the year. <br />Although it appears that volatility may not dissipate quickly, the significant sell-off in the corporate sector (resulting in wider <br />spreads) presents an opportunity to selectively add to the sector. We prefer high-quality, defensive issuers with a focus on <br />one- to three-year maturities and continue to prefer financials (specifically domestic issuers) and to remain selective in <br />industrial issuers. <br />Allocations to AAA -rated Asset -Backed Securities (ABS) will be maintained. The sector continues to offer attractive <br />incremental income compared to government securities while also serving as a lower volatility credit alternative. Further, as <br />issuance is expected to increase through the beginning of the year, opportunities may arise to add exposure. <br />Short-term money market investors continue to reap the rewards of current monetary policy as the fed funds effective rate <br />now nears two and a half percent. Short-term negotiable bank certificates of deposit and commercial paper have since <br />normalized following very narrow yield differences at year-end, and once again provide an attractive, high-quality source of <br />incremental income. <br />PFM Asset Management LLC 141 <br />