AgdaPkt 2020-04-13 Joint SA PFA - Laserfiche WebLink

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S.B. - Page 7 of 59 REDWOOD CITY Portfolio Recap • Our strategy throughout the fourth quarter included the following elements: For the Quarter Ended December 31, 2019 Portfolio Review • Following three consecutive Fed rate cuts, we continued to maintain the portfolio's duration in line with the benchmark for the quarter as market expectations called for stable rates well into 2020. • We maintained broad diversification across all permitted fixed income sectors. Although most sector spread levels were on the tighter end of their recent trading history, the incremental income was generally additive to performance in a range - bound interest rate environment in the fourth quarter. • We continued to de-emphasize agencies and supranationals. Value in federal agency and supranational issuers remained extremely limited, largely on scarce supply. Spreads remained near historically tight levels, capping both sectors' excess returns in the fourth quarter. In some instances, agencies were trading at yields less than similar -maturity Treasuries. We also avoided callable agencies during the quarter as early redemption risk remained elevated. • Following a volatile third quarter in the agency mortgage-backed security (MBS) sector, the fourth quarter saw a retracement of both volatility and spreads. As a result, the prior -period purchases were a boon for portfolio performance as MBS generated relatively attractive excess returns in the quarter • Corporate bonds performed top -of -class once again as yield spreads tightened to their lowest in 2019 and approached post -recession lows. As a result, investment-grade (IG) corporates generated attractive excess returns for the fourth quarter, with lower -quality issuers once again outperforming those of higher quality. Year-to-date excess returns from IG corporates were fantastic, generating 100 to 200 basis points (1 % to 2%) of incremental return relative to similar duration Treasuries. Our corporate sector strategy during the fourth quarter included opportunistic selling, booking profits on the most expensive issues and modestly de -risking the portfolio as spreads moved to very narrow levels. Asset-backed securities (ABS) allocations were maintained during the quarter. Excess returns were muted as incremental income offset the impact of spread widening. In the municipal sector, taxable issuance volume remained elevated. New issue yield concessions provided good value for portfolios compared to other government alternatives and even some high-grade corporates. Excess returns from the sector benefited portfolio performance. PFM Asset Management LLC 1s