Fiscal year ... annual report

158 Pages·1993·5.9 MB·English

by  Montana. Board of Investments

332.6725
I8r
1993
STATT UeeUMENTS COLLECTION
nCT 1 7 1994
MONTANA STATE LIBRARY
1515 E. 6th AVE.
HELENA, MONTANA 59620
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Montana
Board Of Investments
Fiscal Year 1993 Annual Report
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MONTANA STATE BOARD OF INVESTMENTS
Department of Commerce
The Honorable Mark Racicot, Governor
JAN 1 2 19Ki
BOARD MElVfBERS
Wairen Vaughan, Chairman
Business Executive
Billings
Term Ending 01-01-97
James Cowan Troy McGee, Sr.
President/Chairman of the Board Retired State Employee
First Valley Bank Governor's Budget Office
Seeley Lake Helena
Term Ending 01/01/97 Term Ending 01/01/97
Maureen Fleming William R. Price
University Professor of Management President
School of Business Administration Lewistown Insurance, Inc.
University of Montana, Missoula Lewistown
Term Ending 01/01/95 Term Ending 01/01/97
Earl W. Johnson F. Lee Robinson
Retired Banker Farm Equipment Dealer
First Bank Helena Auto Dealer/Farmer
Helena Malta
Term Ending 01/01/95 Term Ending 01/01/95
William Macfadden Sharon Walker
Financial Consultant Elementary School Principal
Executive Director, Eagle Mount Kessler School
Great Falls Helena
Term Ending 01/01/95 Term Ending 01/01/97
inmi.rpi
MONTANA STATE BOARD OF INVESTMENTS
Staff as of June 30, 1993
CarroU V. South • James R. Penner, CFA
Executive Director Chief Investment Officer
• Sheny Bach • Karen Antonick
Program Assistant Security Analyst
• Kris Barnes • Robert Bugni, CFA
Secretary Assistant Investment Officer-Fixed Income
• Michelle Barstad-Jones • Richard Cooley
Bond Program Officer Investment Research Manager
• Geri Burton • Fred Godbout, CFA
Bond Program Assistant Assistant Investment Officer-Equities
• David Ewer • William Hubber
Bond Program Officer Security Analyst
• Cheri Goosen • Charles Hunter, Jr., CFA
Accounting Technician Senior Portfolio Manager
• Sandee Gordee • Edward KeUy
Secretary Assistant Investment Officer-Short Term
• Vikki Gredyk • Charles Meyer, CFA
Accounting Technician Senior Portfolio Manager
• Gayle Moon, CPA • Robert Pancich
Accounting Fiscal Manager Assistant Investment Officer
• Delores Parker • Vince Smith
Accounting Specialist Security Analyst
• Tammy Prout • Terry Spalinger
Accounting Specialist Senior Portfolio Manager
• Rob Thomburg
Security Analyst
• Chris Tocci
Security Analyst
• Janice Towlerton
Security Analyst
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TABLE OF CONTENTS
Introduction 1
Ex:ononiic/Investnient Overview 4
Total Invested Funds 6
Short-Term Investment Pool 11
Montana Common Stock Pool 14
Montana Convertible Securities Pool 19
Alternative Investments 22
Public Employees' Retirement System 24
Teachers' Retirement System 28
Other Retirement Systems 32
Permanent Coal Tax Trust Fund 36
Trust and Legacy Fund 40
Resource Indemnity Trust Fund 44
Coal Tax Parks/Cultural Trust Funds 47
Other Trust Funds 50
Treasurer's Fund 52
State Compensation Insurance Fund 54
Other Insurance Funds 56
In-State Investments, Pension Mortgages 58
In-State Investments, Permanent Coal Tax Fimd Loans 60
Bond Programs 63
Appendix A, Following Page 65:
Total Invested Funds A-1
Total Income By Fund A-2
Invested Balances, Income, and Returns A-6
Montana Residential Mortgages Listing A-8
Permanent Coal Tax Fund Loans Listing A-9
Public Employees' Retirement System Portfolio A-10
Teachers' Retirement System Portfolio A-16
Other Retirement Systems Portfolios A-22
Permanent Coal Tax Trust Fund Portfolio A-25
Trust and Legacy Fund Portfolio A-29
Resource Indemnity Trust Fund Portfolio A-33
Coal Tax Parks Trust Fund Portfolio A-36
Coal Tax Cultural Trust Fund Portfolio A-38
Other Trust Fund Portfolios A-39
Treasurer's Fund Portfolio A-44
State Compensation Insurance Fund Portfolio A-45
Other Insurance Funds Portfolios A-47
Appendix B, Financial Statements, Following PageA-48:
Short-Term Investment Pool Financial Statements B-1
Short-Term Investment Pool Portfolio B-5
Montana Common Stock Pool Financial Statements B-8
Montana Common Stock Pool Portfolio B-12
Montana Convertible Securities Pool Financial Statements B-1
Montana Convertible Securities Pool Portfolio B-19
All Other Funds Financial Statements B-20
Board Of Investments Enterprise Fund Financial Statements B-26
intro.rpi

INTRODUCTION
The Montana Board Of Investments (Board) is honored to submit its Annual Report for the
fiscal year ended June 30, 1993. The purpose of this report is to disclose investment
performance for the past fiscal year and summarize the in-state investment activities of the
Board.
General Board Responsibilities
UnifiedInvestmentProgram - Article VIII, Section 13 ofthe Montana Constitution requires
that the legislature provide for a unified investment program for public funds and that the
investment program be audited annually. The legislature, in Section 17-6-201, MCA,
established the unified investment program, created the Board, and gave the Board sole
authority to invest state funds in accordance with state law and the state Constitution.
State law requires that the Board operate under the "prudent expert principle," which
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requires it to: discharge its duties with the care, skill, prudence, and diligence that a
prudent person acting in a like capacity with the same resources and familiar with like
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matters exercises in the conduct of an enterprise of a like character with like aims;
diversify the holdings of each fund to minimize the risk of loss and maximize the rate of
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return; and discharge its duties solely in the interest of and for the benefit of the funds
managed.
Prior to the Board's assuming all investment responsibilities for state funds, the funds were
invested by individual state agencies, usually on a part-time basis. The creation of the
Board, in state fiscal year 1972, permitted a full-time professional investment staffto invest
all state funds and (at the discretion of local governments) local government funds. At its
first meeting in August 1971, the Board established four major goals:
To centralize the state's investments;
to invest the state's idle cash;
to increase earnings on the state's investments; and
to establish a sound system of control over the investment process, including
provisions forsystematic financial reporting, measurement ofinvestment results, and
a regular independent audit.
The unified investment program has grown significantly since 1972. At year-end 1972, the
book value of total investment funds was $320.99 million. By year-end 1993, the book
value of total invested funds had increased to $4.29 billion. Total funds increased at an
average annual rate of 13.14 percent during the period, or $189.07 million per year. Just
as significant as the growth in dollars invested is the increase in the number of accounts
invested by the Board. At year-end 1972, the Board invested funds for 40 separate
accounts. During the course of 1993, the Board invested funds for more than 275
individual accounts, and at year-end 1993, 250 accounts held investments managed by the
Board.
In-State Investments - In addition to the Board's primary role of managing the state's
unified investment program, it has, in recent years, been called upon by the legislature to
assist in Montana's economic development. Montana law (17-6-304, MCA) states that the
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"objectives for investment of the Permanent Coal Tax Trust Fund are to diversify,
strengthen, and stabilize the Montana economy and to increase Montana employment and
business opportunities while maintaining and improving a clean and healthful
environment." Section 17-6-305, MCA, states that "the Board shall endeavor to invest up
to 25 percent of the Permanent Coal Tax Trust Fund .... in the Montana economy, with
special emphasis on investments in new or expanding locally owned enterprises."
The Board fulfdls its mandates under the in-state investment laws in full compliance with
the "prudent expert principle." The Board assures that each investment it makes meets its
standards for the in-state investment program and the Board makes no investment for the
sole purpose of improving Montana's economy. However, if a thorough analysis of a loan
request determines that an investment in a project would be prudent, while at the same
time increasing employment in the state, the Board seriously considers the request.
Operating the in-state investment program under the "prudent expert principle" has not
prevented the Board from making many investments to spur Montana's economy. Since
the program's inception in 1984, the Board has funded and committed 329 loans, totaling
$102.11 million in 34 of Montana's 56 counties.
The Board also purchases residential Montana mortgages with pension funds as a part of
the in-state investment program. At year-end 1993, the Board held 2,364 mortgages with
a total book value of $109.34 million in 51 of Montana's 56 counties. The program's
outstanding mortgages have declined in recent years because new mortgage purchases have
not kept pace with scheduled mortgage amortization and mortgage refinancing, which have
increased during the recent low interest rate environment. The Board serves as a
secondary lender to qualified financial institutions in the in-state investment programs and
does not lend directly to borrowers.
As a part of the Board's in-state investment activities, it sells bonds and lends the proceeds
to eligible local governments for a variety of projects. Loan duration ranges from one to
ten years, and short-term loans to finance cash fiow deficits or bridge financing are also
available. Both the bond program and the in-state investment program funded from the
Permanent Coal Tax Trust were created in fiscal year 1984, as part ofthe "Build Montana"
program.
Board Operations - The Board, comprised of nine members appointed by the Governor to
staggered four-year terms, employs a Chief Financial Officer and an Executive Director
who, in turn, hire staff up to the level approved by the legislature. The authorized staffing
level of 28 full-time equivalents consists of the two positions hired by the Board, 14
investment staff, six accounting staff, three bond program staff, and three support staff.
Board staff provide all support to the Montana Health Facilities Authority, which is located
in the same building. Except for alternative investments, the unified investment program
is managed entirely by Board investment staff. During 1993, the Chase Manhattan Bank
served as the Board's custodian and calculated returns on Board investments.
Report Content - This report contains selected historical data from 1972 (the first year the
Board managed the unified investment program) through 1992. All historical data was
taken from the Board's published annual reports. Detailed data is provided on the Board's
investment activity in 1993 and various changes that occurred from the Board's 1992
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report. Appendix A includes, among other data, individual securities portfolios for major
accounts managed by the Board. Appendix B contains the Board's audited Hnancial
statements and investment pool portfolios.
Report Format - An economic/investment overview is provided immediately following this
introduction. The next section gives a global overview ofthe Board's investment activities,
by providing narratives, tables, and graphs on the total unified investment program. Next,
the same type of information is provided on the investment pools and alternative
investments. The next part of the report provides similar information on major accounts
invested by the Board, segregated by fund type (pensions, trusts, and insurance). The last
part of the report provides data on the in-state investment and bond programs managed
by the Board.
Report Methodology - Unless otherwise noted, all references to years in this report are state
fiscal years, beginning on July 1 and ending on June 30. Book values represent securities'
par values, plus or minus any premiums or discounts. Market values refiect the value of
securities on June 30. The following acronyms are used in this report:
STIP The Short Term Investment Pool MTCP The Montana Common Stock Pool
MTCVP The Montana Convertibles Pool PERS Public Employees' Retirement System
TRS Teachers' Retirement System RTT Resource Indemnity Trust
FWP Dep. of Fish, Wildlife, and Parks DNRC Dep. OfNatural Resources & Conservation
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ECONOMIC/INVESTMENT OVERVIEW
Economic & Market Conditions - Calendar year 1993 began with a slowing economy,
unemployment at 7.8 percent, industrial production and housing starts flat, and the
consumer confidence index dropping, after a promising upward surge in early calendar
year 1992. The monetary policy followed by the Federal Reserve seemed ineffective in
pushing interest rates lower. The economy struggled, with corporate downsizing and
restructuring largely offsetting gains generated by smaller businesses.
Economic Recovery - Economic recovery may have begun in the fall of 1993, judging by the
number of improved economic news releases published just after the November election.
Interest rates, which had remained high, dropped almost 1.0 percent in the 90 days
following the election and closed out the fiscal year at 6.65 percent. Some market analysts
attribute the decline in long term interest rates to the new Administration's decision to
significantly reduce the issuance of30 year US Treasury Bonds, but the evidence supporting
this assertion is sketchy. By the end of fiscal year 1993, unemployment was down to 7.0
percent, housing starts and capacity utilization were on the rise, and, for the first time in
years, the auto companies were optimistic about future sales. Despite the resurgence ofthe
economy, inflation remained moderate and the economic outlook for the next 12 months
was encouraging.
Interest Rate Changes - Interest rate changes impacted consumers in various ways.
Pensioners who relied on fixed-income investments to supplement pension income were
negatively impacted by the resultant drop in their income. Other investors with maturing
certificates of deposit had to accept a substantial reduction in the rate of interest, or be
willing to move their money to other investments, such as mutual funds offering better
returns but increased risk. The impacts of individuals moving their money out of the
banking system for better returns, coupled with savings generated by homeowners
refinancing high interest rate mortgages, was sufficient to push stock and bond prices
higher for the year.
Declining interest rates were the driving force behind the excellent investment returns in
fiscal 1993. Over the short-run, lower rates were beneficial to Montana's investment funds,
as premiums paid by corporations to call their bonds prior to maturity resulted in one-time
capital gains. However, over the long-term, reinvestment of bond proceeds in lower
yielding bonds will diminish the returns realized by investment managers in Montana and
elsewhere. Montana's exposure to common stock, limited to pension funds by state law,
also benefitted from the increased demand for alternative investments.
Investment Policy Considerations - Montana's unified investment program's portfolio
continues to grow at a healthy pace. Although investment returns during the past decade
were exceptional (double digits in both bond and stock markets), these rates of return are
unlikely to be repeated. Investment returns in the future are more likely to be negatively
impacted by higher interest rates, as global economies expand and the demand for money
increases. Accordingly, it is important to shift asset allocations toward equities in a
responsible way, when state law permits such action.
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