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Presentation to:
Kenai Peninsula Borough
February 28, 2012
Presented by:
Scott Cabalka, Vice President, Institutional Portfolio Manager
Daniel Klus, Vice President, Public Funds Services
RBC Global Asset Management (U.S.) Inc. 100 South Fifth Street, Suite 2300· Minneapolis, MN 55402-1240
612-376-7000·800-553-2143· www.rbcgam.us
Royal Bank of Canada Organizational Overview One of the highest rated, largest and safest banks
in the world"
More than 74,000 employees serving 15 million clients globally.,,-......®
'4th largestin NA and 11th globally; S&P: AA-; Moody's: Aa1; Sources: Bloomberg, RBG, as of October 6, 2011 &Global Finance 2011 "In U.S. dollars as of September 30, 2011
RBC Global1.; ...,-;, " - Asset Management 2
RBC GAM (US) Assets As of 12.31 .11
RBC Global Asset Management (U.S.) Inc. Total Assets: $38 billion
Asset Breakdown:
Long Duration· Fixed Income
Cash Equivalents $27.5 Billion
$7.9 Million
IIntermediate Duration ,hO.5Billion
Short Duration $3.6 Billion
~ ~ Municipal Bond $0.5 Billion
Equity $2.9 Billion
Liquidity Management Solutions
Total Cash Assets: $27 billion
Cash Breakdown:
Money Market Mutual Funds: $20 billion
Separately Managed Mandates
• Local Gov't. Pools: $4.4 billion
• Institutional SMA: $3.0 billion
SMA: Local Gov't. Pools $4.4 Billion ·16%
SMA: Inst. Cash $3.0 Billion - 11%
Money Market Mutual Funds $20.1 Billion· 73%
RBC Global~ Asset Management 3... .I
- - --- -- "'"--" "--" - - --- -- -- ,....." - '-' ..,., -- - -- .......... - _. -..... -..- --- -- .......
Economic Overview
Prior Hurdles Decreased Medium-Term Economic Momentum Economic Hurdles (~---~
A'----~\ (,------~
A~---~\ ~
I II II III Japan
X3 Mid-East
QE2 Debt Unwind Ceilingl
Downgradel US Fiscal
Europe Confidence Fiscal
u.s. Dysfunctions
Self Sustaining
China I Risk
• Economy risks stumbling over a hurdle
Recovery
Economy moves slower as it clears the hurdles
RBC Global Asset Management 5I;#""!
. ~
-.:
u.s. Dashboard
u.s. economy continues to move sluggishly forward
Fiscal worries are still in place and the government needs to pass further austerity measures
, Unemployment rate, housing, and many metrics are still far from normal
u.s. Dashboard Now Fcst
GOP Growth Output Gap Unemployment Credit Inflation Fiscal Balance Government Debt Political Stability Current Account Interest Rates FX
Summary
. .I~RBC Global Asset Management 6
~----------~~-~~--~-~~-----~~--~-~-
Good News In The U.S.
Unemployment levels in the U.S. are starting to come down, though this may soon stall out as GOP growth of 2% is consistent with stagnant levels
U.S. consumer confidence is now recovering nicely, though is well below pre-crunch norms
There is (highly) tentative evidence of a rebound in the housing markethome prices are falling less quickly and builders are reporting greater confidence
u.s. Unemployment Rate Falling to New Levels
12
~ 10 ~
2 t1l
0:::: 8 'E Q)
E ~ 6 c.. E Q) c
::> 4
2 IL
2000 2002 2004 2006 2008 2010 Source: Haver Analytics, RBC GAM
U.s. Consumer Confidence Is Increasing But Still Far Away From Its Norm
100
- University of Michigan Survey
80
x Q) "0 C
60
Confidence is increasing but it still has a lot to recuperate
40 ,-I--------------------
_
2006 2007 2008 2009 2010 2011RBC Global
I~ Source: Haver Analytics, RBC GAM
Asset Management 7... ~.'
Yield Curve As of 12.31.11
During the fourth quarter yields fell modestly between the 3- and 3D-year part of the yield curve
4.50%
400%
3.50%
u.s. Treasury Yield Curves
Treasury yields ended the year at historic lows as investor demand for government debt continued unabated, despite the US downgrade in the late summer
-0 Q)
>
3.00%
2.50%
2.00% .
1.50%
1.00%
0.50%
•.~ RBe Global Asset Management 8
0.00% I "=' I ~-~ Ii' I
3 Month 6 Month 1 Year 2 Year 3 Year 5 Year
Term to Maturity
-12/31/2010 -+- 9/30/2011
I
7 Year 10 Year 30 Year
12/31/2011
~,~--~-~~~--~-~~~~~-~-~~--~~
A Crisis of Confidence
» Confidence had been falling for households, businesses and the market. There seems to be a slight recovery in confidence as reflected in recent economic data.
~ A new daily indicator suggests there is the beginning of a slight rebound, but pessimism still dominates
e RBe Global Asset Management 9I§f~t
u.s. Confidence is Problematic
110 1 _ Small Businesses Optimism Index (LHS) 1 110
- University of Michigan Consumer Confidence (RHS) 105 I I 100
100 1\\.A 1\ \ , I 90
i 95 I V~ , ~~ I'l/\I 80 i 90 70
85 60
80 ! - ! 50
2006 2007 2008 2009 2010 2011 Source: Haver Analytics, RBC GAM
Economic Confidence Remains Low
o
x -10 Q)
""0 C
a; -20 o c Q)
:Q -30 '+c o o -40 .~
E g -50 o o
W -60
-70 1-1-------------------
Jan 2008 Oct 2008 Jul2009 Apr 2010 Jan 2011 Oct 2011 Source: Gallup Economic Indexes
The Adverse Economic Cycle
r ~
Lack of Lack of Confidence Spending
Weak Economy
Businesses are healthy;
solution must come from them
ConsumersBusinesses aren'taren't
Hiring Spending
Consumers are limited in
their spending until job creation picks up
RBe Global·~ . Asset Management 10..I. ,.~
~ ~ ~ ~ ~ - ~ - - - - ~. ~ - ~ ~ ~ - - ~ ~ ~ ~ ~ - ~ ~
European Crisis: What It Means for the US
~ The Euro crisis is likely to subtract 0.50/0 from global growth in 2012
~ Unless the "unthinkable" happens such as the failure of a big global bank or a default of a major EU country, an outright global recession is unlikely based solely on European events
~ If Germany were to lose its AAA rating, global investors would likely pile into US Treasuries, driving Treasury yields even lower
~ Could the Eurozone break apart? Yes, but we view this as very unlikely
~ Bad news from Europe may overshadow good news in the U.S. for some time to come, but global contagion on the scale of 2008 remains unlikely in our view
RBC Global-~ . Asset Management 11 .. 8I
Mighty Businesses
~ The business sector remains strong, defying the broader economic trend
~ Corporate profits make up a commanding share of GOP
~ Businesses are cash rich; risk of default is low
~ Earnings surprises remain moderately positive
~ Businesses need to hire more workers
RBC Global1'-,::. Asset Management 12... "
u.s. - After-Tax Corporate Profits as a Share of GOP 12
9
o~ (9 6 '0 ~ o
3
o
Companies Reporting Results Above Consensus Forecasts
100%
90% I - % Greater Than Expectations
- Long-Term Average
Last Plot: 70% 96% Companies Reporting
en t 80% 0 Q. Q) 70%
0::: en ::} 60% en c Q) 50%
~._ L
1980 1985 1990 1995 2000 2005 2010
Source: Haver Analytics, RBC GAM
en c 0 40% 0 Q) 30%>0 .n
20%«
0% 10%
I.................................. 10 '0310 '0410 '0510 '0610 '0710 '0810 '0910 '1010 '11 10 '12 Source: ThomsonReuters
Economic Summary
> Economic data has been disappointing although recent data has improved
> Whether the outcome is sluggish growth or mild recession, the rate of progress may not be sufficient to absorb much economic slack
> A key culprit is inadequate confidence, created in part by political dithering
> Policymakers are addressing the problem of growth with more stimulus
> Outlook is unusually uncertain as the economy and markets turn on political events
> Europe remains as a serious problem, and should keep risk aversion elevated and markets jittery
> Inflation has peaked and is trending modestly lower
? Emerging economies continue to outperform developed economies
RBe Global ~.
Asset Management 13I" ~
..
~ '-.""- ""'~ ...... ..- ._ _ __ _ _ "-r _ '_ _ _ _ '_ _ _ __ -_ __' ~ _' ..... ""-" _ __ "_ ~ __ _ _ __ "'-" _- .,.c _- _- _- _- _ __ -' __ __ _ _ ........... ....... _
Global Asset Class Performance Total Returns as of 12.31.11 9.8%10% ~
8.2%
6.2%, The US bond market posted strong total I 7.8%
5%returns for the year
I~ 0.9%I 0.9%
0% Treasuries continued to benefit from u.s. Bonds Mor1gage- Backed U.S. Treasuries
.402011 YTD 2011strong investor demand for "safe haven" 10.7%assets I
10%
I 6.0% 6.0%5.4%
4.3%Continued strong corporate fundamentals ~ 3.1%
5%
supported investment grade bond returns 1- - 0.9%-0%
Municipals CMBS Global Fixed Emerging Markets
...... Inv. Grade Credit
Fixed,. Municipal bonds defied predictions for • 4Q 2011 YTD 2011
widespread defaults in 2011, and enjoyed 15% 11.8%
strong returns for the fourth quarter and 3.4%2.1%for the year
0%
-11.7% Source: Barclays Capital, BofA Merrill Lynch, Morningstar and UBS
-15% S&P 500 Russell 2000 MSCI EAFE
Disclosures: Global Fixed is USD hedged; Emerging Markets Fixed is USD Local Issue Total Return .4Q2011 .YTD 2011
I
I
RBC Global . Asset Management 15I. ~ .
RBC GAM (US) Fixed Income Annualized Performance Returns (%) as of 12.31.2011
Kenai Peninsula Borough
Gross 3.87 0.63 1.36 1.49 0.33 0.29 0.05 0.29 3.95
Net 3.76 0.61 1.34 1.46 0.31 0.28 0.04 0.28 3.84
BofAML Corp/Govt 1-5 Yr A+ Rtd 3.05 0.38 0.95 1.46 0.22 0.25 -0.13 0.27 3.47
Source: RBG GAM (US), BofAML
RBC Global
I. ~ ..
Asset Management 16 ~
RBC GAM (US) Fixed Income Portfolio Characteristics - as of 12.31.2011
Kenai Peninsula Borough
Portfolio Index Average Quality AA+ AA+
Market Yield 0.97 0.88
Duration 2.40 2.52
Convexity 0.07 0.01 0.3%OAS 58 49
Spread Duration 2.17 0.92 A BBB
• Kenai Peninsula Borough • Benchmark
Duration Distribution
80%
58.9% 60.9% 60%
40%
20% L 16.4% 5.5%
0% <1 Yr 1-3Yrs 3-5 Yrs
• Kenai Peninsula Borouah • BenchmarkRBC GlobalI''-n Asset Management 17... .,
80%
60%>
62.9%
40%
20%
0%
~
~
I 0.1% 0.1%
Cash
36.9% --Corporate
25.0%1IIIi% Gov.
Related
14.2% -Municipal
18.0%
Securitized Treasury
• Kenai Peninsula Borough • Benchmark
RBC GAM (US) Fixed Income Portfolio Characteristics - as of 12.31.2011
Kenai Peninsula Borough
Sector Distribution
;I RBC Global Asset Management 18
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2012 Market Outlook
~ Our u.s. GOP growth forecasts have been scaled back from last quarter. We believe that growth will be approximately 2.0% to 2.5% for 2012 - a pace that is too slow to materially reduce unemployment rates below 8.0%.
~ We believe there are binary outcomes with respect to global growth forecasts for 2012, with a 70% chance of sluggish global growth. Yet, there may be a modest chance of global recession due to a combination of political dysfunction, a major bank failure, or sovereign default.
~ With respect to inflation, our 2012 outlook is mostly unchanged from our prior forecast, and a touch lower then consensus. Core CPI should reflect mild inflationary pressures, fluctuating at around 2.0% over the course of the next year.
~ The Federal Reserve's monetary policies will remain at exceptionally accommodative levels well into 2014. Short rates will remain anchored near zero with a risk that yields on short U.S. Treasuries will fall into the zero-bound area. The central bank may consider QE3 actions during the year.
~ In corporate credit, industrial and utility issuers will maintain very strong financial strength. Financial credits are on a different path in terms of their credit cycle. Earnings will be challenged as the financial system continues to de-lever, in the shorter run. Volatility remains high in the financial sector throughout 2012.
RBC Global
I. -~
Asset Management 20..~.
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Biographies
Scott Cabalka Vice President, Institutional Portfolio Manager Investment Experience: 31 Years
Scott Cabalka is a senior institutional portfolio manager responsible for our Client Service Portfolio Management Team's coverage of the RBC Money Market Funds, local government investment pools, and other short fixed income solutions. Scott is a veteran member of the firm's Cash Strategy & Credit Committee and Fixed Income Committee, and provides guidance on investment policy and implementation for all of our short mandates. In addition, he leads our communication with clients invested in our short fixed income strategies and ensures that they receive the most appropriate solutions and service. Before joining RBC GAM (US) in 1993, Scott was an account executive at Merrill Lynch, where he focused on short strategies for institutional investors. He has specialized in short fixed income since he began working in the investment industry in 1980. Scott earned a BS and an MBA in Finance from the University of Minnesota Carlson School of Management.
Daniel Klus Vice President, RBC Public Fund Services Investment Experience: 19 Years
Dan Klus is responsible for public fund solution development and client service. Before joining RBC GAM (US) in 2008, Dan worked for an independent registered investment advisor and a major regional bank, focusing on the investment needs of both public and private entities. He began working in the financial services industry in 1992 and has concentrated on institutional client service and business development since 2000. Dan earned a BSBA in Management from Xavier University. He is a member of a school board and several local charitable organizations.
RBC Global Asset Management 22
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