Oregon ShortTerm Fund Overview and Update

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Oregon Short-Term FundOverview and Update

• 2009 OMFOA/OACTFO Annual Spring Conference
• Salishan Spa Golf Resort Spring Conference
  Gleneden Beach, Oregon
• March 10, 2009
• Perrin Lim - Sr. Fixed Income Investment Officer
• Tom Lofton Investment Officer Sr. Credit
  Analyst

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Todays Presentation

• Part 1 Oregon Short-term Fund (OSTF) Oversight,
  Management, and Investment Guidelines.
• Part 2 Changes in the OSTF Portfolio and
  Performance.
• Part 3 Recent market events
• Part 4 Thoughts on Credit Risk Evaluation.

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Oversight and Management Structure
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Portfolio Construction

• The OSTF is actively managed does not passively
  follow an index.
• Management team seeks to add value while adhering
  to a disciplined risk control process.
• Utilizes team approach investment decisions are
  openly debated.
• Investment Objectives (in order of importance)
• Principal preservation
• Liquidity
• Outperform 91-DayTreasury Bill.
• Portfolio adheres to comprehensive set of
  investment guidelines approved by OIC and OSTF
  Board.
• Management Strategy
• Incorporates a top-down or macro-economic
  approach to position portfolio sector and
  interest rate exposures.
• Utilizes a fundamental (bottom-up) risk
  assessment to determine individual investment
  positions.

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Portfolio Construction
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Portfolio Construction

• Generic security types no structured
  investments or derivatives.
• Fixed Income Debt Instruments only -
• U.S. Treasury Securities
• U.S. Government Agency Securities
• Corporate Indebtedness
• Negotiable Certificates of Deposit.
• All investments denominated in US only.

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Portfolio Construction

• Short Term to Maturity
• Maturity Guidelines
• 50 of the portfolio must mature within 93 days.
• A maximum of 25 of the portfolio may mature over
  one year.
• No investment may mature in over 3 years as
  measured from settlement date.

• OSTF Maturity Distribution as of March 4, 2009
• 81 matures within 6 months

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Portfolio Construction

• Diversified with heavy bias towards US
  government-backed obligations
• Diversification guidelines -
• 100 of the portfolio may be in U.S. Treasury
  securities.
• 100 of the portfolio may be in U.S. Government
  Agency securities.
• 50 maximum of portfolio per FDIC issuer
• 33 maximum of portfolio per agency issuer.
• 50 maximum exposure to corporate obligations.
• 5 maximum to corporate debt of any single issuer.

• OSTF diversification as of March 4, 2009
• Largest exposure to any corporate issuer 3.92
• Government-backed 51
• Banking/Financial 30
• Industrial/Manufacturing/Chemical 6
• Utility 4
• Consumer 3
• Energy 1
• Aerospace/Defense 1
• Import/Export 1
• TCD 1
• Medical/Pharmaceutical 1

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Portfolio Construction

• Composed of high quality securities
• Total weighted average credit quality of the
  portfolio shall be a minimum of Aa2 by Moodys
  and AA by SP.
• Minimum corporate indebtedness credit ratings at
  time of purchase must be Aa2 by Moodys and AA by
  SP.
• If investment is downgraded below Aa2/AA after
  purchase, it can remain in the portfolio to
  protect against forced selling into a potentially
  weakened marketplace.

• OSTF as of March 4, 2009
• Average credit quality of Aa2/AA
• 91 of portfolio rated at least Aa3 or AA- or
  higher

Highest
Investment Grade
High Yield
Lowest
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Portfolio Construction

• Active management value can be added through
  three main areas
• Sector Allocation Ongoing research, analysis,
  and evaluation of market sectors with respect to
  current market prices, i.e. spread or risk
  premium
• Issue Selection Primarily a bottom-up process to
  uncover mispriced or undervalued credits and/or
  securities
• Term to Maturity
• macro-economic factors as well as the general
  political environment
• Staff weighs its views vs. market expectations.
• Goal is to add value based on the longer term
  trend and positioning the fund accordingly, not
  timing the market

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Current State of Fixed Income Markets
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The Cost of Credit Risk Has Increased Dramatically
TARP I Passes
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Fear Driving Flight To Safety
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The US Government Is Responding..Massively
Federal Reserve
Federal Reserve
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Induced Liquidity Showing Tenuous signs of Success
Difference between Investment grade and high
yield spreads seeks capture price of credit risk
in corporate term funding markets.
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Significant OSTF Developments.

• New class of investments Government-backed
  corporate obligation.
• Added dedicated credit analyst position.
• Allows for better monitoring of credit risk.
• Increases capacity to improve diversification
  within the portfolio.
• Building Reserve Fund
• Offsets short-term effects of potential future
  credit events.
• Targeting about 1 of OSTF as a reserve fund
  balance.
• Providing an excess of approximately 58 basis
  points versus historical default rates for the
  current credits in the OSTF.

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FDIC-backed TGLP Securities

• FDICs Temporary Liquidity Guarantee Program
  (TLGP)
• Creates a new class of government-backed senior
  corporate debt
• Explicit full faith and credit guarantee by FDIC
  regarding timely payment of principal and
  interest.
• In the event of a default, each of the FDIC
  members would be charged a special assessment to
  cure the default.
• Triple-A or (P1/A/F1 Money Market) rated by
  all three rating agencies (Moody's, SP Fitch).
• TLGP issuance is over 200 billion and continues
  to grow.
• TLGP securities improve diversification versus
  other federal agency exposures.
• TLGP Debt has outperformed agency debt.

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Lehman Brothers Bankruptcy Update

• On September 15, 2008, Lehman Brothers, Inc.
  filed for bankruptcy.
• The OSTF held 2 positions in Lehmans senior
  unsecured debt (rated A2/ A) with a combined cost
  of 187.5 million or 1.98 of total fund.
• Lehman Brothers was one of the largest
  bankruptcies in history with significant
  complexity given geographic dispersion of assets
  and liabilities.
• Significant events since bankruptcy
• Eight operating divisions (mostly trading, sales,
  money management) sold for approximately 2.7B in
  cash and securities.
• Resolved most of derivative counterparty
  contracts.
• Operated by Alvarez Marsal, a turnaround law
  firm, to manage restructuring.
• Alvarez Marsals objective is to position LBHI
  to exit from bankruptcy in 18 to 24 months or
  late 2010.
• Current OPERF mangers average recovery estimate
  is 35 with 3 to 4 year time horizon.

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OSTF Portfolio Changes
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OSTF Portfolio Changes
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OSTF Portfolio Performance
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OSTF Portfolio Performance
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OSTF Investment Environment

• The number of corporate credits with long-term
  ratings of at least Aa2/AA has shrunk
  significantly. Investments beyond 270 days will
  likely be heavily weighted towards
  government-backed investments (a good thing in
  the current economic environment?).
• Corporate debt that was non-financial and not
  commercial paper (i.e. original issue gt 270 days)
  comprises less than 1 of OSTF.
• Regardless of your economic outlook, interest
  rates have little room to decline further.
  However, significantly higher levels of
  government debt create uncertainty regarding
  market expectations for inflation.
• Given the renewed interest in risk control
  (regulation, leverage, underwriting) it is
  difficult to envision robust economic growth in
  the near future.
• In the shorter-term maturity part of the yield
  curve, where the OSTF invests, debt issued by
  financials comprises that vast majority of
  available non-government related investments.

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Credit Risk Assessment

• Relative Value in Credit
• Why not buy all issues that fit portfolio
  guidelines?
• Cash Generation Stability? Sources? Uses?
• Income stability and diversification
• Leverage trends
• Liquidity
• Refinancing risk
• S.W.A.T. Position of Core businesses.
• Filings Management Presentations Earnings Calls
• Event Risk LBOs, Share Repurchases, Break-up
  value.
• Covenants.
• Market value of related public credit and equity
  instruments are an important indicator.
• Investment alternatives
• Fixed vs. float
• 2 yr vs. 5yr

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Credit Risk Assessment

• We try to avoid the rush of looking at
  investments when-offered by the street,
  instead, we have built a pre-approved/pre-sorted
  set of issuers that we monitor continuously.
• Despite a strong focus on fundamentals for
  security selection, subjective considerations are
  a significant part of the credit evaluation
  process.
• In the prior cycle, debt investors needed to be
  aware of a business breakup value for potential
  LBO risk, now we need to be cognizant of recovery
  value of the parts.
• Free cash flow positive? stable?
• Are the assets fungible? There are few
  well-funded buyers in this market do I really
  want an exotic or niche business exposure?
• Maintain a healthy degree of cynicism and
  suspicion of management.
• Do they really have a clue about what is going to
  happen six months ahead? Managements job is to
  improve the perceived value of the company.
• How easy is it to cook the books?
• Examples
• Frequency of non-recurring charges. What about
  add-backs?
• Revenue expense recognition characteristics in
  growth vs. decline phase.

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Credit Risk Assessment
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Summary Take Aways

• Investment Policy dictates investment of assets
• Mistakes happenGoal is to learn and minimize in
  the future
• Know what one buysForm own opinion and evaluate
  relative to all outside resources.
• Always consider Worst Case Scenario/Reaching for
  Yield Sleep Factor
• If 2-year US Treasuries bought and 2-year
  Treasuries increase 200 b.p.?
• If credit bought and issuer experiences negative
  headlines