February 3, 2006

Volume 24, Number 2

Feature Articles and Resources

• Government Investment Pool Report
  • Average Total Effective Fees (in basis points)

• Regulators Create Useful Internet Resources for Investors
  • Web Sites for Checking Broker-Dealers, Investment Advisors, and Banks

• Investment Strategies for the Current Environment
  • Current Environment
  • Prudent Investment Strategies

• Panel of Economists: Economists Provide Forecasts
• Interest Rate Outlook
• Economic and Interest Rate Data
  • Databank
  • Moving Averages
  • Relative Value Yield Chart

• Performance Benchmarks
  • 10-Bill Index
  • Money Market Fund Index
  • LGIP Index
  • Cash Market Key Interest Rates

Government Investment Pool Report

The average government investment pool (with a maximum weighted average maturity of 90 days) has average fees of about 26 basis points. But not all pools charge the same fees. A recent study of government investment pools (GIPs) conducted by iMoneyNet found that privately-sponsored and externally-managed GIPs carry significantly higher average total effective fees when compared to their government-sponsored and internally-managed counterparts.

This article will highlight these and other findings from a recent iMoneyNet report, “Government Investment Pools: 2005 Update of Investment Strategies, Facts, Figures and Trends.” ImoneyNet studied 129 pools that operate in 45 of the 50 states. The report identified some $179.87 billion in net assets held by 108 of the 129 pools studied for which December 31, 2004 asset data was made available. This does not account for millions of additional dollars that individual states and cities invest short-term outside of such pools, nor amounts held in other cash management vehicles, including customized investment options, offered to pool participants by some pool managers.

Average Fees. The most recent average unweighted GIP total effective fee was 23.14 basis points. As shown in Exhibit 2, GIPS catergorized as money market funds (with stable net asset values and maximum weighted average maturities of 90 days) charged investors 25.74 basis points on average—with a range from zero to 74 basis points. Pools categorized by iMoneyNet as “Money Market Fund Plus” (striving to maintain NAVs of $1.00 with weighted average maturities generally extending from 90 days to one year) averaged 13.77 basis points in total effective fees, while so-called “Ultrashort” bond pools (variable net asset value with investment horizons from one to three years) averaged nearly 15 basis points in charged expenses.

Exhibit 3 shows that GIPs with a government sponsor have significantly lower fees than those with a private sponsor. Private competitors point to such enhanced services as check-writing options and online reporting and transaction capabilities that they provide to local government investors to justify the higher fees that they charge. Some state treasury departments and other government pool sponsors reported that pool operations represent a service to local communities, school districts, fire, water and sewer districts, etc., that carries either no charge to taxpayers or simply covers administrative expenses.

Reporting Not Uniform Across Pools. There is some controversy within the industry about how some pools classify themselves and especially about how they publicize their yields. Where Rule 2a-7 and Securities and Exchange Commission guidelines stipulate how MMF yields must be calculated and displayed in advertising and other promotional materials, some pool operators complain that competitors are reporting their pool’s yield, sometimes on a quarterly basis, without netting out expenses.

Pool Sponsorship and Management. More than half of all GIPs are sponsored by private entities (71 pools), while state treasurers or state boards operate 43 of them. Fifteen counties offer local government units short-term investment programs, with 12 in California and the other three in Washington. There are 12 pools that restrict participation to school districts, colleges or other educational institutions.

External advisers or subadvisers handle investment decisions for 90 pools while 39 others use investment professionals employed by state treasurer’s offices or through various state boards set up for that purpose.

Michael Krasner is a senior editor at iMoneyNet and researched and wrote “Government Investment Pools: 2005 Update of Investment Strategies, Facts, Figures and Trends.”

Regulators Create Useful Internet Resources for Investors

The financial sector’s importance to the nation’s overall economic well-being places it amongst the most regulated fields. Brokers, investment advisers and depository institutions, such as banks, may be subject to various levels of regulation at both the federal and state levels. This regulation produces a plethora of information. Often there has been redundancy in the collection and confusion in the dissemination of this information. The Internet has altered and streamlined the way regulatory bodies gather, process and make information available. As a public database, the Internet has, in effect, centralized information. This can benefit parties seeking reliable data.

State and local government finance officers and treasurers enter into relationships with broker-dealers, investment advisers, and banks for a variety of services. Entrusted with the responsibility of safeguarding public funds, public investors undertake extensive due diligence in selecting and monitoring these vendors. The Internet makes access to such information easy, efficient, and cost-effective. The purpose of this article is to provide an overview and useable roadmap of Internet resources available from the various regulatory bodies. Exhibit 1 lists the Web site addresses for these resources.

Broker/Dealers. Public investors employ broker-dealers for various services including access to markets, analysis, and research. As part of the due diligence process that government investors undertake in considering and evaluating broker-dealers, they may access and review regulatory records of broker-dealer firms and the individual registered representatives. The Internet provides powerful resources for accessing this information.

Broker-dealers are regulated under a self-regulatory framework organized under the broad, umbrella authority of the Securities & Exchange Commission (SEC). Under this structure, the National Association of Securities Dealers (NASD) is the private sector regulator of broker-dealers operating in the United States. It uses a centralized database to collect and maintain regulatory information. The NASD developed and hosts BrokerCheck, an online source for the Central Registration Depository of both firms as well as the individual registered representatives of the firms. Federal law, SEC and NASD regulations govern BrokerCheck. Information available through BrokerCheck includes professional background, business practices, qualification status, registration/licensing status, and disclosure history of registered brokerage firms and registered persons.

Investment Advisers. Certain public officers hire investment advisers for other services, often related to investment management activities. Any firm or individual who is compensated for giving advice about investing must register with either the SEC or the state securities agency, depending on the assets the investment adviser has under management.

Investors can find out information on their investment adviser by obtaining an adviser’s registration form, called the Form ADV. This form consists of two parts: 1) information regarding an adviser’s business and history with clients or regulators, and 2) an outline of an adviser’s services, fees, and strategies.

The Investment Adviser Registration Depository (IARD) serves as a centralized information resource for investment advisers. Created by the SEC in 2000, under the National Securities Markets Improvement Act of 1996, this centralized data repository serves two purposes. It provides a central repository permitting investment advisor firms to satisfy their SEC and state filing requirements electronically. More importantly, from the investor’s perspective, it creates a central public database. The Investment Adviser Public Disclosure (IAPD) Web page offers an open database that includes Form ADV and its information on an investment adviser’s business operations, registration status and disclosure of any regulatory action taken against a specific person or firm. While at present the IAPD includes only those firms and persons who register electronically, it will expand to encompass all registered investment advisers—both firms and individuals in every state.

In cases where investment advisor firms do not register using the IARD, an investor can contact a state securities regulator to access the same information otherwise available through the IAPD Web site. Sponsored by the North American Securities Administrators Association (NASAA), invest-ors can access an interactive database identifying each state’s respective securities regulator. The NASAA regulators’ map contains the contact information for obtaining Form ADV and all other material collected and organized by a state’s corresponding regulator.

Banks. Public investors enter into relationships with banks for a variety of services. These can include collection, disbursement and reconciliation services. In addition, banks play important roles in the investment of public funds, acting as custodians as well as providers of depository products. In keeping with the general regulatory trend toward centralized information collection and maintenance, on February 17, 2004, the various federal bank regulatory agencies announced the creation of their own Central Data Repository (CDR) to modernize how the agencies collect, process, and distribute bank financial data. Much in line with BrokerCheck and the IARD, the bank CDR is expected to revolutionize the collection, and in the future, distribution of Call Report data, thus supplying the public with a key tool for due diligence.

The FDIC is responsible for insuring bank deposits, and to this end, it collects Reports of Condition and Income Data, commonly called Call Reports for all national and state commercial banks it insures. Call Reports are widely used to judge a bank’s financial and operational condition and offer among the earliest comprehensive analysis of a bank’s financial results. At present, the CDR serves to collect and store data for these Call Reports. Once collected, the CDR data is fed into and can be accessed from the FDIC Web site.

In addition to Call Reports, the Federal Financial Institutions Examination Council (FFIEC) creates and releases another report, the Uniform Bank Performance Report (UBPR). This report includes performance and composition data that allows investors to evaluate the adequacy of earnings, capital, liquidity, asset and liability management of a specific bank. These reports also contain average data for peer groups that function as a source for evaluating and comparing similar banks.

The Internet has revolutionized the collection and availability of regulatory data for broker-dealers, investment advisers, and banks. Such information is often one of the first steps in conducting due diligence in initiating and maintaining relationships with these entities. In this respect, these Internet tools have streamlined and simplified the process for conducting prudent public investing.

Morgan Shipley is the assistant sales manager for GFOA YieldAdvantage.

Panel of Economists

Economists Provide Forecasts

This month Public Investor asked its panel of economists to provide readers with their forecast of the economy for 2006 commenting on economic growth, inflation, and interest rates.

Carl Tannenbaum of LaSalle Bank ABN/Amro predicts that the economy will sustain a nice rate of growth in 2006. He expects real GDP to grow at 3.5 percent and for the unemployment rate to dip below 5 percent. In addition, the consumer price index will decline to 2.5 percent in 2006 due to a drop in energy prices. Tannenbaum predicts that the Federal Reserve will raise the fed funds rate to 5 percent by the middle of the year, and long-term interest rates will rise modestly, but the yield curve will remain very flat.

Lacy Hunt of Hoisington Investment Management expects economic growth in 2006 to slow to 2 percent (or possibly less) due to several factors. First, job growth in 2005 has been slower than the trend in 2004. In addition, consumer income and balance sheets deteriorated further in 2005, and key sectors of the economy faltered in the second half of 2005. Finally, monetary policy has been restrictive. Hunt predicts that, after the Fed stops raising the fed funds rate, interest rates will fall across the yield curve.

According to John Silvia of Wachovia Securities, GDP will grow at 3.3 percent in 2006 with slower consumer spending. He expects inflation to decline to 2.9 percent with lower energy prices, and for the Federal Reserve to raise the fed funds rate to 5.0 percent.

Gary Thayer of AG Edwards & Sons expects a modest slowdown in the economy. The wild card would be a major disruption to world commodity supplies as a result of geopolitical events.

Databank

	Current Period	Previous Period	Year Ago
Economic Growth
Real GDP growth	III Q '05	II Q '05	Year Ago
Annual rate, constant dollars	4.1%	3.3%	4.0%
Retail sales	Dec	Nov	Year Ago
$ billions	357.84	355.39	336.43
Industrial production index	Dec	Nov	12 mo. chg.
Change, monthly and annually	0.6%	0.8%	2.8%
Leading indicators index	Dec	Nov	6 mo. chg.
Change, monthly and annually	-0.2%	0.7%	0.6%
New housing starts	Dec	Nov	Year Ago
Thousands of units, annualized	1,933	2,121	2,050
Purchasing Management Index	Dec	Nov	Year Ago
Nati'l. Assoc. of Purchasing Management	55.6	57.3	58.6
Inflation
Consumer price index	Dec	Nov	12 mo. chg.
Change, monthly and annually	-0.1%	-0.6%	3.4%
Producer price index	Dec	Nov	12 mo. chg.
Change, monthly and annually, seasonally adjusted	0.9%	-0.7%	5.4%
GDP price deflator	III Q '05	II Q '05	Year Ago
Annual rate	3.3%	2.6%	1.5%
Unemployment rate	Dec	Nov	Year Ago
BLS	4.9%	5.0%	5.4%
Other
Money market fund maturities	Jan 24	Dec 13	jan '05
Average portfolio maturity (Money Fund Report Averages TM)	36 days	37 days	32 days

6-Month Treasury Bill
2-Year Treasury Note
30-Year Treasury Bond

Performance Benchmarks

Quarterly/Monthly
Return