City and County of Denver

City and County of Denver

Investment Portfolio Performance Report

Quarter Ended 12/31/2018

Prepared By: Cash, Risk & Capital Funding Division

Director of Cash & Investments:

Caroline Hendrickson 1.720.913.9335

caroline.hendrickson @

Portfolio Administrator:

Gregory T. King 1.720.913.9348

gregory.king @

Sr. Portfolio Analyst:

Mario Dominguez 1.720.913.3091 mario.dominguez@denv



Report Content:

Discussion of

1

Investment

Performance

Consolidated

2

Portfolio

Airport Reserve 6 Portfolio

Worker's Comp 8 Portfolio

Special Purpose 9 Investments

Escrows

9

I. Economic Commentary

Capital markets declined in the fourth quarter wiping out the gains of 2018 as volatility hit the market. U.S. Treasury yields declined in December. The 2-year Treasury yield was down nearly 30 basis points while the 10-year Treasury yield was down slightly more than 30 basis points. The spread between 2-year and 10year was just 20 basis points at year-end. Additionally, the Treasury yield curve ended the year with an inversion between the 1-year and 7-year. The continuation of US-China trade dispute intensified volatility to the market. Market participants saw a near-term resolution as doubtful. The partial Federal government shutdown at the end of December further contributed to market instability as a bipartisan bill to keep the government open failed approval from the Executive branch.

The Federal Open Market Committee (FOMC) increased the federal funds rate 25 basis points to a range of 2.25% 2.50% in December. The rate hike was widely expected. However, the Fed did little to acknowledge the changing market dynamics and tightening financial conditions, reaffirming their strong economic forecast for 2019 and emphasizing the balance sheet reduction strategy remains on track. Some market participants were expecting a more dovish tone from the Fed Chair. The Federal Reserve estimates two rate hikes in 2019.

Payrolls rose in the fourth quarter with December figures rising by 312,000. The

Portfolios

Managed Portfolios

Special Purpose Portfolios

Finance Administrated

average payroll increase was 254,000 for the quarter. Wage growth was modest at 0.4% in December, but wage inflation remained subdued. On a year-over-year basis, wages increased 3.2% in December. The monthly unemployment rate increased further to 3.9% in December due to higher labor force participation.

The U-6, a broader measure of unemployment, was unchanged at 7.6% in November and December. Manufacturing data indicated continued expansion, with the ISM Index value of 54.1 by quarter end. An ISM Index value above 50 is viewed as expansionary, signaling steady, but less robust growth ending the 2018 calendar year. The housing sector saw home prices increase 5.0% year over year in October, but housing is showing signs of softening as price increases weakened from prior months and mortgage rates increased. Housing starts declined 4.6% and multi-family starts were up 3.2% in November.

Exposure to credit securities in the portfolios increased during the fourth quarter. The credit spreads widened due to the increasing probability of an economic downturn. Additional asset classes continue to facilitate modest growth in incremental earnings for the portfolios. The City's investment portfolio outperformed the stated benchmark indices by 0.23% as the 10-year U.S.

Market Value $5,938,462,635 $52,472,762 $5,990,935,397

1

City and County of Denver

Investment Portfolio Performance Report

Quarter Ended 12/31/2018

Prepared By: Cash, Risk & Capital Funding Division

Director of Cash & Investments:

Caroline Hendrickson 1.720.913.9335

caroline.hendrickson @

Portfolio Administrator:

Gregory T. King 1.720.913.9348

gregory.king @

Sr. Portfolio Analyst:

Mario Dominguez 1.720.913.3091 mario.dominguez@denv



Report Content:

Discussion of

1

Investment

Performance

Consolidated

2

Portfolio

Airport Reserve 6 Portfolio

Worker's Comp 8 Portfolio

Special Purpose 9 Investments

Escrows

9

II. Consolidated Portfolio

$5,308,181,759

Total Return Blended Benchmark (TR) Excess Return

Current Return Blended Benchmark (CR) Excess Return

Total Return Current Return

1-Month 0.78% 0.83% -0.05%

3-Month 1.24% 1.30% -0.06%

YTD 1.57% 1.39% 0.18%

1-Month 2.36% 2.72% -0.36%

3-Month 2.29% 2.73% -0.44%

YTD 2.01% 2.49% -0.48%

Year-to-Date earnings on a current return basis for the Consolidated Portfolio were $80,787,520.

The 1-5 Year Strategy Blended Benchmark consists of 67.50% Intercontinental Exchange (ICE) BofAML 1-5 Year US Treasury & Agency Index, 17.50 % ICE BofAML 1-5 Year AAA-A US Corporate Index, 7.50% ICE BofAML AAA US Asset Backed Securities, 5.00% ICE BofAML 0-3 Year US Agency CMOs and 2.50% ICE BofAML 3-5 Year US Mortgage Backed Securities Index. Prior to 1/1/2016 the benchmark was the BofA Merrill Lynch 1-5 Year US Treasury & Agency Index.

The 1-10 Year Strategy Blended Benchmark consists of 65.00% ICE BofAML 1-10 Year US Treasury & Agency Index, 15.00 % ICE BofAML 1-5 Year AAA-A US Corporate Index, 5.00% ICE BofAML AAA US Asset Backed Securities, 7.50% ICE BofAML 0-10 Year US Agency CMOs and 7.50% ICE BofAML 0-10 Year US Mortgage Backed Securities Index. Prior to 1/1/2016 the benchmark was the BofA Merrill Lynch 1-10 Year US Treasury & Agency Index.

Factors Affecting Performance & Management Strategies

Chandler's proprietary Horizon Model that the City uses with the intent to meet or outperform the benchmarks over time (the Intercontinental Exchange (ICE) BofAML Treasury/Agency 1-5 year index and the ICE BofAML Treasury/Agency 1-10 year index) are revised on a regular basis, reflecting the volatility of both bond market interest rates and interest rate curve movements. The City evaluates the portfolios each time a new Horizon Model is received. The key variables subject to potential revision as a result of Horizon Model changes include duration, composition and structure.

The portfolios have been allocated towards a modestly shorter benchmark duration within the 1-5 and 1-10 year strategies. We believe the risk to principal far outweighs the potential income gain from extending the duration of the strategies in the event interest rates do continue to rise. Safety of principal is paramount in investing the City's funds.

Corporate Bonds, Collateralized Mortgage Obligations, Mortgage-Backed Securities, and Asset-Backed Securities are new asset classes approved by voters for implementation in 2014 by an amendment to the City Charter. Purchases of the new asset classes continued to increase as a percentage of total composition during the fourth quarter of 2018.

The Consolidated Portfolio benchmarking indices are comprised of five ICE BofAML indices, creating a static weighted blended benchmark. A total of two blended benchmarks are used for the 1-5 year and 1-10 year strategies to closely reflect the portfolio duration and asset allocation constraints.

2

City and County of Denver

Investment Portfolio Performance Report

Quarter Ended 12/31/2018

Prepared By: Cash, Risk & Capital Funding Division

Director of Cash & Investments:

Caroline Hendrickson 1.720.913.9335

caroline.hendrickson @

Portfolio Administrator:

Gregory T. King 1.720.913.9348

gregory.king @

Sr. Portfolio Analyst:

Mario Dominguez 1.720.913.3091 mario.dominguez@denv



Report Content:

Discussion of

1

Investment

Performance

Consolidated

2

Portfolio

Airport Reserve 6 Portfolio

Worker's Comp 8 Portfolio

Special Purpose 9 Investments

Escrows

9

Consolidated Portfolio Composition

Characteristics

Average Duration

1.84

Average Coupon Average Yield to Maturity

2.32% 2.59%

Average Rating (S&P)

AA+

Average Life

1.94 yrs

Credit Quality (S&P)

A, 10.3%

BBB, 0.2%

AAA, 23.7%

AA, 65.8%

MBS, 1.6%

CMO, 2.3%

Muni, 2.8%

Supra, 6.9%

ABS, 4.8%

Asset Allocation

LGIP, Comm Paper, 1.4% 2.8%

MM Fund, 0.1%

Corps, 12.0%

U.S. Agency, 22.4%

U.S. Treasury,

42.9%

Maturity Distribution

35.0% 32.7%

30.0% 25.0% 20.0% 15.0%

24.8%

17.4% 14.6%

10.0%

5.2%

5.0%

3.0% 2.3%

0.0%

0.0%

0 - 0.5 0.5 - 1 1 - 2 2 - 3 3 - 5 5 - 7 7 - 10 10+

The Consolidated Portfolio's net assets increased by approximately $318 million during the fourth quarter of 2018. On December 31st, 2018, net assets were $5.3 billion, compared to $5.6 billion on September 30th, 2018, as expenditures exceeded inflows. The decrease in net assets was primarily due to cyclical expenditures, consistent with historical fourth quarter activity. A large portion of expenditures for the City occur during the second half of the year.

The weighted average maturity (WAM), an aggregate portfolio measure of total years remaining until the maturity of all underlying holdings, ended lower during the fourth quarter. The WAM decreased at end of the quarter, as the portfolio exposure to short term assets increased as a ladder structure was implemented for the influx of bond proceeds into the portfolio. While modestly short benchmark duration, rebalancing and securities purchase activity in the intermediate strategies during the fourth quarter extended duration more closely with the model and benchmark. The model continues to remain short of benchmark duration.

3

Prepared By:

Cash, Risk & Capital Funding Division

City and County of Denver

Investment Portfolio Performance Report

Quarter Ended 12/31/2018

Portfolio Management Environment

Bloomberg United States Financial Conditions Index

2.5

Director of Cash & Investments:

Caroline Hendrickson 1.720.913.9335

caroline.hendrickson @

Portfolio Administrator:

Gregory T. King 1.720.913.9348

gregory.king @

Sr. Portfolio Analyst:

Mario Dominguez 1.720.913.3091 mario.dominguez@denv



Report Content:

Discussion of

1

Investment

Performance

Consolidated

2

Portfolio

Airport Reserve 6 Portfolio

Worker's Comp 8 Portfolio

Special Purpose 9 Investments

Escrows

9

0

-2.5 Dec-13 Jun-14 Dec-14 Jun-15 Dec-15 Jun-16 Dec-16 Jun-17 Dec-17 Jun-18 Dec-18

Yield

U.S. Treasury Yield Curve

3.50%

3.00%

2.50%

2.00%

1.50%

1.00%

0.50%

0.00% 3M 6M 1Y 2Y 3Y 4Y 5Y 7Y 8Y 9Y 10Y

As of 6/30/2018

As of 12/29/2017

As of 12/31/2018

The Federal Reserve increased the Fed funds rate to the range of 2.25%-2.50% during the

fourth quarter of 2018. The Fed is projecting an average of 2.44% fed funds rate by the end

of 2019, which implies two more 25 basis point hikes by the end of the year. The one-month LIBOR rate was 2.52% as of December 31st, 2018, an increase of 26 basis

points from September 30th, 2018. As of December 31st, 2018, the yield of the two-year Treasury index was 2.49%, and the

five-year Treasury index was yielding 2.51%. A year earlier, as of December 31st, 2017, the

yield of the two-year Treasury index was 1.88%, and the five-year Treasury index was

yielding 2.21%. The median of economists' forecast is for a 2.65% two-year Treasury yield at the end of

2019. The shape of the yield curve inverted between the one-year and the seven-year Treasury

indices. The one-year treasury index was at 2.60% while the seven-year reported at 2.59%.

The two-year, three-year, and five-year were at 2.49%, 2.45%, and 2.51%, respectively.

4

City and County of Denver

Investment Portfolio Performance Report

Quarter Ended 12/31/2018

Prepared By:

Cash, Risk & Capital Funding Division

Director of Cash & Investments:

Caroline Hendrickson 1.720.913.9335

caroline.hendrickson @

Consolidated Top Holdings

Issuer American Honda Finance Toyota Motor Credit Corp JP Morgan Chase & Co Apple Inc Microsoft Total

Top 5 Credit Holdings

Market Value % of Portfolio

130,101,600

2.19%

99,600,942

1.68%

93,390,887

1.57%

80,333,508

1.35%

63,460,371

1.07%

466,887,308

7.86%

*Credit holdings include commercial paper, asset-backed securities, and corporate bonds.

Industry Automobiles Automobiles

Financial Technology Technology

1.07%

2.19%

Portfolio Administrator:

Gregory T. King 1.720.913.9348

gregory.king @

1.35% 1.57%

1.68%

Sr. Portfolio Analyst:

Mario Dominguez 1.720.913.3091 mario.dominguez@denv



Report Content:

Issuer FHLB FNMA FHLMC FFCB TVA

Top 5 Agency Holdings Book Value 516,319,707 285,287,769 127,083,014 77,267,568 53,029,437 1,058,987,495

% of Portfolio 8.69% 4.80% 2.14% 1.30% 0.89% 17.82%

Discussion of

1

Investment

Performance

Consolidated

2

Portfolio

Airport Reserve 6 Portfolio

Worker's Comp 8 Portfolio

Special Purpose 9 Investments

1.30% 2.14%

4.80%

0.89% 8.69%

Escrows

9

5

City and County of Denver

Investment Portfolio Performance Report

Quarter Ended 12/31/2018

Prepared By: Cash, Risk & Capital Funding Division

Director of Cash & Investments:

Caroline Hendrickson 1.720.913.9335

caroline.hendrickson @

Portfolio Administrator:

Gregory T. King 1.720.913.9348

gregory.king @

Sr. Portfolio Analyst:

Mario Dominguez 1.720.913.3091 mario.dominguez@denv



Report Content:

Discussion of

1

Investment

Performance

Consolidated

2

Portfolio

Airport Reserve 6 Portfolio

Worker's Comp 8 Portfolio

Special Purpose 9 Investments

Escrows

9

III. Airport Reserve Portfolio

$587,911,242

Total Return Blended Benchmark (TR) Excess Return

Total Return 1-Month 1.32% 1.38% -0.06%

3-Month 1.91% 1.96% -0.05%

YTD 1.67% 1.51% 0.16%

Current Return Blended Benchmark (CR) Excess Return

Current Return 1-Month 2.55% 2.85% -0.30%

3-Month 2.45% 2.98% -0.53%

YTD 2.25% 2.74% -0.49%

Year-to-Date earnings on a current return basis for the Reserve Portfolio were $10,735,524.

The 1-5 Year Strategy Blended Benchmark consists of 67.50% ICE BofAML 1-5 Year US Treasury & Agency Index, 17.50 % ICE BofAML 1-5 Year AAA-A US Corporate Index, 7.50% ICE BofAML AAA US Asset Backed Securities, 5.00% ICE BofAML 0-3 Year US Agency CMOs and 2.50% ICE BofAML 3-5 Year US Mortgage Backed Securities Index. Prior to 1/1/2016 the benchmark was the BofA Merrill Lynch 1-5 Year US Treasury & Agency Index.

The 1-10 Year Strategy Blended Benchmark consists of 65.00% ICE BofAML 1-10 Year US Treasury & Agency Index, 15.00 % ICE BofAML 1-5 Year AAA-A US Corporate Index, 5.00% ICE BofAML AAA US Asset Backed Securities, 7.50% ICE BofAML 0-10 Year US Agency CMOs and 7.50% ICE BofAML 0-10 Year US Mortgage Backed Securities Index. Prior to 1/1/2016 the benchmark was the BofA Merrill Lynch 1-10 Year US Treasury & Agency Index.

The Airport Bond Reserve portfolio has a maximum maturity constraint of 10 years. On an ongoing basis, liquidity is generated from income received from the portfolio holdings, as well as from periodic bond calls of Agency securities. All income received during the year is transferred out of this portfolio into the Airport Operating funds contained in the Consolidated Portfolio (subject to ongoing adjustments to the required portfolio balance stated in the bond indenture).

The Airport Reserve Portfolio benchmarking indices are comprised of five ICE BofAML indices, creating a static weighted blended benchmark. A total of one blended benchmark is utilized for the 1-10 year strategy to closely reflect the portfolio duration and asset allocation constraints.

6

City and County of Denver

Investment Portfolio Performance Report

Quarter Ended 12/31/2018

Prepared By:

Cash, Risk & Capital Funding Division

Airport Reserve Portfolio Composition

Characteristics

Average Duration

3.35

Average Coupon

2.57%

Credit Quality (S&P)

A, 11.6%

AAA, 23.7%

Director of Cash & Investments:

Caroline Hendrickson 1.720.913.9335

caroline.hendrickson @

Average Yield to Maturity Average Rating (S&P) Average Life

2.73% AA+ 3.64 yrs

AA, 64.7%

Portfolio Administrator:

Gregory T. King 1.720.913.9348

gregory.king @

Sr. Portfolio Analyst:

Mario Dominguez 1.720.913.3091 mario.dominguez@denv



CMO, 5.5% Muni, 3.9%

Supra, 10.6%

Asset Allocation

MBS, 2.0%

U.S. Agency, 34.1%

ABS, 5.4%

Corps, 16.8%

U.S. Treasury,

21.7%

Maturity Distribution

45.0% 40.0%

39.8%

35.0%

30.0% 25.0%

23.9%

20.0% 15.0% 10.0%

5.0% 0.0%

12.6% 1.5% 2.8% 0 - 0.5 0.5 - 1 1 - 2 2 - 3

11.7% 7.7%

0.0% 3 - 5 5 - 7 7 - 10 10+

Report Content:

Discussion of

1

Investment

Performance

Consolidated

2

Portfolio

Airport Reserve 6 Portfolio

Worker's Comp 8 Portfolio

Special Purpose 9 Investments

Escrows

9

7

City and County of Denver

Investment Portfolio Performance Report

Quarter Ended 12/31/2018

Prepared By: Cash, Risk & Capital Funding Division

Director of Cash & Investments:

Caroline Hendrickson 1.720.913.9335

caroline.hendrickson @

Portfolio Administrator:

Gregory T. King 1.720.913.9348

gregory.king @

Analyst:

Mario Dominguez 1.720.913.3091 mario.dominguez@denv



Report Content:

Discussion of

1

Investment

Performance

Consolidated

2

Portfolio

Airport Reserve 6 Portfolio

Worker's Comp 8 Portfolio

Special Purpose 9 Investments

Escrows

9

IV. Workers Compensation Portfolio Composition

$42,369,634

Characteristics

Average Duration

4.11

Average Coupon

2.93%

Credit Quality (S&P)

A, 6.1%

AAA, 24.2%

Average Yield to Maturity 2.97%

Average Rating (S&P) Average Life

AA+ 5.23 yrs

AA, 69.7%

Asset Allocation

MBS, 6.5%

CMO, 4.9%

U.S. Agency, 23.3%

Muni, 23.1%

Supra, 17.3%

U.S. Treasury

8.0%

ABS, 2.3%

Corps, 14.6%

Maturity Distribution

30.0% 25.0% 20.0% 15.0% 10.0%

25.7%

11.6% 8.8%

21.0% 17.7%

14.0%

5.0% 1.2% 0.0%

0.0% 0 - 0.5 0.5 - 1 1 - 2 2 - 3 3 - 5 5 - 7 7 - 10 10+

WC liabilities have a much longer term expected average duration than most other funds managed by the City. For this reason, management has determined that it is prudent to extend the duration of the invested assets associated with these obligations.

A combination of cash and securities were transferred from the Consolidated Portfolio to the newly established WC portfolio in August 2009. An allocation to cash equivalents appropriate to fund the liquidity needs of the unit was set aside (and is monitored and adjusted monthly), and the balance of the funds were invested in treasury, corporate, agency, municipal, and structured fixed income securities. The annualized current return for the fourth quarter of 2019 was 2.86%.

Year-to-Date earnings on a current return basis for the Worker's Compensation were $1,225,735.

8

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