Public Trust Advisors Blog

Methods of Asset Valuation: A Comparison

Posted on Fri, Apr 21, 2017


The Valuation Showdown: Mark-to-Market vs Amortized Cost

Chess Match-1.jpgInvestment advisors, like Public Trust Advisors (Public Trust), may select different methods of determining the value of assets held within local government investment pool (LGIP) portfolios for reporting purposes.

The two most common methods used to report on the assets of the portfolio are mark-to-market and amortized cost...So which is better? While both methods are acceptable, in our opinion mark-to-market (Fair Market Value) provides a higher level of transparency than amortized cost.

Why Mark-to-Market?

Public Trust has chosen to use the mark-to-market methodology for LGIPs managed. This methodology involves obtaining prices for securities in the portfolio on a frequent or daily basis. In the case of the Public Trust managed LGIPs, the portfolios are priced every business day. (Note: mark-to-market can be performed multiple times a day if deemed necessary by the fund manager). The prices are based on what a willing buyer would pay to a willing seller for the individual positions in the portfolio. Public Trust, in its role as administrator, believes that this information is exceptionally useful to both the investor and investment manager. When completed routinely and while using prices from reliable sources, readers of the financial statements gain an understanding of the liquidity and credit quality of the positions in the portfolio. Mark-to-market reflects current economic and monetary cycles which may have a direct impact on the underlying values of the portfolio. Changes in the rating or perceived credit quality of the insurer will also be immediately reflected in the value of the securities held in the portfolio.

Alternatively, LGIPs employing the amortized cost method adjust the value of the securities in the portfolio daily by a predetermined amount from the purchase date to the maturity date. This method produces very predictable asset valuations regardless of current economic or monetary cycles. The predetermined value may or may not reflect the actual price achievable in the open market. As a result, many LGIP portfolios which utilize the amortized cost method will still use mark-to-market periodically to more accurately reflect the actual prices. 

Mark-to-Market and Transparency

While amortized cost and mark-to-market can approximate one another during periods of stability in the financial markets, the results can be much different during times of stress (take for example, the financial crisis of 2008). Most LGIPs maintain sufficient cash to meet investors’ request for funds, however uncertain cash flows can happen and are more likely to develoiStock-153711706.jpgp during times of economic uncertainty. At any given time, the investment manager may need to sell individual securities in the open market. Mark-to-market methodology allows both the participant in the LGIP and the investment advisor to determine the possible gain or loss to be realized from selling the securities in the portfolio. We believe that the mark-to-market methodology gives the users of the financial statements a much better understanding of the structure and quality of the portfolio.

At Public Trust Advisors, we believe that transparency is a critical component of the investment of all public funds, and mark-to-market is essential to that transparency. 

*All comments and discussion presented are purely based on opinion and assumptions, not fact. These assumptions may or may not be correct based on foreseen and unforeseen events. The information above is not a recommendation to buy, sell, implement, or change any securities or investment strategy, function or process. Any financial and/or investment decision should be made only after considerable research, consideration and involvement with an experienced professional engaged for the specific purpose. Past performance is not an indication of future performance. Any financial and/or investment decision may incur losses.

Tags: fixed-income asset management, Investing Public Funds, LGIP Administration, Public Trust Advisors, investment managment for the public sector, asset valuation, mark-to-market

Short-term Interest Rates: The Dot Plot Explained

Posted on Wed, May 27, 2015

By Joe Carroll, Vice President, Sales and Marketing


Short-term Interest Rates: The Dot Plot Explained

The Federal Open Market Committee (FOMC) is a twelve member committee consisting of members of the Federal Reserve Board and regional Reserve Bank presidents. The FOMC has eight regularly scheduled meetings throughout the year to discuss and assess economic and financial conditions, monetary policy, and risks to its long-run goals of price stability and sustainable economic growth.

One aspect of these meetings which garners a lot of attention is the dot plot. The dot plot is a visual representation of where each member of the FOMC thinks the federal funds rate should be at the end of each of the next three years and into the future (long run). While the dot plot is not an official tool of the FOMC, it does provide some insight as to what various members of the FOMC are thinking in regards to the federal funds rate.

Here is a picture of the March 18th FOMC meeting dot plot chart.

Dot Plot Blog 1

Each dot represents where individual members of the FOMC think the federal funds rate should be at the end of the year given current economic information. As seen above, the views on where the federal funds rate will be in the future varies quite a bit within the FOMC. For example, in 2016 the majority of the FOMC believes that the federal funds rate should be between 1.5% and 2.0%. There are a few members who think the rate should be much higher or lower than the consensus at the end of 2016.

Further examination of the dot plot provides even more insight into the thought process of the FOMC. The chart below shows the past three dot plot assessments along with the respective Fed Funds Futures contracts. The Fed Funds Futures contracts (seen in red) represent how the market is pricing the federal funds rate in the future. Noticeably, the market is not quite as optimistic as the FOMC. In addition to lower market expectations of the federal funds rate, it is clear that all the members of the FOMC have reduced their outlook for future interest rate levels.

Dot Plot Blog 2

The dot plot can be an insightful and useful tool when examining the federal funds rate and future projections. With recent changes in the FOMC language, we are expecting an increase in the federal funds rate sometime in 2015. Short-term interest rates have been at record lows for years. An increase in interest rates, and therefore interest income can mean a significant change for many local governments. The time for budgeting zero interest income may be coming to an end! Be sure to keep an eye out for the next dot plot and what it means to you.


Charts Sourced from Bloomberg

Tags: public funds investing, investment advisor, Short-term interest rates, fixed-income asset management, yield, public funds investor, Public Funds Investment, Local Government Investment Pools, safety, Investing Public Funds, LGIP Administration

Investing Public Funds: Basel III and What the Financial Crisis...

Posted on Tue, Oct 21, 2014

By Todd Alton, Vice President of Credit Research, Public Trust Advisors

Investing Public Funds: Basel III and What the Financial Crisis Taught Us About Above Market Yield.

Dodd-Frank set into motion a comprehensive set of financial regulatory changes. For the banking sector the new rules surround what is referred to as Basel III. Basel III is intended to be “a comprehensive set of reform measures, developed by the Basel Committee on Banking Supervision (and adopted by the United States Federal Reserve Bank), to strengthen the regulation, supervision and risk management of the banking sector.” (Source:


Public Funds Investing

The end goals of Basel III are three-fold:

  • “to improve the banking sector's ability to absorb shocks arising from financial and economic stress, whatever the source;”

  • “to improve risk management and governance;”

  • “to strengthen banks' transparency and disclosures.” (Source:

The first phase of Basel III became effective for the largest internationally active U.S. banks on January 1, 2014. The second phase of the Basel III Comprehensive Capital Framework is scheduled to go into effect beginning January 1, 2015. This phase will affect the “standard approach” or “non-advanced approach” banking organizations. Below are some key highlights of the rule, coupled with its possible effects on bank balance sheets.

Key Highlights:

  • The Basel III risk-based capital rules will apply to all banks and savings associations (and holding companies with greater than $500 million in total assets).

  • The rule will require banks to hold higher levels of regulatory capital.

  • The new risk-weighting regime will require institutions to maintain significantly higher capital reserves when they hold assets considered to have higher risk exposures.

In certain circumstances, some items that were previously included in a bank’s capital ratios will now either be reduced or eliminated from the calculation, thus reducing depositors’ overall capital protection.

Public Funds Investing

Potential effects on banks that “pay up” for deposits (i.e. fund themselves with hot/volatile money):

  • Margin compression: more capital held equates to less productively deployed capital and thus lower earnings which when added to the higher costs of the deposits equals compression.

  • Acquiring assets with yields sufficient enough to “pay for” the increased capital charge will result in the bank necessarily taking on more potential challenges -- those of either greater interest rates or credit risks.

What types of banks might still be willing to pay the highest deposit rate in their trade areas?

  1. Banks that have to replace wholesale funding

  2. Banks that are trying to grow rapidly

Prudent Questions to Consider:

If a bank is currently replacing wholesale funding by paying up for deposits there is a reason, so what is forcing their reduction in reliance on that type of funding source AND what were they doing on the asset side of the balance sheet that drove them to need that concentration in funding to begin with?

  1. If the bank is attempting to grow rapidly, what is the strategic goal . . . the old “cross sell” story that often fails to develop . . . or the “build the balance sheet to sell the bank” paradigm . . . or maybe it is merely some concentrated industry growth in the bank’s trade area that they want to fund in an attempt to retain a client relationship . . . the next relevant question in any of these cases is, given my fiduciary duty, are these strategies likely to result in my deposit relationship being safe and long-lived?

  2. If the need for increased funding (deposits) is driven by the new, special mouse trap strategy, one really needs to decide if this is a strategic growth story that is prudent to fund with the deposit dollars under prudential care, and then if the additional yield is sufficient reward for the investment risk and brand exposure taken?

So after all the necessary analysis, from the perspective of a public funds investor one must be able to effectively answer these final questions:

What are the pros and cons of depositing the public’s funds in a bank that is paying top of, or above, market deposit rates . . . AND is the risk/reward profile in balance, a prudent allocation of funds, and an appropriate discharge of my fiduciary duties? And ultimately, are the extra few basis points really worth the risk, even with collateral?

One final note, during FDIC Material Loss Reviews of failed institutions, paying above market deposit rates and investing those funds in a pool of assets with high or similar risk concentrations, were the PRIMARY drivers of bank failures during the recent banking crisis. 


Tags: fixed-income asset management, fixed income management services, Investing Public Funds

Investing Public Funds: Where Do We Go From Here?

Posted on Tue, Oct 01, 2013
By Neil Waud, CFA, Senior Portfolio Manager

With U.S. Treasury yields continuing to languish at all-time lows, it may be difficult to see the value in investing public funds at this time. For the past five years, we’ve witnessed events that have shaken our fundamental investment principals to the core. The sub-prime mortgage crisis, Lehman Brothers’ bankruptcy, constraints on the U.S. federal budget leading to the downgrade of Treasury debt, the fiscal cliff as well as the European sovereign debt crisis. All of these events have triggered consequences that were unimaginable not that long ago. Worse yet, none of these issues has been resolved in a manner that gives an investor confidence or clarity going forward.

investing public funds, investment principals

Since the financial crisis began in 2008, central banks have massively expanded their balance sheets in an effort to avert a global economic recession. By offering excess liquidity to the markets, central banks have bought their respective governments time. However, most economists agree that there are limits to what can be repaired through monetary policy. Without sound fiscal policy, it will be difficult for the global economy to gain meaningful traction. The politics involved to enact such change will take time. 

Under these circumstances, it’s no surprise that “safe” assets such as Treasury Bonds, highly rated corporate debt and even gold have seen significant price appreciation since the dawn of the global financial crisis. Due to the meager returns now offered by the Treasury market, an investor must consider the possibility that we are observing yet another “bubble” in the making. When investing in Treasuries, most market participants will agree on the following three things.

1.)  As the financial crisis trudges on Treasury yields can certainly head lower.

2.)  When yields eventually head higher it is going to end badly for many investors who have overly extended their portfolios.

3.) No one has any idea just when the shift to higher rates will occur!

It is this third point that perplexes investors the most. Six years into this crisis, we have slowly come to the realization that we are not observing another typical boom-bust economic cycle. If this were the case, the massive stimulus enacted to spark the economy should have generated GDP growth well above the 2%-3% rate we have observed to date. In reality, we have experienced a period of wealth destruction, credit contraction and asset deflation that has significantly impaired our ability to stimulate the economy through traditional measures. A return to above trend-line growth may still be years away.

investing public funds 

So where does a public investor go from here?

Due to the “bubble” argument outlined above, it is tempting to eschew U.S. Treasuries, Agencies and highly rated corporate bonds of any duration. We believe that would be a mistake. With the benefit of 20/20 hindsight, it is easy to see why avoiding investing has not been a successful strategy over the past few years. However going forward, given the significant headwinds still impacting the global economy, it will be difficult at best to determine the “perfect” time to invest.

The market received a bit of a wake-up call in May when Federal Reserve (Fed) Chairman Ben Bernanke hinted at a possible reduction in monthly bond purchases for Federal Open Market Committee (FOMC) Quantitative Easing program. Since then, the bond market has experienced significant volatility as investors begin to contemplate a world where the Fed gradually tightens monetary policy. Many Wall Street analysts had predicted the Fed to begin tapering bond purchases as early as this September. However, the recent rise in interest rates in conjunction with the looming Congressional budget and debt ceiling debate has apparently given the Fed second thoughts. The Fed has now stated that they would like more time to analyze economic data before reversing course on monetary policy. As a result, the recent action (or inaction) by the Fed has left the markets in a fog. One has to wonder if the Fed still deems the economy so weak that it can’t support itself without unprecedented support from the FOMC.

With no end in sight, how should a prudent investor manage their funds?  We would recommend a disciplined approach, focusing on the long-run by adhering to established benchmarks and patiently capitalizing on perceived opportunities in the market. With a keen eye on the market distortions from the current fiscal and monetary policies, the prudent investor will stay focused on the primary objectives of safety-first, followed by liquidity then yield.

Tags: fixed-income asset management, public investor, Investing Public Funds

Investing Public Funds - Building the Public's Trust

Posted on Wed, Jun 12, 2013


By Thomas D. Jordan, President, Public Trust Advisors

Welcome to our first official Public Trust blog! 

I know what you’re thinking— just what the world needs—another blog that purports to have something to say when really it’s just more “blog… blog… blog…” promotion about whoever is writing it. 

But hopefully you already know us better than that. This is our blog debut and we refuse to turn our important occasions to talk with you into a soap box from which we self anoint ourselves as the “best in breed” or proclaim our “awesomeness.”

No, that blog is for the other guys. 

Ours is for you. Our purpose is to share new ideas, information and trends with you, along with answering your questions. In the process of sharing your own thoughts and ideas with us…we may even start industry wide conversations about investing public funds and fixed-income asset management services.

No matter what the topic at hand, you can be sure our point of view will be informative. We will share information regarding our approach and experiences as a provider of fixed income management services to the public sector, and if we do what we hope to do, we will successfully convey information that is both useful and educational.  

As with all we do at Public Trust, we will strive to provide you a valuable service. 

Now on to the first topic at hand…

Building the Public’s Trust:

Fixed Income Asset Management

Unfortunately, the word trust has gradually eroded and lost its meaning in the public funds sector—it can be overused by fixed income asset managers when discussing public funds investing and it can be under-delivered by the firms who claim it to be one of their “values.”

From our perspective, there is no value more essential to every aspect of our business than the trust we build with our clients. 

Trust is the prism through which public entities must evaluate fixed income asset managers to invest and manage public funds.

When evaluating a firm for the management of a local government investment pool or a separately managed account, it will quickly become apparent that there are a number of technically qualified fixed income asset managers and management services in the marketplace. Price, in the form of a firm’s management fee, is often the driver in the selection process, as is performance, track record, and the proposed scope of services. All of these “objective” elements can be procured from any number of asset management firms.

It is TRUST that sets us apart from the others. From relationships to customer service and from investment options to recommendations, trust is at the heart of all we do for you. 

You have our word, and on that we deliver.

Rates Change, Values Should Not

We believe that for many public entities, the relationship with their fixed income asset managers has been altered by the current protracted low-interest rate environment. Fee pressure can change the behavior of the firms engaged in public funds investing. Firm business models, predicated on the ability to charge the now unthinkable fixed income “50 basis point” management fees, can create dysfunctional relationships between clients and the investment management service provider. Client-first values can suffer, and quite possibly, have struggled during the recent economic down-turn. As time goes on, rates do and will change, however a firm’s values should not. At Public Trust we have built our business on that very premise.

Don’t Manage Trust, Build It:

fixed income asset management

For the team at Public Trust Advisors, building trust, through long term relationships with our clients, is key in all that we do, and it permeates our deeds and words. Public Trust was founded to address a void we perceived in the fixed-income asset management services sector focused on investing public funds. Public Trust was started to create a renewed sense of commitment to do what we deem is right for public sector marketplace including state and local government’s clients and the assets that we manage on their behalf. We believe our actions and the fundamental foundation of our company points to a higher purpose that resides in our mission statement:

The Public Trust Mission Statement: 

“To provide valued and trusted services to our marketplace in the manner we would serve ourselves and to create enduring bonds of trust between us and the clients we serve.”

We think fixed income managers have a duty to build a high-level of trust with their public sector clients. Here are ten easy steps to building trust between the investment service provider and public sector marketplace.

10 Steps to Building Trust with the Public Sector Investor


1)      Transparency:  Open dialogue. Alignment with your client goals and objectives.

2)      Sincerity: Say what you mean, mean what you say.

3)      Adding Value:  Have your client’s interest at heart.

4)      Respect:  Treat your client as you would yourself.

5)      Feedback: Welcome it, learn from it.

6)      Consistency: Committed in words and deeds to your clients.

7)      Responsibility: Mistakes happen, own them, learn from them.

8)      Expectations: Be clear and honest as to what you can deliver.

9)      Execution: Work to meet or exceed expectations.

10)    Word is Bond: Promises made are promises met.


Trust, Demand It: 

If you are a buyer of fixed income management services for the public sector, we believe that you are due a high-level of trust. Your fiduciary role in maintaining public funds is significant.  Beyond that, only with trust can an optimal working relationship exist that creates complete alignment between the public funds client and the fixed income management services provider. It is the mutual trust between the client and the fixed income manager that provides the quality investment management services that the client should not only expect, but deserves. 

Trust is not an option; it’s a long-term commitment to building value.


Tags: public funds investing, fixed-income asset management, Investing Public Funds

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