DOVER, Del. (AP) — An independent report released Friday by state treasurer Chip Flowers is recommending that Delaware officials take steps to improve the performance of the state’s investment portfolio.
According to the report by Credit Suisse Securities, annual returns from the state’s portfolio have not kept pace with inflation over the past five years. The cumulative annual return of 2.75 percent for the period from January 2005 to March of this year was only slightly above the benchmark inflation rate of 2.62 percent, according to the report.
The report also found that the annualized total return for the past five years from the $1.9 billion portfolio of fixed-income securities lagged behind the average of 16 peer states with similarities to Delaware’s AAA credit rating or comparably sized investments used in a similar manner.
Analysts suggested that while some of the decline in performance can be attributed to market conditions, changes could be made to the state’s investment strategy to improve performance while maintaining or reducing the current level of risk.
The state currently uses five investment managers to oversee seven separate accounts within two broad account categories. Liquidity accounts, which totaled $98 million as of March 31, have an investment horizon of up to two years. Reserve accounts, which totaled $923 million, have an investment horizon of up to 10 years.
To improve portfolio performance, Credit Suisse recommended increasing the diversification in the state’s investment holdings and adding new investment asset categories. Specific recommendations include cutting the percentage of cash and short-term investments in liquidity accounts in half, from 21.3 percent to 10 percent, and reducing the percentage of U.S. Treasury holdings in reserve accounts from about 50 percent to 35 percent.
Credit Suisse analysts also recommended that the state increase its international debt holdings, which would include adding Canadian treasury bills and government bonds, and boost its investment in municipal obligations.
Flowers said many of the findings and recommendations align with concerns and suggestions previously expressed by his office.
“This independent report provides further evidence beyond the Delaware State Treasury’s public reports and analysis that there are structural issues with the state’s investment portfolio that need to be addressed,” he said.
Flowers has recently quarreled with Gov. Jack Markell over the hiring of Credit Suisse and the role of the state’s Cash Management Policy Board in overseeing the portfolio. The board, which includes several appointees of the governor, would have to approve many of the recommendations in the report.
Markell’s office had language inserted into this year’s budget bill that authorizes the board to approve one-year extensions for any existing contracts for banking or investment services that expire this fiscal year. The bill also prohibits the treasurer from retaining banking or investment services without the consent of the board and requires that funds in the treasurer’s custody be invested consistent with board guidelines.
Markell spokesman Brian Selander said the Credit Suisse report confirms that the historical results produced by the board’s guidelines and the state’s investment managers were “very close” to the benchmarks Credit Suisse used.
Selander said important recommendations in the report include greater transparency involving portfolio results and more specific investment manager guidelines. But other suggestions, such as giving the treasurer more flexibility to invest in collateralized mortgage obligations, AA mortgage backed securities, and international and corporate debt, require careful review, he said.
“These funds are needed to pay the state’s ongoing operational expenses and we need to be very careful how we invest this money,” Selander noted.
