This month’s Texas CLASS newsletter features a Q&A interview by Emmie Madison, Content Writer for Public Trust Advisors, LLC (Public Trust), with Portfolio Managers Neil Waud and Randy Palomba. Public Trust is the Investment Advisor/Administrator for Texas CLASS. We discussed their experience, the economic landscape, and managing local government funds.
Q: How long have you been with Public Trust, and overall how long have you been managing portfolios?
Neil Waud: I have been with Public Trust since the very beginning, and I have been investing cash since 2000.
Randy Palomba: I’m also fortunate enough to have been with Public Trust since inception, and I’ve been investing cash in the public sector for over 30 years now. Time flies!
Q: You’ve been working together for a while now, right? How long? What’s the team like?
Neil: Randy and I have worked together since July of 1995. For the past twenty plus years, Randy has been a mentor for me, always willing to share his thoughts and observations while helping me hone my craft. As the Public Trust team continues to grow, Randy’s guidance has fostered a culture that shares institutional knowledge while encouraging new ideas. By design, our trading desk is a lively environment where the team openly debates our investment strategy as we discuss the prudent management of our clients’ investable funds.
Randy: Neil and I have been working together for over twenty years if I remember correctly. We both started in Client Service roles and progressed to Portfolio Managers. We have a solid team that allows us to share ideas and execute trades that are the best ones for the clients we serve.
Q: You both are CFA® charterholders, so what does that mean? Who else on your team is a current CFA® charterholder?
Neil: The Chartered Financial Analyst (CFA) credential is offered to investment professionals through the CFA Institute. To earn the CFA credential, candidates must demonstrate a firm grasp of portfolio management, various investment tools, and the ethical standards required as a professional. To become a CFA charterholder, you must pass three levels of exams that rigorously test your investment related knowledge. Once earned, you are encouraged to continue your professional development while holding yourself to the highest ethical standards.
Randy: To build on what Neil said, Public Trust encourages everyone on the team to go through the program. We have three members of the team that have completed the requirements for CFA designation and have an additional four members of the team currently enrolled in the program working toward their designation.
Q: What is your overall strategy on investing on behalf of governmental entities?
Neil: The safety of public funds is always the primary objective when developing our investment strategy. An emphasis on high quality securities, diversification, and the minimization of volatility helps ensure our clients’ portfolios maintain an appropriate balance of safety and liquidity throughout market cycles.
Randy: Safety! Safety of principal and liquidity of funds. These are taxpayer dollars we are investing. It is extremely important to ensure these funds are invested safely and in compliance with governing legislation as well as the clients’ investment policies.
Q: Do you have anything you want Texas CLASS Participants to know about how their investments are being managed?
Neil: Prudent investment management mandates a thorough credit analysis of the counterparties we lend to and strict adherence to our clients’ liquidity needs. Having met these requirements, we then focus on maximizing investment returns. While we work in a competitive landscape, at the end of the day we need to be mindful of the old axiom: “it is the return of your principal not the return on your principal that matters most to our Participants.”
Randy: I’m proud of the team we have assembled and the comradery we have in doing the best job we can for our clients. It’s a real team effort with everyone working together to produce a superior product for our clients.
Q: We’ve seen some changes in the market this past year. What is your take on the current market?
Neil: Since the November election, we have seen a shift in market sentiment. The initial optimism of deregulation, tax reform, and fiscal stimulus in Washington driving growth and inflation metrics higher has given way to the reality of a polarized political process that will take some time to unravel. For the past eight years, the U.S. economy has experienced relatively steady but unspectacular growth. While sufficient enough to tighten the labor market to pre-crisis levels, the growth has not translated into rising inflation. While the stock market continues to press towards new highs, inflation will likely need to rise for interest rates to push higher.
Randy: I’m happy to see the Federal Reserve begin to raise interest rates. I’m not convinced that the Fed will be as aggressive as its dot plot suggests. I’ve been doing this long enough to see interest rates go from double digits in the 1980s to practically zero for most of the last ten years. I hope we can see interest rates at levels that make sense for the earnings to once again become a budget item for local governments. The earnings on excess cash can be important to providing additional resources for governmental entities ultimately benefiting the taxpayers.
“It is the return of your principal not the return on your principal that matters most to our Participants.”— Neil Waud
Q: So, what are your expectations for the next Federal Open Market Committee (FOMC) meeting in September?
Neil: The July FOMC meeting didn’t really tip its hand regarding another rate hike this year simply noting that inflation was still below its 2% target rate. However, the post-meeting statement did say the normalization of its balance sheet will begin “relatively” soon. I agree with most, interpreting this to mean that the Fed’s longer-term holdings will be addressed at the September meeting. As far as the next rate hike is concerned, inflation will likely need to rise for this to occur this year. If it happens at all, the December meeting makes the most sense at this point.
Randy: I believe the FOMC will announce the start of the balance sheet normalization process. I also think that it will keep the Fed funds target rate unchanged until we see some indication that inflation is heading back toward 2%. The FOMC has accomplished one objective by raising rates from the nearly zero level we experienced for several years. I’m not convinced the U.S. economy is ready for a twoyear Treasury yielding 5%. However, I know that finance managers and savers would welcome that investment return.
Q: Anything else you’d like Texas CLASS Participants to know?
Neil: I would like to thank everyone for their continued support of Texas CLASS and encourage Participants to reach out to the Portfolio Management Team with any questions you may have regarding the program. Having placed your trust in us, we want to always be available for you.
Randy: I have had a great career working with some very talented individuals in the public sector. I look forward to continuing to work hard with those individuals as well as the opportunity to work with some of the younger folks that are now entering the public sector. I’m thankful for all the great people I have met and have had the pleasure to work with over the years.