CHANDLER ASSET MAN AGEMEN T
Estimating Future Investment
Earnings Today
Martin Cassell, CFA
CEO & CIO
6225 Lusk Boulevard
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San Diego, CA 92121
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Phone 800.317.4747
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Fax 858.546.3741
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www.chandlerasset.com
Questions to Address
■ How can future investment earnings be estimated?
■ Why does the earnings rate matter?
■ Does history matter?
■ How can rolling time periods help manage results?
■ Is there a disclosure statement?
■ Of course, please see the statement at the end of this
presentation for important disclosure information
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Forecasting Earnings
■ Key components affecting an earnings forecast
■ Forecast period.
■ Investment portfolio balance.
■ Purchase yield of investment portfolio.
■ Investments maturing.
■ Reinvestment rate of cashflows.
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Possible Forecasting Inputs
■ Purchase Yield to Maturity
■ Market Yield to Maturity
■ Historical Returns
■ Market Benchmark Return
■ Inflation Rate
■ Implied Forward Rates
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Investment Balance
■ Investment Balance
■ Establish the beginning investment balance
■ Market value
■ Book value
■ Accrued Interest
■ Include any potential contribution/withdrawals
Beginning Portfolio Balance
$
10,000,000
Ending Balance
$
10,000,000
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Current Portfolio Income
■ Income from existing securities
■ Sum the securities maturing during the forecast period.
■ Calculate the weighted average purchase yield of the current portfolio.
■ Purchase Yield = Yield to Maturity at time of purchase
■ Multiply the securities remaining in the portfolio by the weighted average
purchase yield to calculate the income forecast.
Maturing after Forecast Period
Purchased Yield
Income
$
$
8,000,000
2.70%
216,000
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Forward Rates
Tenors
3Mo
6Mo
1Yr
2Yr
3Yr
4Yr
5Yr
10Yr
Current
0.12
0.16
0.21
0.32
0.50
0.77
0.98
1.11
US Agency Forward Rates
1YR
2YR
3YR
0.33
0.72
1.39
0.35
0.76
1.46
0.39
0.86
1.60
0.62
1.23
1.82
0.95
1.49
1.55
1.21
1.37
1.41
1.17
1.30
1.39
1.33
1.55
1.75
5YR
0.99
0.99
0.99
0.99
1.09
1.16
1.22
2.02
10YR
2.32
2.35
2.41
2.53
2.66
2.79
2.92
3.58
Source: Bloomberg, LLP
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Reinvestment Income
■ Income from reinvestment of maturities
■ Calculate the average number of days until reinvestment of the maturity of securities.
■ Forecast a reinvestment rate for security maturities
■ Gov’t forward rates
■ Corporate forward rates
■ Blended forward rates
■ Multiply the dollar amount of the maturing securities by the reinvestment rate.
■ Multiple the above value by the fraction time period of the left on the horizon period.
Maturing before Forecast Period
Average Maturity (days) of
reinvestment
Reinvestment Rate
Income
$
$
2,000,000
279
1.62%
37,489
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Total Portfolio Income
■ Total Portfolio Income
■ Add existing portfolio income to the reinvestment income to calculate
the total portfolio income forecast.
Wt Avg Earnings Rate
Total Income
$
2.53%
253,489
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Interest Earnings Forecast
Interest Earnings Forecast
Beginning Portfolio Balance
$
10,000,000
Ending Balance
$
10,000,000
Maturing after Forecast Period
Purchased Yield
Income
$
$
8,000,000
2.70%
216,000
Maturing before Forecast Period
Average Maturity (days) of
reinvestment
Reinvestment Rate
Income
$
2,000,000
Wt Avg Earnings Rate
Total Income
$
279
1.62%
37,489
$
2.53%
253,489
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The Earnings Rate Matters
■ The earnings rate helps to estimate the growth of the
portfolio
■ The growth of the portfolio helps to pay for future liabilities
■ Underestimating the earnings rate can create a funding shortfall
■ What is the appropriate time period for earnings?
■ Does history have a roll in forecasting future earnings?
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Developing A Rolling Return Estimate
 Incorporating historical return information and future
earnings estimate
 Seeking an effective estimate of future returns
Market Value
1 Yr Total Rate of Return
3 Yr Total Rate of Return
5 Yr Total Rate of Return
Purchase Yield
Market Yield
Future Earnings Estimate
Portfolio
10.000
4.40%
3.30%
5.00%
2.80%
1.20%
2.53%
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Required Future Return
 For a given discount rate, what do we need to earn in the future?
 What rate of return do we need to earn for a given discount rate?
Dicount Rate
3 Year Historical Total Rate of Return
Required 2 year return to meet discount rate
4.00%
3.30%
5.06%
3.00%
3.30%
2.55%
2.00%
3.30%
0.08%
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Finding an Reasonable Discount Rate
The 3 year historical return and the 2 year future return
estimate have an expected return of about 3%
Historical 3 Year TRR
Future Return Estimate
5 year Rolling Return Estimate
Reasonable Discount Rate
3.30%
2.53%
2.99%
3.00%
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Rolling Return Estimates
A combination of historical returns and estimated future earnings
may help provide a relatively stable and effective tool to help a
pool manage funding of future liabilities.
8.0%
7.0%
6.0%
5.0%
4.0%
3.0%
2.0%
1.0%
0.0%
2000
2001
2002
2003
2004
2005
Est 5 yr TRR
2006
2007
2008
2009
2010
2011
Actual 5 yr TRR
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Conclusions
■ Forecasting is an estimate, not an absolute
■ Known facts can help improve your forecast - better than
a SWAG
■ It is always prudent to be conservative in your forecast
■ Past performance does not guarantee future results
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The Future is Clear
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Biographies
Martin Cassell, CFA
CEO, Chief Investment Officer
Jayson Schmitt, CFA
Senior Vice President, Portfolio Manager
Martin Cassell is the chief executive and investment
officer at Chandler Asset Management and is a principal
of the firm. Mr. Cassell is responsible for defining,
planning, and directing company programs. He heads
implementation of the firm’s investment strategies and
portfolio risk management. He designed the proprietary
quantitative models that drive our investment process,
establishing duration, structure, and asset allocation
throughout client portfolios.
Jayson Schmitt is a senior vice president and portfolio
manager at Chandler Asset Management. He has been
instrumental in the development and integration of
quantitative analytic tools for the portfolio management
process.
Mr. Cassell joined Chandler Asset Management in 1991
from the City of San Diego where he managed a $1 billion
fixed income portfolio. He began his investment career in
1987 managing portfolios at World Savings and Loan.
Mr. Cassell received his B.S. in finance from California
State University, Hayward. He is a member of the CFA
Society of San Diego and holds the designation of
Chartered Financial Analyst. He is also a member of the
California Association of Joint Power Authorities (CAJPA)
finance committee.
Prior to joining Chandler Asset Management in 1995, Mr.
Schmitt was employed as a financial analyst with USA
Federal Credit Union in San Diego, managing a $100
million liquidity book. His responsibilities there also
included asset/liability management.
Mr. Schmitt earned his B.A. in economics from San Diego
State University. He is a member of the CFA Society of
San Diego and holds the designation of Chartered
Financial Analyst.
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Disclosures
DISCLOSURES
Past performance is not indicative of future results, which may vary. There is no guarantee that any opinion, forecast, or
objective will be achieved. The information herein is provided for informational purposes only and should not be
construed as a recommendation of any security, strategy or investment product, nor as an offer or solicitation for the
purchase or sale of any financial instrument. The financial model described in this presentation has been prepared
using a hypothetical portfolio and assumptions provided by the author for the purposes of demonstrating the model.
References to specific securities, issuers and market sectors are for solely illustrative purposes of the model presented
herein.
This presentation contains the current opinions of the author, which are subject to change without notice. Any
statements concerning financial market trends are based on current market conditions, which will fluctuate. Forecasts
and assumptions are inherently limited and should not be relied upon as an indicator of future results. Unless otherwise
noted, Chandler is the source of the tables, graphs, performance data and characteristics contained in this
presentation.
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