Investments 442 Present and Future Opportunities

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FGFOA Conference
The Trade Off Higher Returns versus Market Value
Fluctuations
Investments 442
Present and Future Opportunities
Gregory L. Coleman, CFA Atlanta Capital
Management Company June 14, 2006
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Traditional Public Investment Guidelines Tend to
Give Public Investments These Characteristics

• Very Short Term
• Total Liquidity
• No Price Fluctuation
• Highest Quality
• Easy To Invest
• Easy To Audit
• Low Yield

Maximum Safety...
Reduced Investment Income
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Investment Characteristics of Short to
Intermediate Maturity Public Fund Portfolios
Non-Treasuries
Short to Intermediate Term High Liquidity
Some Price Fluctuation Very High Quality
Harder to Manage In House Harder to
Reconcile/Audit (Monthly Variable Principal
Interest Cash Flow) Substantially Higher
Yield Than Stable Value Money Market Funds

Longer Maturities

Increased Investment Income
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Short-Term Bonds Benefit From Riding the Sweet
Spot of the Yield Curve
Average Treasury Yield Curve Since 1955
Yield in Percent
You Get The Most Incremental Yield In 1-3 Year
Maturities Without a Significant Increase in
Volatility
2 Yr
5 Yr
30 Yr
10 Yr
Data as of May 2006
Source Bloomberg
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The Long Run Track Record of Short-Term Bonds In
most time periods over the last 22 years,
short-term bonds beat money markets with
little downside risk.


Analysis 271 Rolling 12-month periods. Conclusion
72 Short-term bonds outperformed money
markets. 99.6 Short-term bonds had positive
returns. Analysis 246 Rolling 36-month
periods. Conclusion 93 Short-term bonds
outperformed money markets. 100 Short-term
bonds had positive returns.
Merrill Lynch 1-3 Year Government Index
Merrill Lynch T-Bill Index
An investment in money market funds is not
insured or guaranteed by the Federal Deposit
Insurance Corporation or any other government
agency. Although money market funds seek to
preserve the value of your investment at 1.00
per share, it is possible to lose money by
investing in money market mutual funds. Past
performance data quoted represents past
performance which is no guarantee of future
results. Investment returns and principal value
of an investment will fluctuate so that an
investor's shares, when redeemed, may be worth
more or less than the original cost.
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Slight Maturity Extension Higher Returns
Return Profile December 1990 to March 2006
3-Month T-Bill 61 1.67 0.24 61 0 100 4.14
Merrill Lynch 1-3 Yr Treasury 61 3.68 -1.06 58
3 95 5.42
Merrill Lynch 1-5 Yr Treasury 61 4.25 -1.67 49
12 80 5.79
Number of Quarters Highest Quarterly
Return Lowest Quarterly Return Number of Positive
Qtrs. Number of Negative Qtrs. Positive
Quarters Return for the Period
Past performance does not predict or guarantee
future results.
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Slight Maturity Extension Spread Product
Much Higher Returns
Return Profile December 1990 to March 2006
Merrill Lynch A or Better 1-3 Yr
Corp 61 3.63 -1.27 58 3 95 6.36 AA
Merrill Lynch 1-3 Yr Treasury 61 3.68 -1.06 58
3 95 5.42 Govt.
3-Month T-Bill 61 1.67 0.24 61 0 100 4.14 Go
vt.
Merrill Lynch ABS Index 61 5.08 -1.04 56 5 92
6.59 AAA
Number of Quarters Highest Quarterly
Return Lowest Quarterly Return Number of Positive
Qtrs. Number of Negative Qtrs. Positive
Quarters Annualized Return Average SP Rating
Past performance does not predict or guarantee
future results.
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Combining The Sweet Spot of the Yield
Curve With Higher Yielding Assets Has Paid Off
Return Summary December 1990 to March 2006
Annualized Return for the Period 6.59 6.36 5.7
9 5.42 4.14
Merrill Lynch Fixed Rate Asset-Backed
Index Merrill Lynch 1-3 Yr A or Better Corporate
Index Merrill Lynch 1-5 Yr Treasury Index Merrill
Lynch 1-3Yr Treasury Index 3-Month T-Bill
Past performance does not predict or guarantee
future results.
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Quarterly Returns Fluctuate vs. Money Markets But
The Excess Returns Are Dramatic Over Time
Quarterly Total Rates of Return (December 31,
1990 to March 31, 2006)
Merrill Lynch ABS Index
Merrill Lynch 1-3 Year Treasury Index
3-mo Treasury Bills
Annualized Returns for the
Period Merrill Lynch ABS Index
6.59 Merrill Lynch 1-3 Year Treasury Index
5.42 3-Month Treasury Bills 4.14
Past performance does not predict or guarantee
future results.
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On a Cumulative Basis, Over Longer Time Periods,
The Fluctuations Are Smoothed and the Market
Value Differences Can Be Large Versus Money
Markets.
Indexed Quarterly Returns, 12/31/90 - 3/31/06
Merrill Lynch Asset-Backed Index Merrill Lynch
1-3 Year Treasury Index Merrill Lynch 3-Month
Treasury Bills
4 Million
8 Million
Millions
Annualized Returns for the
Period Merrill Lynch Asset-Backed Index
6.59 Merrill Lynch 1-3 Year Treasury Index
5.42 Merrill Lynch 3-Month Treasury Bills
4.14
Past performance does not predict or guarantee
future results.
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Dont Need Perfect Conditions to Win, Just a
Little Patience
Recent Bad Times Performance June 2004 to March
2006 (Fed Begins Tightening Phase15 in a Row)
ABS 3.06
T-Bills 2.83
Millions
Recent Average Times Performance December 2000
to March 2006
ABS 4.88
Millions
T-Bills 2.43
Source Merrill Lynch data as of 3/31/06
Annualized growth rate over the indicated time
period Proxy for SBA
Past performance does not predict or guarantee
future results.
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Merrill Lynch Index Characteristics
Merrill Lynch Asset-Backed Index
Merrill Lynch 1-3 Year Treasury Index
3-Month Treasury Bill
Rating Yield Duration Convexity
AAA 4.62 0.25 years 0.00
Rating Yield Duration Convexity
AAA 4.85 1.72 years 0.04
Rating Yield Duration Convexity
AAA 5.41 1.76 years 0.07
Proxy for money market yield
Source Merrill Lynch data as of 3/31/06
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Good news! As the Federal Reserve and global
competition have reduced inflation, market value
fluctuations have similarly been reduced.
Spread Between High and Low Yield of 2-Year
Treasury Note During the Year CPI Core
(Inflation Excluding Food and Energy) by Decade
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The Inflation Outlook Remains Constructive
ensuring long-run price stability is essential
for achieving maximum employment and overall
economic stability. Ben S. Bernanke, New
Federal Reserve Chairman Nominee
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Do some Fed cycles provide a better environment
for short to intermediate bond portfolios than
others?
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Yes, The Best Time for Short-Term Bonds isWhen
The Fed Ends Its Tightening Cycle
Short-term Bond Money Market Performance from
Peak-to-Trough
Seven Peak-to-Trough Cycles
Short-Term Bonds
Money Markets
Short-Term Bond Out-performance
(using closest month-end)
February 1980 to May 1980

11.95
4.25
7.07
April 1981 to August 1982
18.99
15.93
3.06
August 1984 to August 1986
15.43
8.68
6.75
February 1989 to August 1992
10.45
7.17
3.28
January 1995 to January 1996
10.41
5.98
4.43
March 1997 to November 1998
7.42
5.31
2.11
May 2000 to June 2003
6.85
3.39
3.46
Linked Total for the 161 Months
11.22
7.21
4.01
Simple Average for Seven Cycles
11.66
7.24
4.40
(161 months or 13.4 years)
Merrill Lynch 1-3 Year Treasury Index
Merrill Lynch 3 Month T-Bill Index
Not annualized since less than 1 year.
Past performance does not predict or guarantee
future results.
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The Seven Peak-To-Trough Cycles
Federal Funds Target Rate (May 1977 to May 2006)
Even in an 8 Year Uptrend Short-Term Bonds
Outperformed
Source Bloomberg, Federal Reserve Board
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The Average Peak in Fed Funds After a Tightening
Campaign, Has Lasted Just 3 Months
Federal Funds Target Rate (May 1977 to May 2006)
1
1
2
4
5
7
Source Bloomberg, Federal Reserve Board
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The Trade off..Part II
Collateralized Mortgage Obligations Enhancing
Returns and Maintaining Credit Stability
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Traditional Mortgage-Backed Securities Cash
Flow Profile
Homeowner
Bank
Trustees
Guaranteed Timely Principal Interest Payments
Government Sponsored Entity (Ginnie Mae, Fannie
Mae, Freddie Mac)
Investors receive pro-rata share of interest,
principal, and principal prepayments. Investors
have uncertainty about when they get principal
back.
Investors
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Collateralized Mortgage Obligations (CMOs) Cash
Flow Profile
Homeowner
Bank
Trustees
Guaranteed Timely Principal Interest Payments
Government Sponsored Entity (Ginnie Mae, Fannie
Mae, Freddie Mac)
Classes Increase Cash Flow Certainty
Investor certainty is increased. Investors in
short-term, intermediate-term and long-term
securities can now participate in the
mortgage-backed securities market.









Class 3
Class 2
Class 1
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Short Mortgages Provide FavorableYields to Other
Asset Classes
Maturity Adjusted Mortgage, Asset-Backed and
Corporate Indices
Percent
Source Lehman Brothers and Bloomberg Data
as of September 30, 2005
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Yield Is A Predictor Predictor of Return
Return Profile March 1993 to September 2005
Merrill Lynch 1-5 Yr Treasury 53 4.10 -1.67 42
11 80 5.06 2.3 Years
Merrill Lynch 0-3 Yr Mortgage 53 4.02 -0.48 50
3 94 5.53 2.2 Years
Number of Quarters Highest Quarterly
Return Lowest Quarterly Return Number of Positive
Quarters Number of Negative Quarters Positive
Quarters Annualized Return for Period Average
Duration Over Period
Past performance does not predict or guarantee
future results.
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For Over 13 Years and Through Two
Recessions, CMOs Were Rarely Downgraded
Fitch Ratings Asset-Backed Securities Transition
Matrix 1991-2004
One-Year Transition
Downgrade Downgrade Downgrade To
Below Rating Category No Change To AA-Rated
To A-Rated A-Rated Default AAA 99.9
0.1 0.0 0.0 0.0 AA 23.1 76.9
0.0 0.0 0.0
Source Fitch Ratings
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The Key Investment Attributes of Collateralized
Mortgage Obligations
Yield to Investor Attractive Generally Higher
Than Asset-Backeds or Corporate
Bonds Diversification Well Diversified Many
Borrowers Event Risk None Actuarial
Stability Ratings Oversight Continuous Monitored
Monthly Coupon Payments Monthly Stable Cash
Flow Principal Payment Monthly Stable Cash
Flow Principal Window Variable CMOs Increase
Predictability
Key Investment Attributes
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Why Use Collateralized Mortgage Obligations?

• Favorable Yield Premium versus Treasuries
  Other Sectors

• Superior Credit Performance

• Liquidity From Predictable Monthly Cash Flow