Ov Overvi erview of f PERA ERA I Investmen ments Dominic - - PowerPoint PPT Presentation

Ov Overvi erview of f PERA ERA I Investmen ments

Dominic Garcia, Chief Investment Officer June 6, 2019

Slide 2

Key T Task F Force In Investm tment t Qu Questi tions & Req equest uests

Inves estmen ment P Pan anel el:

• “Can we Invest Our Way Out”
• “What if we Employed the Nevada or Passive Investment

Strategy?” Prese sentati tion

• n:
• “What is our Investment Strategy and Performance?” Provide an

Overview.

• “Do You Have Recommendations on How We Can Do Better?”

How Can the Task Force Help?”

Slide 3

What is PERA ’s Investment Strategy and Historical Performance? Provide an Overview.

Slide 4

 Maintain appropriate strategic asset allocation to meet the actuarial discount rate assumption (7.25%) over the long run

• In process: portfolio enhancements to meet expected hurdle for

next 10 years

• Work toward 30 year funding period of unfunded actuarial accrued

liability (in process)  Meet ten-year annualized returns to equal

• r

exceed the policy benchmark  Achieve a total investment cost at or below 85 bps

5-Year ar Strateg egic P Plan an

Slide 5

PER ERA In Investm tment t Str trategy

Market Return

Compound & produce better terminal wealth over time Keep-up, but lag in boom times Minimize Market Drawdowns

PERA

Slide 6

Great Recession Experience Capital Allocation model & limited illiquid asset deployment Adopted more streamlined SAA integrating liquid and illiquid assets. Eliminated gatekeeper capacity from Illiquid Consultant. Enhanced governance & adoption of risk- based allocation, alpha beta separation philosophy Continue diversification,

• ptimize

return/risk efficiency, be cost- effective

2008-2010 2011-2013 2014-2016 2017-2018 2019- Beyond

PERA ERA Portfolio D Devel elopmen ent T Timel meline

Slide 7

Op Opportunit ity t to Forge e a a New Path

(Slid lide from S m Summe ummer 20 2017 Bo Board M Meetin ting)

“If If y you

• u always do
• what y

you

• u’ve a

always don

• ne, you
• u’ll always get what y

you

• u’ve

always g got.” t.”

• He

Henry y Fo Ford “Coming t g toget gether er is a a begi eginning, keep eeping t g toget gether er is p progr gres ess, working g together i r is s su success. s.”

• He

Henry F y For

• rd

Slide 8

• Adoption of a Risk Budget and active return target
• Additional layer of Board governance
• Improved accountability for implementation decisions
• Enhanced monitoring and attribution process
• Benchmarking
• Adopted Policy Portfolio Index: clear and objective means for evaluating

active management

• Adopted Reference Portfolio: evaluation tool to determine if utilization of

diversified, more complex asset allocation provides benefit

• Optimized Strategic Asset Allocation (SAA) and Overall Investment Strategy
• Diversification of assets by risk, not dollars
• Less dependent on a single economic environment
• Better integrate active management
• Upgraded internal investment process
• 5-Stage Manager Selection process

En Enhan anced S ed Strateg egic Govern ernan ance e

Slide 9

PER ERA P Perf rform rman ance Turn rnaround

Pre re- 2017 Bo Boar ard Meet eeting

• Behind benchmark for all periods (1 year, 3 year, 10 year)
• Lagging passive “Reference” Portfolio
• In the bottom 4% of all peer funds for 10 years

Post

• st- 2017 Bo

Boar ard Meet eeting

• Ahead of benchmark for all relevant time periods (1 year, 3

year, 10 year), as of 12/31/18

• Ahead of passive “Reference” Portfolio for all time periods
• In the top 38% for all peer funds for 10 years; top 24% 1 year

period

• In the top 2% for all peer funds on a risk adjusted basis for 1

year period

2018 2017 2016 2015 2014 2013 2012 2011 2010 2009 2008

Median Return Median Risk

PERA Risk/Return vs. TUCS Median (3 Years Ending)

II: Lower Risk/Higher Return I: Higher Risk/Higher Return III: Lower Risk/Lower Return IV: Higher Risk/Lower Return

PERA P Portfol

• lio Progression
• n:

Building a a More Ef Efficient P t Portf tfolio

3 Years 5 Years 10 Years 1 Year (est.)

Median Return Median Risk

PERA Risk/Return vs. TUCS Median (Cumulative)

II: Lower Risk/Higher Return I: Higher Risk/Higher Return III: Lower Risk/Lower Return IV: Higher Risk/Lower Return

PERA P Portfol

• lio Prog
• gression
• n:

Cumulati tive Ef Effects o

• f Better Ef

r Efficiency

Slide 12

10.1% 6.0% 8.4% 8.9% 0.0% 2.0% 4.0% 6.0% 8.0% 10.0% 12.0% 10 years 20 years 30 years Since Inception (1985) Net of Fees Performance

Average Actuarial Return Hurdle 7.71%

Meet eeting L Long T Term erm Assumed umed R Ret eturn rns

as of 03/31/2019

Slide 13

PERA ERA Long T Term P erm Perf erforma rmance

Period 1 Passive Period 2 Passive +Active Period 3 Passive + Active + Private Assets

ITD TD RETURN a as of 3 3/3 /31/1 1/19 10 10 y year 15 15 y year 20 y year ar 30 y year ar (6/1 /1/8 /85) NM PERA TF NOF 10.07 5.88 5.97 8.42 8.89 Passive Portfolio 8.90 5.99 5.48 7.38 8.04 RISK as o

• f 3/3

/31/1 1/19 10 10 y year 15 15 y year 20 y year ar 30 y year ar ITD TD NM PERA TF NOF 8.11 9.52 9.30 9.40 9.58 Passive Portfolio 8.19 8.99 9.07 8.78 9.16

Slide 14

1. 1. “ Br Bridg dge t the Gap ap”

• Meeting Actuarial Returns in a Low Return Environment

2.

• 2. Mane

neuvering ing thr hrough L h Late Cycle le E Econo nomy 3.

• 3. “P

“Pig in in the he P Pytho hon”

• Managing liability bulge and burgeoning negative cash flow of the

system

Thr Three Big Cha ig Challeng nges es A Ahe head ad

Slide 15

0.00% 1.00% 2.00% 3.00% 4.00% 5.00% 6.00% 7.00% Passive + Risk Balance + Private Assets + Active = Total 5.60% 5.60% 0.40% 0.40% 0.60% 0.60% 0.40% 0.40%

10 Year Targeted Expected Returns

Passive Reference Portfolio Risk Balance Diversified Private Assets Active Management

7.00%

Strategy #1: Improved Risk Diversification Strategy #2: Private Asset Allocation Strategy #3: Selective Active Management

Value Add

Note: 10-year forecast.; projected and subject to change based on market volatility

Bri ridg dging the e Ret etur urn G Gap ap

Slide 16

PER ERA In Investm tment t Str trategy 2019 9 & B Beyond

Strategy #1: Improved Risk Diversification Strategy #2: Private Asset Allocation Strategy #3: Selective Active Management

Pot

• tenti

tial S Str trategy #4: 4: Build ild Internal l Capabilit ilitie ies

Slide 17

How We C Can D Do E Even Better

1.

• 1. Strateg

egy #4 #4: Build “Intern ernal al” Cap apabilities es to Minimi mize e Cost

• Co-Invest: Private Asset and Asset-Owner Partnerships
• JV/Club Investing: Private Asset Creative structures: JV, Separate

Accounts

• Internal Passive & Overlay Management

2.

• 2. Attrac

act & & Ret etai ain Tal alen ent

• Keep New Mexico’s Best and Brightest Investment Professionals
• Performance Compensation to Incentivize Value Creation and Build

Internal Capabilities

Slide 18

Addit dditional R al Req eque uests

Can We Invest Our Way Out? What If PERA Employed a Passive Investment Strategy or the Nevada Strategy?

Slide 19

71% F Fun unde ded d Ratio 10 Y 0 Year ars

Approximate Required Return to “Catch Up” to 100% Funding 10.9% annualized return

Probabilit ility of A Achi hieving ing “ “Catch h Up” Return n Current P Por

• rtfol
• lio
• 11.2%

probability

Source: Wilshire Associates

Investmen ment Ret eturn urns: C : Can an we e “Catch- Up” p”?

Slide 20

5.61% 5.80% 5.61% 6.00% 0.30% 0.60% 0.40% 2019 PASSIVE REFERENCE PORTFOLIO 70% STOCKS/30% BONDS PORTFOLIO 2019 NEVADA PORTFOLIO 2019 PERA (PASSIVE + ACTIVE) Beta (Passive) Private Asset Allocation Public Active

7.00% 00%

For illustration purposes only, data is forecasted over a multi- year time period, and subject to change

PERA ERA Strateg egy y vs. . Passive e vs. . Nevada da

As o s of March h 31, 2 1, 2019

Actuarial Hurdle: 7.25%

5.9 .91%

Slide 21

What t If If W We R Risk-Up an and B Buy M More St e Stock cks? s?

PERA Current Strategy (passive + private+ active) Reference Portfolio Nevada Strategy Concentrated Risk Portfolio (70% Equity) Concentrated Risk Portfolio (90% Equity)

4.00 4.50 5.00 5.50 6.00 6.50 7.00 7.50 4.00 6.00 8.00 10.00 12.00 14.00 16.00 18.00

Expected Return Expected Risk

10 Year Portfolio Expectations Comparison

Slide 22

Im Impact o t of Higher r Risk A Allocati tion

2 2

• Uses current plan and current funding (baseline) using current

assumptions

• Changes investment allocation to 90% global equity & 10% risk

reduction and mitigation allocation

• Changes expected return environment to be: expected return of

6.48%, standard deviation of 15.46%

Slide 23

Im Impact o t of Higher r Risk A Allocati tion

2 3