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Public Equity IAC Presentation Presented by: Rhonda Smith, - - PowerPoint PPT Presentation

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Public Equity IAC Presentation Presented by: Rhonda Smith, Director Casey High, Portfolio Manager Greg Taylor, Portfolio manager Hussein Sharafi, Investment Analyst August 21, 2019 Investment Management Division Public E Equity ty T

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Public Equity – IAC Presentation

Presented by: Rhonda Smith, Director Casey High, Portfolio Manager Greg Taylor, Portfolio manager Hussein Sharafi, Investment Analyst

August 21, 2019

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Investment Management Division

Public E Equity ty T Team

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Rhonda M Smith

Director

17 years with IMD 26 Years Industry Experience

Hussein Sharafi Investment Analyst

<1 year with IMD 4+ Years Industry Experience

Casey High

Portfolio Manager Trader

6.5 years with IMD 8.5 Years Industry Experience

Greg Taylor

Portfolio Manager Trader

3.5 years with IMD 7+ Years Industry Experience

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Investment Management Division

NCRS Public Equity Net Performance – June 30, 2019

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Market Value ($MM) 3 Month 1 Year 3 Years 5 Years 10 Years 15 Years Public Equity $40,288 3.76 5.11 12.07 6.47 11.01 6.90 Benchmark 3.34 4.43 10.88 5.74 10.20 6.26 Domestic Portfolio $21,227 4.58 9.74 14.67 10.14 14.80 8.98 Russell 3000 4.10 8.98 14.02 10.19 14.67 8.88 Non-US Portfolio $18,442 2.88 .65 10.75 3.41 7.29 6.22 Custom Benchmark 2.74 .26 9.17 2.25 6.38 5.05 Equity Hedge $617 1.81 .22 4.24 4.09

  • MSCI ACWI (beta adjusted)

1.44 2.16 4.59 2.31

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Investment Management Division

24.8 34.0 32.9 28.3 33.4 38.1 39.2 37.0 38.5 39.1 34.4 40.4 33.1

5 10 15 20 25 30 35 40 45 Dec-08Dec-09Dec-10Dec-11Dec-12Dec-13Dec-14Dec-15Dec-16Dec-17Dec-18 Jun-19 Jul-19

Equity Assets ($B)

Dec- 08 Dec- 09 Dec- 10 Dec- 11 Dec- 12 Dec- 13 Dec- 14 Dec- 15 Dec- 16 Dec- 17 Dec- 18 Jun- 19 Jul-19 Equity Hedge 0.0% 0.0% 0.0% 0.0% 0.4% 0.4% 0.1% 5.5% 7.6% 8.2% 1.9% 1.5% 1.9% Global 1.3% 4.8% 5.6% 5.5% 5.4% 6.5% 7.5% 6.8% 6.9% 0.0% 0.0% 0.0% 0.0% Non-US 29.7% 29.9% 38.8% 48.3% 51.6% 47.9% 40.4% 42.2% 39.7% 47.5% 46.6% 45.7% 55.2% Domestic 69.0% 65.3% 55.7% 46.2% 42.6% 45.2% 52.0% 45.5% 45.8% 44.3% 51.5% 52.8% 42.9% 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

Asset Allocation

Dec- 08 Dec- 09 Dec- 10 Dec- 11 Dec- 12 Dec- 13 Dec- 14 Dec- 15 Dec- 16 Dec- 17 Dec- 18 Jun-19 Jul-19 Passive 32.1% 26.8% 30.9% 41.6% 44.7% 43.4% 37.3% 43.2% 52.9% 63.1% 58.9% 59.0% 56.1% Active 67.9% 73.2% 69.1% 58.4% 55.3% 56.6% 62.7% 56.8% 47.1% 36.9% 41.1% 41.0% 43.9% 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

Active vs Passive Excludes cash and transition Excluded Hedged Equity until 2016

29 28 21 18 18 18 17 16 16 11 11 11 9 13 15 16 17 17 17 17 16 15 8 9 9 9 2 3 3 2 2 2 2 2 2

  • 1

1 1 1 5 5 4 4 4 5 10 15 20 25 30 35 40 45 50 Dec-08 Dec-09 Dec-10 Dec-11 Dec-12 Dec-13 Dec-14 Dec-15 Dec-16 Dec-17 Dec-18 Jun-19 Jul-19

Number of Mandates

Domestic Non-US Global Equity Hedge

Snapshot of Total Public Equity

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Investment Management Division

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Public Equity – De-Risking

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Investment Management Division

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Domestic Equity De-Risking (July 2019)

  • Equity team liquidated $7.4bn of US equities between July 17 & July 24, across

6 portfolios.

  • Negotiated very competitive broker commission rates < 0.3c per share; utilizing

several different implementation strategies with the goal of minimizing both explicit and implicit trading costs.

NCRS Account Market Value ($) Internal Russell 200 3,784,412,795 Internal Russell Midcap 1,269,520,882 Internal Russell Midcap Value 417,511,079 US Active All Cap 770,390,839 US Active Mid Cap 759,949,119 US Active Small Cap 417,214,478 Total 7,418,999,190

  • An additional $51mn of cash within the active accounts was also moved from

the equity portfolio.

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Investment Management Division

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Public Equity - Diversification

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Investment Management Division

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Active Long-Only Public Equity Portfolio Composition

  • NCRS utilizes both active and passive management for public equity
  • 21% of domestic equity portfolio is actively managed (24% post de-risking)
  • 52% of Non-US equity portfolio is actively managed (57% post de-risking)
  • Active management is utilized to add value through:

1) Outperformance; 2) Reduction in risk; 3) Some combination thereof

  • Risk-reduction can be an important feature for compounding returns—particularly

for a pension plan with net negative cash flows

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Investment Management Division

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NCRS Domestic Equity Observations

20092010 2011 2012 2013 2014 2015 2016 2017 20182019 0.4 0.6 0.8 1.0 1.2 1.4 1.6 1.8 2.0 2.2 2.4 for 10 Years Ended June 30, 2019 Rolling 12 Quarter Tracking Error Relative To Russell 3000 Tracking Error

0.6 - Domestic Equity

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Investment Management Division

Up Market a t and D Down M Market C t Captu ture

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Market Capture vs Russell 3000 Index Rankings Against Public Fund - Domestic Equity (Gross) Five Years Ended June 30, 2019

80% 85% 90% 95% 100% 105% 110% 115% Up Market Down Capture Market Capture B(27) A(30) B(63) A(73) 10th Percentile 103.25 111.68 25th Percentile 100.59 107.20 Median 97.96 102.53 75th Percentile 92.49 97.73 90th Percentile 86.56 92.89 Domestic Equity A 100.08 98.14 MSCI US IMI B 100.49 100.14 75% 80% 85% 90% 95% 100% 105% 110% 115% 120% 125% Up Market Down Capture Market Capture (18) (47) 10th Percentile 118.06 105.59 25th Percentile 110.59 100.58 Median 105.00 96.69 75th Percentile 98.16 92.24 90th Percentile 92.30 82.81 Non-US Equity 113.17 97.14

Market Capture vs Non-US Benchmark Rankings Against Public Fund - International Equity (Gross) Five Years Ended June 30, 2019

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Investment Management Division

Port rtfolio lio’s A Active St Strategy D Diversif ific icatio ion

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Numeric* Mondrian Wellington Int’l Franklin Templeton ValueAct Wellington US TimesSquare* Brown Baillie Gifford Earnest Walter Scott TOBAM

* Indicates the manager is no longer in the portfolio

Source: FIS/Aapryl

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Investment Management Division

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Portfolio Diversification

Russell 1000 Top 10 Weight Risk Contribution MICROSOFT 3.79% 4.36% APPLE 3.42% 4.16% AMAZON 2.95% 3.86% ALPHABET 2.45% 2.44% FACEBOOK 1.74% 2.39% BERKSHIRE HATHAWAY 1.45% 1.07% JPMORGAN CHASE 1.34% 1.33% JOHNSON & JOHNSON 1.23% 0.97% EXXON MOBIL 1.14% 0.79% VISA INC 1.14% 1.18% Total 20.62% 22.56%

  • Market cap weighted indices remain highly

concentrated in the top holdings.

  • Can lead to a concentration in portfolio risk,

especially when these companies are exposed to similar risk factors.

Source: TOBAM

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Investment Management Division

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Portfolio Diversification Options

Active management

  • Can provide diversification away from, and

the opportunity to out perform, a market cap weighted benchmark.

  • However active management can be costly

and introduces other portfolio risks (e.g. manager or style concentration). Alternatively Weighted Indices (i.e. Smart Beta) Implementation

  • Identify areas of the global equity market

where the team believe active management is appropriate.

  • Continue to work with external managers to

find investments suitable for NCRS’ needs. Implementation

  • In 2018 the Public Equity team made its first

allocation to a ‘smart beta’ manager, with a US portfolio being implemented internally.

  • Continue expansion of internal equity

capabilities, and identify ways to manage more assets in-house while improving portfolio risk and diversification.

Source: TOBAM

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Investment Management Division

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Public Equity - Internal Index Management

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Investment Management Division

Internal Passive Equity

$2,793 $7,621 $10,525 $12,407 $8,812 $657 $1,662 $2,520 $3,057 $1,823 $392 $402 $353 $417 $- $2,000 $4,000 $6,000 $8,000 $10,000 $12,000 $14,000 $16,000 $18,000 3/31/2018 6/30/2018 12/31/2018 6/30/2019 7/19/2019 (post de-risking)

Internal U.S. Passive Equity AUM (MM’s)

Russell 200 Russell MidCap Russell MidCap Value $15,881 $13,398 $10,635 $3,842 $9,685

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Investment Management Division

  • 0.25
  • 0.20
  • 0.15
  • 0.10
  • 0.05

0.00 0.05 0.10 0.15 0.20 0.25 0.80 0.85 0.90 0.95 1.00 1.05 1.10 1.15

Russell 200 Internal: Fiscal Year 2018 - 2019

NC_R200 Benchmark Excess Return % - RHS

10.86% FY return

  • 0.03% excess return
  • 0.25
  • 0.20
  • 0.15
  • 0.10
  • 0.05

0.00 0.05 0.10 0.15 0.20 0.25 0.8 0.85 0.9 0.95 1 1.05 1.1 1.15

Russell Mid Cap Internal: Fiscal Year 2018 - 2019

NC_RMC Benchmark Excess Return (bps) - RHS

7.88% FY return 0.08% excess return

Performance (Fiscal Year 2018 - 2019)

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  • 0.25
  • 0.20
  • 0.15
  • 0.10
  • 0.05

0.00 0.05 0.10 0.15 0.20 0.25 0.8 0.85 0.9 0.95 1 1.05 1.1 1.15

Russell Mid Cap Internal: Fiscal Year 2018 - 2019

NC_RMC Benchmark Excess Return % - RHS

7.91% FY return 0.08% excess return

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Investment Management Division

  • 0.25
  • 0.20
  • 0.15
  • 0.10
  • 0.05

0.00 0.05 0.10 0.15 0.20 0.25 0.80 0.85 0.90 0.95 1.00 1.05 1.10

Russell MidCap Value Internal: Fiscal Year 2018 - 2019

NC_RMCV Benchmark Excess Return % - RHS

3.78% FY return 0.10% excess return

Performance (Fiscal Year 2018 - 2019)

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  • The Internal Russell MidCap Value account was liquidated on 7/17/2019 as part
  • f the equity de-risking exercise discussed earlier in the presentation.
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Investment Management Division

Russell Indices Annual Reconstitution (June 2019)

NCRS Account No of shares Held No of shares Traded No of shares Transferred Turnover (%) Russell 200 130,613,339 3,611,850 3,730,985 2.36% Russell Mid Cap 56,485,506 4,422,155 3,183,177 6.80% Russell Mid Cap Value 9,683,136 2,093,310 547,808 16.11% Total 196,781,981 10,127,315 7,461,970 3.57%

  • 1,024 names and 10.1MM shares traded; gross market value of $596MM.
  • Negotiated very competitive broker commission rates < 0.25c per share;

$6,515 total explicit cost.

  • Transferred 7.5MM shares (market value of $539MM) between custodial

accounts for securities migrating between indices; avoided trade-related costs for transferred shares.

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Public Equity – Wrap Up

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Investment Management Division

Ne Next S t Steps…

  • Assess if/when to rebalance within Public Equity
  • Examine active exposure within Domestic Equity
  • Evaluate portfolio diversification within Domestic Equity
  • Expand internal management capabilities

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Appendix

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Investment Management Division

Por

  • rtfol
  • lio S
  • Sector
  • r Di

Diversification

  • n (

(pre a and p pos

  • st d

de-risking ng)

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16.45 15.32 13.05 12.41 11.71 8.01 7.07 4.69 4.60 3.56 3.14 15.53 16.48 10.99 11.30 11.37 8.13 7.83 5.28 5.61 4.20 3.30 0.00 2.00 4.00 6.00 8.00 10.00 12.00 14.00 16.00 18.00

Percentage in Each Sector

GICS Sector Exposures as of 6/30/19

Portfolio Benchmark 15.52 15.63 13.51 12.49 11.34 8.04 7.62 4.95 4.51 3.30 3.09 16.02 16.35 11.01 11.21 11.22 8.28 7.94 5.14 5.38 4.20 3.26 0.00 2.00 4.00 6.00 8.00 10.00 12.00 14.00 16.00 18.00

Percentage in Each Sector

GICS Sector Exposures as of 7/31/19

Portfolio Benchmark

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Investment Management Division

Por

  • rtfol
  • lio C
  • Cou
  • untry Di

Diversification

  • n (

(pre a and pos

  • st d

de-risking ng)

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54.82 8.35 5.71 4.70 3.24 2.77 2.71 1.88 1.87 1.67 54.75 7.50 5.16 4.00 3.14 2.57 2.64 3.09 1.13 2.20 0.00 10.00 20.00 30.00 40.00 50.00 60.00 Percentage in Each Country

Top 10 Country Exposures as of 6/30/19

Portfolio Benchmark 45.02 10.40 6.92 5.76 3.84 3.29 3.22 1.88 2.25 2.07 55.64 7.49 5.01 4.10 3.03 2.45 2.59 3.09 1.10 2.21 0.00 10.00 20.00 30.00 40.00 50.00 60.00 Percentage in Each Country

Top 10 Country Exposures as of 7/31/19

Portfolio Benchmark