Rho de I sla nd Sta te I nve stme nt Co mmissio n E RSRI 2015 - PowerPoint PPT Presentation

Rho de I sla nd Sta te I nve stme nt Co mmissio n E RSRI 2015 Pe rfo rma nc e Re vie w Pre se nte d b y: Pe nsion Consulting Allia nc e , Inc . Alla n E mkin Jo hn J. Burns, CF A F e b rua ry 24, 2016 Pe nsio n Co nsulting Allia nc e , L L C II Asse t Allo c a tio n Re vie w 1

ASSE T AL L OCAT I ON : E RSRI BACK GROUND Ge ne ra l Cha ra c te ristic s of the F und Pla n is unde rfunde d (a ppro x. 60% funde d). • Pla n is ma ture : Be ne fit pa yme nts > E mplo ye r + E mplo ye e c o ntrib utio ns • (a ppro xima te ly 5% ne t ne g a tive o utflo w pe r ye a r) Re q uire s liq uidity to pa y b e ne fits – Unde rfund e d sta tus a nd ne g a tive c a sh flo w re duc e the F und’ s a b ility to re c o ve r fro m • a la rg e ne g a tive ma rke t e ve nt (la rg e dra wdo wn – simila r to 2008). Also re duc e s ma na g e me nt fle xib ility – As a re sult, the F und, tho ug h a lo ng -te rm inve sto r, ha s to a lso b e c o nc e rne d with • pe rfo rma nc e o utc o me s in the ne a r te rm. Pe nsio n Co nsulting Allia nc e , L L C II Asse t Allo c a tio n Re vie w 2

PORT F OL I O NE AR-T E RM ST RAT E GY (Re a do pte d in July 2015) Co ntinue to a llo c a te to wa rds stra te g ic po lic y a llo c a tio n ta rg e ts • E q uity I nfra struc ture (3%) in the Re a l Re turn Po rtfo lio – F und the Re a l E sta te po rtfo lio : Curre nt a llo c a tio n 6% (ve rsus Po lic y a llo c a tio n o f – 8%) Pe nsio n Co nsulting Allia nc e , L L C II Asse t Allo c a tio n Re vie w 3

E RSRI CHARACT E RI ST I CS VS. ME DI AN PUBL I C PE NSI ON F UND Me dia n Public F und Me dia n F und E RSRI (2013) (2015) F unding L e ve l 73% 55.6% Ra tio Ac tive to Re tire e s 1.55 : 1 1: 1 Ne t Ne g a tive Ca sh F lo w 2.7% p.a . >5% p.a . Me dia n Ac tua ria l Re turn T a rg e t 7.75% 7.50% Asse t Alloc a tion Me dia n F und E RSRI (2013) (2015) Pub lic E q uity 50% 47% F ixe d I nc o me 24% 23% Re a l E sta te 7% 6% Alte rna tive s 15% 23% Ca sh/ Othe r 4% 1% T o ta l 100% 100% No te : Me dia n F und da ta so urc e – NASRA 2013 da ta E RSRI da ta - 2015 Pe nsio n Co nsulting Allia nc e , L L C II Asse t Allo c a tio n Re vie w 4

SOURCE S OF PORT F OL I O RI SK : CURRE NT ST RAT E GI C POL I CY E xpe c te d 10 ye a r risk a nd re turn * Altho ug h po rtfo lio is dive rsifie d a mo ng a sse t c la sse s / stra te g ie s – Por tfolio Ar ithme tic Re tur n: 7.2% Por tfolio Ge ome tr ic Re tur n: 6.6% E q uity (g ro wth) risk is still the Por tfolio Standar d De viation: 11.1% la rg e st po rtfo lio risk E xpe c te d Shar pe Ratio: 0.39 Cash Portfolio Policy Allocation Porfolio Risk Allocation 3% Core Fixed Cash 2% 0% Private Real Estate Equity 4% Private Equity 7% Real Estate 14% Abs Return Core Fixed 8% Real Return Hedge Funds 15% 11% 2% Equity Long- Global Short HFs 5% Equity Real 38% Return 14% Equity Global Equity 62% Long- Abs Return Short Hedge HFs Funds 8% 7% * Ba se d o n PCA 2014 c a pita l ma rke t a ssumptio ns Pe nsio n Co nsulting Allia nc e , L L C II Asse t Allo c a tio n Re vie w 5

E RSRI RI SK MANAGE ME NT PHI L OSOPHY F o c us o n po rtfo lio risk a nd re turn e ffic ie nc y – impro ve po rtfo lio ’ s Sha rpe ra tio • E q uity (g ro wth) a sse ts a re the prima ry drive r o f to ta l po rtfo lio re turn a nd risk • Po rtfo lio dive rsifying a sse ts / stra te g ie s • He dg e F und Po rtfo lio s – Glo b a l E q uity He dg e F unds • Ab so lute Re turn He dg e F unds • Co re F ixe d I nc o me Po rtfo lio – Co re Re a l E sta te Asse ts – U.S. T I PS Po rtfo lio – Ca sh – Pe nsio n Co nsulting Allia nc e , L L C II Asse t Allo c a tio n Re vie w 6

ROL EOF ASSE T S E a c h a sse t c la ss ha s uniq ue inve stme nt c ha ra c te ristic s. • E a c h a sse t c a n b e use d in po rtfo lio c o nstruc tio n to b ring a spe c ific risk, re turn o r c o rre la tio n • c ha ra c te ristic to the po rtfo lio . Ind ivid ua l a sse t c a n pla y se ve ra l ro le s in the po rtfo lio d e pe nd ing o n ho w the y a re • struc ture d . K no wing the ro le a n a sse t pla ys in the po rtfo lio minimize s (b ut d o e s no t e limina te ) ne g a tive • re turn surprise s. Asse t Cla ss Ro le Risk Co re Fixe d Inc o me Stability / Liquidity Inte re st Rate Abso lute Re turn HFs Stability / Div e rsific atio n Ac tiv e manag e me nt Re al Re turn Inflatio n Pro te c tio n Cre dit / Gro wth Re al E state Inc o me / Gro wth Inte re st Rate E quity HFs Gro wth / Div e rsific atio n Ac tiv e manag e me nt Glo bal E quity Gro wth / Liquidity E quity (Gro wth) Priv ate E quity Gro wth E quity / Illiquidity Pe nsio n Co nsulting Allia nc e , L L C II Asse t Allo c a tio n Re vie w 7

CAPI T AL MARK E T RE T URNS E NDI NG DE CE MBE R 2015 Inde xe s 1 Ye a r 3 Ye a r 5 Ye a r 10 Ye a r 20 Ye a r Globa l E quity MSCI All Co untry Wo rld -1.8% 8.3% 6.7% 5.3% 6.4% Dome stic E quity S&P 500 1.4% 15.1% 12.6% 7.3% 8.2% Russe ll 3000 0.5% 14.7% 12.2% 7.4% 8.3% Inte rna tiona l E quity MSCI All Co untry Wo rld e x US -5.3% 1.9% 1.5% 3.4% 5.0% MSCI EAF E -0.4% 5.5% 4.1% 3.5% 4.8% MSCI Pa c ific 3.2% 6.0% 3.4% 2.6% 2.0% MSCI E uro pe -2.3% 5.1% 4.5% 4.0% 6.8% MSCI E M (E me rg ing Ma rke ts) -14.6% -6.4% -4.5% 4.0% 5.5% F ixe d Inc ome BC Ag g re g a te Bo nd 0.6% 1.4% 3.3% 4.5% 5.3% BC Go ve rnme nt 0.9% 1.0% 2.8% 4.1% 5.0% BC Cre dit Bo nd -0.8% 1.5% 4.4% 5.2% 5.8% BC Mo rtg a g e Ba c ke d Se c uritie s 1.5% 2.0% 3.0% 4.6% 5.4% BC Hig h Yie ld Co rpo ra te Bo nd -4.5% 1.7% 5.0% 7.0% 6.8% Re a l E sta te NCRE I F (Priva te RE ) 13.3% 12.0% 12.2% 7.8% 9.9% NARE I T (Pub lic RE ) 2.3% 10.3% 11.6% 6.9% 10.3% Commodity Inde x Blo o mb e rg Co mmo dity (fo rme rly DJUBS) -24.7% -17.3% -13.5% -6.4% 1.0% Risk ta king re wa rde d in the U.S. E q uity a nd Re a l E sta te ma rke ts o ve r the pa st 5 ye a rs • No n-U.S. E q uity la g s U.S. E q uity; E me rg ing E q uity Ma rke ts ha ve ne g a tive re turns o ve r the • pa st 5 ye a rs - Co mmo dity ma rke ts pa rtia lly re spo nsib le Cre dit risk re wa rde d in the lo ng -te rm; ho we ve r no t in the pa st ye a r • Pe nsio n Co nsulting Allia nc e , L L C II Asse t Allo c a tio n Re vie w 8

E RSRI PORT F OL I O: RE T URNS E NDI NG 12/ 31/ 2015 Ne t o f F e e s T otal F und Pe r for manc e vs. Polic y Be nc hmar k 1 Ye a r 3 Ye a r 5 Ye a r T o ta l Po rtfo lio (0.28) 5.92 6.27 Po lic y Be nc hma rk (0.38) 6.21 6.35 E xc e ss Re tur n 0.10 (0.29) (0.08) T o ta l fund re turns simila r to po lic y b e nc hma rk: 1% a nnua l tra c king e rro r Pe rform. vs. Ac tua ria l Ra te 1 Ye a r 3 Ye a r 5 Ye a r 10 Ye a r T o ta l Po rtfo lio (0.28) 5.92 6.27 5.05 Ac tuarial Rate 7.50 7.50 7.76 8.01 E xc e ss Re turn (7.78) (1.58) (1.49) (2.96) Ca pita l ma rke t re turns ha ve b e e n lo w fo r the pa st de c a de (pa g e 8) So urc e : BNY Me llo n Pe nsio n Co nsulting Allia nc e , L L C II Asse t Allo c a tio n Re vie w 9

E RSRI PORT F OL I O: RE T URN AND RI SK As of De c e mbe r 31, 2015 5- Ye a r Annua lize d Risk/ Re turn Re turn / Risk 8.0% n xpe c te d Re tur 6.0% E 4.0% 4% 6% 8% Standard Deviation T o ta l Pla n Po lic y Be nc hma rk Me dia n Fund 60/ 40 Ble nd T o ta l po rtfo lio ha s e xhib ite d lo we r re turn vo la tility tha n the po lic y b e nc hma rk, 60/ 40 po rtfo lio a nd • the me dia n pub lic pe nsio n pla n Ca pita l ma rke t re turn vo la tility ha s b e e n ve ry lo w fo r this 5-ye a r pe rio d • So urc e : BNY Me llo n Pe nsio n Co nsulting Allia nc e , L L C II Asse t Allo c a tio n Re vie w 10

E RSRI PORT F OL I O: RE T URNS As of De c e mbe r 31, 2015 Globa l E quity Ne t o f F e e s Mkt Value Manage r ($000) Asse t Class 1 YR 3 YR QVM T ilt 502,494 Custo mize d Be ta --- --- MSCI Wo rld Ne t Divide nd I nde x SSGA MSCI E AF E Inde x F und 998,358 Inde x F und (0.59) 5.28 MSCI E AF E Ne t Divide nd I nde x --- --- (0.81) 5.01 SSGA MSCI Ca nada Inde x F und 96,804 Inde x F und (23.70) (6.06) MSCI Canada Ne t Divide nd I nde x --- --- (24.16) (6.66) SSGA MSCI E me rg ing Ma rke ts Inde x F und 308,407 Inde x F und (15.16) (6.97) MSCI E me rg ing Marke ts Ne t Divide nd --- --- (14.92) (6.76) SSGA Russe ll 3000 Inde x F und 1,477,020 Inde x F und 0.60 14.77 Russe ll 3000 0.48 14.74 E q uity He dg e F unds 606,024 He dg e F unds-Glo bal E q uitie s 1.27 6.77 HRF I E q uity He dg e (T o tal) I nde x (0.45) 5.02 Glo b a l E q uity Po rtfo lio is b e ing ma na g e d c o nsiste nt with e xpe c ta tio ns T he ro le – b e ta e xpo sure to g ro wth • Ma na g e rs a re me e ting inve stme nt o b je c tive s / QVM T ilt re c e ntly funde d • o utpe rfo rming b e nc hma rk E q uity he dg e fund po rtfo lio is me e ting inve stme nt o b je c tive • So urc e : BNY Me llo n Pe nsio n Co nsulting Allia nc e , L L C II Asse t Allo c a tio n Re vie w 11