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

SLIDE 1

Pe nsio n Co nsulting Allia nc e , L L C II Asse t Allo c a tio n Re vie w

1

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

F e b rua ry 24, 2016

Pre se nte d b y:

Pe nsion Consulting Allia nc e , Inc .

Alla n E mkin Jo hn J. Burns, CF A

SLIDE 2

Pe nsio n Co nsulting Allia nc e , L L C II Asse t Allo c a tio n Re vie w

2

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.

ASSE T AL L OCAT I ON : E RSRI BACK GROUND

SLIDE 3

Pe nsio n Co nsulting Allia nc e , L L C II Asse t Allo c a tio n Re vie w

3

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%)

PORT F OL I O NE AR-T E RM ST RAT E GY (Re a do pte d in July 2015)

SLIDE 4

Pe nsio n Co nsulting Allia nc e , L L C II Asse t Allo c a tio n Re vie w

4

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 (2013) E RSRI (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 (2013) E RSRI (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

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

SLIDE 5

Pe nsio n Co nsulting Allia nc e , L L C II Asse t Allo c a tio n Re vie w

5

Por tfolio Ar ithme tic Re tur n: 7.2% Por tfolio Ge ome tr ic Re tur n: 6.6% Por tfolio Standar d De viation: 11.1% E xpe c te d Shar pe Ratio: 0.39

Cash 3% Core Fixed 15% Real Estate 8% Real Return 14% Abs Return Hedge Funds 7% Equity Long- Short HFs 8% Global Equity 38% Private Equity 7%

Portfolio Policy Allocation

Cash 0% Core Fixed 2% Real Estate 4% Real Return 11% Abs Return Hedge Funds 2% Equity Long- Short HFs 5% Global Equity 62% Private Equity 14%

Porfolio Risk Allocation

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 – E q uity (g ro wth) risk is still the la rg e st po rtfo lio risk

* Ba se d o n PCA 2014 c a pita l ma rke t a ssumptio ns

SLIDE 6

Pe nsio n Co nsulting Allia nc e , L L C II Asse t Allo c a tio n Re vie w

6

F
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

E RSRI RI SK MANAGE ME NT PHI L OSOPHY

SLIDE 7

Pe nsio n Co nsulting Allia nc e , L L C II Asse t Allo c a tio n Re vie w

7

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

ROL EOF ASSE T S

SLIDE 8

Pe nsio n Co nsulting Allia nc e , L L C II Asse t Allo c a tio n Re vie w

8

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%

CAPI T AL MARK E T RE T URNS E NDI NG DE CE MBE R 2015

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

SLIDE 9

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 URNS E NDI NG 12/ 31/ 2015

T

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

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

T

tal 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

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)

Ne t o f F e e s

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

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)

SLIDE 10

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 URN AND RI SK

As of De c e mbe r 31, 2015 Re turn / Risk 5- Ye a r Annua lize d Risk/ Re turn

T
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

4.0% 6.0% 8.0%

4% 6% 8% E xpe c te d Re tur n

Standard Deviation T

ta l Pla n

Po lic y Be nc hma rk Me dia n Fund 60/ 40 Ble nd

SLIDE 11

Pe nsio n Co nsulting Allia nc e , L L C II Asse t Allo c a tio n Re vie w

11

E RSRI PORT F OL I O: RE T URNS

As of De c e mbe r 31, 2015 Globa l E quity

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

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

Ne t o f F e e s

Manage r Mkt Value ($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

tal) I

nde x (0.45) 5.02

SLIDE 12

Pe nsio n Co nsulting Allia nc e , L L C II Asse t Allo c a tio n Re vie w

12

E RSRI PORT F OL I O: RE T URNS

As of De c e mbe r 31, 2015 Re a l E sta te Portfolio

Re a l E sta te 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 in the po rtfo lio – inc o me / g ro wth: fo c us o n c o re Re a l E sta te

2-5 ye a r unde rpe rfo rma nc e due to po rtfo lio re struc turing to c urre nt po lic y

So urc e : BNY Me llo n

Ne t o f F e e s

Asse t Class 1 Ye ar 3 Ye ar 5 Ye ar

Re a l E sta te 14.22 10.20 11.44 NF I

ODCEI

nde x 13.17 12.47 13.29

SLIDE 13

Pe nsio n Co nsulting Allia nc e , L L C II Asse t Allo c a tio n Re vie w

13

E RSRI PORT F OL I O: RE T URNS

As of De c e mbe r 31, 2015 Priva te E quity Portfolio

Priva te 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 in the po rtfo lio – re turn g e ne ra tio n

3-5 ye a r unde rpe rfo rma nc e due to po rtfo lio o ut o f the ma rke t in 2009-2010

So urc e : BNY Me llo n

Ne t o f F e e s

Asse t Class 1 Ye ar 3 Ye ar 5 Ye ar

Priva te E q uity 7.02 9.80 10.70 I L PA All F ds Custo m BM 1Q L ag 5.17 15.28 13.99

SLIDE 14

Pe nsio n Co nsulting Allia nc e , L L C II Asse t Allo c a tio n Re vie w

14

E RSRI PORT F OL I O: RE T URNS

As of De c e mbe r 31, 2015 F ixe d Inc ome

Co re F ixe d I nc o me Po rtfo lio is b e ing ma na g e d c o nsiste nt with e xpe c ta tio ns

Ro le in the po rtfo lio - dive rsific a tio n a nd e xpo sure to inte re st ra te risk
Ma na g e rs a re me e ting inve stme nt o b je c tive s

So urc e : BNY Me llo n

Ne t o f F e e s

Manage r Mkt Value ($000) Asse t Class 1 YR 3 YR

Pyra mis Glo b a l Ad viso rs 537,350 Co re F ixe d Inc o me 0.01 1.25 Ma c ka y Shie ld s, L L C 528,307 Co re F ixe d Inc o me 0.48 1.51 BC Ag g re g ate

0.55

1.44

SLIDE 15

Pe nsio n Co nsulting Allia nc e , L L C II Asse t Allo c a tio n Re vie w

15

E RSRI PORT F OL I O: RE T URNS

As of De c e mbe r 31, 2015 Re a l Re turn

Re a l Re turn Po rtfo lio re turn is no t c o nsiste nt with e xpe c ta tio ns in the ne a r te rm

Ro le in the po rtfo lio is to e xc e e d infla tio n b y 4% o ve r a full ma rke t c yc le

– Ma ny re a l re turn a sse ts’ re turns a re drive n b y fa c to rs o the r tha n infla tio n tha t c a n le a d to unde rpe rfo rma nc e o f the inve stme nt o b je c tive in the ne a r-te rm

WAMCO is no t pe rfo rming to e xpe c ta tio ns – re turns ha ve la g g e d b e nc hma rk
He dg e F

unds a re me e ting e xpe c ta tio ns (pa g e 16)

So urc e : BNY Me llo n

Ne t o f F e e s

Manage r Mkt Value ($000) Asse t Class 1 YR 3 YR

Bro wn Bro the rs Ha rrima n 281,047 U.S. T re a sury Infla tio n-linke d Bo nd s (0.26) (1.23) BBH I nflatio n-L inke d Custo m BM

0.14

(1.03) PIMCO 206,342 Hig h Yie ld a nd Ba nk L

a ns

1.13 WAMCO 200,619 Hig h Yie ld a nd Ba nk L

a ns

(3.69) 30% Bo A 1-3 BB-B HY/70% CSL L I (0.18) Ha rve st F und Ad viso r 56,055 ML P (31.01) Ale rian ML P I nde x (32.59) Ab so lute Re turn He d g e F und s 518,385 He d g e F und s - Re a l Re turn 0.86 4.14 HF RI F und o f F unds Co mpo site I nde x (0.36) 3.92

SLIDE 16

Pe nsio n Co nsulting Allia nc e , L L C II Asse t Allo c a tio n Re vie w

16

Cash Core Fixed Real Estate Real Return

Abs. Ret HFs

Equity LS HFs Global Equity Private Equity 0% 1% 2% 3% 4% 5% 6% 7% 8% 9% 10% 0% 5% 10% 15% 20% 25% 30%

Capital Market Line – 10 Year Horizon

Expectations Results

Asse t Allo c a tio n Mo de ling I nput (re turns a nd risk)

So urc e : PCA So urc e : Cliffwa te r

Risk ta king ha s b e e n re wa rde d in the inve stme nt ma rke tpla c e (upwa rd slo ping c a pita l ma rke t line ) sinc e

the inc e ptio n o f the He dg e F und stra te g ie s

Asse ts a b o ve the c a pita l ma rke t line a re mo re e ffic ie nt (hig he r re turn pe r unit o f risk) a nd impro ve the to ta l

po rtfo lio e ffic ie nc y

F OCUS ON HE DGE F UNDS: RI SK / RE T URNS (SI NCE I NCE PT I ON)

He dg e F und po rtfo lio s ha ve a c hie ve d the ir inve stme nt o b je c tive s

SLIDE 17

Pe nsio n Co nsulting Allia nc e , L L C II Asse t Allo c a tio n Re vie w

17 DI S CL OS URE S: T his do c ume nt is pro vide d fo r info rmatio nal purpo se s o nly. I t do e s no t c o nstitute an o ffe r o f se c uritie s o f any o f the issue rs that may b e de sc rib e d he re in. I nfo rmatio n c o ntaine d he re in may have be e n pro vide d b y third partie s, inc luding inve stme nt firms pro viding info rmatio n o n re turns and asse ts unde r manag e me nt, and may no t have b e e n inde pe nde ntly ve rifie d. T he past pe rfo rmanc e info rmatio n c o ntaine d in this re po rt is no t ne c e ssarily indic ative o f future re sults and the re is no assuranc e that the inve stme nt in q ue stio n will ac hie ve c o mparab le re sults o r that the F irm will be able to imple me nt its inve stme nt stra te g y o r ac hie ve its inve stme nt o b je c tive s. T he ac tual re alize d value o f c urre ntly unre alize d inve stme nts (if any) will de pe nd o n a varie ty o f fa c to rs, inc luding future o pe rating re sults, the value o f the asse ts and marke t c o nditio ns at the time o f dispo sitio n, any re late d transac tio n c o sts and the timing and manne ro f sale , all o f whic h may diffe r fro m the assumptio ns and c irc umstanc e s o n whic h any c urre nt unre alize d valuatio ns are b ase d. Ne ithe r PCA no r PCA’ s o ffic e rs, e mplo ye e s o r ag e nts, make any re pre se ntatio n o r warranty, e xpre ss o r implie d, in re latio n to the ac c urac y o r c o mple te ne ss o f the info rmatio n c o ntaine d in this do c ume nt o r any o ral info rmatio n pro vide d in c o nne c tio n he re with, o r any data sub se que ntly g e ne rate d he re fro m, and ac c e pt no re spo nsibility, o b lig atio n o r liability (whe the r dire c t o r indire c t, in c o ntrac t, to rt o r o the rwise ) in re latio n to any o f suc h info rmatio n. PCA and PCA’ s o ffic e rs, e mplo ye e s and ag e nts e xpre ssly disc laim any and all liability that may b e b ase d o n this do c ume nt and any e rro rs the re in o r o missio ns the re fro m. Ne ithe r PCA no r any o f PCA’ s o ffic e rs, e mplo ye e s o r ag e nts, make any re pre se ntatio n o f warranty, e xpre ss o r implie d, that any transac tio n has b e e n o r may b e e ffe c te d o n the te rms o r in the manne r state d in this do c ume nt, o r as to the ac hie ve me nt o r re aso nab le ne ss

f future pro je c tio ns, manag e me nt targ e ts, e stimate s, pro spe c ts o r re turns, if any. Any vie ws o r te rms c o ntaine d he re in are pre liminary o nly, and are b ase d o n financ ial, e c o no mic ,

marke t and o the r c o nditio ns pre vailing as o f the date o f this do c ume nt and are the re fo re sub je c t to c hang e . T he info rmatio n c o ntaine d in this re po rt may inc lude fo rward-lo o king state me nts. F

rward-lo o king state me nts inc lude a numb e r o f risks, unc e rtaintie s and o the r fac to rs b e yo nd the

c o ntro l o f the F irm, whic h may re sult in mate rial diffe re nc e s in ac tual re sults, pe rfo rmanc e o r o the r e xpe c tatio ns. T he o pinio ns, e stimate s and analyse s re fle c t PCA’ s c urre nt judg me nt, whic h may c hang e in the future . Any tab le s, g raphs o r c harts re lating to past pe rfo rmanc e inc lude d in this re po rt are inte nde d o nly to illustrate inve stme nt p e rfo rmanc e fo r the histo ric al pe rio ds sho wn. S uc h tab le s, g raphs and c harts are no t inte nde d to pre dic t future pe rfo rmanc e and sho uld no t b e use d as the b asis fo r an inve stme nt de c isio n. All trade marks o r pro duc t name s me ntio ne d he re in are the pro pe rty o f the ir re spe c tive o wne rs. I ndic e s are unmanag e d and o ne c anno t inve st dire c tly in an inde x. T he inde x data pro vide d is o n an “as is” b asis. I n no e ve nt shall the inde x pro vide rs o r its affiliate s have any liab ility o f any kind in c o nne c tio n with the inde x data o r the po rtfo lio de sc ribe d he re in. Co pying o r re distrib uting the inde x data is stric tly pro hib ite d. T he Russe ll indic e s are e ithe r re g iste re d trade marks o r trade name s o f F rank Russe ll Co mpany in the U.S. and/

r o the r c o untrie s.

T he MS CI indic e s are trade marks and se rvic e marks o f MS CI o r its sub sidiarie s. S tandard and Po o r’ s (S &P) is a divisio n o f T he Mc Graw-Hill Co mpanie s, I nc . S &P indic e s, inc luding the S &P 500, are a re g iste re d trade mark o f T he Mc Graw-Hill Co mpanie s, I nc . CBOE , no t S &P, c alc ulate s and disse minate s the BXM I nde x. T he CBOE has a b usine ss re latio nship with S tandard & Po o r's o n the BXM. CBOE and Chic ag o Bo ard Optio ns E xc hang e are re g iste re d trade marks o f the CBOE , and S PX, and CBOE S &P 500 BuyWrite I nde x BXM are se rvic e marks o f the CBOE . T he me tho do lo g y o f the CBOE S &P 500 BuyWrite I nde x is

wne d b y CBOEand may b e c o ve re d b y o ne o r mo re pate nts o r pe nding pate nt applic atio ns.

T he Barc lays Capital indic e s (fo rme rly kno wn as the L e hman indic e s) are trade marks o f Barc lays Capital, I nc . T he Citig ro up indic e s are trade marks o f Citic o rp o r its affiliate s. T he Me rrill L ync h indic e s are trade marks o f Me rrill L ync h & Co . o r its affiliate s. F T S E is a trade mark o f the L

ndo n S

to c k E xc hang e Gro up c o mpanie s and is use d b y F T S E unde r lic e nse . All rig hts in the F T S E indic e s and/

r F

T S E rating s ve st in F T S E and/

r its lic e nso rs.

No furthe r distrib utio n o f F T S Edata is pe rmitte d with F T S E ’ s e xpre ss writte n c o nse nt.