SWIB Update Rochelle Klaskin Deputy Executive Director/Chief - - PowerPoint PPT Presentation

Rochelle Klaskin Deputy Executive Director/Chief Administrative Officer Edwin Denson Managing Director – Asset & Risk Allocation

SWIB Update

Agenda

• Organizational Structure
• Performance
• Asset Allocation
• Peer Cost Comparison
• Questions

2

Organizational Structure

3

SWIB Organizational Structure

4

Trustees Internal Audit

Executive Director/Chief Investment Officer

• Communications
• Compliance
• Corporate Governance
• Finance & Enterprise Risk
• Government Relations
• Human Resources
• Legal
• Operations
• Information Technology
• Performance
• Data Management
• Asset & Risk Allocation
• Public Fixed Income
• Equities
• Multi Asset
• Private Markets
• Funds Alpha
• Project Management Office
• Business Analyst
• Business Strategy
• Transition Management
• Separately Managed Funds

Management Council Administration Operations & Technology Investment Management Agency Business

Performance

5

Year-to-Date as of December 31, 2018

2018 Gross Performance – Core Fund

6

• 3.3%

Benchmark: -3.5%

3-Year 5-Year 10-Year 6.9% 5.2% 8.8%

Benchmark: 6.5% Benchmark: 4.9% Benchmark: 8.2%

Year-to-Date as of December 31, 2018

2018 Gross Performance – Variable Fund

7

• 7.9%

Benchmark: -7.8%

3-Year 5-Year 10-Year 7.9% 5.9% 11.7%

Benchmark: 7.8% Benchmark: 5.9% Benchmark: 11.3%

Preliminary as of March 31, 2019

First Quarter Gross Returns

8

Core Fund 8.1%

Benchmark: 8.0%

Variable Fund 13.0%

Benchmark: 13.0%

Funding Levels Impact Effective Rate

• f Return

9

Peer group comparisons should incorporate funding levels to better understand performance and a fund’s effective rate of return.

Funding Level Investment Return Effective Rate of Return on Liability

100% 7% 7% 70% 7% 4.9%

When a plan is not fully funded, its effective rate decreases because all of the assets needed to fund the liability are not available to earn investment returns. 75% of the income needed to fund the WRS comes from investment returns.

Midwest Peer Group Comparison as of June 30, 2018

Achieving Investment Goals with Less Risk

Public Pension Plan1 Funded Ratio2 Net 5-yr Returns (6/30/18) Target Rate 5-Yr Effective Rate4

Wisconsin Retirement System—Core Fund 102.9% 7.63% 7.20%3 7.85% Minnesota State Board 81.8% 9.50% 7.50% 7.77% Ohio State Teachers Retirement System 77.3% 9.26% 7.45% 7.16% Ohio Public Employees Retirement System 84.9% 8.37% 7.50% 7.10% Iowa Public Employees Retirement System 83.6% 8.22% 7.50% 6.87% Michigan Public School Employees' Retirement System 64.0% 10.20% 7.50% 6.52% Indiana Public Retirement System 66.5% 6.30% 6.75% 4.19% Illinois Teachers' Retirement System 40.0% 8.30% 7.00% 3.32% Illinois State Employee Retirement System 34.6% 8.10% 7.00% 2.80% Weighted Averages for 8 Peers (excluding SWIB) 67.4% 7.36% 6.27%

10

1The majority of the information other than the 6/30/18 assets under management and returns was taken from the plan

CAFR dated between 9/30/17 - 6/30/2018.

2Ratio of Fiduciary Net Position to Total Pension Liability. 3In December 2018, the ETF Board reduced the assumed rate of investment return from 7.2% to 7.0%. 4Funded Ratio multiplied by Net 5-year Returns.

Asset Allocation

11

2018 CTF 5-Year Return Decomposed

12

• 3.3%

16.2% 8.6%

• 0.4%

5.7%

2018 2017 2016 2015 2014 Core Trust Fund Annual Return (Gross) 5-Year Annualized Return

6.0% Est.

• 3.3%

16.2% 8.6%

• 0.4%

2019 2018 2017 2016 2015 Core Trust Fund Annual Return (Gross)

3

2019 CTF 5-Year Return - ?

Source: SWIB; 5-year Annualized Return is forecast using NEPC’s 6.0% policy portfolio assumptions for 2019 (gross of fees).

8.1% Preliminary YTD Return as of March 31, 2019

5-Year Estimated Annualized Return*

5.2%

13

2019

Core Fund Asset Allocation Targets

14

49% 25% 16% 8% 9% 4%

Stocks Fixed Income Inflation Sensitive Real Estate Private Equity Multi-Asset

Totals exceed 100% due to SWIB’s overall leverage of Core Fund assets. SWIB’s actual asset allocation may vary up to +/- 6% from the targets shown above.

2019

Variable Fund Asset Allocation Targets

15

70% 30%

U.S. Stocks International Equities

December 1998 to December 2018

CTF Performance vs. 60/40 Reference Portfolio

16

• CTF Adjusted Policy Benchmark outperforms Reference Portfolio by 26% over 20 years, equivalent to about

+$30.4 billion of excess value added.

• CTF outperforms Reference Portfolio by 38% over 20 years, equivalent to approximately +$43.8b of excess

value added with $13.4b of excess value added due to active management. (Based on CTF market value as of December 1998 assuming no contributions or withdrawals)

96 100 104 108 112 116 120 124 128 132 136 140 Value of $100 Invested

Benefit of SWIB's Asset Allocation & Active Management Over Time

CTF Adjusted Policy Benchmark vs Reference Portfolio CTF vs Reference Portfolio 16

Active Return Enhances Total Return

17

Cost

18

55.4 bps 48.6 bps 45.9 bps 6.8 bps

2.7 bps

0.0 10.0 20.0 30.0 40.0 50.0 60.0 Peer Median Cost CEM Benchmark Cost SWIB Cost

Total Cost Comparison

SWIB’s costs are 9.5 bps lower than its peers. On average, SWIB’s savings are approximately $90M over its peers.

$65M Asset class differences

• fewer

higher cost assets $26M More internal & passive mgmt and lower external mgmt fees Data source: CEM Benchmarking, Inc. 2017 Report 19 19

Internal vs. External Management

20

Internal management costs significantly less

CY 2018 Costs = $450.7 million 59%

18%

41%

82%

Assets Costs

Internal Management External Management $366.0 million $84.7 million $64.1 billion $45.4 billion Cost to externally manage 41% of assets represents 82% of SWIB’s total costs.

Lower Cost of Internal Management

SWIB’s cost for internal active management is multiples lower than the cost for external management.

Data source: CEM Benchmarking, Inc. 2017 Report 21

SWIB’s cost for internal active management is materially lower than the cost for external management.

Public Market Asset Type (active strategies) External Mgmt Cost (bps)* SWIB Internal Mgmt Cost

Global Large Cap Equity 42.4 66-75% lower Small Cap Equity 65.5 66-75% lower Gov’t/Credit Domestic Fixed Income 13.9 Up to 50% lower Global Fixed Income 39.9 66-75% lower

* External costs represent the median cost for SWIB’s CEM public fund peers Costs are expressed in basis points (bps) and 100 bps equals 1 percent

Cost Trends – Relative to CEM Peers

2013 2014 2015 2016 2017 SWIB 37.6 40.1 39.3 43.1 45.9 Peer Average 54.3 58.5 56.1 58.2 56.9

10 20 30 40 50 60 70

Cost in Basis Points SWIB’s total costs have increased since 2013, but have remained materially lower than peers due to more internal management.

Data source: CEM Benchmarking, Inc. 2017 Report 22

SWIB Cost Savings vs. Peers

23

SWIB saved $1.3 billion vs. peers from 2008 to 2017

$0 $50 $100 $150 $200 $250

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

(in millions)

SWIB Cost Savings vs. Peers*

SWIB Cost Savings Compared to Peer Median

*This analysis compares SWIB's savings vs. the peer group median costs for every $100 under management and multiplies that average savings by SWIB's median assets under management

Working for You & the WRS

Cost optimization and negotiating lower fees combined with the performance of the investment strategies have added $2.7 billion for the past ten years and $224.5 million for the past five years of added value over benchmark returns to the WRS, which benefits over 632,000 participants.

24

Summary

SWIB is:

• Positioned for future success
• Continuously focused on optimization of costs
• Protecting the WRS from future downturns
• Performing favorably compared to peers

25

Stay Connected

(800) 424-7942 www.swib.state.wi.us info@swib.state.wi.us

26

Questions?

27