Ov Overvi erview of f PERA ERA I Investmen ments Dominic Garcia, Chief Investment Officer June 6, 2019
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 on: “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 2
What is PERA ’s Investment Strategy and Historical Performance? Provide an Overview. Slide 3
5-Year ar Strateg egic P Plan an 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 or exceed the policy benchmark Achieve a total investment cost at or below 85 bps Slide 4
PER ERA In Investm tment t Str trategy Market Return Compound & produce better terminal wealth over time PERA Keep-up, but lag in boom times Minimize Market Drawdowns Slide 5
PERA ERA Portfolio D Devel elopmen ent T Timel meline Adopted more streamlined SAA integrating liquid and illiquid assets. Continue Eliminated diversification, gatekeeper optimize capacity from return/risk Great Recession Illiquid efficiency, be cost- Experience Consultant. effective 2008-2010 2011-2013 2014-2016 2017-2018 2019- Beyond Capital Allocation Enhanced model & limited governance & illiquid asset adoption of risk- deployment based allocation, alpha beta separation philosophy Slide 6
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 ou always do o what y you ou’ve a always don one, you ou’ll always get what y you ou’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 ord Slide 7
Enhan En anced S ed Strateg egic Govern ernan ance e 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 • Slide 8
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 ost- 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 Slide 9
PERA P Portfol olio Progression on: Building a a More Ef Efficient P t Portf tfolio PERA Risk/Return vs. TUCS Median (3 Years Ending) II: Lower Risk/Higher Return I: Higher Risk/Higher Return 2014 Median Return 2018 2013 2011 2015 2012 2016 2017 2010 2008 2009 Median Risk IV: Higher Risk/Lower Return III: Lower Risk/Lower Return
PERA P Portfol olio Prog ogression on: Cumulati tive Ef Effects o of Better Ef r Efficiency PERA Risk/Return vs. TUCS Median (Cumulative) II: Lower Risk/Higher Return I: Higher Risk/Higher Return 1 Year (est.) 3 Years Median Return 10 Years 5 Years Median Risk IV: Higher Risk/Lower Return III: Lower Risk/Lower Return
Meet eeting L Long T Term erm Assumed umed R Ret eturn rns 12.0% 10.1% 10.0% 8.9% Average Actuarial 8.4% Return Hurdle 7.71% 8.0% 6.0% 6.0% 4.0% 2.0% 0.0% 10 years 20 years 30 years Since Inception (1985) Net of Fees Performance as of 03/31/2019 Slide 12
PERA ERA Long T Term P erm Perf erforma rmance ITD TD Period 3 RETURN a as of 3 3/3 /31/1 1/19 10 y 10 year 15 y 15 year 20 y year ar 30 y year ar (6/1 /1/8 /85) Passive + 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 Active + Private RISK as o of 3/3 /31/1 1/19 10 y 10 year 15 15 y year 20 y year ar 30 y year ar ITD TD Assets 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 Period 2 Passive +Active Period 1 Passive Slide 13
Three Big Cha Thr ig Challeng nges es A Ahe head ad 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. “P 3. “Pig in in the he P Pytho hon” Managing liability bulge and burgeoning negative cash flow of the • system Slide 14
Bri ridg dging the e Ret etur urn G Gap ap 10 Year Targeted Expected Returns 7.00% Value 0.40% 0.40% 7.00% Add 0.60% 0.60% Strategy #3: 0.40% 6.00% 0.40% Selective Active Strategy #2: Management Private Asset Strategy #1: 5.00% Allocation Improved Risk Diversification 4.00% 5.60% 5.60% 3.00% 2.00% 1.00% 0.00% Passive + Risk Balance + Private Assets + Active = Total Passive Reference Portfolio Risk Balance Diversified Private Assets Active Management Note: 10-year forecast.; projected and subject to change based on market volatility Slide 15
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 otenti tial S Str trategy #4: 4: Build ild Internal l Capabilit ilitie ies Slide 16
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 17
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 18
Investmen ment Ret eturn urns: C : Can an we e “Catch- Up” p”? 71% F Fun unde ded d Ratio 10 Y 0 Year ars 10.9% Approximate Required Return to annualized “Catch Up” to 100% Funding return Probabilit ility of A Achi hieving ing “ “Catch h Up” Return n 11.2% Current P Por ortfol olio o probability Source: Wilshire Associates Slide 19
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% 7.00% 00% 0.40% 0.60% 5.9 .91% 0.30% 6.00% 5.80% 5.61% 5.61% 2019 PASSIVE 70% STOCKS/30% 2019 NEVADA 2019 PERA REFERENCE BONDS PORTFOLIO (PASSIVE + PORTFOLIO PORTFOLIO ACTIVE) Beta (Passive) Private Asset Allocation Public Active For illustration purposes only, data is forecasted over a multi- Slide 20 year time period, and subject to change
What t If If W We R Risk-Up an and B Buy M More St e Stock cks? s? 10 Year Portfolio Expectations Comparison 7.50 PERA Current Strategy (passive + private+ 7.00 active) Expected Return 6.50 Concentrated Risk Portfolio (90% Equity) 6.00 Nevada Strategy Concentrated Risk Portfolio (70% Equity) 5.50 Reference Portfolio 5.00 4.50 4.00 4.00 6.00 8.00 10.00 12.00 14.00 16.00 18.00 Expected Risk Slide 21
Im Impact o t of Higher r Risk A Allocati tion • 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 22 2 2
Im Impact o t of Higher r Risk A Allocati tion Slide 23 2 3
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