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 Team Rhonda M Smith Director 17 years with IMD 26 Years Industry Experience Casey High Greg Taylor Portfolio Manager Portfolio Manager Trader Trader 6.5 years with IMD 3.5 years with IMD 8.5 Years Industry Experience 7+ Years Industry Experience Hussein Sharafi Investment Analyst <1 year with IMD 4+ Years Industry Experience 2
Investment Management Division NCRS Public Equity Net Performance – June 30, 2019 Market Value 3 Month 1 Year 3 Years 5 Years 10 Years 15 Years ($MM) 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 $617 1.81 .22 4.24 4.09 - - MSCI ACWI (beta adjusted) 1.44 2.16 4.59 2.31 - - 3
Investment Management Division Snapshot of Total Public Equity Equity Assets ($B) Number of Mandates 45 50 40.4 39.2 38.1 38.5 39.1 40 34.4 45 37.0 3 2 34.0 33.4 32.9 33.1 40 35 1 3 1 5 1 28.3 1 2 2 2 13 15 35 2 30 2 24.8 2 30 16 25 17 17 17 17 25 16 15 5 20 4 4 20 - - 4 - - 15 9 9 15 8 29 28 9 21 10 10 18 18 18 17 16 16 11 11 11 5 9 5 0 0 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 Dec-08Dec-09Dec-10Dec-11Dec-12Dec-13Dec-14Dec-15Dec-16Dec-17Dec-18 Jun-19 Jul-19 Domestic Non-US Global Equity Hedge Asset Allocation Active vs Passive 100% 100% 90% 90% 80% 80% 70% 70% 60% 60% 50% 50% 40% 40% 30% 30% 20% 20% 10% 10% 0% 0% Dec- Dec- Dec- Dec- Dec- Dec- Dec- Dec- Dec- Dec- Dec- Dec- Dec- Dec- Dec- Dec- Dec- Dec- Dec- Dec- Dec- Dec- Jun- Jun-19 Jul-19 Jul-19 08 09 10 11 12 13 14 15 16 17 18 08 09 10 11 12 13 14 15 16 17 18 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% 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% 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% 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% Excludes cash and transition Excluded Hedged Equity until 2016 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% 4
Investment Management Division Public Equity – De-Risking 5
Investment Management Division 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. 6
Investment Management Division Public Equity - Diversification 7
Investment Management Division 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 8
Investment Management Division NCRS Domestic Equity Observations Rolling 12 Quarter Tracking Error Relative To Russell 3000 for 10 Years Ended June 30, 2019 2.4 2.2 2.0 1.8 Tracking Error 1.6 1.4 1.2 1.0 0.8 0.6 0.6 - Domestic Equity 0.4 20092010 2011 2012 2013 2014 2015 2016 2017 20182019 9
Investment Management Division Up Market a t and D Down M Market C t Captu ture Market Capture vs Russell 3000 Index Market Capture vs Non-US Benchmark Rankings Against Public Fund - International Equity (Gross) Rankings Against Public Fund - Domestic Equity (Gross) Five Years Ended June 30, 2019 Five Years Ended June 30, 2019 115% 125% 120% 110% 115% (18) 105% 110% B(27) B(63) 100% 105% A(30) A(73) 100% 95% (47) 95% 90% 90% 85% 85% 80% 80% Up Market Down 75% Up Market Down Capture Market Capture Capture Market Capture 10th Percentile 103.25 111.68 10th Percentile 118.06 105.59 25th Percentile 100.59 107.20 25th Percentile 110.59 100.58 Median 97.96 102.53 Median 105.00 96.69 75th Percentile 92.49 97.73 75th Percentile 98.16 92.24 90th Percentile 86.56 92.89 90th Percentile 92.30 82.81 Domestic Equity A 100.08 98.14 Non-US Equity 113.17 97.14 MSCI US IMI B 100.49 100.14 10
Investment Management Division Port rtfolio lio’s A Active St Strategy D Diversif ific icatio ion * Indicates the manager is no longer in the portfolio Brown Baillie Gifford Wellington US TimesSquare* Franklin Templeton ValueAct Earnest Walter Scott Mondrian TOBAM Wellington Int’l Numeric* 11 Source: FIS/Aapryl
Investment Management Division Portfolio Diversification • Russell 1000 Top 10 Weight Risk Contribution Market cap weighted indices remain highly MICROSOFT 3.79% 4.36% concentrated in the top holdings. APPLE 3.42% 4.16% AMAZON 2.95% 3.86% • Can lead to a concentration in portfolio risk, ALPHABET 2.45% 2.44% especially when these companies are FACEBOOK 1.74% 2.39% BERKSHIRE HATHAWAY 1.45% 1.07% exposed to similar risk factors. 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% Source: TOBAM 12
Investment Management Division Portfolio Diversification Options Active management Alternatively Weighted Indices (i.e. Smart Beta) • 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). Source: TOBAM Implementation Implementation • • Identify areas of the global equity market In 2018 the Public Equity team made its first where the team believe active management allocation to a ‘smart beta’ manager, with a is appropriate. US portfolio being implemented internally. • • Continue to work with external managers to Continue expansion of internal equity find investments suitable for NCRS’ needs. capabilities, and identify ways to manage more assets in-house while improving portfolio risk and diversification. 13
Investment Management Division Public Equity - Internal Index Management 14
Investment Management Division Internal Passive Equity Internal U.S. Passive Equity AUM (MM’s) $18,000 $15,881 $16,000 $417 $3,057 $14,000 $13,398 $353 $12,000 $2,520 $10,635 $9,685 $10,000 $1,823 $402 $12,407 $1,662 $8,000 $10,525 $6,000 $7,621 $8,812 $3,842 $4,000 $392 $657 $2,000 $2,793 $- 3/31/2018 6/30/2018 12/31/2018 6/30/2019 7/19/2019 (post de-risking) Russell 200 Russell MidCap Russell MidCap Value 15
Investment Management Division Performance (Fiscal Year 2018 - 2019) Russell 200 Internal: Fiscal Year 2018 - 2019 1.15 0.25 0.20 1.10 0.15 1.05 0.10 0.05 1.00 0.00 10.86% FY return 0.95 -0.05 -0.03% excess return -0.10 0.90 -0.15 0.85 -0.20 0.80 -0.25 NC_R200 Benchmark Excess Return % - RHS Russell Mid Cap Internal: Fiscal Year 2018 - 2019 Russell Mid Cap Internal: Fiscal Year 2018 - 2019 1.15 1.15 0.25 0.25 0.20 0.20 1.1 1.1 0.15 0.15 1.05 1.05 0.10 0.10 0.05 0.05 1 1 0.00 0.00 0.95 0.95 -0.05 -0.05 7.91% FY return 7.88% FY return -0.10 -0.10 0.9 0.9 0.08% excess return 0.08% excess return -0.15 -0.15 0.85 0.85 -0.20 -0.20 0.8 0.8 -0.25 -0.25 16 NC_RMC NC_RMC Benchmark Benchmark Excess Return % - RHS Excess Return (bps) - RHS
Investment Management Division Performance (Fiscal Year 2018 - 2019) Russell MidCap Value Internal: Fiscal Year 2018 - 2019 1.10 0.25 0.20 1.05 0.15 0.10 1.00 0.05 0.95 0.00 -0.05 3.78% FY return 0.90 -0.10 0.10% excess return -0.15 0.85 -0.20 0.80 -0.25 NC_RMCV Benchmark Excess Return % - RHS • The Internal Russell MidCap Value account was liquidated on 7/17/2019 as part of the equity de-risking exercise discussed earlier in the presentation. 17
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