Investment & Economic Outlook for Public Entity Pools

Transcription

1 Investment & Economic Outlook for Public Entity Pools 1

2 Presentation Outline I. Overall Economic/Investment Environment II. Portfolio Return Expectations III. Investment Income: Use & Applications IV. Investment Policy & Program Governance V. Investment Manager Considerations VI. How Other Pools Are Investing 2

3 Key U.S. Economic Indicators 3 Source: Russell Investments Dashboard

4 Key U.S. Fed Reserve Policy Data Point - Inflation Source: Source: BLS, FactSet, J.P. Morgan Asset Management. CPI used is CPI-U and values shown are % change vs. one year ago and reflect February 2016 CPI data. Core CPI is defined as CPI excluding food and energy prices. The Personal Consumption Expenditure (PCE) deflator employs an evolving chain-weighted basket of consumer expenditures instead of the fixed-weight basket used in CPI calculations. U.S. Data are as of March 31,

5 Key U.S. Fed Reserve Policy Data Point - Employment Source: BLS, FactSet, J.P. Morgan Asset Management. U.S. Data are as of March 31,

6 Key U.S. Fed Reserve Policy Data Point - Employment 6 Source: BLS, FactSet, J.P. Morgan Asset Management. U.S. Data are as of March 31, 2016.

7 Fed Policy External Considerations 43% of global GDP tied to USD either by hard/soft currency pegs Asia/China impacted more by currency rates via export-based economies. China represents ½ global GDP GDP 2005 ($2.3T) vs. GDP 2015 ($11.4T) 7

8 Intermediate-Term Global Demographic Trends 8

9 Demographic Change Issues Economic growth potential Consumption patterns Capital flows Specific industry growth/decline 9

10 Long-Term Driver of U.S. Economic Growth Source: J.P. Morgan Asset Management; (Top left) Census Bureau, DOD, DOJ; (Top left and right) BLS; (Right and bottom left) BEA. GDP drivers are calculated as the average annualized growth between 4Q of the first and last year. Future working age population is calculated as the total estimated number of Americans from the Census Bureau, controlled for military enrollment, growth in institutionalized population and demographic trends. U.S. Data are as of March 31,

11 Oil Markets Source: J.P. Morgan Asset Management; (Top and bottom left) EIA; (Right) FactSet; (Bottom left) Baker Hughes. *Forecasts are from the March 2016 EIA Short-Term Energy Outlook and start in **U.S. crude oil inventories include the Strategic Petroleum Reserve (SPR). Active rig count includes both natural gas and oil rigs. Brent crude prices are monthly averages in USD using global spot ICE prices. U.S. Data are as of March 31,

12 World Oil Reserves (est.) Total world proved oil reserves reached billion barrels at the end of 2014 sufficient to meet 52.5 years of global production. The largest additions to reserves came from Saudi Arabia, adding 1.1 billion barrels. The largest decline came from Russia, where reserves fell by 1.9 billion barrels. OPEC countries continue to hold the majority of the world s reserves, accounting for 71.6% of the global total. Over the past decade, global proved reserves have increased by 24%, or over 330 billion barrels. Source: BP Global The estimates have been compiled using a combination of primary official sources, third-party data from the OPEC Secretariat, World Oil, Oil & Gas Journal and independent estimates of Russian reserves based on official data and Chinese reserves based on information in the public domain. Canadian oil sands 'under active development' are an official estimate. Venezuelan Orinoco Belt reserves are based on the OPEC Secretariat and government announcements. 12

13 Central Bank Policy / Global Fixed Income Dynamics Source: Bloomberg, J.P. Morgan Asset Management; (Right) BofA/Merrill Lynch. *Target policy rates for Japan are estimated using EuroYen 3m futures contracts less a risk premium of 6bps. Government bond index is the BofAML Global Government Bond Index. U.S. Data are as of March 31,

14 Global Fixed Income Markets Source: J.P. Morgan Asset Management; (Left) FactSet, Barclays; (Right) BIS. Fixed income sectors shown above are provided by Barclays and are represented by the global aggregate for each country except where noted. EMD sectors are represented by the J.P. Morgan EMBIG Diversified Index (USD), the J.P. Morgan GBI EM Global Diversified Index (LCL) and the J.P. Morgan CEMBI Broad Diversified Index (Corp). European Corporates are represented by the Barclays Euro Aggregate Corporate Index and the Barclays Pan-European High Yield index. Sector yields reflect yield to worst. Duration is modified duration. Correlations are based on 7 years of monthly returns for all sectors. Past performance is not indicative of future results. Global bond market regional breakdown may not sum to 100% due to rounding.. U.S. Data are as of March 31,

15 Negative Interest Rates Utility is still questionable Japan Potential for market distortions Increased tail risk 15

16 Portfolio Return Expectations 16

17 What are the pools longterm and short-term Objectives and Initiatives? How can the investment portfolio support them? 17

18 Long-Term Market Returns & Expectations Source: Barclays, FactSet, Federal Reserve, Robert Shiller, Strategas/Ibbotson, J.P. Morgan Asset Management. Returns shown are based on calendar year returns from 1950 to Stocks represent the S&P 500 Shiller Composite and Bonds represent Strategas/Ibbotson for periods from 1950 to 1980 and Barclays Aggregate after index inception in Growth of $100,000 is based on annual average total returns from 1950 to U.S. Data are as of March 31,

19 Fixed Income Yields (3/31/2016) 3% 2% 1% 19

20 Fixed Income Yield & Return Expectations Over the long-term, yield is the largest contributor to fixed income performance. 20 Source: Bloomberg, SAA

21 SAA Long-Term Expectations (7-10 Year Horizon) Asset Class Forecast (Annualized) Pre-Tax Return After-Tax Return Risk Fixed Income U.S. Aggregate (Core Fixed) 3.75% 2.50% 4.00% U.S. Municipal 3.25% 3.09% 3.30% U.S. TIPS 2.75% 1.84% 6.00% U.S. High Yield 6.75% 4.62% 9.30% U.S. Leveraged Loans 5.25% 3.60% 6.30% EM Sovereign 6.50% 4.45% 10.50% EM Corporate 6.50% 4.45% 9.00% Equity & Alternatives U.S. Large Cap 7.00% 6.78% 15.50% U.S. Mid Cap 7.25% 7.14% 18.50% U.S. Small Cap 7.25% 7.14% 21.30% EAFE 7.75% 7.42% 18.00% EM Equity 10.00% 9.74% 25.50% Global Equity 7.50% 7.26% 17.30% U.S. REIT 6.00% 5.46% 18.00% Global Infrastructure 6.50% 5.92% 12.50% 6% Last 65 years 11.1% Last 65 years 21 Source: SAA, JP Morgan

22 Opportunities: Constrained vs. Unconstrained Pools Highly Constrained Investing U.S. Treasury Bonds/Notes U.S. Agency Bonds FDIC Insured CDs Considerations Duration Extension Agency MBS / CMBS Subordinated Agency Debt Brokered CD Program Flexible Investing All highly constrained items plus: Investment Grade Corporate Bonds Mortgage Bonds Asset-Backed Bonds High Yield Bonds Equities Considerations Strategic Asset Allocation Changes Risk Asset Allocation to Surplus Increase Non-Treasury Allocation Duration Extension Unconstrained Fixed Income Emerging Market Debt/Equity High Yield Fixed Income High Dividend Equity International Equity Alternative Asset Classes Tactical Risk Asset Allocation Changes 22

23 Investment Income: Use & Applications 23

24 How To Measure? Total Return (Per GASB) Coupon / Dividends Accretion/Amortization Realized Gain/Loss Change in Unrealized Gains/Losses Income Only (Management Report) Coupon / Dividends Accretion/Amortization Realized Gain/Loss 24

25 Why measure income only? 25 Source: Bloomberg, SAA

26 Investment Income Considerations Direct vs. Indirect Subsidies to support: Premium rates Risk retention levels Member equity distributions (i.e. Dividends) Income Only is a better proxy for baseline support expectations. 26

27 ERM Approach to Risk Management Use an enterprise risk management approach when considering investment risk and utilize the matrix below to address the following questions: Operational Risk Underwriting Risk Surplus Stress Testing Reinsurance, Reserving Risk Investment Risk How much surplus does our pool need to: Meet its members needs; Manage the risk exposures its comfortable taking; Maintain a cushion for contingencies. 27

28 Regulated vs. Unregulated Pools Direct vs. Shadow Regulation Industry Standards ERM / Governance NAIC / A.M. Best 28

29 Investment Policy & Program Governance 29

30 Investment Policy Simply stated, the investment policy articulates the risk/reward appetite of the pool. Key components of Best Practices Investment Policy: Preamble Who? What? Roles and Responsibilities Investment Return and Management Objectives Asset Allocation and Risk Management Guidelines Identification of Appropriate Benchmarks Investment Performance Evaluation and Reporting Investment Policy and Guidelines Evaluation Board and Committee involvement and commitment requires an education and communication program that must be pool driven. 30

31 Investment Manager Considerations 31

32 Investment Manager Search & Selection Investment manager evaluation requires balancing the four P s and requires both quantitative and qualitative analysis 32

33 Performance Measurement & Analysis If book income is the goal, this should be factored into the analysis of performance. Performance should be adjusted for risk, fees and taxes if applicable. Performance should be analyzed to determine why the portfolio performed as it did (attribution analysis). Trends over short and long term periods are important is the manager and overall portfolio performing as expected? Comparisons with peers is important especially in the context of the overall business. 33

34 Portfolio Monitoring & Communication Portfolio Monitoring consists of several important components: Compliance monitoring Investment practices review Analytical reporting review Stress & sensitivity testing Analysis of changing regulatory environment Turnover analysis Communication process: Routine vs. material event notification Perhaps surprisingly, trouble with communication is the leading cause of fixed income manager terminations from SAA s experience; performance is a distant second. 34

35 How Other Pools Are Investing 35

36 PUBLIC ENTITY POOL PEER ANALYSIS AS OF 6/30/

37 Peer Analysis Overview SAA Governmental Pooling Clients As of 6/30/ Clients 21 Portfolios (15 Primary / 6 Reinsurance) $2.65B In Assets $2.24B Core Fixed Income (85%) $0.41B Risk Assets (15%) 37

38 RISK ASSET ALLOCATION 38

39 Risk Asset Allocation - % of Total Portfolio Risk Assets % Max 41.2% Min 0.0% Median 10.7% Average 14.1% 39

40 Risk Asset Allocation - % of Surplus / Net Position RA % of Surplus Max 66.4% Min 0.0% Median 23.9% Average 23.9% 40

41 Risk Asset Allocation Sorted by Largest Risk Asset Allocation U.S. Equity % Intl. Equity % HY % Other % Max 100.0% 22.4% 41.4% 39.3% Median 79.6% 11.3% 10.3% 0.0% Average 70.5% 10.1% 14.6% 4.8% 41

42 CORE FIXED INCOME ALLOCATION 42

43 Fixed Income Portfolio Book Yield & Duration Duration (Yrs) Book Yield (%) Max Median Average

44 Risk Asset Allocation & Fixed Income Portfolio Duration Duration (Yrs) RA % of Surplus Max % Median % Average % 44

45 INVESTMENT LEVERAGE Invested Assets / Surplus or Net Assets = Investment Leverage 45

46 Investment Leverage Inv Assets/Surplus Max 393.8% Median 161.0% Average 188.2% 46

47 Investment Leverage & Risk Assets-to-Surplus Ratio RA % of Surplus Inv Assets/Surplus Max 66.4% 393.8% Median 23.9% 161.0% Average 23.9% 188.2% 47

48 PERFORMANCE REVIEW FIXED INCOME PORTFOLIO 48

49 Fixed Income Performance 1 Year Ending 6/30/

50 Fixed Income Performance 3 Years Ending 6/30/

51 Fixed Income Performance 5 Years Ending 6/30/

52 PERFORMANCE REVIEW RISK ASSET PORTFOLIO 52

53 Risk Assets Performance 1 Year Ending 6/30/

54 Risk Assets Performance 3 Years Ending 6/30/

55 Risk Assets Performance 5 Years Ending 6/30/

56 PERFORMANCE REVIEW TOTAL PORTFOLIO 56

57 Total Portfolio Performance - 1 Year Ending 6/30/

58 Total Portfolio Performance - 3 Years Ending 6/30/

59 Total Portfolio Performance - 5 Years Ending 6/30/

60 Fixed Income Investment Management Fees 0.20% 0.15% If applicable, where is your pool on the fixed income manager fee scale? 60

61 The WHAT KEEPS YOU UP AT NIGHT Slide...It Depends... Where is your pool s comfort level? Source: Zephyr StyleADVISOR 61

62 LOOKING AHEAD 62

63 Key Pool Boardroom Themes 2016/2017 INVESTMENT POLICY COMPLIANCE & FLEXIBILITY o Roles & Responsibilities STRATEGIC ASSET ALLOCATION o How to best support public entity pooling mandate? o Changing Bond Markets & Liquidity Awareness o How to combat low yields? o Changes in risk appetite? Risky assets as % of surplus? Investment Leverage? INVESTMENT RISK MANAGEMENT & COMMUNICATON o Manager risk management systems and monitoring o Performance interpretation and evaluation 63

64 THANK YOU Please visit or contact: Alton Cogert, CFA, CPA, CAIA, CGMA, President (360) Dan Smereck, Managing Director & Principal (215) John Mohr, CFA, CAIA, Managing Director & Principal (774) Mike Koetters, Managing Director & Principal (513)