TEACHERS RETIREMENT BOARD. INVESTMENT COMMITTEE Item Number: 5 CONSENT: ATTACHMENT(S): 3. DATE OF MEETING: February 7, 2018 / 20 mins.

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1 TEACHERS RETIREMENT BOARD INVESTMENT COMMITTEE Item Number: 5 SUBJECT: Chief Investment Officer s Report Open Session CONSENT: ATTACHMENT(S): 3 ACTION: INFORMATION: X DATE OF MEETING: / 20 mins. PRESENTER(S): Christopher Ailman POLICY The Chief Investment Officer s Report Open Session is covered under the reporting and monitoring requirements of the overall CalSTRS Investment Policy and Management Plan, Teachers Retirement Board Policy Manual, Section 1000, page A-17. HISTORY AND PURPOSE OF THE ITEM This item has been included in the Investment Committee agenda at each meeting, for the purpose of providing the Committee with critical market and asset allocation information to assist in their oversight of the CalSTRS Investment Portfolio. REPORTS ON THE WEB CalSTRS.com go to the Investments tab for the most current information on the CalSTRS Investment Portfolio. Reports & Surveys for annual and quarterly investment reports. Investments 101 for a video glossary of investment terms. Inside CalSTRS Investments - for a video library on key topics, such as fees, returns and asset classes. CONCLUSION In addition to this information, at the Investment Committee meeting, the CIO will present a PowerPoint presentation on current market conditions and global risks on the horizon. Prior to the meeting, the PowerPoint presentation will be posted on the CalSTRS.com website. As requested by the Investment Committee at the November meeting, the CIO will report back with an update regarding the research into retailers selling firearm accessories that are illegal in the State of California and staff s activity regarding the labor negotiations at the Pullman Hotel. INV25

2 Page 2 ATTACHMENTS/POWERPOINT Attachment 1 Investment Committee CIO Report Attachment 2 PCA Risk Overview as of December 2017 Attachment CalSTRS Investment performance At-a-Glance PowerPoint Chief Investment Officer s Report OPEN SESSION INV26

3 Attachment 1 Page 1 Investment Committee CIO Report As of November 30, 2017 INV27

4 CALSTRS INVESTMENT COMMITTEE RISK REPORT Investment Portfolio as of December 31, 2017 Chart 1. Portfolio Value Billions $225 $220 Attachment 1 Page 2 Assets of $ billion est. $ $215 $210 $205 $200 $195 $190 Chart 2. Asset Allocation over the past three years (monthly) 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Cash Innov. Strat. RMS Inflat Real Estate Total Debt Private Equity Total Public Equity INV28

5 CALSTRS INVESTMENT COMMITTEE RISK REPORT Attachment 1 Page 3 Total Fund Risk & Asset Allocation (As of November 30, 2017) The Risk team utilizes the BlackRock Aladdin risk management system for the total plan portfolio. According to the BlackRock risk model, approximately 64 percent of the total risk in the portfolio comes from public equity, versus an approximately 56 percent asset weight. Public equity risk and private equity risk combined comprise nearly 73 percent of portfolio risk. Chart 3. Asset Allocation Fixed Income 13.2% Cash 2.8% Inflation Sensitive 1.6% Real Estate 11.8% Chart 4. Sources of Portfolio Risk RMS 7.3% Private Equity 7.6% RMS FI & Cash Real Assets Equity & Growth Global Equity 55.5% Expected Volatility: 5.9% Country 15 bps 2.5% All Other Sources 91 bps 15.2% Real Estate 56 bps 9.4% Equity Risk (Private) 51 bps 8.6% Equity Risk (Public) 382 bps 64.2% INV29

6 CALSTRS INVESTMENT COMMITTEE RISK REPORT Growth Outlook Attachment 1 Page 4 Chart 5 depicts the trend in global growth. The map below reflects the IMF forecast versus the recent actual GDP in the respective countries. Chart 5. Forecast trends in global growth CalSTRS Market Exposures Across all asset classes, the fund has significant exposure to the U.S. with approximately 68 percent of the portfolio invested in the U.S. The next-largest exposure is over 4 percent in Japan. Hong Kong rounded out the top 10, bumping Australia down one spot, into 11th place. Chart 6. Top 10 Market Value Exposures By Country - As of November 30, 2017 INV30

7 CALSTRS INVESTMENT COMMITTEE RISK REPORT Table 1. CalSTRS Top 10 Exposures Market Value Exposure (000s) % Total Fund US Govt* 25,325, % Apple 2,019, % Microsoft 1,436, % Alphabet 1,378, % Amazon 1,124, % Berkshire 934, % Facebook 925, % JP Morgan 924, % Johnson & Johnson 867, % Bank of America 827, % Total Top 10 35,763, % Attachment 1 Page 5 *includes US Treasuries, Agency MBS and other government agency debt INV31

8 CALSTRS INVESTMENT COMMITTEE RISK REPORT Attachment 1 Page 6 Table 2. Public Equity Exposure Mkt Val % Public (000s) Equity Apple 1,917, % Microsoft 1,390, % Alphabet 1,378, % Amazon 1,080, % Facebook 925, % Johnson and Johnson 866, % Berkshire 821, % Samsung Electronics 798, % Exxon Mobil 790, % JP Morgan 788, % Total Top 10 10,759, % Table 3. Fixed Income Exposure Mkt Val (000s) % FI U.S. Government* 16,996, % Bank of America 188, % Goldman Sachs 179, % Citigroup 169, % Mexico Government** 162, % AT&T 148, % Morgan Stanley 147, % Wells Fargo 140, % JP Morgan 136, % Berkshire 113, % Total Top 10 18,382, % *US Treasuries, Agency MBS and other govt Agency debt ** PEMEX and Mexico Govt debt Table 4. Private Equity Manager Mkt Val (000s) % of PE Blackstone Group 758, % New Enterprise Associates 663, % TPG Capital 601, % Permira 563, % Centerbridge Capital 420, % Providence Equity Partners 391, % Thoma Cressey Bravo 387, % Carlyle Group 385, % Summit Partners 371, % Bank of America Capital 360, % Total Top 10 4,903, % Table 5. Real Estate Mkt Val Manager (000s) % of RE Principal 4,400, % CBRE 3,031, % BlackRock 1,517, % GI Partners 1,477, % Lionstone 1,351, % Blackstone Grp 1,272, % Clarion 1,253, % Fortress 1,092, % Fairfield 1,092, % PCCP 918, % Total Top 10 17,408, % as of 6/30/2017 as of 9/30/2017 INV32

9 CALSTRS INVESTMENT COMMITTEE RISK REPORT Valuations Attachment 1 Page 7 For most of the larger asset classes in the portfolio, the price of the asset at any given time is an important component of expected return, particualrly over the medium term (three to five years). Metrics like the price-toearnings ratio (P/E ratio) are particuarly useful because they tend to fluctuate over time around a long-term average. Credit speads, the incremental yield for corporate bonds over treasuries, and the premium paid for buyouts in Private Equity are similarly useful metrics. Higher prices tend to precede periods of lower returns, an important consideration for the risk-return opportunities across the portfolio. Chart 6 below shows several common measures of valuation converted to a common scale for comparability. Prices remain high for many assets in the public and private markets. Despite a recent ralley, emerging markets equity continue to be relatively inexpensive by historical standards. Chart 7. Asset Class Valuations *Valuation Metrics: Long-Term P/E Ratio for public equity; Total Value / EBITDA for Private Equity; Transaction Cap Rate for Real Estate; Credit spreads for Inv. Grade & HY Credit INV33

10 CALSTRS INVESTMENT COMMITTEE RISK REPORT Market Volatility Attachment 1 Page 8 The volatility index presented in the two charts below is an indicator of general market turbulence. The red lines provide a threshold by which to judge whether a day is an "outlier" or not. The longer-term chart shows that, historically, periods of higher turbulence tend to cluster in time. The clustering of turbulent periods means that if a particular day is an outlier, the following day is much more likely to be an outlier. Several days in a row of outliers are a strong indicator that market turbulence could persist for many weeks or months. Since the U.S. election vote in November 2016, markets continue to remain relatively calm. Chart 8. Market Turbulence - Long Term Chart 9. Market Turbulence - Recent Liquidi Equity & INV34

11 Attachment 2 Investment Committee - Item 5 Page 1 Pension Consulting Alliance Risk Overview as of December 2017 INV35 Page 1 of 2

12 Attachment 2 Investment Committee - Item 5 Page 2 Pension Consulting Alliance Risk Overview as of December 2017 Three, and almost four asset classes are at unfavorable pricing levels. There are no asset classes at favorable pricing levels. Interest rate risk remains at the top of its historic range. INV36 Page 2 of 2

13 Attachment 3 Page 1 Investment Performance At-a-Glance December 31, 2017 PACE: THE GOAL: average 7.0% over the next 30 years 8.7% 5.5% 10.4% 8.6% 16.8% 30 Years 10 Years 5 Years 3 Years 2017 All returns are NET of investment fees, (the 30 yr. net uses estimated costs for the 1980 s & 90 s) Summary of Market Returns 2017: For the 1 st time in history the US stock market was positive every single month in It climbed 21%. In fact almost off of the major market across the globe were up over 20% on the year. Non-U.S. stocks gaining 25% and Emerging markets were up 36%. The 2nd strongest asset class was Private Equity posting a very strong 18% In contrast, U.S. Govt. Bonds posted a 4% return as interest rates began to move higher, with 3 Federal Reserve rate hikes. Total Fund net returns over the past ten years 25.00% 20.00% 15.00% 10.00% 5.00% 0.00% -5.00% % % % % % Asset Allocation as of December 31, 2017 Innovation 0.5% Inflation Sensitive, 1.6% Private Equity, 7.7% Real Estate, 11.8% Fixed Income, 12.8% RMS, 7.8% Cash, 2.6% Global Equity, 55.2% 100% 80% 60% 40% 20% 0% Asset mix over the past 3 years INV37

14 Attachment 3 Page 2 Investment Performance At-a-Glance December 31, Years 5 Years Actuary (ARR) 7.50 Actuary (ARR) 7.25 CalSTRS (net) 5.53 CalSTRS (net) Reference Portf.* 5.81 Reference Portf.* 7.95 Policy Return 6.44 Policy Return The Actuary (ARR) is the Actuary assumed rate of return for funding the System. * Reference Portfolio is the Morningstar Moderate Target Risk Retirement Fund composite (MSAAMMOR) Performance of the four main Asset Classes over time (returns are NET of fees) Legend: CalSTRS portfolio Benchmark As a long-term investor, the key is 5 and 10 year time periods. GLOBAL EQUITY yr. 5 yr. 3 yr FIXED INCOME yr. 5 yr. 3 yr PRIVATE EQUITY yr. 5 yr. 3 yr REAL ESTATE yr. 5 yr. 3 yr The Y axis is kept constant to allow a visual comparison of the returns. INV38