Office of the Treasurer of The Regents

Transcription

1 UCRP and GEP Quarterly Investment t Risk Report Quarter ending March 3 Committee on Investments/ Investment Advisory Group May 3

2 Contents UCRP Asset allocation history 5 7 What are the fund s asset exposures? Asset allocation current position and risk contributions 6 8 How do they compare to policy targets? Capital markets expectations for return 7 9 What is the probability the fund will achieve its required return? Is the amount of risk required acceptable? Historical Funded Status 8 NA Forecast Funded Status 9 NA What is the probability the fund will be able to meet future obligations (with and without additional contributions)? Historical standard deviation of total returns vs. benchmark Historical standard deviation of active return What is fund s realized volatility? How does it compare with the policy benchmark and risk budgets? GEP March Quarter 3 May 3

3 Contents continued UCRP GEP Systematic vs. residual risk contribution Asset allocation vs. selection risk contribution What are the sources of volatility? What factors drive performance? Is the fund adequately diversified? Sharpe ratio (total risk) 3 3 Information ratio (active risk) 4 4 Are risk exposures being rewarded? Historical risk adjusted returns Performance Attribution 5 5 What are the sources of active return? Asset allocation versus security selection Which asset classes contributed or detracted from return? March Quarter 3 May 3 3

4 Risk Metrics for UCRP March Quarter 3 May 3 4

5 Asset Allocation Total Risk is largely related to the allocation between equity and bonds At quarter-end the portfolio s equity exposure was modestly above policy weight 4% 4.% UCRP ASSET ALLOCATION (%) 7%.% 6% Activ ve Exposure (bar rs).%.% 4.% 6.% 8.% 5% 4% 3% % % l Exposures (lines s) Total.% % Mar 8 Sep 8 Mar 9 Sep 9 Mar Sep Mar Sep Public Eq. Over/ (Under) [left] Public Equity [right] U.S. Equity [right] Non U.S. Equity [right] March Quarter 3 May 3 5

6 Asset Allocation and Risk Note: Exposures and Risk charts below are shown using April, 3 target asset weights. Systematic risk is estimated using long term forecasts [from Mercer Investment Consulting, July ], not recent realized volatility. (Lower Left) Asset weights are measured relative to Current Policy. The fund is underweight in Core Bonds and TIPS by.8% and.5% respectively. The fund is slightly overweight to US Equity, Emerging Markets Equity, High Yield, Cross Asset Class, Real Estate, and Cash. (Lower Right) The fund s forecast total systematic risk (blue bars) is 3.9% annualized standard deviation. It is heavily weighted to Public Equity (73% of total). Alternatives contributed 4%. Forecast active systematic risk is 3bp. The policy benchmark risk decomposition (red bars) is roughly identical to the actual fund as of quarter end. Percent US Equity Int'l Dev. Eq UCRP Asset Exposures vs. Policy as of Mar 3 Emg Mkt Eq Glo obal/ Opp Eq Core Bonds High Yield Active vs. Current Policy Em mg Mkt Debt TIPS Private Eq Abs Ret CAC Opp Equity Real Assets RE Private RE Public Cash Percent UCRP Forecast Contrib. to Systematic Risk at Mar 3, 3 (%) UCRP Current Policy UCRP Actual US Eq Non US Eq Emg Mkt Eq G lobal/opp Eq US Agg FI HY Debt EM Debt US TIPS Private Eq Abs Ret CAC RE Private RE Public March Quarter 3 May 3 6

7 Expected Risk and Return Forecast risk and return (using Mercer s July capital markets assumptions) lies near the constrained efficient frontier; long-term forecast return of the current policy allocation of 7.7%* is close to the actuarially required return of 7.5%. Expected Retu urn Capital Market Assumptions *Asset Class returns Risk and Expected Return with Constrained Efficient Frontier and efficient frontiers are shown in the chart as arithmetic (i.e., average) expected returns Risk (Standard Deviation) US Eq Non US Eq Emg Mkt Eq US Agg FI HY Debt EM Debt $ EM Debt Local US TIPS Cash Private Equity Timber Commodities UCRPLong Term UCRPCurrent Current Policy Effic. Frontier The projected compound annual return over multiyear horizon is 7.7% for the Current Policy weights. Forecast volatility of the current policy is 3.7%. March Quarter 3 May 3 7

8 Historical Funded Status 6 4 UCRP ASSETS, LIABILITIES, and SURPLUS ($B) The Pension Fund s liabilities have been growing steadily (upper left) with University employment, while the assets have grown (and fallen) with the equity markets. The ratio of actives to retirees has fallen from 3x to x (lower left). () Membe ers (Touusands) Assets (Smoothed) Liabilities bl (AAL) Assets (Market) Surplus/Deficit (Smoothed) Pension Membership (LHS) and Active/Retiree Ratio (RHS) Active Members Ratio: Active/Retired i Retired Members Ratio o: Active / Retired The Funded Ratio (= the ratio of assets to liabilities), is an overall metric of the financial health of a pension plan. This ratio has fluctuated considerably over the past (lower right), ) and has fallen below % with the bear market of 7-9, and has not yet recovered. UCRP FUNDED RATIOS % 75% 5% 5% % 75% 5% Funded dratio (smoothed) Funded dratio (Market) March Quarter 3 May 3 8

9 Forecast Funded Status nded Ratio Fu % % 9% 8% 7% 6% 988 UCRP Cash Flows (Contributions, Benefit Payments) vs. Normal Cost ($ Billion) Total Outflows (ex Labs) Total Inflows Normal Cost UC Pension Projections (Treasurer's Office) with Planned Contributions Contributions were reinstated in after a pension holiday that began in 99. Annual benefit payments have grown in line with and recently exceeded Normal Cost over the last decade (upper left). The bottom charts show projected funded ratio with planned contributions. On the left is a static forecast assuming a constant 7.5% investment return beginning FY 3. On the right is a simulation of a variable rate of return. It indicates that the probability of reaching full funding (ratio =.) by 6 is below %. [These projections and simulations are estimates t only, developed d by the Treasurer s Office, not Segal Co, the Regents actuary.] Simulated Funded Ratio 6 % 9% 8% 7% 6% 5% 4% 3% % % % Future Funded Ratio Funded Ratio (Smoothed) Funded Ratio (Market Val) 6 Market 6 Smoothed lue Probability of Ex xceeding Given Va 4% 5% 6% 7% March Quarter 3 May 3 9 8% 9% % % %

10 Risk Measures: Total ercent Standard Deviation P Mar 8 UCRP Total Risk, Total Risk Budget, and Ranges Sep 8 Mar 9 Sep 9 Mar Pension Total Risk Sep Mar Sep Total Risk Budget Lower Range: % Upper Range: + % Total Risk is measured by standard deviation of monthly total returns; each point or bar shows a month measurement period. A standard d deviation of % means that t roughly /3 of the time, the realized return will be within ± % points from the average return. At the end of the quarter total risk was 5.99% for UCRP and 5.74% for the benchmark. Total risk trend is quite similar to the benchmark; recently Plan volatility has been slightly less than the Budget, but well within allowed ranges. Total volatility has resumed a historically normal range, higher than the mid s but lower than the 8-9 crash. Total Risk budget equals Benchmark risk plus the Active risk budget. The ranges are +/- % around the budget. nt Standard Dev Perce 4 viation UCRP Total Risk, Total Risk Budget, and Ranges Apr May Jun Jul Aug Oct Nov Dec Jan 3 Feb 3 Pension Total Risk Total Risk Budget Lower Range: % Upper Range: + % March Quarter 3 May 3

11 Risk Measures: Active Perce ent Standard De eviation Mar 8 UCRP Active Risk, Active Risk Budget, and Ranges Sep 8 Mar 9 Sep 9 Mar Active risk is measured by standard deviation of monthly active returns; each point or bar shows a month measurement period. Sep Mar Sep 4.5 Pension Tracking Error Tracking Error Budget 4 Lower Range: 33% Upper Range: + 33% A standard deviation of 3% means that roughly /3 of the time, the realized active return will be within ± 3% points from the average active return. The spike in Active Risk in Q 9 resulted from the underweight in equity as the market fell and then rallied, plus higher equity volatility. Active risk has currently resumed its low level of the mid s (about.5% annualized standard deviation). Although well diversified, active risk is still well below long term expectations for active return. The Active risk budget is 3% annualized Tracking Error (adjusted for market volatility), with ranges of +/- % point around Budget. Perc cent Standard De eviation UCRP Active Risk, Active Risk Budget, and Ranges Active risk at the end of the quarter was.44%. Lower Range: 33% Upper Range: + 33% Apr May Jun Jul Aug Pension Tracking Error Oct Nov Dec Jan 3 Feb 3 Tracking Error Budget March Quarter 3 May 3

12 Risk Attribution % 99% 98% 97% 96% 95% 94% 93% 9% 9% 9% Mar 8 Sep 8 UCRP Components of Total Risk Mar 9 Sep 9 Mar Sep Mar Sep Systematic Risk % Residual Risk % Note: Scale represents -% but for greater clarity between systematic and residual risk horizontal and vertical axes cross at 9%. (Upper Left) Virtually all (99.9%) of Total Risk is attributed to systematic (market) factors (red bars). (Lower Right) Normally, the majority of Active Risk is attributed to security/manager selection. When asset allocation transitions are implemented, allocation risk increases. During the market turmoil, the equity over/underweight dominated all other decisions, but for the past quarters security selection risk is resuming its normal contribution. % Risk is measured here by variance (standard 5% deviation squared) of monthly returns; each bar shows a month measurement period. 3% Systematic Risk is associated with policy benchmark exposures; residual risk is associated with non benchmark decisions (security selection or asset allocation tilts). 9% 7% % % Mar 8 Sep 8 UCRP Components of Active Risk Mar 9 Sep 9 Mar Resid Risk Contrib Sep Mar Sep Alloc Risk Contrib March Quarter 3 May 3

13 Risk Adjusted Return: Total ess Return per un nit Volatility Exc Mar 8 Sep 8 UCRP and Benchmark Sharpe Ratio Mar 9 Sep 9 Mar Pension Sep Mar Benchmark Sharpe ratio is excess return (total return less risk-free rate) divided by total risk; each point or bar shows a month measurement period. Over long periods, most asset classes show an average Sharpe ratio of.5. At the end of the quarter the UCRP Sharpe Ratio was.7 vs..6 for the benchmark. Sep Excess Return per unit Vo olatility Sharpe Ratio (risk adjusted total return) trend has been quite similar to the benchmark for the past 5 years. The month return on risky assets has been generally positive since 9 but with considerable volatility Apr UCRP and Benchmark Sharpe Ratio May Jun Jul Aug Pension Oct Nov Benchmark Dec Jan 3 Feb 3 March Quarter 3 May 3 3

14 Risk Adjusted Return: Active Info Ratio 3... (.) (.) (3.) Pension Information Ratio and Significance Level Mar 8 Sep 8 Mar 9 Sep 9 Mar Sep Last Mo Signif. Level Mar Sep Last Mo Info Ratio % 9% 8% 7% 6% 5% 4% 3% % Information ratio is active return (total return less benchmark) divided by active risk; each point shows a month measurement period. % % Sig gnificance Leve el The Significance level is the probability that results are due to skill, with 5% being a neutral measure (e.g., % sure, % sure, 5/5 ). The UCRP Information Ratio was. at quarter-end. Information ratio (risk adjusted active return) is the result of both asset weighting decisions and active performance. It is higher when the returns are positive and more consistent (less volatile). The Info. ratio has been positive for the past quarters; from the graph below, active returns for the past 5 quarters have been small but positive. Percen nt Mar 8 UCRP Active Return & Active Risk Budget [Monthly] Sep 8 Mar 9 Sep 9 Mar Sep Mar Sep UCRP Active Return Risk Budget + Risk Budget Lower Range: 33% Upper Range: + 33% March Quarter 3 May 3 4

15 Performance Attribution US Equity Non US Equity Emg Mkt Equity Global/Opp Equity Core Fixed Income High Yield Debt Emg Mkt Debt TIPS Private Equity Abs Ret CAC Real Assets RE Private RE Public Cash US Equity Non US Equity Emg Mkt Equity Global/Opp Equity Core Fixed Income High Yield Debt Emg Mkt Debt TIPS Private Equity Abs Ret CAC Real Assets RE Private RE Public Cash Avg. Active Weight (%) Avg. Active Return (%) Active Return for the Quarter was +.44% (Fund return of +4.59% vs. policy benchmark of +4.5%). [BELOW] Asset allocation decisions in US Equity, Core Fixed Income and TIPS (blue bars) contributed to active return(5bp). Security selection decisions (red bars) added 9bp (primarily Non-US and EM Equity, Core Fixed Income, Absolute Return Strategies, Real Assets and Real Estate). US Equity Non US Equity Emg Mkt Equity Global/Opp Equity Core Fixed Income High Yield Debt Emg Mkt Debt TIPS Private Equity Abs Ret CAC Real Assets RE Private RE Public Cash TOTAL UCRP Attribution for 3 mo. ending Mar 3 3 (%) Alloc. Select. TOTAL March Quarter 3 May 3 5

16 Risk Metrics for GEP March Quarter 3 May 3 6

17 Asset Allocation Total Risk is largely related to the allocation between equity and bonds At quarter-end the portfolio s equity exposure was modestly above policy weight 4% GEP ASSET ALLOCATION (%) 5% ive Exposure (ba ars) Acti % % % 4% 6% 8% 45% 4% 35% 3% 5% % 5% % 5% es) xposures (lin Total E % % Mar 8 Sep 8 Mar 9 Sep 9 Mar Sep Mar Sep Public Eq. Over/ (Under) [left] US U.S. Equity [right] Public Equity [right] Non U U.S. Equity [right] March Quarter 3 May 3 7

18 Asset Allocation and Risk Note: Exposures and Risk charts below are shown using January, 3 target asset weights. Systematic risk is estimated using long term forecasts [from Mercer Investment Consulting, July ], not recent realized volatility. (Lower Left) Asset weights are measured relative to Current Policy. The fund is underweight in Core Fixed Income, EM Debt, and TIPS by.9%,.5%, and.7% respectively. The fund is overweight in US and EM Equity, Cross Asset Class, and Real Estate. (Lower Right) The fund s forecast total systematic risk (dark blue bars) is 4.4% annualized standard deviation. It is still heavily weighted to Public Equity (57% of the total). Forecast active systematic risk is 4bp. The policy benchmark risk ik decomposition (light blue bars) is similar il to the actual fund as of quarter end. Percent US Equity Int'l Dev. Eq GEP Asset Exposures vs. Policy as of Mar 3 Active vs. Current Policy Emg Mkt Eq Global Eq Core Bonds High Yield Em mg Mkt Debt TIPS Private Eq Abs Ret CAC Opp Equity Real Assets RE Private RE Public Cash Percent US Eq GEP Forecast Contrib. to Systematic Risk at Mar 3, 3 (%) Non US Eq Emg Mkt Eq GEP Current Policy Global/Opp Eq US Agg FI GEP Actual HY Debt EM Debt $ US TIPS Private Eq Abs Ret CAC RE Private March Quarter 3 May 3 8

19 Expected Risk and Return Forecast risk and return (using Mercer s July capital markets assumptions) lies near the constrained efficient frontier; forecast return of the current policy mix of 8.%* is close to the nominal return needed to maintain a constant real payout per student (estimated at 8.5%). Ex xpected Retur rn Capital Market Assumptions Risk and Expected Return with Constrained Efficient Frontier Risk (Standard Deviation) US Eq Non US Eq Emg Mkt Eq US Agg FI HY Debt EM Debt $ EM Debt Local US TIPS Cash Private Equity Timber Commodities GEPLong Term GEPCurrent Policy Effic. Frontier * Asset Class returns and Efficient frontiers are shown in the chart as arithmetic (average) expected returns. The projected compound annual return over multi year horizon is 8.% for the Current Policy weights. Forecast volatility of the current policy is 4.%. March Quarter 3 May 3 9

20 Risk Measures: Total Pe ercent Standard Deviation GEP Total Risk, Total Risk Budget, and Ranges 3 Mar Sep 8 Mar 9 Sep 9 Mar Sep Mar Sep Mar Sep Mar Total risk trend has been quite similar to the benchmark; GEP volatility is quite close to its Budget. Total volatility has resumed a historically normal range, higher than the mid s but lower than the 8-99 crash. Total Risk budget equals Benchmark risk plus the Active risk budget. The ranges are +/- % around the budget. Endowment Total Risk Total Risk Budget Lower Range: % Upper Range: + % Total risk is measured by standard deviation of monthly total returns; each point or bar shows a month measurement period. A standard deviation of % means that roughly /3 of the time, the realized return will be within ± % points from the average return. Percent Standard Devia ation GEP Total Risk, Total Risk Budget, and Ranges At the end of the quarter total risk was 5.73% for Endowment Total Risk Total Risk Budget GEP and 5.99% for the benchmark. Lower Range: % Upper Range: + % Apr May Jun Jul Aug Oct Nov Dec Jan 3 Feb 3 March Quarter 3 May 3

21 Risk Measures: Active ent Standard Deviation Perc Mar 8 GEP Active Risk, ikactive Risk ikbudget, and Ranges Sep Mar Sep Mar Sep Mar Sep Mar Sep 3 Mar The spike in Active Risk in resulted from the underweight in equity as the market fell and then rallied, plus higher equity volatility. Active risk has resumed its low level of the mid s (about.%) Although well diversified, active risk is still well below long term expectations for active return The Active risk budget is 3.% annualized Tracking Error (adj. for market volatility), with ranges of +/- pct. point around Budget Endow. Tracking Error Tracking Error Budget Lower Range: 33% Upper Range: + 33% 5 Active risk is measured by standard deviation of monthly active returns; each point or bar shows a month measurement period. A standard deviation of 3% means that roughly /3 of the time, the realized active return will be within ± 3% points from the average active return. Standard Deviat tion Percent 4 3 GEP Active Risk, Active Risk Budget, and Ranges Apr May Jun Jul Aug Endow. Tracking Error Oct Nov Dec Tracking Error Budget Active risk at the end of the quarter was.9%. Lower Range: 33% Upper Range: + 33% March Quarter 3 May 3 Jan 3 Feb 3

22 Risk Attribution % 99% 98% 97% 96% 95% 94% 93% 9% 9% 9% Mar 8 Sep 8 GEP Components of Total Risk Mar 9 Sep 9 Mar Sep Mar Sep Systematic Risk % Residual Risk % Note: Scale represents -% but for greater clarity between systematic and residual risk horizontal and vertical axes cross at 9%. Risk is measured here by variance (standard deviation squared) of monthly returns; each bar shows a month measurement period. Systematic risk is associated with policy benchmark exposures; residual risk is associated with non benchmark decisions ( it l ti t ll ti tilt ) (Upper Left) Virtually all (99.%) of Total Risk is attributed to systematic (market) factors (red bars). (Lower Right) Normally, the majority of Active Risk is attributed to security/manager selection. When asset allocation transitions are implemented, allocation risk tends to dominate. In late 9, the equity overweight dominated all other active decisions. i For the past quarters, security selection risk has resumed its normal contribution level. GEP Components of Active Risk % % 9% 8% 7% 6% 5% 4% 3% % % % % (security selection or asset allocation tilts). Resid idrisk Contrib Alloc Risk Contrib Mar 8 Sep 8 Mar 9 Sep 9 Mar Sep Mar Sep March Quarter 3 May 3

23 Risk Adjusted Return: Total nit Volatility Exc cess Return per u GEP and Benchmark Sharpe Ratio Mar 8 Sep Mar Sep Mar Sep Mar Sep Mar Sep Mar Sharpe Ratio (risk adjusted total return) trend has been quite similar to the benchmark for the past 5 years; in the past year it has been slightly higher. The month return on risky assets had been generally positive since 9 but with considerable volatility. Endowment Benchmark Sharpe ratio is excess return (total return less risk-free rate) divided id d by total t risk; each point or bar shows a month measurement period. Over long gperiods, most asset classes show an average Sharpe ratio of.5..5 At the end of the quarter the GEP Sharpe Ratio was.7 vs..6 for the benchmark. Excess Retu urn per unit Volat tility Apr May GEP and Benchmark Sharpe Ratio Jun Jul Aug Endowment Oct Nov Benchmark March Quarter 3 May 3 3 Dec Jan 3 Feb 3

24 Risk Adjusted Return: Active Info Ratio 3... (.) (.) (3.) GEP Information Ratio and Significance Level Mar 8 Sep 8 Mar 9 Sep 9 Mar Sep Last Mo Signif. Level Mar Sep Last Mo Info Ratio % 9% 8% 7% 6% 5% 4% 3% % % % Information ratio is active return (total return less benchmark) divided by active risk; each point shows a month measurement period. ignificance Lev vel S The Significance level is the probability that results are due to skill, with 5% being a neutral measure (e.g., % sure, % sure, 5/5 ). Information ratio (risk adjusted d active return) is the result of both asset weighting decisions and active equity and bond performance. It is higher when the returns are more consistent (less volatile). The information ratio has been positive for the past quarters; active return has been small but on average, positive in the past 5 quarters. Percent GEP Active Return & Active Risk Budget [Monthly] The GEP Information Ratio was.7 at quarter-end. g pp g Mar 8 Sep 8 Mar 9 Sep 9 Mar Sep Mar Sep GEP Active Return Risk Budget + Risk Budget Lower Range: 33% Upper Range: + 33% March Quarter 3 May 3 4

25 Performance Attribution US Equity Non US Equity Emg Mkt Equity Core Bonds HY Debt EM Debt TIPS Private Equity Abs Ret CAC Opp Equity Real Assets RE Private RE Public Cash US Equity Non US Equity Emg Mkt Equity Core Bonds HY Debt EM Debt TIPS Private Equity AbsRet CAC Opp Equity Real Assets RE Private RE Public Avg. Active Weight (%) Active Return for the Quarter was +.8% (Fund return of +4.58% vs. policy benchmark of +3.76%). [BELOW] Asset allocation decisions (blue bars) from Core Fixed Income and TIPS contributed 8bp. Security selection decisions (red bars) added 74bp (primarily Emerging Markets Equity, Absolute Return Strategies and Opportunistic Equity). GEP Attribution for 3 mo. ending Mar 3 3 (%) Cash Avg. Active Return (%) 3 US Equity Non US Equity Emg Mkt Equity Core Bonds HY Debt EM Debt TIPS Private Equity Abs Ret CAC Opp Equity Real Assets RE Private RE Public Cash TOTAL Cash Alloc. Select. TOTAL March Quarter 3 May 3 5