Investment Review and Economic Outlook for Public Entity Pools Webinar

Transcription

1 Investment Review and Economic Outlook for Public Entity Pools Webinar November 3 rd, 2015 Dan Smereck Managing Director

2 Table of Contents I. Capital Markets Review II. Public Entity Pool Investment Program Peer Analysis III. Looking Ahead to

3 How did we fare the past year? Index Asset Class 1Yr Ending 9/30/2015 1Yr Ending 9/30/2014 Dow Jones U.S. Select REIT U.S. Real Estate 11.82% 13.44% Merrill Lynch US Treasury Master U.S. Fixed Income 4.10% 2.69% S&P SmallCap 600 U.S. Equity 3.81% 5.74% Barclays Capital Municipal Bond U.S. Fixed Income 3.16% 7.93% S&P Composite 1500 Growth U.S. Equity 3.14% 20.05% Barclays Capital U.S. Aggregate U.S. Fixed Income 2.94% 3.96% Barclays U.S. Government/Credit U.S. Fixed Income 2.73% 4.08% Barclays Intermediate U.S. Government/Credit U.S. Fixed Income 2.68% 2.20% Credit Suisse Leveraged Loan Index U.S. Fixed Income 1.89% 4.29% Barclays Capital U.S. Corporate Investment Grade U.S. Fixed Income 1.66% 6.77% S&P MidCap 400 U.S. Equity 1.40% 11.82% Citigroup 3-month T-bill Cash/Cash Equivalent 0.02% 0.04% S&P Composite 1500 U.S. Equity -0.30% 18.57% S&P 500 U.S. Equity -0.61% 19.73% Barclays U.S. Treasury: U.S. TIPS U.S. Fixed Income -0.83% 1.59% Dow Jones Industrial Average U.S. Equity -2.11% 15.29% BofA Merrill Lynch US Convertibles U.S. Convertible Bond -2.25% 14.18% Citigroup WorldBIG Index World Fixed Income -2.95% 1.36% Barclays Capital U.S. Corporate High Yield U.S. Fixed Income -3.43% 7.20% S&P Composite 1500 Value U.S. Equity -4.02% 16.98% MSCI World Index World Equity -4.57% 12.80% MSCI EAFE Index International Equity -8.27% 4.70% MSCI World Ex. US Index World Equity -9.73% 5.34% MSCI Emerging Market Index International Equity % 4.66% Alerian MLP Master Limited Partnerships % 25.80% 2

4 Oil Prices Over prices have fallen 42% since November

5 CORE FIXED INCOME 4

6 Current Yield Environment Barclays Credit Index (3.30%, +33 bps) 10yr U.S. Treasury (2.18%, -17 bps) While slightly higher than November 2014, low fixed income market yields continue to stress portfolio earnings for public entity risk pools. Barclays Aggregate Index (2.37%, +9 bps) 5

7 U.S. Fixed Income Sector Yields & Returns Source: SEI, SAA, & J.P. Morgan Asset Management 6

8 Credit Market Performance Trends Latest 10 Years Annualized 10yr Return = 4.41% to 4.72% 12-Months 9/30/2015 = 1.36% to 4.10% 7

9 Bond Price Volatility vs. Coupon Income 8

10 Yield & Price Return Over the long-term, yield is the largest contributor to fixed income performance. 9

11 The Quest for Yield Yield switches to flip o Duration o Credit Quality o Liquidity o Structure o Leverage 10

12 EQUITY & OTHER RISKY ASSETS 11

13 Did Risk Taking Payoff Last Year? 12

14 Did Risk Taking Payoff Last Three Years? 13

15 Broad Market Performance Trends Latest 10 Years 14

16 WHY CONSIDER RISK ASSETS? 15

17 Risk, Return & Time Generally, the diversification benefits of riskier, higher return asset classes accrue over time and the investment horizon (along with risk appetite) is critical when considering a potential allocation away from high quality fixed income. 16

18 Drawdown 20 Years (Equity vs. Fixed Income) In thinking of disadvantages and to gauge risk appetite, the drawdown analysis looks to highlight periods of negative returns. Although equities outperformed fixed income by 3.11% over the last twenty years, it was a bumpy ride. However, an 85/15 diversified portfolio outperformed by 0.68% with volatility similar to 100% fixed income. 17

19 PUBLIC ENTITY POOL PEER ANALYSIS AS OF 6/30/2015

20 Peer Analysis Overview SAA Governmental Pooling Clients 15 Clients 21 Portfolios (15 Primary / 6 Reinsurance) $2.65B In Assets $2.24B Core Fixed Income (85%) $0.41B Risk Assets (15%) 19

21 RISK ASSET ALLOCATION 20

22 Risk Asset Allocation - % of Total Portfolio Risk Assets % Max 41.2% Min 0.0% Median 10.7% Average 14.1% 21

23 Risk Asset Allocation - % of Surplus / Net Position RA % of Surplus Max 66.4% Min 0.0% Median 23.9% Average 23.9% 22

24 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% 23

25 CORE FIXED INCOME ALLOCATION 24

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

27 Risk Asset Allocation & Fixed Income Portfolio Duration Duration (Yrs) RA % of Surplus Max % Median % Average % 26

28 INVESTMENT LEVERAGE Invested Assets / Surplus or Net Assets = Investment Leverage 27

29 Investment Leverage Inv Assets/Surplus Max 393.8% Median 161.0% Average 188.2% 28

30 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% 29

31 PERFORMANCE REVIEW FIXED INCOME PORTFOLIO 30

32 Fixed Income Performance 1 Year Ending 6/30/

33 Fixed Income Performance 3 Years Ending 6/30/

34 Fixed Income Performance 5 Years Ending 6/30/

35 PERFORMANCE REVIEW RISK ASSET PORTFOLIO 34

36 Risk Assets Performance 1 Year Ending 6/30/

37 Risk Assets Performance 3 Years Ending 6/30/

38 Risk Assets Performance 5 Years Ending 6/30/

39 PERFORMANCE REVIEW TOTAL PORTFOLIO 38

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

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

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

43 Fixed Income Investment Management Fees If applicable, where is your pool on the fixed income manager fee scale? 42

44 Fixed Income Investment Management Fees As % of 6/30/2015 Book Yield 43

45 Public Entity Risk Pooling Mechanisms Investment Opportunities 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 Increase Non-Treasury Allocation Duration Extension Unconstrained Fixed Income Emerging Market Debt/Equity High Yield Fixed Income High Dividend Equity Strategic Asset Allocation Changes Risk Asset Allocation to Surplus Alternative Asset Classes Tactical Risk Asset Allocation Changes 44

46 The WHAT KEEPS YOU UP AT NIGHT Slide...It Depends... Where is your pool s comfort level? 45

47 LOOKING AHEAD 46

48 Key Pool Boardroom Themes 2015/2016 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 Electronic Trading Platforms 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 47

49 A Sample of Current Economic Concerns Risk Management o o Presumptive Coverage Issues Police & Fireman Drones Capital Markets o o o o o China s Economy Reversal of Single Child Policy (Getting old before getting rich) Risk of Emerging Market Crisis Growth vs. Financial Effect on Developed Markets Capital Flows Oil Price Decline Form of global monetary tightening as oil producing nations not recycling petro-dollars into financial markets U.S. Unemployment & Wage Growth U.S. Fed / World Central Banks Policy Divergence? 48

50 The Wait for Fed Liftoff Continues...Markets Power of Prediction? Source: Deutsche Bank Research 49

51 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 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. 50