UCRP and GEP Quarterly Investment Risk Report

Transcription

1 UCRP and GEP Quarterly Investment Risk Report Quarter ending June 2011 Committee on Investments/ Investment Advisory Group September 14, 2011

2 Contents UCRP Asset allocation history 5 17 What are the fund s asset exposures? Asset allocation current position and risk contributions 6 18 How do they compare to policy targets? Capital markets expectations for return 7 19 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 June Quarter 2011 Sept. 14,

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) Information ratio (active risk) Are risk exposures being rewarded? Historical risk adjusted returns Performance Attribution What are the sources of active return? Asset allocation versus security selection Which asset classes contributed or detracted from return? June Quarter 2011 Sept. 14,

4 Risk Metrics for UCRP June Quarter 2011 Sept. 14,

5 Jun06 Dec06 Jun07 Dec07 Jun08 Dec08 Jun09 Dec09 Jun10 Dec10 Jun11 Active Exposure (bars) Total Exposures (lines) Asset Allocation Total Risk is largely related to the allocation between equity and bonds The portfolio was rebalanced to a neutral weighting between equity and bonds by the end of Q UCRP ASSET ALLOCATION (%) 4.0% 80% 2.0% 0.0% 2.0% 4.0% 6.0% 8.0% 70% 60% 50% 40% 30% 20% 10.0% 12.0% 10% 0% Public Eq. Over/ (Under) [left] Public Equity [right] U.S. Equity [right] NonU.S. Equity [right] June Quarter 2011 Sept. 14,

6 US Equity Devel. Non US Eq Emg Mkt Eq Global Equity Core Bonds High Yield Emg Mkt Debt Non $ Debt TIPS Private Eq Abs RetDiv. Abs RetCAC Real Assets Real Estate Cash US Equity Int'l Dev. Equity Emg Mkt Equity Global Equity US Fixed Inc. US High Yield Emg Mkt Debt TIPS Private Equity Hedge Funds Private RE Other Percent Percent Asset Allocation and Risk Note: Exposures and Risk charts below are shown using March 1, 2011 target asset weights. Systematic risk is estimated using long term forecasts [from Mercer Investment Consulting, July 2011], not recent realized volatility. (Lower Left) Asset weights are measured relative to Current Policy. The fund has an overweight in Private equity and underweight in Core Bonds and TIPS. (Lower Right) The fund s forecast total systematic risk (blue bars) is 13.53% annualized standard deviation. It is heavily weighted to US and NonUS developed equity (66% of total). Forecast active systematic risk is up slightly at 36 bp. The Private equity overweight accounted for almost 80% of this amount (red bars) UCRP Asset Exposures vs. Policy as of Jun UCRP Forecast Contribution to Systematic Risk at Jun 11 Active vs. Current Policy Contrib. to Total Risk Contrib. to Active Risk June Quarter 2011 Sept. 14,

7 Expected Return Expected Risk and Return Forecast risk and return (using Mercer s July 2011capital markets assumptions) lies near the constrained efficient frontier; longterm forecast return of the current policy allocation of 7.6%* is close to the actuarially required return of 7.5% Capital Market Assumptions Risk and Expected Return with Constrained Efficient Frontier *Asset Class returns and efficient frontiers are shown in the chart as arithmetic (i.e., average) expected returns Risk (Standard Deviation) US Equity Devel. Non US Eq Emg Mkt Eq US Fixed Inc. US High Yield Int'l Fixed Inc. Emg Mkt Debt TIPS Private Equity Hedge Funds Private RE Cash UCRP LongTerm UCRP Current Policy Effic. Frontier The projected compound annual return over multiyear horizon is 7.6% for the Current Policy weights. Forecast volatility of the current policy is 14.0%. June Quarter 2011 Sept. 14,

8 Historical Funded Status (10) 140, , ,000 80,000 60,000 40,000 20,000 UCRP ASSETS, LIABILITIES, and SURPLUS ($B) Assets (Smoothed) Assets (Market) Liabilities (AAL) Surplus (Smoothed) Pension Membership (LHS) and Active/Retiree Ratio (RHS) 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 recently fallen from 3x to 2x (lower left). 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 recently fallen below 100% with the bear market of % 175% 150% 125% 100% 75% UCRP FUNDED RATIOS 50% Active Members Ratio: Active/Retired Retired Members Funded Ratio (smoothed) Funded Ratio (Market) June Quarter 2011 Sept. 14,

9 Forecast Funded Status UCRP Cash Flows (Contributions, Benefit Payments) vs. Normal Cost ($ Billion) Total Outflows (exlabs) Total Inflows Normal Cost Contributions were reinstated in 2010 after a pension holiday that began in 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 On the right is a simulation of a variable rate of return. It indicates that the probability of reaching full funding (ratio = 1.0) by 2016 is below 20%. [These projections and simulations are approximations only, developed by Treasurer s Office, not Segal Co.] June Quarter 2011 Sept. 14,

10 Jun10 Jul10 Aug10 Sep10 Oct10 Nov10 Dec10 Jan11 Feb11 Mar11 Apr11 May11 Jun11 Jun06 Dec06 Jun07 Dec07 Jun08 Dec08 Jun09 Dec09 Jun10 Dec10 Jun11 Risk Measures: Total UCRP Total Risk, Total Risk Budget, and Ranges Total risk trend is quite similar to the benchmark; recently Plan volatility has been slightly less than the Budget, but well within ranges. Total volatility has resumed a historically normal range, higher than the mid 2000 s but lower than the crash. Total Risk budget equals Benchmark risk plus the Active risk budget. The ranges are +/ 20% around the budget. 18 UCRP Total Risk, Total Risk Budget, and Ranges Pension Total Risk Total Risk Budget Lower Range: 20% Upper Range: + 20% Risk is measured by standard deviation of monthly total returns; each point or bar shows a 12 month measurement period. All risk calculations done using exponentially declining weights. (This and following charts show risk budgets as if they had been in place during entire historical period.) Pension Total Risk Total Risk Budget Lower Range: 20% Upper Range: + 20% June Quarter 2011 Sept. 14,

11 Jun10 Jul10 Aug10 Sep10 Oct10 Nov10 Dec10 Jan11 Feb11 Mar11 Apr11 May11 Jun11 Jun06 Dec06 Jun07 Dec07 Jun08 Dec08 Jun09 Dec09 Jun10 Dec10 Jun11 Risk Measures: Active UCRP Active Risk, Active Risk Budget, and Ranges Pension Tracking Error The Active risk budget is 3% annualized Tracking Error (adjusted for market volatility), with ranges of +/ 1 pct. point around Budget Risk is measured by standard deviation of monthly active returns; each point or bar shows a 12 month measurement period. All risk calculations done using exponentially declining weights. Tracking Error Budget Lower Range: 33% Upper Range: + 33% The spike in Active Risk in Q1 09 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 2000 s (about 0.50% annualized standard deviation). It is still well below long term expectations for active return, but is well diversified UCRP Active Risk, Active Risk Budget, and Ranges Pension Tracking Error Tracking Error Budget Lower Range: 33% Upper Range: + 33% June Quarter 2011 Sept. 14,

12 Jun06 Dec06 Jun07 Dec07 Jun08 Dec08 Jun09 Dec09 Jun10 Dec10 Jun11 Jun06 Dec06 Jun07 Dec07 Jun08 Dec08 Jun09 Dec09 Jun10 Dec10 Jun11 Risk Attribution 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% UCRP Components of Total Risk (Upper Left) Virtually all of Total Risk is attributed to systematic (market) factors (red bars). (Lower Right) Normally, the majority of Active Risk is attributed to security 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 5 quarters residual risk is resuming its normal contribution. Systematic Risk % Residual Risk % 110% 90% UCRP Components of Active Risk 70% Risk is measured here by variance (standard deviation squared) of monthly returns; each bar shows a 12 month measurement period Systematic Risk is associated with benchmark exposures; residual risk is associated with non benchmark decisions (security selection) 50% 30% 10% 10% Resid Risk Contrib Alloc Risk Contrib June Quarter 2011 Sept. 14,

13 Jun10 Jul10 Aug10 Sep10 Oct10 Nov10 Dec10 Jan11 Feb11 Mar11 Apr11 May11 Jun11 Jun06 Dec06 Jun07 Dec07 Jun08 Dec08 Jun09 Dec09 Jun10 Dec10 Jun11 Risk Adjusted Return: Total (1.0) UCRP and Benchmark Sharpe Ratio Sharpe Ratio (risk adjusted total return) trend has been quite similar to the benchmark for the past 5 years. The 12 month return on risky assets is positive since 2009 but with typical volatility. (2.0) (3.0) 2.5 UCRP and Benchmark Sharpe Ratio Pension Benchmark Sharpe ratio is excess return (total return less riskfree rate) divided by total risk; each point or bar shows a 12 month measurement period. All risk calculations done using exponentially declining weights. 0.5 Pension Benchmark June Quarter 2011 Sept. 14,

14 Jun06 Dec06 Jun07 Dec07 Jun08 Dec08 Jun09 Dec09 Jun10 Dec10 Jun11 Jun06 Dec06 Jun07 Dec07 Jun08 Dec08 Jun09 Dec09 Jun10 Dec10 Jun11 Info Ratio Significance Level Risk Adjusted Return: Active (1.0) (2.0) (3.0) Pension Information Ratio and Significance Level 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 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 5 quarters; from the graph below, active returns for the past 8 quarters have been small but positive UCRP Active Return & Active Risk Budget [Monthly] 1.00 Last 12 Mo Signif. Level Last 12 Mo Info Ratio 0.50 Information ratio is active return (total return less benchmark) divided by active risk; each point shows a 12 month measurement period. The Significance level is the probability that results are due to skill, with 50% being a neutral measure. All risk calculations done using exponentially declining weights. (0.50) (1.00) (1.50) UCRP Active Return Risk Budget + Risk Budget Lower Range: 33% Upper Range: + 33% June Quarter 2011 Sept. 14,

15 Performance Attribution Avg. Active Weight US Equity NonUS Equity Emg Mkt Equity Global Equity Core Fixed Income High Yield Debt Emg Mkt Debt TIPS Private Equity Abs Ret Div. Abs Ret CAC Real Assets Real Estate Cash US Equity NonUS Equity Emg Mkt Equity Global Equity Core Fixed Income High Yield Debt Emg Mkt Debt TIPS Private Equity Abs Ret Div. Abs Ret CAC Real Assets Real Estate Avg. Active Return Active Return for the Quarter was +0.36% (Fund return of 1.48% vs. policy benchmark of 1.12%). [BELOW] Asset allocation decisions (blue bars) added 0.01% (equity overweight and core bond underweight). Security selection decisions (red bars) added 0.35% (primarily Absolute Returns and nonus public equity) UCRP Attribution for 3 mo. ending Jun3011 US Equity NonUS Equity Emg Mkt Equity Global Equity Core Fixed Income High Yield Debt Emg Mkt Debt TIPS Private Equity Abs Ret Div. Abs Ret CAC Real Assets Real Estate Cash Total (3) Alloc. (1) Select. TOTAL June Quarter 2011 Sept. 14,

16 Risk Metrics for GEP June Quarter 2011 Sept. 14,

17 Jun06 Dec06 Jun07 Dec07 Jun08 Dec08 Jun09 Dec09 Jun10 Dec10 Jun11 Active Exposure (bars) Total Exposures (lines) Asset Allocation Total Risk is largely related to the allocation between equity and bonds The portfolio was rebalanced to a neutral weighting between equity and bonds by the end of Q GEP ASSET ALLOCATION (%) 8.0% 6.0% 4.0% 2.0% 0.0% 2.0% 4.0% 6.0% 8.0% 10.0% 70% 60% 50% 40% 30% 20% 10% 0% Public Eq. Over/ (Under) [left] Public Equity [right] U.S. Equity [right] NonU.S. Equity [right] June Quarter 2011 Sept. 14,

18 US Equity Devel. Non US Eq Emg Mkt Eq Global Equity Core Bonds High Yield Emg Mkt Debt Non $ Debt TIPS Private Eq Abs RetDiv. Abs RetCAC Real Assets Real Estate US Equity Int'l Dev. Equity Emg Mkt Equity Global Equity US Fixed Inc. US High Yield Emg Mkt Debt TIPS Private Equity Hedge Funds Private RE Other Cash Percent Percent Asset Allocation and Risk Note: Exposures and Risk charts below are shown using March 1, 2011 target asset weights. Systematic risk is estimated using long term forecasts [from Mercer Investment Consulting, July 2011], not recent realized volatility. (Lower Left) Asset weights are measured relative to Current Policy. The fund is overweight in Private equity, and Cash, and underweight in Core Bonds and TIPS. (Lower Right) The fund s forecast total systematic risk (blue bars) is 14.28% annualized standard deviation. It is evenly balanced among US equity, Non US developed equity, and Absolute Return (71% of total). Forecast active systematic risk is up slightly at 26 bp. The Private equity overweight accounted for almost 70% of active risk (red bars) GEP Asset Exposures vs. Policy as of Jun (10) GEP Forecast Contribution to Systematic Risk at Jun 11 Active vs. Current Policy Contrib. to Total Risk Contrib. to Active Risk June Quarter 2011 Sept. 14,

19 Expected Return Expected Risk and Return Forecast risk and return (using Mercer s July 2011capital markets assumptions) lies near the constrained efficient frontier; forecast return of the current policy mix of 8.2%* is close to the nominal return needed to maintain a constant real payout per student (estimated at 8.5%) Capital Market Assumptions Risk and Expected Return with Constrained Efficient Frontier * Asset Class returns and Efficient frontiers are shown in the chart as arithmetic (average) expected returns Risk (Standard Deviation) US Equity Devel. Non US Eq Emg Mkt Eq US Fixed Inc. US High Yield Int'l Fixed Inc. Emg Mkt Debt TIPS Private Equity Hedge Funds Private RE Cash GEP LongTerm GEP Current Policy Effic. Frontier The projected compound annual return over multi year horizon is 8.2% for the Current Policy weights. Forecast volatility is 14.1%. June Quarter 2011 Sept. 14,

20 Jun10 Jul10 Aug10 Sep10 Oct10 Nov10 Dec10 Jan11 Feb11 Mar11 Apr11 May11 Jun11 Jun06 Dec06 Jun07 Dec07 Jun08 Dec08 Jun09 Dec09 Jun10 Dec10 Jun11 Risk Measures: Total GEP Total Risk, Total Risk Budget, and Ranges 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 2000 s but lower than the crash. 5 Total Risk budget equals Benchmark risk plus the Active risk budget. The ranges are +/ 20% around the budget. Endowment Total Risk Total Risk Budget Lower Range: 20% Upper Range: + 20% Risk is measured by standard deviation of monthly total returns; each point or bar shows a 12 month measurement period. All risk calculations done using exponentially declining weights. (Charts show risk budgets as if they had been in place during entire historical period.) GEP Total Risk, Total Risk Budget, and Ranges Endowment Total Risk Total Risk Budget Lower Range: 20% Upper Range: + 20% June Quarter 2011 Sept. 14,

21 Jun10 Jul10 Aug10 Sep10 Oct10 Nov10 Dec10 Jan11 Feb11 Mar11 Apr11 May11 Jun11 Jun06 Dec06 Jun07 Dec07 Jun08 Dec08 Jun09 Dec09 Jun10 Dec10 Jun11 Risk Measures: Active GEP Active Risk, Active Risk Budget, and Ranges The spike in Active Risk in Q1 09 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 2000 s (about 1.0%), but is still well below longterm expectations for active return, and is well diversified. Endow. Tracking Error Tracking Error Budget Lower Range: 33% Upper Range: + 33% The Active risk budget is 3.0% annualized Tracking Error (adj. for market volatility), with ranges of +/ 1 pct. point around Budget GEP Active Risk, Active Risk Budget, and Ranges Risk is measured by standard deviation of monthly active returns; each point or bar shows a 12 month measurement period. All risk calculations done using exponentially declining weights. Endow. Tracking Error Tracking Error Budget Lower Range: 33% Upper Range: + 33% June Quarter 2011 Sept. 14,

22 Jun06 Dec06 Jun07 Dec07 Jun08 Dec08 Jun09 Dec09 Jun10 Dec10 Jun11 Jun06 Dec06 Jun07 Dec07 Jun08 Dec08 Jun09 Dec09 Jun10 Dec10 Jun11 Risk Attribution 100% 80% 60% 40% 20% 0% GEP Components of Total Risk (Upper Left) Virtually all of Total Risk is attributed to systematic (market) factors (red bars). (Lower Right) Normally, the majority of Active Risk is attributed to security selection. When asset allocation transitions are implemented, allocation risk tends to dominate. In late 2009, the equity overweight dominated all other active decisions. For the past 14 months, residual risk has resumed its normal contribution level. Systematic Risk % Residual Risk % GEP Components of Active Risk Risk is measured here by variance (standard deviation squared) of monthly returns; each bar shows a 12 month measurement period Systematic risk is associated with benchmark exposures; residual risk is associated with non benchmark decisions (security selection) 110% 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 10% 0% Resid Risk Contrib Alloc Risk Contrib June Quarter 2011 Sept. 14,

23 Jun10 Jul10 Aug10 Sep10 Oct10 Nov10 Dec10 Jan11 Feb11 Mar11 Apr11 May11 Jun11 Jun06 Dec06 Jun07 Dec07 Jun08 Dec08 Jun09 Dec09 Jun10 Dec10 Jun11 Risk Adjusted Return: Total (1.0) (2.0) (3.0) GEP and Benchmark Sharpe Ratio Sharpe Ratio (risk adjusted total return) trend has been quite similar to the benchmark for the past 5 years. The 12 month return on risky assets is positive since 2009 but with typical volatility. Endowment Benchmark 2.5 GEP and Benchmark Sharpe Ratio Sharpe ratio is excess return (total return less riskfree rate) divided by total risk; each point or bar shows a 12 month measurement period. All risk calculations done using exponentially declining weights Endowment Benchmark June Quarter 2011 Sept. 14,

24 Jun06 Dec06 Jun07 Dec07 Jun08 Dec08 Jun09 Dec09 Jun10 Dec10 Jun11 Jun06 Dec06 Jun07 Dec07 Jun08 Dec08 Jun09 Dec09 Jun10 Dec10 Jun11 Info Ratio Significance Level Risk Adjusted Return: Active (1.0) (2.0) Endowment Information Ratio and Significance Level 100% 80% 60% 40% 20% Information ratio (risk adjusted 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 5 quarters; active return has been small but on average, positive in the past 8 quarters. (3.0) 0% Last 12 Mo Signif. Level Last 12 Mo Info Ratio Information ratio is active return (total return less benchmark) divided by active risk; each point shows a 12 month measurement period. The Significance level is the probability that results are due to skill, with 50% being a neutral measure. All risk calculations done using exponentially declining weights (0.50) (1.00) (1.50) (2.00) GEP Active Return & Active Risk Budget [Monthly] GEP Active Return Risk Budget + Risk Budget Lower Range: 33% Upper Range: + 33% June Quarter 2011 Sept. 14,

25 Performance Attribution US Equity NonUS Equity Emg Mkt Equity Global Equity Core Bonds HY Debt EM Debt TIPS Private Equity Abs Ret Div. Abs Ret CAC Real Assets Real Estate US Equity NonUS Equity Emg Mkt Equity Global Equity Core Bonds HY Debt EM Debt TIPS Private Equity Abs Ret Div. Abs Ret CAC Real Assets Real Estate Avg. Active Weight Avg. Active Return Active Return for the Quarter was +0.90% (Fund return of 1.24% vs. policy benchmark of 0.34%). [BELOW] Asset allocation decisions (blue bars) added 0.02%. Security selection decisions (red bars) added 0.89% (virtually all from Absolute Returns). US Equity NonUS Equity Emg Mkt Equity Global Equity Core Bonds HY Debt EM Debt TIPS Private Equity Abs Ret Div. Abs Ret CAC Real Assets Real Estate GEP Attribution for 3 mo. ending Jun Allocation Selection Total Impact June Quarter 2011 Sept. 14,