72 STATE OF NEW JERSEY DEPARTMENT OF THE TREASURY DIVISION OF PENSIONS AND BENEFITS

Transcription

1 Investment Section

2 72 DEPARTMENT OF THE TREASURY

3 Investments _ Review of Major Policy Issues State of New Jersey Department of the Treasury Division of Investment PO Box 290 Trenton NJ The State Investment Council has established the investment objectives for the pension funds, which are as follows: "primary investment objectives are the preservation of capital and the realization over time of earnings sufficient to meet or exceed the regular interest rate established for the actuaries in their determination of the assets and liabilities of each pension fund system. The Council sets as a further investment objective the realization of the greatest possible returns on investment commensurate with the standards of risk and prudency set forth within the Regulations of the Council." At that time, the Council reviewed the stated objectives and discussed the possibility of amending them to include reference to specific market indices, the rate of inflation or percentile rankings of other managers. They also considered whether a higher risk profile for the portfolios would be appropriate, under the assumption that a diversified portfolio of higher risk securities could, in the aggregate, provide higher returns over the long term. The Council concluded that the pension funds' primary objectives were preservation of capital and income, and that these requirements were inherent in the state prudency and pension laws. The Council noted that its regulations had broadened the permissible investment universe of the Division in recent years to include options, real estate, conventional mortgages and a broader list of common stocks. The Council concluded that the present investment regulations provide for a satisfactory range of investment opportunities within the Council's fiduciary standards, and that new investment opportunities could be considered in the traditional manner as they arose. Continued PERS TPAF PFRS SPRS JRS ABP POPF CPFPF SEDCP SACT CPF PAF UCTD SHBP PDP SEDP 73

4 Investments, Continued Review of Major Policy Issues, Continued The Council also reviewed and confirmed the present standards for selecting stocks which are set forth below: a. The company should have growth in revenues and earnings which exceed growth in the Gross National Product; b. The company should have a strong market franchise, unique products and proven marketing capability; c. The company's management should have demonstrated the ability to preserve profit margins, to avoid earnings surprises and to take the needed initiatives to preserve and improve upon the company's strengths; d. The company should have a capitalization which is not heavily leveraged, thereby allowing it more flexibility to finance future expansion; the company should not be unduly capital intensive, which might expose it to the necessities of raising capital at times when capital markets were unduly expensive; and, the company should demonstrate that it can generate capital internally for growth; e. The market for the company's shares should have enough liquidity to permit the orderly acquisition and disposition of a full position; and f. The company should have conservative accounting practices. The standards are only meant to serve as guidelines. The Council agreed that not all companies on its approved list will meet all of these guidelines; however, a failure to meet most of these guidelines will be cause for concern. In addition, the Council believes that good corporate citizenship enhances the value of a company, and, conversely, that poor corporate citizenship detracts from a company's value. 74 DEPARTMENT OF THE TREASURY

5 _ STATE INVESTMENT COUNCIL REGULATORY POLICY DECISION FOR THE PENSION FUNDS Equity investment must be no more than 70% of the portfolio, including both international and domestic equities. International investment is limited to 22% of the portfolios, including both international stocks and bonds. International investment in both stocks and bonds is limited to countries which have at least one AA sovereign rating. All international investments may be hedged through currency transactions. Equity real estate investment is limited to 10% of the portfolio; however, investment in this area is restricted to REITs due to regulatory limitations. Unlimited investment is permitted in securities of U.S. Government and designated agencies. CMOs are limited by internal policy. Investment in domestic corporate bonds is limited to companies with a rating of Baa/BBB or better. Investment by the pension funds in mortgages is defined as pools of certain specified government agencies, with one regulation permitting investment in pools of conventional mortgages with specific credit guidelines. Investments in municipal bonds, commercial paper, repurchase agreements, certificates of deposits, bankers acceptances, etc. are all permitted by specific regulations which specify high credit standards and conservative investment limits. All investments in any one security are limited to a portion of the security issue, and thus all investments require co-investment ensuring diversification and market pricing. PERS TPAF PFRS SPRS JRS ABP POPF CPFPF SEDCP SACT CPF PAF UCTD SHBP PDP SEDP 75

6 Investments, Continued NEW JERSEY MAJOR INVESTMENT POLICY CHANGES Council policy target raised from 25% to 35% for common stocks Council policy target raised to 40% common stocks over 2 years and established goal of 50% provided it could be accomplished without jeopardizing the "actuarial assumed interest rate." So. Africa Divestment Law enacted Council policy to begin international investment (5%), small capitalization stocks (5%) and increase common stock target to 60% from 50% Pension Revaluation Law enacted. Moved actuarial method from book value (cost) to market value Council international policy target raised to 15% from 5% So. Africa Divestment repealed Pension Reform Law enacted. Change to Projected Unit Credit actuarial method from modified Entry Age Normal Council international investment policy limitation raised from 15% to 20% State Prudency Law amended to permit "Whole Plan Principle"; higher risk investments (venture capital, junk bonds, etc.) for the first time. Law also permitted investment in limited partnerships (real estate and private equities) Council considered real estate and emerging markets and deferred action on both Council raised common stock maximum to 70%, including both domestic and foreign Council considered private equities and deferred action Council considered private equities, real estate and emerging markets and deferred action Council policy to begin emerging markets investment (2%), and raised the international policy target to 22%. Council considered high yield debt and deferred action. 76 DEPARTMENT OF THE TREASURY

7 _ INVESTMENT RETURNS Annualized 2000(P) 3-Year 5-Year TOTAL PORTFOLIO 11.9% 16.8% 17.7% Equity Segment Domestic Approved List (US) S&P S&P International EAFE-USD Fixed Income Segment Domestic Lehman Brothers-Govt/Corp Index Salomon Brothers Broad Bond Index International SB Non-US Govt-Unhedged Mortgages SB Mortgage Index Cash Management Fund Day Treasury Bills (P) Preliminary The above information is in accordance with AIMR performance presentation standards. PERS TPAF PFRS SPRS JRS ABP POPF CPFPF SEDCP SACT CPF PAF UCTD SHBP PDP SEDP 77

8 Investments, Continued COMPOSITE ASSET ALLOCATION HISTORY Mortgage Cash Equiv. Int'l Fixed Domestic Fixed Int'l Equity Domestic Equity /96 12/96 3/97 6/97 9/97 12/97 3/98 6/98 9/98 12/98 3/99 6/99 6/00 78 DEPARTMENT OF THE TREASURY

9 _ DOMESTIC STOCK HOLDINGS Portfolio Sector Weightings Utilities Transportation Telecommunications Technology Miscellaneous Health Sector Finance Energy Consumer Staples Consumer Cyclicals Capital Goods Basic Materials A Fund S&P INTERNATIONAL STOCK HOLDINGS Portfolio Sector Weightings Utilities Telecommunications Materials Information Technology Industrials Health Care Financials Energy Consumer Staples Consumer Discretionary D Fund EAFE and Canada PERS TPAF PFRS SPRS JRS ABP POPF CPFPF SEDCP SACT CPF PAF UCTD SHBP PDP SEDP 79

10 Investments, Continued LIST OF LARGEST ASSETS HELD Largest Domestic Stock Holdings (by Fair Value) June 30, 2000 Fair Value Shares Stock (Mil) 1) 29,956,712 General Electric Co. $ 1, ) 19,511,000 Microsoft Corp. 1, ) 15,441,400 Sun Microsystems, Inc. 1, ) 19,760,000 Cisco Systems, Inc. 1, ) 9,065,000 Intel Corp. 1, ) 20,679,185 Pfizer, Inc ) 8,402,496 Lilly (Eli) & Co ) 14,510,000 Wal-Mart Stores, Inc ) 10,108,632 Exxon Mobil Corp ) 11,786,248 Citigroup Largest Domestic Bond Holdings (by Fair Value) June 30, 2000 Fair Value Par Bonds Coupon Due Rating (USD) 1) 599,600,000 US Treasury Bonds 7.250% 05/15/16 AAA $ 659,739,880 2) 625,000,000 Federal Home Loan Mtge. Corp % 09/15/09 AAA 602,687,500 3) 534,000,000 US Treasury Bonds 7.500% 11/15/16 AAA 601,390,800 4) 450,000,000 US Treasury Bonds 6.500% 11/15/26 AAA 469,395,000 5) 455,000,000 US Treasury Notes 6.125% 12/31/01 AAA 452,406,500 6) 428,200,000 US Treasury Bonds 6.250% 08/15/23 AAA 430,854,840 7) 375,000,000 US Treasury Bonds 9.375% 02/15/06 AAA 428,775,000 8) 397,500,000 US Treasury Notes 7.500% 11/15/01 AAA 402,588,000 9) 325,000,000 US Treasury Notes 6.000% 08/15/09 AAA 322,335,000 10) 300,000,000 Federal Home Loan Mtge. Corp % 02/15/03 AAA 300,180,000 A complete list of the portfolio holdings is available from the Division of Investment, P.O. Box 290, Trenton, NJ DEPARTMENT OF THE TREASURY

11 _ LIST OF ASSETS HELD, Continued Largest International Stock Holdings (by Fair Value) June 30, 2000 Fair Value Shares Stock (USD) 1) 8,000,000 Nokia (AB) Oy $ 409,893,084 2) 17,200,000 Ericsson (Lm) Tel. 342,189,614 3) 4,965,000 Alcatel 326,970,735 4) 71,075,211 Vodafone Group 288,371,947 5) 3,797,298 Nortel Networks Corp. 263,211,113 6) 349,091 Bouygues 234,244,599 7) 8,000,000 Skandia Insurance 212,514,640 8) 715,000 Rohm Company 209,496,088 9) 4,232,000 Philips Elec. (Kon) 200,403,592 10) 3,000,000 Takeda Chemical Inds. 197,350,703 Largest International Bond Holdings (by Fair Value) June 30, 2000 Fair Value Par (Local) Bonds Coupon Due (USD) 1) 250,000,000 Government of Italy 6.000% 05/01/31 $ 245,470,934 2) 150,000,000 United States Treasury Bonds /15/30 157,440,000 3) 100,000,000 Asian Development /31/05 101,600,000 4) 100,000,000 Inter American Development /16/03 99,960,000 5) 100,000,000 Germany (Fed Rep) /04/28 85,650,017 6) 55,000,000 UK Government Gilt /06/01 84,247,578 7) 52,407,417 German Government /22/02 53,118,331 8) 50,000,000 International Finance /06/05 50,187,500 9) 50,000,000 Government of France /25/29 47,689,853 10) 65,000,000 Canadian Government /01/03 45,829,553 A complete list of the portfolio holdings is available from the Division of Investment, P.O. Box 290, Trenton, NJ PERS TPAF PFRS SPRS JRS ABP POPF CPFPF SEDCP SACT CPF PAF UCTD SHBP PDP SEDP 81

12 Investments, Continued LIST OF ASSETS HELD, Continued DOMESTIC EQUITY TRADING Brokerage Number of Total Commissions Firm Shares Traded Commissions Per Share Lehman Brothers 21,369,580 $ 1,068,479 $ 0.05 Reuters Instinet 33,310, , Francis Maglio 28,369, , Cuttone &Co. 24,007, , Schwab/Mayer 13,452, , Mogavero Lee & Co. 21,993, , Morgan Stanley 10,592, , Merrill Lynch 9,986, , Brown Brothers 9,023, , Josephthal 8,912, , A complete list of the portfolio holdings is available from the Division of Investment, P.O. Box 290, Trenton, NJ DEPARTMENT OF THE TREASURY