2/23/ ) How much can you expect to earn? 2) How much risk are you willing to prudently take? Pool Investment Strategies for Today and Tomorrow

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1 Pool Investment Strategies for Today and Tomorrow March 4 th, 2018 Presented by: Dan Smereck, Managing Director & Principal STRATEGIC ASSET ALLIANCE, INC. Document not to be reproduced without the explicit consent of SAA. Session Introduction Investment income: Is a cornerstone to the risk transfer business model, and maximizing investment income can mean the difference between remaining competitive or losing members to aggressive pricing. 1) How much can you expect to earn? 2) How much risk are you willing to prudently take? 2 Session Introduction - Investment Performance Objectives Where do you fall on this objective continuum and why? Book yield or Income Only Constrained total return Most Risk Pools & Insurers Total return 3 1

2 SETTING THE STAGE 4 Current Yields The World is Flat 5 Q U.S. Fixed Income Sector/Duration - Yields New money and reinvestment yields for U.S. investment grade fixed income range from 2% to 3.5% Source: Bloomberg, Barclays 6 2

3 World Economic Momentum - Manufacturing SAA BOTTOMLINE: Global growth continues to strengthen and remains synchronized across the world s regions. While the U.S. has been growing for over eight years, other regions are in much earlier phases of their cycles, suggesting there is further room to run but with a heightened focus on inflationary factors. Heatmap colors are based on PMI relative to the 50 level, which indicates acceleration or deceleration of the sector, for the time period shown Source: Markit, J.P. Morgan Asset Management 7 Unemployment & Wage Inflation Concern? Source: J.P. Morgan Asset Management 8 Global Monetary Policy From QE to QT but slowly Source: BlackRock 9 3

4 U.S. Fiscal Policy 10 Market Volatility The VIX U.S. Financial Conditions Index So Far So Good 0 STD -2 STD -12 STD 12 4

5 LOOKING AHEAD 13 Business Cycle More Room to Run? 14 Tough to Make A Buck 6% 4% Source: Research Affiliates 15 5

6 Allocation to Achieve - 7.5% Annualized Expected Return Source: BlackRock 16 Expected Volatility 7.5% Annualized Expected Return Source: BlackRock 17 Investments One of the Cornerstones Operational Risk Underwriting Risk Surplus Reinsurance, Reserving Risk Investment Risk How much surplus does your organization need to: o Meet its members needs; o Manage the risk exposures it is comfortable taking; o Maintain a cushion for contingencies. 18 6

7 Public Entity Risk Pooling Investment Options Investment Grade Fixed Income o Government & Agency o Structured Securities MBS/ABS/CMBS o Corporates Risk Assets o Non-Investment Grade Fixed Income o U.S. and International Equities o Real Estate o Alternatives 19 Strategic Asset Allocation Explains 90%+ of investment returns over time Some Approaches o The Endowment Model (Alternatives, Alternative, Alternatives ) o The Risk Parity Approach o Liability-Driven Investment Basic Philosophies o Traditional Diversification o Risk Budgeting o Goal Driven Current Issues 20 HOW ARE OTHER POOLS INVESTING? 21 7

8 Peer Analysis Overview SAA Governmental Pooling Clients Data as of 9/30/ Clients 25 Portfolios (19 Primary / 6 Reinsurance) $3.00B In Assets $2.54B Core Fixed Income (84.6%) $0.46B Risk Assets (15.4%) 22 CORE FIXED INCOME ALLOCATION 23 Fixed Income Portfolio Book Yield & Duration Duration (Yrs) Book Yield (%) Max Median Average

9 Fixed Income Allocation By Sector Corporate & Taxable ST/ MMF (%) UST & US Agency (%) Agency MBS (%) ABS/ CMBS (%) Muni (%) Max 26.0% 68.2% 52.0% 30.9% 61.2% Median 1.5% 15.0% 19.0% 12.9% 45.5% Average 4.1% 21.5% 20.3% 14.2% 39.8% Sorted by largest exposures to corporate and structured securities. 25 RISK ASSET ALLOCATION 26 Risk Asset Allocation - % of Total Portfolio Risk Assets % Max 36.7% Median 17.3% Average 15.6% 27 9

10 Risk Asset Allocation - % of Surplus / Net Position RA % of Surplus Max 57.5% Median 26.4% Average 24.9% 28 Risk Asset Allocation Sorted by Largest Risk Asset Allocation U.S. Equity % Intl. Equity % HY % Other % Max 100.0% 23.5% 37.9% 13.1% Median 81.8% 9.7% 10.0% 0.0% Average 77.7% 9.0% 12.2% 1.1% Sorted high-to-low by risk assets as a % of surplus. 29 INVESTMENT LEVERAGE Invested Assets / Surplus or Net Assets = Investment Leverage 30 10

11 Investment Leverage Inv Assets/ Surplus Max 393.8% Median 140.6% Average 173.7% 31 Total Portfolio Performance - 3 Years Ending 9/30/2017 3Yr Max 4.4% Min 1.4% Median 3.3% Average 3.2% Net of fees; return median/average calculated by portfolio not asset-weighted 32 Total Portfolio Performance - 5 Years Ending 9/30/2017 5Yr Max 4.7% Min 1.1% Median 2.8% Average 2.8% Net of fees; return median/average calculated by portfolio not asset-weighted 33 11

12 Fixed Income Investment Management Fees Annual Fees (%) Max 0.29% Min 0.07% Median 0.15% Average 0.16% Median/average calculated by portfolio not asset-weighted 34 Conclusion & Issues to Consider 1) How much can you expect to earn? o Realistic risk/return expectations 2) How much risk are you willing to prudently take? o Approaches to strategic asset allocation o Risk assets as a percentage of surplus Downside risk tolerance 35 12