Moving Forward to Better Serve Our Members. Last Five / Next Five Britt Harris, Chief Investment Officer

Transcription

1 Moving Forward to Better Serve Our Members Last Five / Next Five Britt Harris, Chief Investment Officer

2 TRS IMD: Last Five Years As of 9/30/01 Last 5-Years Target Return 9.% 8.0% Risk 5.9% 11.0% Inflation 1.%.5% Sharpe Ratio Real Return 8.0% 5.0% Rank (%-ile) Return 3 50 Risk Return/Risk Actual ($, B) Projected ($, B) Trust Value Investment Returns Total Contributions Members State/District Payouts Funded Status TRS Peer Average % 75.8% % 77.0% Contributions (Employer/ Member) 15.% (7.7%/ 7.7%) ~31% (~0%/~11%) Benefits 5% 8% Duration. Years 13-0 Years Source: Aon Hewitt, TRS IMD, GRS 1 Risk-rank shown in inverse Trust Market Value 3 Funded status Peers include all public plans greater than $0 B, Contribution/Benefit Peers include all Teacher retirement systems that do not make contributions to Social Security Source: TRS Pension Benefit Design Study. Reflects Relative Benefit Index, a measure of the value of retirement income provided to a prototypical career employee from retirement until the member no longer receives benefits. An index score indicates a plan provides a benefit with a value equal to the full salary replacement and cost living adjustments consistent with inflation. The impact of social security benefits are included as well, if applicable.

3 TRS IMD: Last Five Years As of 9/30/01 Global Equity Annualized Return vs. Annualized Standard Deviation 5 Years Ending September 30, 01 Stable Value Long Treasury.3% Stable Value Hedge Fund 3.9% Absolute Return 1.% US Equity 15.1% Non-US Dev 8.0% Em Markets.% Dir Hedge Fund.% Private Equity 1.5% Real Return TIPS.0% Real Assets 1.9% ENRI 1 -.3% Risk Parity 1 5.5% Return Risk Sharpe Corr. to GE.% 10.% 8.3% 8.5% 7.7%.3% (-0.) Source: TRS IMD, State Street Bank, Aon Hewitt 1 3- Year results, Risk Parity and ENRI do not yet have 5-year track records 3

4 Global Equity Regime: Monetary Policy Supported Markets Central Bank Policy GDP Growth Inflation Fed Funds Rate (LHS, %) Fed Balance Sheet (RHS, $Tn) US Real GDP, YOY Growth US Inflation, YOY Change Easy monetary policy has fueled a prolonged market rally Growth is steady, but low Inflation remains below normal Unemployment Private Spending Labor Productivity US Unemployment Rate Personal Consumption, YOY Change US Labor Productivity Pre-GFC Trend Labor markets have recovered 7 10 Growth in private spending remains subdued Labor Productivity is below-trend Source: Bloomberg, Bureau of Labor Statistics, OECD

5 Last 5 Years: Top Priorities 5

6 Preferred Destination: Principal Investments Ability to Act Circle of Competence Repeatable Practices Bubble Risk Strong Pricing skills Private Equity Real Assets Total Count Commitment ($,B) $.5 $ 9.0 $ NAV ($,B) $.9 $ 5.85 $ Year IRR 17.% 15.0% 15.7% Median Peer 9.% 11.3% 10.8% Value Added 7.7% 3.7%.9% Dollars Earned ($,B) $ 1.30 $.53 $ Value Added ($,MM) $ 39. $ 5. $ 88.9 Source: State Street Bank, TRS IMD and TUCS as of 9/30/01. Median Peer Total represents a weighted average based on TRS allocation. Note: Principal Investments are either commitments to a single investment and/or a single LP structure.

7 Bubble Risk Dilution Number of Signals Bubble Monitor c Monthly Bubble Signals by Asset Class Equities Fixed Income Commodities Currencies Alternatives Economic Regime Ability to Act Circle of Competence 100% 90% 80% 70% 0% 50% 0% 30% 0% 10% Repeatable Practices Bubble Risk Bear Market Indicators Percentage of cindicators On Strong Pricing skills Threshold Level: 50% Current Level: % 0% Oct-0 Oct-07 Oct-08 Oct-09 Oct-10 Oct-11 Oct-1 Oct-13 Oct-1 Oct-15 Inflation (CPI QoQ Annualized) 1% 9% % -1% -% -11% Signal Forecast Box 1 Box Box 3 Box Box 5 Box Box 7 Box 8 Box 9 Latest (Q3 01) Current 1 Year Forecast Political Risk -1% -10% -8% -% -% -% 0% % % % 8% Growth (GDP QoQ Annualized) New Investment Capabilities Risk Parity Low Volatility Short > +1.0 Long > +1.0 Long > +0.5 Stable No Data Source: Bloomberg, TRS IMD 7

8 Repeatable Practices Ability to Act Circle of Competence Repeatable Practices Bubble Risk Strong Pricing skills Productivity Critical Processes Process Mapping External Manager Program 0% Annual Productivity Improvement Better, Cheaper, Faster Valuation Risk Management Relationship Management Trading Operations Culture Communications Recruitment/ Retention Strategic Planning Review asset allocation Evaluate Premier List needs Premier List Development Initial manager proposal Perform minimum criteria analysis Collaborative review by TRS, Aon Hewitt & Albourne Add/reject proposed portfolio Certification Process Onsite visit conducted Receive/review consultant report Evaluate 9 critical areas Prepare certification report Risk Analysis Quantitative analysis Review of current portfolio (chars.& valuations) Develop optimized asset class structure Final Fit Analysis Alpha Stacking demonstrated Determine initial and optimal size 8

9 Competitive Advantage Ability to Act Circle of Competence Repeatable Practices Bubble Risk Strong Pricing skills Trust Level Policy Circle of Competence Long-Term Large Not levered Liquid Diversification Performance Collaboration Transparency Strategic Relationships Principal Investing Developing New Strategies TRS Dislocation Strategy Recruit and Retain Top Investor Talent World Class Agency Structure 9

10 Agency Structure Ability to Act Circle of Competence Repeatable Practices Bubble Risk Strong Pricing skills TRS Accolades Top Fund/ Top LP CIO: Ranked second in the World CIO: Two Lifetime Achievement Awards Chief Risk Officer: Top ranked in US Best Investors under Forty: Two 1 Full Time Employees 13 years of average investment experience 8 Masters Degrees 7 CFA s 10

11 Contribution Requirements: Last 5 Years Last 5-Years Median Peer Return 9.% 8.% Risk 5.9%.% Sharpe Ratio Funded Status TRS Peer Average % 7.9% % 77.0% Contributions (Employer/ Member) 15.% (7.7%/ 7.7%) ~31% (~0%/~11%) Benefits 5% 8% Duration. Years 13-0 Years Over the past 5-years, TRS delivered Risk-adjusted returns better than 90% of peers o 1.% above 8.0% target Funded Status fell to 79.7% Contribution levels and overall benefits are well below the national average TRS Duration is longer than most peers Source: Aon Hewitt, TRS IMD, GRS 1 Funded status Peers include all public plans greater than $0 B, Contribution/Benefit Peers include all Teacher retirement systems that do not make contributions to Social Security Source: GRS. Reflects Relative Benefit Index, a measure of the value of retirement income provided to a prototypical career employee from retirement until the member no longer receives benefits. An index score indicates a plan provides a benefit with a value equal to the full salary replacement and cost living adjustments consistent with inflation. The impact of social security benefits are included as well, if applicable. 11

12 Investment Outlook: Investment Markets Are Fully Valued US Stock Market Current PE Above Average Interest Rates US Dollar Global Central Banks Interest Rates Very Low US Dollar Strengthening 011 Policy Rate Easing/ Tightening Market- Expectation for Dec 017 USA 0.3% Tightening 1.13% Japan -0.05% Easing -0.01% Eurozone -0.0% Easing -0.37% UK 0.5% Tightening 0.1% Private Equity Real Estate Cap Rates Energy Markets VIX Volatility Index EBITDA Multiples Near Peak % 9% 8% 7% % 5% % Cap Rates are at their lows Oil Prices crashed in, but strengthened VIX Index low Source: Bloomberg, Townsend, S&P Capital Group, TRS IMD 1

13 Blank Canvas Report: Projected Intermediate Term Returns Have Fallen US EAFE EM PE DHF LT Bonds SVHF Cash TIPS Real Estate Infrastructure Energy Illiquid Credit Risk Parity 0.5% Blank Canvas Expected Return Review (Beta) 1.9% 1.7% Blank Canvas Expected Return Review (Beta) AVG 3.3% 3.%.7%.8% 3.5%.%.8% 5.1% 5.3% 5.3% 5.0% 5.8% 5.9%.5%.5%.0% 7.0% 8.0% 9.3% 10.7% 0.0%.0%.0%.0% 8.0% 10.0% 1.0% 8.5% 8.5% 9.1% 9.9% US EAFE EM PE DHF LT Bonds SVHF Cash TIPS Real Estate Infrastructure Energy Illiquid Credit Risk Parity 0.% 0.0% 0.% 0.% 0.3% 0.5% Blank Canvas Expected Return Review (Alpha) 0.7% Blank Canvas Expected Return Review (Alpha) AVG 1.% 1.7% 1.7%.0%.0%.0%.0% 3.% 0.0% 1.0%.0% 3.0%.0% 5.0%.0% 7.0%.8% 5.0% 5.0% 5.0% 5.0% 5.1%.5% Source: TRS IMD 13

14 Diversification: Disinflationary Investment Returns Are Low Next 5-Year Projected Returns from Blank Canvas Study Total Stable Value.3% Total Global Equity.% Total Real Return.1% Total Risk Parity: 5.9% Source: TRS IMD 1

15 Top Priorities: Next 5 Years Beta Management Alpha Production Absolute Returns Private Markets CIO Issues 15

16 Top Priorities Beta Management Alpha Production Absolute Returns Private Markets CIO Issues Reduce Deflation Hedge Re-Allocate Currency Risk Evaluate Use of Leverage Prepare for Cycle Transition Global Equity Best Practices Transition Hedge Funds Fee Modification 70/30 Gross Alpha Split Rebalance Hedge Fund Strategy Illiquid Credit Evaluate Internal TAA Expand Alternative Risk Premia Overlay Determine Conservative Baselines Increase Energy Exposure Improved Access to GP s and Allocations Better Fee Structure (70% Alpha) Modify Organization Evaluate Global Footprint Executive Management Growth Career Ladder Compensation Alignment James Jase Mohan Eric Jerry 1

17 TRS IMD: Calculating Funded Status Funded Ratio 1 : 79.7% (Plan Assets / Projected Benefit Obligation) Funding Period: 3 years (Est. Time to Pay Down Unfunded Liability) Liabilities Assets 3 Contributions Current (.% Growth Last 5-Years) Current (Last 5-Years: 3.8%) Current (15.% Total) Projected (.% Growth) Projected (.9% Growth) Projected (15.%) State FY 018/19 - Texas Budget 5 Federal/ Other Total Biennium Total Annual $110. B $103.0 B $13. B $10.7 B Annual TRS Pension System State Districts Members Trust Total Dollars $.0 B $1. B $3.3 B $150 M % of Budget 1.8% Source: GRS, TRS IMD 1 The Funded Ratio is a measure of Plan Assets relative to the Projected Benefit Obligation at a point in time. If Projected Contributions are included in this calculation, it goes up to 99.3%. Current number includes changes in mortality assumptions made in 3 Asset growth rate reflects Fund Investment Returns (+) Contributions (-) Payouts Contributions expressed as a percent of Payroll 5 Total budget reflects proposal in Senate Bill 1 for the next biennium. State line includes General Revenue and GR-Dedicated line-items. TRS Trust operating budget is paid out of the Trust Fund and is not a state expense 17