DEPARTMENT OF FIRE AND POLICE PENSIONS 701 E. 3rd Street, Suite 200 Los Angeles, CA 90013 (213) 279-3000 REPORT TO THE BOARD OF FIRE AND POLICE PENSION COMMISSIONERS DATE: DECEMBER 20, 2018 ITEM: A.13 FROM: SUBJECT: RAYMOND P. CIRANNA, GENERAL MANAGER CHIEF INVESTMENT OFFICER S QUARTERLY REPORT OF ASSET ALLOCATION STATUS AND POSSIBLE BOARD ACTION RECOMMENDATION That the Board approve the actual asset allocation of the Fund and Staff s plans for bringing asset classes currently outside of their target allocation ranges back within their allocation ranges. BACKGROUND The Rebalancing Policy (Board Policies Sec 1.7) specifies that the Board will review and affirmatively approve any allocations of Fund assets outside of their target ranges. It states: Staff will monitor the portfolio s asset allocation relative to the target allocations. If the actual allocations fall within the defined ranges, no rebalancing will be required. If actual allocations fall outside the predetermined range, Staff will implement a rebalancing back to within the range of the target allocation. Staff will report all rebalancing activities to the Board on a quarterly basis at a minimum. In circumstances where it is impractical to rebalance the portfolio for any market or portfolio-specific reason, Staff shall assess the rebalancing options, notify the Board of the out of balance situation, and report its recommendations to the Board. Staff shall seek approval from the Board to implement rebalancing according to Staff s recommended rebalancing plan in situations that involve leaving the portfolio, or some portion of the portfolio out of balance for an extended period of time. On June 16, 2016, the Board approved the current asset allocation: November 30, 2018 Target Upper Lower Actual Asset Class Allocation Range Range Allocation* Dom. Large Cap Equity 23.00% 25.80% 20.20% 24.72% Dom. Small Cap Equity 6.00% 7.30% 4.70% 6.38% Int'l Equity 16.00% 18.40% 13.60% 15.19% Int'l Emerging Markets 5.00% 6.40% 3.60% 4.30% Core Bonds 12.00% 12.70% 11.30% 11.20%
(cont d from previous page) Target Upper Lower Actual Asset Class Allocation Range Range Allocation TIPS 5.00% 5.30% 4.70% 4.54% High Yield Bonds 3.00% 3.40% 2.60% 2.51% Unconstrained Fixed Income 2.00% 2.20% 1.80% 2.09% Real Estate 7.00% 8.00% 6.00% 5.64% REITS 3.00% 3.50% 2.50% 2.95% Commodities-Energy 5.00% 6.20% 3.80% 4.36% Private Equity 12.00% 15.00% 9.00% 9.89% Cash Equivalent 1.00% 4.00% 1.00% 6.23% * May not add up to 100% due to rounding Together with the General Consultant RVK and Staff, rebalancing range limits were established. DISCUSSION During the 3-month period ended November 30, 2018, volatility in the stock markets resurfaced attributed to weaker economic data from Europe as well as emerging markets, geo-political issues such as trade disputes and Brexit, retreat of technology stocks due to high valuations, abrupt decline in the oil markets and continual increase in interest rates. Global equities including domestic equities declined while US bond yields continued to increase (bond prices decline as interest rates increase) as the Federal Reserve (Fed) raised the federal fund rate by 25bp in September 2018 due to strong domestic economic data and signaled another 25bp rate increase in December 2018. In late November, the Fed lowered expectations of further rate increases in 2019 alleviating concerns of slower economic growth from higher interest rates. Before the large correction experienced by the equity markets in October and November 2018, a rebalance of assets was performed in September 2018. As domestic equities exceeded their allocation targets substantially in September 2018, $200 million in large cap domestic equities and $100 million in small cap equities or a total of $300 million in domestic equities were liquidated. The funds from liquidation ($300 million) along with $100 million in cash were contributed to underallocated assets which included: 1) international developed equities ($100 million), 2) international emerging market equities ($100 million), 3) core bonds ($100 million) and 4) TIPS ($100 million). Of the $100 million contributions to TIPS, a $50 million contribution was made in September 2018 while the balance was contributed in October 2018. In November 2018, a contribution of $50 million was made to high yield bonds as the high yield market began to cheapen after the selloff in equities. After the rebalancing of assets, Core Bonds, TIPS, High Yield and Real Estate (excluding REITS) remained below their lower target ranges while Cash continued to be above the upper target range (as of November 30, 2018). Cash was managed to allocate to cheaper under-allocated asset classes but maintained at a level to ensure liabilities were met without forced liquidation of assets Board Report Page 2 December 20, 2018
that were under pressure. Real Estate is expected to reach its lower target limit when the purchase (approximately $50 million) of a separate account property is funded during the 1 st quarter of 2019. Attachment I and II illustrate the portfolio and allocation status of each asset class as of November 30, 2018. DUE DILIGENCE During the 3-month period ended November 30, 2018, Staff conducted 9 due diligence meetings (including site visits, manager visits, conference calls and annual meetings) with investment managers working for the Fund. Site visits included the following managers: 1) Fairview Capital, 2) Portfolio Advisors, 3) Odyssey Investment Partners, 4) Oak HC/FT, 5) TPG and 6) Encap Investment LP. For the same period, Staff believes all fund managers that invested in public securities were investing Fund assets in compliance with their individual investment policy guidelines. CASH FLOW The actual and estimated cash flows (in millions) for 4Q2018 and 1Q2019 are summarized as below: Oct 1 - Dec 30, 2018 Jan 1 - Mar 31, 2018 Actual/Projected Projected City Contributions (Net) 1 0 0 Member Contributions 34.3 36.4 Securities Lending 1.4 1.5 Investment Income 98.6 93.7 Earnings on Cash/Misc. 7.1 5.7 Real Estate 22.2 18.7 Private Equity 4.4 8.2 DROP -5.5-60.1 Benefits & Administrative Expense -282.3-240.6 Net Cash Flow (est.) -119.8-136.5 *Negative Cash Flow is funded by Cash. 1 The Net City Contribution = (the Total General Fund Contribution the retirement contribution payment from LAFPP to LACERS for LAFPP staff) + the Special Fund (Harbor) contribution) + the Special Fund (LAWA) contribution. CURRENT EVENTS On October 18, 2018 the Board approved a search for domestic small cap manager. The search process has started and is expected to be completed during the 1 st quarter of 2019. Board Report Page 3 December 20, 2018
This report was prepared by: Tom Lopez Chief Investment Officer RPC:TL:DN:AP Attachments: I. Portfolio Allocation Chart as of November 30, 2018 II. Total Portfolio as of November 30, 2018 Board Report Page 4 December 20, 2018
Attachment I Total Fund Portfolio Allocation 35.00% 30.00% 24.72% 25.00% 25.8 20.00% 15.00% 10.00% 5.00% 20.2 6.38% 7.3 4.7 0.00% Core Equity (23%) Small Cap. Equity (6%) Int'l Equity (16%) Int'l Emerg. Mkts (5.0%) Core Bonds Iincluding TIPS) (17.0%) 15.19% 18.4 13.6 4.30% 6.4 3.6 15.74% 3.4 2.6 18.0 16.0 2.51% High Yield Bonds (3%) 2.2 1.8 2.09% Unconstrained Fixed Income (2.0%) Actual Allocation, Target Allocation in parenthesis Over-allocated (Blue), Under-allocated (Red) 4.0 1.0 6.23% 11.5 8.5 15.0 8.59% 9.89% 9.0 6.2 3.8 Cash (1.0%) Total RE (Including REITS) Private Equity (12.0%) (10.0%) *Board approved ranges on 6/16/16 4.36% Commodities Energy (5.0%)
Attachment II A Portfolio as of November 30, 2018 EQUITIES STOCKS BONDS CASH TOTAL ALLOC. PRIVATE EQUITY STOCKS / EQUITY / RE BONDS CASH TOTAL ALLOC. AllianceBernstein (S&P 500 Index) 1,746.7-6.5 1,753.2 Abbott Capital 29.7 - - 29.7 AllianceBernstein (Systematic Value) 513.0-1.5 514.5 Hamilton Lane 4.2 - - 4.2 AllianceBernstein (Russell 1000 Growth Index) 1,205.5-4.3 1,209.8 PCA 20.7 - - 20.7 LA Capital (Enhanced Index-Growth) 395.5-1.4 396.9 Fairview Capital 13.4 - - 13.4 NTI S&P 500 Equal Weight 769.3-5.4 774.7 Portfolio Advisors 1,834.7 - - 1,834.7 NTI Stoxx USA 900 447.1-9.9 457.0 Aldus Equity 178.2 - - 178.2 Boston Partners (Value) 365.9-6.0 371.9 TCP 15.1 - - 15.1 Redwood Investments (Large Cap-Core) 32.7-1.4 34.0 Stepstone Group 108.5 - - 108.5 Terminated Domestic Equity Managers 0.0-0.1 0.1 TOTAL PRIVATE EQUITY MGRS (12%) 2,204.5 - - 2,204.5 9.89% Core Equity Managers (23%) 5,475.6-36.4 5,512.0 24.72% Target Differential (2.11)% (470.8) Target Differential 1.72% 384.4 REAL ESTATE Frontier Capital Mgt. (Growth) 462.1-9.5 471.6 AllianceBernstein Global REIT 113.4-0.4 113.8 Daruma Capital Mgt. (Core) 371.7-8.5 380.2 Principal Global REIT 183.4-2.0 185.4 Channing Capital Mgt. (Core) 66.1-1.1 67.3 Principal U.S. REIT 172.0-2.2 174.2 Phocas Financial (Value) 63.3-2.2 65.5 Cohen & Steers U.S. REIT 179.8-3.7 183.5 Westwood Management (Value) 219.2-1.5 220.7 Terminated REIT Managers - - - - AllianceBernstein (Value) 209.2-8.8 218.0 REIT Managers (3.0%) 648.5-8.3 656.8 2.95% Terminated Small Cap Equity Managers - - - - Small Cap. Equity Mgrs (6%) 1,391.6-31.7 1,423.4 6.38% Target Differential (0.05)% (12.0) Target Differential 0.38% 85.7 REAL ESTATE COMMINGLED FUNDS SUMMARY Total Pooled Funds 769.5 - - 769.5 3.45% Brandes Investment Partners (Value) 921.0-66.0 987.0 REAL ESTATE SEPARATE ACCT. SUMMARY BY MANAGER Fisher Asset Mgt. (Core) 456.7-12.3 469.0 AEW (Heitman, Sentinel) 455.7 - - 455.7 Blackrock (Core Passive) 781.7-4.1 785.8 Neptune Building 33.3 - - 33.3 Baille Gifford (Growth) 631.8-10.4 642.2 Real Estate Equity Mgrs 489.0 - - 489.0 2.19% Boston Common (ESG) 29.3-0.6 30.0 TOTAL REAL ESTATE (10%) 1,907.0-8.3 1,915.3 8.59% Principal Global Int'l Small Cap 175.6-6.9 182.5 Target Differential (1.41)% (314.1) Victory Capital Mgt. Small Cap 180.1-2.6 182.6 COMMODITIES FIS (Mgr of Emerging Mgrs) International 104.6-2.0 106.6 Alliance (Commodities, Public Equity) 620.5-2.6 623.1 Terminated Int'l Equity Managers 0.3-0.5 0.8 Gresham Invest. Mgmt. (Commodities, Active) 97.5-6.8 104.3 Int'l Equity Mgrs (16%) 3,281.2-105.3 3,386.5 15.19% Goldman Sachs (Commodities, Enhanced Index) 107.8 - - 107.8 Target Differential (0.81)% (180.5) PA (Commodities, Private Equity) 136.0 - - 136.0 Harding Loevner 421.9-9.2 431.1 TOTAL COMMODITIES (5.0%) 961.8-9.3 971.1 4.36% Dimensional Fund Advisors 524.2-2.6 526.8 Target Differential (0.64)% (152.9) Terminated Int'l Emerg. Mkts. Mgrs. 0.0 - - 0.0 Int'l Emerg. Mkts Mgrs (5.0%) 946.0-11.9 957.9 4.30% CASH Target Differential (0.70)% (156.8) HOUSE ACCOUNTS TOTAL EQUITIES MGRS (50.0%) 11,094.5-185.3 11,279.8 50.60% Tier 1 (Article 17) - - 3.9 3.9 Int'l Tax Reclaims - - 0.1 0.1 Tier 2 (Article 18) - - 1,121.8 1,121.8 FIXED INCOME Tier 3 (Article 35) - - 13.5 13.5 Northern Trust (Fixed Income Index) - 700.2 25.4 725.7 Tier 4 (New) - - 8.2 8.2 Reams Asset Mgmt. (Opportunistic) - 683.2-683.2 Tier 5 (New) - - 228.1 228.1 LM Capital (Opportunistic) - 306.9 7.8 314.7 Tier 6 (New) - - 12.7 12.7 GIA Partners (Opportunistic) - 46.5 0.4 47.0 CASH SUMMARY Semper Capital Mgt. - 47.3 1.3 48.6 Unallocated Cash Reserve (1%) - - 1,388.1 1,388.1 6.23% Loomis Sayles (Long Duration) - 601.8 1.8 603.5 Target Differential 5.23% 1,165.2 CA Comm. Mort. Fund - 0.4-0.4 Transition - - - - Bridgewater (TIPS) - 356.9-356.9 TOTAL FUND Reams Asset Mgmt. (Passive TIPS) - 654.6 0.4 655.0 PRIVATE REAL Bridgewater Pure Alpha - 73.9-73.9 COMMODITIES EQUITY STOCKS BONDS ESTATE CASH TOTAL Core Bond Mgrs (17.0%) - 3,471.8 37.1 3,508.9 15.74% ACTUAL ASSET MIX Target Differential (1.26)% (281.0) Current Month 961.8 2,204.5 11,100.5 4,484.4 1,907.0 1,635.7 22,293.9 MacKay Shields 6.1 546.3 7.4 559.8 4.31% 9.89% 49.79% 20.11% 8.55% 7.34% 100.00% High Yield Bond Mgrs (3.0%) 6.1 546.3 7.4 559.8 2.51% Last Month 972.4 2,156.0 10,998.4 4,433.2 1,882.1 1,664.8 22,107.0 Target Differential (0.49)% (109.0) % Change -1.09% 2.25% 0.93% 1.15% 1.32% -1.75% 0.85% Reams Asset Mgmt. (Unconstrained) - 232.9-232.9 Payden & Rygel (Unconstrained) 233.4-233.4 Unconstrained Fixed Income (2.0%) 466.2-466.2 2.09% Target Differential 0.09% 20.4 TOTAL FIXED INCOME MGRS (22.0%) 6.1 4,484.4 44.6 4,535.0 20.34% Subtotals & totals may not sum up exactly due to rounding. Note: Data is unaudited Dollars expressed in Millions. Note: City Pension Contribution received on 7/13/18