Michael G. Trotsky, CFA Executive Director Chief Investment Officer October 15, 2012
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MACRS June 5, 2012 3
15 10 5 0 5 10 4 Mar 10 Apr 10 May 10 Jun 10 Jul 10 Aug 10 Sep 10 Oct 10 Nov 10 Dec 10 Jan 11 Feb 11 Mar 11 Apr 11 May 11 Jun 11 Jul 11 Aug 11 Sep 11 Oct 11 Nov 11 Dec 11 Jan 12 Feb 12 Mar 12 Apr 12 May 12 Jun 12 Jul 12 Aug 12 Sep 12 MACRS June 5, 2012
5 Performance Review Risk Management New Strategic Initiatives Organization ED/CIO Combination Vacancies Compensation Update
Performance
7 10% PRIT Fund Policy Benchmark Value Add 9.43% 8% 8.18% 7.82% 7.12% 7.13% 8.41% 7.95% 7.77% 6% 4% 2% 0% 2% 0.36% 0.01% 1.02% 1.83% 1.32% 0.51% CYTD 1 Year 3 Years 5 Years 10 Years Notes: 1) Performance is gross of fees. 2) Total assets of $49.9 billion as of August 31, 2012. 3) Since inception (2/28/1985), the total PRIT Fund has had an average annual return of 9.42%, as of August 31, 2012. 0.18%
8 12% 10% 8% 10.15% 9.44% 9.59% 9.59% PRIT Portfolio Benchmark Value Add 9.33% 8.74% 8.37% 8.03% 6% 4% 5.08% 4.09% 4.72% 2% 0% 0.71% 0.00% 0.59% 0.34% 0.99% 2.48% 2.24% 0.48% 0.69% 0.21% 2% Notes: 1) Performance is gross of fees. 2) Total assets of $49.9 billion as of August 31, 2012. 3) Since inception (2/28/1985), the total PRIT Fund has had an average annual return of 9.42%, as of August 31, 2012.
9 16% 14% 13.82% 12% 11.48% 10% 8% 8.25% 6% 5.92% 4% 2% 0% U.S. Large U.S. Small SMID International Emerging Gross CYTD as of August 31, 2012.
10 14% 12% 11.93% 10% 10.51% 10.00% 8% 6% 5.02% 5.13% 6.16% 4% 2% 0% Core Bond TIPS High Yield Bank Loans EMD Private Debt *Gross CYTD as of August 31, 2012.
Risk Management
12 The Barra system helps us describe: What the PRIT Fund looks like and how it might behave. Utilizing Barra risk analysis to improve investment decisions Measure total portfolio risk Identify most risky investments Simulate portfolio performance More accurately track manager performance and strategy implementation Launched a new relationship with MIT Sloan School of Management with a focus on integrating risk management techniques into PRIM s investment management process
13 25 20 15 10 15.49 13.67 PRIT Fund S&P 500 Barclays Agg 5 0 Jan-12 Feb-12 Mar-12 Apr-12 May-12 Jun-12 Jul-12 Total Risk has declined over the last 7 months The PRIT Fund s Total Risk level is between stocks and bonds
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15 Total Risk Contribution Risk Decomposition 1/31/2012 7/31/2012 Delta (Δ) Total Risk 15.49 13.67 1.82 Local Market Risk 14.46 12.50 1.95 Common Factor Risk 14.45 12.49 1.95 Industry 13.32 11.49 1.83 Style 0.22 0.20 0.01 Term Structure 0.12 0.12 0.00 Spread 0.30 0.24 0.06 Emerging Market 0.06 0.08 0.01 Private Real Estate 0.66 0.60 0.07 Hedge Fund 0.00 0.00 0.00 Selection Risk 0.01 0.01 0.00 Currency Risk 1.03 1.16 0.13 Last, Barra breaks down why each factor changed: Is it because of our asset allocation changes Is it because the volatility of the factor changed Or did the correlations of the factors change First, Barra breaks down how the factors have changed Second, we can identify which factor changed the most (Equity Industry) Δ Industry Factors Contribution 1.83 Δ X Δ σ Δ ρ 0.70 1.03 0.11 So PRIT s total risk has declined primarily because the industry factor s volatility has declined and from asset allocation changes.
Asset Allocation
17 $60.0 $50.0 $50.0B $43.8 $43.1 $47.0 $45.3 $48.2 $47.5 $49.4 $49.9 $50.6 $40.0 $37.5 $30.0 $20.0 $10.0 $ Start Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Market 25.0% 15.0% 5.0% 5.0% 5.0%? Fund Performance 12.5% 7.5% 2.5% 2.5% 2.5%?
18 15% 10% 5% 0% 1 Mar 10 1 Jun 10 1 Sep 10 1 Dec 10 1 Mar 11 1 Jun 11 1 Sep 11 1 Dec 11 1 Mar 12 1 Jun 12 1 Sep 12 5% 10% 15% 20%
19 Timber/Natural Resources 4.0% Hedge Funds 10.0% Portable Alpha Wind Down 0.0% Real Estate 10.0% Global Equity 43.0% Private Equity 10.0% Value Added Fixed Income 10.0% Core Fixed Income 13.0% *Long Term Target Allocation shown on this page reflects the target asset allocation accepted by the PRIM Board on 8/2/11. PRIM Staff will implement the necessary changes to achieve the newly adopted target asset allocation over the coming quarters.
20 Former Current U.S. Large Cap 17% 15% U.S. Small/Mid Cap 4% 4% International 21% 17% Emerging Markets 7% 7% Total Global Equity 49% 43% Core Bonds 10% 10% TIPS 3% 3% Total Core Fixed Income 13% 13% High Yield/Bank Loans 2% 3% EMD (Dollar Denominated) 1% 1% EMD (Local Currency) 0% 2% Private Debt 3% 4% Total Value Added Fixed Income 6% 10% Private Equity 10% 10% Real Estate 10% 10% Timber 4% 4% Hedge Funds 8% 10% 5 7 Year Expected Return* 7.7% 7.9% 30 Year Expected Return* 9.1% 8.4% Risk (Std. Deviation) 12.4% 12.1% Sharpe Ratio 0.42 0.55 *Expected Return Amended February 7, 2012
21 Former Current U.S. Large Cap 17% 15% U.S. Small/Mid Cap 4% 4% International 21% 17% Emerging Markets 7% 7% Total Global Equity 49% 43% Core Bonds 10% 10% TIPS 3% 3% Total Core Fixed Income 13% 13% High Yield/Bank Loans 2% 3% EMD (Dollar Denominated) 1% 1% EMD (Local Currency) 0% 2% Private Debt 3% 4% Total Value Added Fixed Income 6% 10% Private Equity 10% 10% Real Estate 10% 10% Timber 4% 4% Hedge Funds 8% 10% 5 7 Year Expected Return* 7.7% 7.9% 30 Year Expected Return* 9.1% 8.4% Risk (Std. Deviation) 12.4% 12.1% Sharpe Ratio 0.42 0.55 *Expected Return Amended February 7, 2012
What Next?
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25 Asset Allocation: New asset allocation study planned for December Rebalancing study ongoing How frequently? How large are the bands? New methods Goals
26 Public Markets: New manager search process More staff involvement Identify for ourselves who the best managers are and seek them out 2 new databases New manager monitoring discipline Buy/hold/sell ratings
27 Real Estate: Non core strategy Portfolio leverage program Timberland: New emerging markets exposure Australia
28 Seller: The Government of Australia Size: Approximately $700 million PRIM 20% Partners: Future Fund Acres: 262,000 Timber Type: 98% Pine 2% Eucalyptus
29 Combined CIO/ED role Provide immediate stability to organization Streamline PRIM Free resources Will only work because we have built out our noninvestment staff Future career growth opportunities for staff Other challenges compensation
PRIM Organization Chart 30 Executive Director Chief Investment Officer Michael G. Trotsky, CFA August 18, 2010 Executive Assistant Samantha Wong October 4, 2010 Chief Investment Officer Michael G. Trotsky, CFA August 18, 2010 General Counsel Christopher J. Supple July 26, 2011 Senior Client Service Officer Paul W. Todisco November 5, 1984 Senior Risk Management Officer David M. Gurtz, CPA, CFA January 31, 2008 Chief Financial Officer Thomas A. Hanna, CPA May 22, 2000 Deputy Chief Investment Officer Public Markets and Director of Strategic Initiatives Hannah Gilligan Commoss August 2, 2004 Senior Investment Officer Private Equity OPEN Senior Investment Officer Real Estate and Timberland Timothy V. Schlitzer March 21, 2005 Senior Investment Officer Hedge Funds OPEN Risk Management Officer Donald R. Payne November 6, 2006 Director of Finance and Manager of Human Resources Deborah Coulter, CPA August 1, 2012 Director of Private Investment Accounting & Manager Information Systems Anthony J. Falzone January 3, 2006 Financial Reporting Manager Qingmei Li, CPA August 18, 2011 Investment Officer Public Markets Sarah N. Samuels, CFA June 27, 2011 Senior Investment Officer Private Equity OPEN Investment Officer Real Estate and Timberland John F. LaCara August 4, 2008 Manager of Client Reporting and Cash Management Jennifer L. Cole February 11, 2002 Senior Financial Analyst Eileen A. Molloy July 22, 2002 Investment Analyst Public Markets Michael Carritte October 13, 2011 Investment Officer Private Equity Scott L. Hutchins January 4, 2010 Manager of Investment Reporting and Systems Administrator Yisroel "Izzy" Markov, CPA February 16, 1998 Senior Financial Analyst Catherine M. Hodges March 8, 2004 Investment Officer Private Equity Peony K. Keve, CFA, CAIA July 21, 2008 Financial Analyst Veronica Williams January 9, 2006 Office Administrator Alyssa Smith February 17, 2004 Compliance Analyst Ellen M. Hennessy April 30, 2012 Administrative Assistant Accounting and Communications OPEN