UCRP and GEP Quarterly Investment Risk Report Committee on Investments/ Investment t Advisory Group Quarter ending March 200 May 7, 200
Contents UCRP Asset allocation history 5 7 What are the fund s asset exposures? Asset allocation current position and risk contributions 6 8 How do they compare to policy targets? Capital markets expectations for return 7 9 What is the probability the fund will achieve its required return? Is the amount of risk required acceptable? Historical Funded Status 8 NA Forecast Funded Status 9 NA What is the probability the fund will be able to meet future obligations (with and without additional contributions)? Historical standard deviation of returns vs. benchmark 0 20 Historical standard deviation of active return 2 What is fund s realized volatility? How does it compare with the policy benchmark and risk budgets? GEP st Quarter 200 May 7, 200 2
Contents continued UCRP GEP Systematic vs. residual risk contribution 2 22 Asset allocation vs. selection risk contribution 2 22 What are the sources of volatility? What factors drive performance? Is the fund adequately diversified? Sharpe ratio (total risk) 3 23 Information ratio (active risk) 4 24 Are risk exposures being rewarded? Historical risk adjusted returns Performance Attribution 5 25 What are the sources of active return? Asset allocation versus security selection Which asset classes? st Quarter 200 May 7, 200 3
Risk Metrics for UCRP st Quarter 200 May 7, 200 4
Asset Allocation Total Risk is largely related to the allocation between equity and bonds The portfolio s exposures were similar to the benchmark during Q 200 6.0% UCRP ASSET ALLOCATION (%) 80% 4.0% 70% Exposure (bars s) Active 2.0% 0.0% 2.0% 4.0% 6.0% 8.0% 0.0% 60% 50% 40% 30% 20% 0% xposures (lines s) Total E 2.0% 0% Mar05 Sep05 Mar06 Sep06 Mar07 Sep07 Mar08 Sep08 Mar09 Sep09 Mar0 Public Equity Over/ (Under) Public Equity U.S. Equity NonU.S. Equity st Quarter 200 May 7, 200 5
Asset Allocation and Risk Note: Exposures and Risk charts below are shown using June, 2009, target asset weights. Systematic risk is estimated using long term forecasts [from Mercer Investment Consulting, March 2009], not recent realized volatility. (Lower Left) Asset weights are measured relative to Current Policy. The fund has an overweight in Absolute Return, and an underweight in TIPS and Real Estate. (Lower Right) The fund s forecast total systematic risk (blue bars) is up slightly at 2.55% annualized standard deviation. It is heavily weighted to US and NonUS developed equity (73% of total). Forecast active systematic risk is up slightly at 39 bp. The Real Estate underweight and Absolute Return overweight accounted for almost 90% of this amount (yellow bars). UCRP Asset Exposures vs. Policy as of Mar 200 UCRP Forecast Contrib. to Systematic Risk at Mar 200 Percent 2.5 2.5 0.5 0 0.5 Percent 70 60 50 40 30 20 0 0.5 2 US Equity Non US Eq Em mg Mkt Eq Glob bal Equity Priva ate Equity US Bonds High Yield Non US Fixed EM Debt Active vs. Current Policy TIPS Re eal Estate Abs Ret Cash 0 US Equity Int'l Dev. Equity Emg Global Mkt Equity Equity US Fixed Inc. US High Yield Contrib. to Total Risk Emg Mkt Debt TIPS Cash Private RE Contrib. to Active Risk Private Equity Hedge Funds st Quarter 200 May 7, 200 6
Expected Risk and Return Forecast risk and return (using Mercer s April 2009 capital markets assumptions) lies near the constrained efficient frontier; longterm forecast return of 8.%* is close to the actuarially required return of 7.5%. [Note: Mercer January 200 capital mkt. assumptions largely unchanged] Ex xpected Return 4 2 0 8 6 4 2 2009 Capital Market Assumptions Risk and Expected Return with Constrained Efficient Frontier 5 0 5 20 25 30 Risk (Standard Deviation) US Equity Int'l Dev. Equity Emg Mkt Equity Global Equity US Fixed Inc. US High Yield Int'l Fixed Inc. Emg Mkt Debt TIPS Cash Private RE Private Equity Hedge Funds UCRP LongTerm UCRP Current Policy Effic. Frontier *Asset Class returns and efficient frontiers are shown in the chart as arithmetic (i.e., average) expected returns. The projected compound annual return over multiyear horizon is 8.% for the Current Policy weights. Forecast volatility is 2.4%. st Quarter 200 May 7, 200 7
Historical Funded Status 60 50 40 30 20 0 (0) 982 UCRP ASSETS, LIABILITIES, and SURPLUS ($B) 984 986 988 990 992 994 996 998 2000 2002 2004 2006 2008 The Pension Fund s liabilities have been growing steadily (upper left) with University employment, while the assets have grown (and fallen) with the equity markets. The ratio of actives to retirees has recently fallen from 3x to 2x (lower left). Surplus (Smoothed) Assets (Smoothed) The Funded Ratio (= the ratio of assets to liabilities), is an overall metric of the financial health of a pension plan. This ratio has fluctuated considerably over the past (lower right), and has Liabilities (AAL) Assets (Market) recently fallen below 00% with the bear market of 200709 Pension Membership (LHS) and Active/Retiree Ratio (RHS) 40,000 7 20,000 6 200% 75% UCRP FUNDED RATIOS 00,000 5 50% 80,000 4 25% 60,000 40,000 20,000 988 989 990 99 992 993 994 995 996 997 998 999 2000 200 2002 2003 2004 2005 2006 2007 2008 2009 3 2 00% 75% 50% 988 989 990 99 992 993 994 995 996 997 998 999 2000 200 2002 2003 2004 2005 2006 2007 2008 2009 Active Members Retired Members Ratio: Active/Retired Funded Ratio (smoothed) Funded Ratio (Market) st Quarter 200 May 7, 200 8
Forecast Funded Status Funded Ratio 2.25 2.00.75.50 25.25.00 0.75 0.50 0.25 UCRP Cash Flows (Contributions, Benefit Payments) vs. Normal Cost ($ Billion) 988 989 990 99 992 993 994 995 996 997 998 999 UC Pension Projections (Treasurer's Office) 20% 00% 80% 60% 40% 20% 0% 2000 200 2002 2003 2004 2005 2006 2007 2008 2009 Total Outflows (exlabs) Total Inflows Normal Cost 2008 2009 200 20 202 203 204 Funded Ratio (Smoothed) Funded Ratio (Market Val) 205 206 Funded Ratio UC Pension Projections (Treasurer's Office) 20% 00% 80% 60% 40% 20% 0% 2008 Contributions were suspended in 990, but annual benefit payments have grown in line with and recently exceeded, Normal Cost over the last decade (upper left). ) The bottom two charts show projected funded ratio without and with contributions, assuming a 9% return for FY 2009 and a constant 7.5% investment return beginning FY 200. (For this example, contributions were set to be equal to forecast Normal Cost, beginning FY 20.) LEFT: Assumes no contributions, 7.5% annual investment return after FY 2009 RIGHT: Assumes Normal Cost contributed annually beginning FY 20; 7.5% return after FY 2009 These projections are approximations only, developed by Funded Ratio (Smoothed) Treasurer s Office, not Segal Co. 2009 200 20 202 203 204 Funded Ratio (Market Val) 205 206 st Quarter 200 May 7, 200 9
Risk Measures: Total 30 25 20 5 0 5 UCRP Total Risk, Total Risk Budget, and Ranges Total risk trend quite similar to benchmark; recently Plan volatility has been slightly less than the Budget, but well within ranges. Total volatility has resumed a historically normal range, higher than the mid 2000 s but lower than the 200809 crash. Total Risk budget equals Benchmark risk plus the Active risk budget. The ranges are +/ 20% around the budget. Mar05 Sep05 Mar06 Sep06 Mar07 Sep07 Mar08 Sep08 Mar09 Sep09 Mar0 30 UCRP Total Risk, Total Risk Budget, and Ranges Pension Total Risk Total Risk Budget Lower Range: 20% Upper Range: + 20% 25 20 5 Risk is measured by standard deviation of 0 monthly total returns; each point or bar shows a 5 2 month measurement period. All risk calculations done using exponentially declining weights. (This and following charts show risk budgets as if they had been in place during Pension Total Risk Total Risk Budget entire historical i period.) Lower Range: 20% Upper Range: + 20% Mar09 Apr09 May09 Jun09 Jul09 Aug09 Sep09 Oct09 Nov09 Dec09 Jan0 Feb0 Mar0 st Quarter 200 May 7, 200 0
Risk Measures: Active 5.00 4.50 4.00 3.50 3.00 2.50 2.00.50.00 0.50 Mar05 UCRP Active Risk, Active Risk Budget, and Ranges Sep05 Mar06 Sep06 Mar07 Sep07 Mar08 Sep08 Pension Tracking Error Tracking Error Budget 3.5 Mar09 Lower Range: 33% Upper Range: + 33% The Active risk budget is 3% annualized Tracking Error (adjusted for market volatility), with ranges of +/ pct. point around Budget Risk is measured by standard deviation of monthly active returns; each point or bar shows a 2 month measurement period. All risk calculations done using exponentially declining weights. Sep09 Mar0 Until 2009, active risk for the total fund has held steady at 0.50% annualized standard deviation. The spike up in Q 09 resulted from the underweight in equity as the market fell and then rallied. Active risk has resumed its low level of the mid 2000 s, but is still well below long term expectations for active return, and is well diversified. 5.0 4.5 4.0 3.0 2.5 2.0.5.0 0.5 Mar09 UCRP Active Risk, Active Risk Budget, and Ranges Apr09 May09 Jun09 Jul09 Aug09 Pension Tracking Error Sep09 Oct09 Nov09 Dec09 Jan0 Feb0 Tracking Error Budget Lower Range: 33% Upper Range: + 33% Mar0 st Quarter 200 May 7, 200
Risk Attribution 00% 90% 80% 70% 60% 50% 40% 30% 20% 0% 0% UCRP Components of Total Risk (Upper Left) Almost all of Total Risk is attributed to systematic (market) factors. (Lower Right) Normally, the majority of Active Risk is attributed to security selection. When active management is reduced, or when asset allocation transitions are implemented, allocation risk increases. In the last 2 months, the equity over / underweight dominated all other decisions. 0% UCRP Components of Active Risk ar05 M Se ep05 ar06 M Se ep06 ar07 M Se ep07 ar08 M Se ep08 ar09 M Se ep09 ar0 M 90% Systematic Risk % Residual Risk % 70% Risk is measured here by variance (standard deviation squared) of monthly returns; each bar shows a 2 month measurement period 50% 30% 0% Systematic Risk is associated with benchmark exposures; residual risk is associated with non benchmark decisions (security selection) 0% Mar05 Sep05 Mar06 Sep06 Mar07 Sep07 Resid Risk Contrib Mar08 Sep08 Mar09 Alloc Risk Contrib Sep09 Mar0 st Quarter 200 May 7, 200 2
Risk Adjusted Return: Total 4.0 3.0 2.0.0 UCRP and Benchmark Sharpe Ratio Sharpe Ratio (risk adjusted total return) trend has been quite similar to the benchmark for the past 5 years. The 2 month return on risky assets has finally turned positive as the March 2009 rally continues. (.0) UCRP and Benchmark Sharpe Ratio (2.0) 35 3.5 3.0 (3.0) Mar05 Sep05 Mar06 Sep06 Mar07 Sep07 Mar08 Sep08 Mar09 Sep09 Mar0 2.5 2.0.5.0 Pension Benchmark 0.5 (0.5) Sharpe ratio is excess return (total return less riskfree rate) divided by total risk; each point or bar shows a 2 month measurement period. All risk calculations done using exponentially declining weights. (.0) (.5) (2.0) Mar09 Apr09 May09 Jun09 Jul09 Aug09 Sep09 Oct09 Nov09 Pension Benchmark Dec09 0) y p Jan0 Feb0 Mar0 st Quarter 200 May 7, 200 3
Risk Adjusted Return: Active Info Ratio 3.0 2.0.0 (.0) (2.0) Pension Information Ratio and Significance Level 00% 90% 80% 70% 60% 50% 40% 30% 20% 0% Significance Level Information ratio (risk adjusted active return) is the result of both asset weighting decisions and active performance. It is higher when the returns are positive and more consistent (less volatile). The Info. ratio at quarter end was positive; from the graph below, active returns for the past nine months have been small but positive..50 UCRP Active Return & Active Risk Budget [Monthly] (3.0) 0%.00 Mar05 ep05 S Mar06 ep06 S Mar07 ep07 S Mar08 ep08 S Mar09 ep09 S Mar0 0.50 Last 2 Mo Signif. Level Last 2 Mo Info Ratio Information ratio is active return (total return less (.00) benchmark) divided by active risk; each point shows a 2 month measurement period. The (.50) Significance level is the probability that results are due to skill, with 50% being a neutral measure. All risk calculations done using exponentially declining i weights. Lower Range: 33% Upper Range: + 33% (0.50) Mar05 Sep05 Mar06 Sep06 Mar07 UCRP Active Return Risk Budget + Risk Budget Sep07 Mar08 Sep08 Mar09 Sep09 Mar0 st Quarter 200 May 7, 200 4
Performance Attribution US Equity NonUS Equity Emg Mkt Equity Global Equity Private Equity Core Bonds High Yield Debt Emg Mkt Debt TIPS Real Estate Abs Ret Cash US Equity NonUS Equity Emg Mkt Equity Global Equity Private Equity CoreBonds High Yield Debt Emg Mkt Debt TIPS Real Estate Abs Ret Cash Avg. Active Weight (2.0) (.0).0 2.0 Avg. Active Return (.0).0 2.0 3.0 Active Return for the Quarter was +0.23% (Fund return of 3.6% vs policy benchmark of 2.92%). [BELOW] Asset allocation decisions (blue bars) added 0.4% (primarily the underweight in Real Estate) and Security selection (red bars) decisions i added d 0.09% 09% (primarily Absolute Return) US Equity NonUS Equity Emg Mkt Equity Global Equity Pi Private Equity Core Bonds High Yield Debt Emg Mkt Debt TIPS Real Estate Abs Ret Cash TOTAL UCRP Attribution for 3 mo. ending Mar30 0.05 0 0.05 0. 0.5 0.2 0.25 0.3 Allocation Selection Total Impact st Quarter 200 May 7, 200 5
Risk Metrics for GEP st Quarter 200 May 7, 200 6
Asset Allocation Total Risk is largely related to the allocation between equity and bonds Total equity remained slightly overweight at the end of Q 200 80% 8.0% GEP ASSET ALLOCATION (%) 70% Exposure (b bars) Active 6.0% 4.0% 20% 2.0% 0.0% 2.0% 4.0% 40% 6.0% 8.0% 0.0% 60% 50% 40% 30% 20% 0% 0% Mar05 Sep05 Mar06 Sep06 Mar07 Sep07 Mar08 Sep08 Total Exposures (lin nes) Mar09 Sep09 Mar0 Public Equity Over/ (Under) Public Equity U.S. Equity NonU.S. Equity st Quarter 200 May 7, 200 7
Asset Allocation and Risk Note: Exposures and Risk charts below are shown using October, 2008 target asset weights. Systematic risk is estimated using long term forecasts [from Mercer Investment Consulting, March 2009], not recent realized volatility. (Lower Left) Asset weights are measured relative to Current Policy. The fund is overweight in US Equity and Absolute Return, and underweight in Real Estate and TIPS. (Lower Right) The fund s forecast total systematic risk (blue bars) is unchanged at 2.2% annualized standard deviation. It is evenly balanced among US equity, Non US developed equity, and Absolute Return (over 75% of total). Forecast active systematic risk is unchanged at 48 bp. The R.E. underweight and Absolute Return overweight accounted for almost 80% of this amount (yellow bars). Percent 2.5 2.5 0.5 0 0.5.5 2 2.5 US Equity GEP Asset Exposures vs. Policy as of Mar 200 Non US Eq Emg Mkt Eq Global Equity Private Equity US Bonds High Yield Non US Fixed EM Debt TIPS Real Estate Active vs. Current Policy Abs Ret Cash Percent 60 50 40 30 20 0 (0) GEP Forecast Contrib. to Systematic Risk at Mar 200 US Int'l Emg Global Equity Dev. Mkt Equity Equity Equity US Fixed Inc. US High Yield Contrib. to Total Risk Int'l Fixed Inc. Emg Mkt Debt TIPS Contrib. to Active Risk Cash Private Private Hedge RE Equity Funds st Quarter 200 May 7, 200 8
Expected Risk and Return Forecast risk and return (using Mercer s April 2009 capital markets assumptions) lies near the constrained efficient frontier; forecast return of 8.3%* is close to the nominal return needed to maintain a constant real payout per student (estimated at 8.5%) [Note: Mercer January 200 capital mkt. assumptions largely unchanged] * Asset Class Ex xpected Retur rn 4 2 0 8 6 4 2 2009 Capital Market Assumptions Risk and Expected Return with Constrained Efficient Frontier 5 0 5 20 25 30 Risk (Standard Deviation) US Equity Int'l Dev. Equity Emg Mkt Equity Global Equity US Fixed Inc. US High Yield Int'l Fixed Inc. Emg Mkt Debt TIPS Cash Private RE Private Equity Hedge Funds GEP LongTerm GEP Current Policy Effic. Frontier returns and Efficient frontiers are shown in the chart as arithmetic (average) expected returns. The projected compound annual return over multi year horizon is 8.3% for the Current Policy weights. Forecast volatility is 2.0%. st Quarter 200 May 7, 200 9
Risk Measures: Total 25 20 5 GEP Total Risk, Total Risk Budget, and Ranges Total risk trend has been quite similar to benchmark; GEP volatility is quite close to its Budget. Total volatility has resumed a historically normal range, higher than the mid 2000 s but lower than the 20080909 crash. 0 5 Total Risk budget equals Benchmark risk plus the Active risk budget. The ranges are +/ 20% around the budget. Mar05 Sep05 Mar06 Sep06 Mar07 Sep07 Mar08 Sep08 Mar09 Sep09 Mar0 25 GEP Total Risk, Total Risk Budget, and Ranges Endowment Total Risk Total Risk Budget 20 Lower Range: 20% Upper Range: + 20% 5 Risk is measured by standard deviation of monthly total returns; each point or bar shows a 2 month measurement period. All risk calculations done using exponentially declining weights. (Charts show risk budgets as if they had been in place during entire historical period.) 0 5 Mar09 Apr09 May09 Jun09 Jul09 Aug09 Sep09 Oct09 Nov09 Dec09 Jan0 Feb0 Endowment Total Risk Total Risk Budget Lower Range: 20% Upper Range: + 20% Mar0 st Quarter 200 May 7, 200 20
Risk Measures: Active 5.00 4.50 4.00 3.50 300 3.00 2.50 2.00.50.00 0.50 GEP Active Risk, Active Risk Budget, and Ranges Active risk for the total fund has grown slowly over this period from 0.50% to.50% annualized standard deviation, up until the 2008 crash. Active risk has resumed its low level of the mid 2000 s, but is still well below longterm expectations for active return, and is well diversified. Mar05 Sep05 Mar06 Sep06 The Active risk budget is 3.0% annualized Tracking Error (adj. for market volatility), with ranges of +/ pct. point around Budget Mar07 Sep07 Mar08 Endow. Tracking Error Tracking Error Budget 5.0 4.5 Lower Range: 33% Upper Range: + 33% 4.0 3.5 3.0 2.5 2.0.5.0 Sep08 Mar09 Sep09 Mar0 GEP Active Risk, Active Risk Budget, and Ranges Risk is measured by standard deviation of monthly active returns; each point or bar shows a 2 month measurement period. All risk calculations done Endow. Tracking Error Tracking Error Budget using exponentially declining weights. Lower Range: 33% Upper Range: + 33% 0.5 Mar09 Apr09 May09 Jun09 Jul09 Aug09 Sep09 Oct09 Nov09 Dec09 Jan0 Feb0 Mar0 st Quarter 200 May 7, 200 2
Risk Attribution GEP Components of Total Risk 00% 90% 80% 70% 60% 50% (Upper Left) Almost all of Total Risk is attributed to systematic (market) factors. (Lower Right) Normally, the majority of Active Risk is attributed to security selection. When asset allocation transitions are implemented, allocation risk tends to dominate. In the last 6 months, the equity overweight dominated all other active decisions. 40% 30% 20% 0% 0% 0% 00% GEP Components of Active Risk 05 05 Sep 06 06 Sep 07 07 Sep 08 08 Sep 09 Systematic Risk % Residual Risk % 09 Sep 0 Mar Mar Mar Mar Mar Mar 90% 80% 70% 60% 50% Risk is measured here by variance (standard deviation squared) of monthly returns; each bar shows a 2 month measurement period Systematic risk is associated with benchmark exposures; residual risk is associated with non benchmark decisions (security selection) 40% 30% 20% 0% 0% 0% Mar05 Sep05 Mar06 Sep06 Mar07 Sep07 Mar08 Sep08 Mar09 Sep09 Mar0 Resid Risk Contrib Alloc Risk Contrib st Quarter 200 May 7, 200 22
Risk Adjusted Return: Total 4.0 3.0 2.0.0 (.0) (2.0) (3.0) GEP and Benchmark Sharpe Ratio Sharpe Ratio (risk adjusted total return) trend has been quite similar to the benchmark for the past 5 years. The 2 month return on risky assets has finally turned positive as the March rally continues. Mar05 Sep05 Mar06 Sep06 Mar07 Sep07 Mar08 Sep08 Mar09 Sep09 Mar0 GEP and Benchmark Sharpe Ratio Endowment Benchmark 4.0 3.0 Sharpe ratio is excess return (total return less.0 riskfree rate) divided by total risk; each point or bar shows a 2 month measurement period. All (.0) risk calculations done using exponentially declining weights. (2.0) 2.0 Mar09 Apr09 May09 Jun09 Jul09 Aug09 Sep09 Oct09 Nov09 Dec09 Jan0 Feb0 Mar0 Endowment Benchmark st Quarter 200 May 7, 200 23
Risk Adjusted Return: Active Info Ratio 3.0 2.0.0 (.0) (2.0) Endowment Information Ratio and Significance Level 00% 90% 80% 70% 60% 50% 40% 30% 20% 0% Significance Level Information ratio (risk adjusted d active return) is the result of both asset weighting decisions and active equity and bond performance. It is higher when the returns are more consistent (less volatile). The active return has recently turned positive (see graph below), while active risk is decreasing (see page 20). In the last two quarters, both allocation and selection decisions have been positive. (3.0) Mar05 Sep05 Mar06 Sep06 Mar07 Sep07 Mar08 Sep08 Mar09 Sep09 Mar0 0%.50.00 GEP Active Return & Active Risk Budget [Monthly] Last 2 Mo Signif. Level Last 2 Mo Info Ratio 0.50 Information ratio is active return (total return less benchmark) divided by active risk; each point shows a 2 month measurement period. The Significance level is the probability that results are due to skill, with 50% being a neutral measure. All risk calculations done using exponentially declining weights. (0.50) (.00) (.50) (2.00) Mar05 Sep05 Mar06 Sep06 Mar07 GEP Active Return Risk Budget + Risk Budget Sep07 st Quarter 200 May 7, 200 24 Mar08 Lower Range: 33% Upper Range: + 33% Sep08 Mar09 Sep09 Mar0
Performance Attribution US Equity NonUS Equity Emg Mkt Equity Global Equity Private Equity Core Bonds High Yield Debt Emg Mkt Debt Non USD Debt TIPS Real Estate Abs Ret Cash Avg. Active Weight Active Return for the Quarter was +0.68% (Fund return of 2.64% vs policy benchmark of.96%). [BELOW] Asset allocation decisions (red bars) added 0.24% (primarily the overweight in US Equity and the underweight in Real Estate) and Security selection decisions (orange bars) added 0.44% (primarily Absolute Return Strategies) GEP Attribution for 3 mo. ending Mar30 US Equity NonUS Equity Emg Mkt Equity Global Equity Private Equity Core Bonds High Yield Debt Emg Mkt Debt Non USD Debt TIPS Real Estate Abs Ret (4.0) (2.0) 2.0 4.0 Avg. Active Return US Equity NonUS Equity Emg Mkt Equity Global Equity Private Equity Core Bonds High Yield Debt Emg Mkt Debt Non USD Debt TIPS Real Estate Abs Ret Cash TOTAL Cash 0.2 0 0.2 0.4 0.6 0.8 (.0).0 2.0 3.0 Allocation Selection Total Impact st Quarter 200 May 7, 200 25