Public Equity Portfolio Overview May 29, 2013

Transcription

1 Public Equity Portfolio Overview May 29, 2013

2 Agenda Equity Markets Overview Portfolio Profile Portfolio Structure Activities/Accomplishments Global Equity Initiatives Hedged Equity Portfolio 2

3 General Market Performance Review RUSSELL % 14.6% S & P % 14.0% MSCI FRONTIER 8.2% 11.6% MSCI ACWI IMI 6.9% 11.0% MSCI EAFE 5.1% 11.3% MSCI ACWI Ex-USA IMI 3.6% 8.6% MSCI EM -1.6% 2.0% -4.0% -2.0% 0.0% 2.0% 4.0% 6.0% 8.0% 10.0% 12.0% 14.0% 16.0% 1Q Year 3 Sources: Russell, MSCI, Bloomberg

4 US Equity Market Performance Review Russell 3000 MSCI ACWI IMI Russell 2000 Value Russell 2000 Growth Russell 2000 Russell Mid Cap Growth Russell Mid Cap Value Russell Mid Cap Russell 1000 Value Russell 1000 Growth Russell 1000 Russell Top 200 S&P 500 Utilities Financials Producer Durables Materials Energy Consr. Staples Consr. Disc. Healthcare Technology 6.9% 11.1% 14.6% 11.0% 11.6% 18.1% 13.2% 14.5% 12.4% 16.3% 11.5% 12.8% 14.2% 13.0% 12.3% 9.5% 10.1% 11.0% 14.5% 10.1% 13.2% 10.6% 14.0% 17.3% 18.8% 21.5% 0.0% 5.0% 10.0% 15.0% 20.0% 25.0% -3.8% 1Q % 4.3% 1 Year 11.8% 20.3% 12.1% 19.1% 12.5% 16.7% 11.1% 10.5% 10.2% 15.2% 11.9% 15.9% 19.6% 20.8% 25.3% US stocks shrugged off European debt worries and posted the best returns regionally for the quarter and 1 year. Markets reached new highs. Strong housing related rebound in retail sales, quantitative easing, and improved employment were contributors to market performance. Large cap stocks lagged small and mid cap stocks. Value stocks outperformed growth stocks. Defensive sectors such as health care, consumer staples, and utilities outperformed the broader market. Technology sector generated the weakest returns in part due to Apple s weakness and large benchmark weight % 0.0% 5.0% 10.0% 15.0% 20.0% 25.0% 30.0% Source: Russell 3000 global sectors

5 5 International Equities Performance Review MSCI Frontier MSCI Canada MSCI UK MSCI Japan MSCI Europe MSCI EM SC MSCI EM MSCI ACWI Ex-USA IMI MSCI ACWI IMI MSCI Ex-USA SC MSCI ACWI Ex-USA MSCI ACWI SC MSCI ACWI MSCI EAFE SC MSCI EAFE Healthcare Consr. Staples Cons. Discr Industrials Financials Info. Tech Telecom. Serv. Utilities Energy Materials -1.6% 0.9% 3.4% 2.5% 2.7% 4.2% 8.2% 11.6% 9.8% 8.5% 11.6% 10.6% 9.2% 2.0% 3.6% 8.6% 6.9% 11.0% 6.5% 10.4% 3.2% 8.4% 9.7% 13.7% 6.5% 10.6% 8.4% 13.3% 5.1% 11.3% -5.0% 0.0% 5.0% 10.0% 15.0% 20.0% -0.2% -1.7% -1.9% -6.1% -6.7% -7.4% 1Q % 4.6% 2.7% 5.3% Year 8.9% 11.9% 6.5% 11.4% 5.3% 8.1% 4.5% 18.9% 17.2% 25.6% -20.0% -10.0% 0.0% 10.0% 20.0% 30.0% Source: MSCI ACWI Ex-USA IMI GICS Sector Mixed returns amongst international markets. Cyprus banking crisis and poor economic data suppressed returns in the European regions. Emerging markets equities were the weakest due to slower growth rates in some regions, concerns of increased regulation in China, pressures of inflation in Brazil, and lower commodities prices. Japanese stocks strong performance was driven by Bank of Japan policies to hit 2% inflation rate. International small cap stocks outperformed international developed large cap stocks. Health care, financials, and consumer staples performed strongly during the year. Energy, utilities, and materials sectors were the laggards.

6 Equity Markets Valuation Review PE Ratio (Current vs. 10 Yr History) Russell 1000 Russell 2000 DAX FTSE 100 Nikkei Dividend Yield (Current vs. 10 Yr History) Russell 1000 Russell 2000 DAX FTSE 100 Nikkei 225 Lower Quartile Median Upper Quartile Current Lower Quartile Median Upper Quartile Current Debt / Equity (Current vs. 10 Yr History) EV / EBITDA (Current vs. 10 Yr History) Russell 1000 Russell 2000 DAX FTSE 100 Nikkei Russell 1000 Russell 2000 DAX FTSE 100 Nikkei 225 Lower Quartile Median Upper Quartile Current Lower Quartile Median Upper Quartile Current 6

7 Total Equity Profile March 31, % 15.0% 10.0% 5.0% 0.0% 7.1% 6.9% 18.4% 17.8% Performance 11.5% 11.5% 8.8% 8.7% 3.7% 3.1% 8.7% Qtr Fiscal YTD 1 Yr 3 Yrs. 5 Yrs. 10 Yrs. Portfolio Benchmark 8.3% Utilities Financials Producer Durables Materials Energy Cons. Staples Cons. Disc. Health Care Technology 6.8% 7.1% 12.1% 11.0% 6.5% 7.9% 9.5% 9.8% 7.9% 9.1% 14.3% 12.7% 10.6% 9.6% 11.9% 10.6% 20.4% 22.2% 0.0% 5.0% 10.0% 15.0% 20.0% 25.0% Portfolio Sector Allocation MSCI ACWI IMI 60.0% 50.0% 40.0% 30.0% 20.0% 10.0% 0.0% 50.1% 47.8% U.S. 16.2% 13.2% 15.0% 12.2% 10.1% 12.1% 7.6% 7.9% Europe Ex- UK Regional Allocation Portfolio Asian /Pacific Basin Emerging Mkts MSCI ACWI IMI UK 3.8% 4.0% Canada Portfolio Characteristics Portfolio MSCI ACWI IMI Price/Earnings Dividend Yield (%) Price/Book Debt/Equity Market Cap ($ Weighted Median) 27,937 30,157 Return on Equity 1 Year Source: BNY Mellon Note: Regional allocation, sector allocation and portfolio characteristics are calculated on Equity ex-cash. Sector Allocation is based on Russell Global Sectors.

8 U.S. Equity Portfolio Profile March 31, % 15.0% 10.0% 5.0% 0.0% 18.7% 11.1% 11.1% 18.3% Performance 14.6% 13.7% 12.8% 13.0% 6.7% 6.3% 9.4% 9.2% Qtr Fiscal YTD 1 Yr 3 Yrs. 5 Yrs. 10 Yrs. Portfolio Russell 3000 Index Utilities Financials Producer Durables Materials Energy Cons. Staples Cons. Disc. Health Care Technology Sector Allocation 5.1% 6.0% 3.6% 4.4% 12.7% 11.5% 10.3% 9.9% 7.5% 8.4% 14.5% 14.2% 12.9% 12.1% 16.1% 14.9% 17.4% 18.5% 0.0% 5.0% 10.0% 15.0% 20.0% Portfolio Russell 3000 Index 40.0% 30.0% 20.0% 10.0% 8 0.0% 39.3% 36.8% Large Cap. Market Capitalization Allocation 26.0% 23.6% Medium/Large Cap. Portfolio 17.9% 17.7% Medium Cap. 13.2% 9.9% 8.4% 7.1% Medium/Small Cap. Russell 3000 Index Source: BNY Mellon. Note: Market Capitalization, sector allocation and portfolio characteristics are calculated on Equity Ex-Cash. Sector Allocation is based on Russell Global Sectors. Small Cap. Portfolio Characteristics Portfolio Russell 3000 Index Price/Earnings Dividend Yield (%) Price/Book Debt/Equity Market Cap ($ Weighted Median) 34,254 40,378 Return on Equity 1 Year

9 Non-U.S. Equity Profile March 31, % 15.0% 10.0% 5.0% 0.0% -5.0% 18.4% 17.8% Performance Sector Allocation 10.5% 9.6% 8.9% 8.6% 3.6% 3.6% 4.2% 4.2% -0.5% -1.1% Qtr Fiscal YTD 1 Yr 3 Yrs. 5 Yrs. 10 Yrs. Portfolio Benchmark Utilities 8.6% 8.1% Financials 23.0% 25.8% Producer Durables 11.8% 10.9% Materials 9.8% 11.1% Energy 9.4% 9.5% Cons. Staples 8.5% 9.7% Cons. Disc. 13.5% 11.2% Health Care 7.7% 7.4% Technology 7.8% 6.3% 0.0% 5.0% 10.0% 15.0% 20.0% 25.0% 30.0% Portfolio MSCI ACWI ex- US 35.0% 30.0% 25.0% 20.0% 15.0% 10.0% 5.0% 0.0% % 28.8% 24.6% 25.3% 23.1% 20.7% 13.8% 15.1% 7.7% 7.5% 5.6% 0% Europe Ex- UK Asian /Pacific Basin Regional Allocation Portfolio Emerging Mkts UK Canada U.S. MSCI ACWI Ex-US IMI Source: BNY Mellon. Note: Sector allocation and portfolio characteristics are calculated on Equity Ex-Cash. Sector Allocation is based on Russell Global Sectors. Portfolio Characteristics Portfolio MSCI ACWI Ex-US IMI Price/Earnings Dividend Yield (%) Price/Book Debt/Equity Market Cap ($ Weighted Median) 22,952 24,065 Return on Equity 1 Year

10 Portfolio Structure Active-Passive Allocation Total Equity (%) Active Passive # of Managers in Segments Domestic Equity Foreign Equity Global Equity Passive Domestic Intl Global Active Long Long FoF's 1 (10) 1 (8) 0 Long-Short 1 (2) 0 0 Note: Calculations do not include cash, rebalancing & hedged strategy Level II 2.7% Liquidity of Assets Level I 97.3% 25 managers/46 strategies 5 Historically Under-utilized Businesses ( HUB ) 3 NC based firms 10

11 Portfolio Risk Profile REDACTED: CONTAINS CONFIDENTIAL INFORMATION PROVIDED BY A VENDOR 11

12 Portfolio Active Risk Evolution Domestic Equity International Equity 12 Source: BlackRock

13 Review of FY2013 Activities Funded Emerging Manager Program Leading Edge (Russell 1000 strategy) - $150 million FIS Group (MSCI ACWI ex-u.s. strategy) - $150 million Rebalanced portfolio $1.0 billion increase in international exposure $1.8 billion benefits, Emerging Manager and passive funding Included terminating an international portfolio SAS implementation Finalized equity reports and performed user acceptance testing Continue to renegotiate fees with managers Searches: emerging markets, global and international Updated portfolio structure review with BlackRock Hedged equity discussions with fund of funds providers 13

14 Global Equity FY2014 Work Plan and Initiatives Consolidate passive mandates Leverage economies of scale Mitigate operational risk and transition costs Simplification Emphasize high conviction managers Address potential over-diversification Simplification Evaluate Non-US, Global and Emerging Markets short lists currently under review 14 Evaluate differentiated active strategies Activists Low volatility Hedged equity

15 REDACTED: CONTAINS CONFIDENTIAL INFORMATION PROVIDED BY A VENDOR Historical Hedged Equity Risk/Return Profile

16 Strategic Hedged Equity Beta Target REDACTED: CONTAINS CONFIDENTIAL INFORMATION PROVIDED BY A VENDOR 16

17 Historical Hedged Equity Risk REDACTED: CONTAINS CONFIDENTIAL INFORMATION PROVIDED BY A VENDOR 1

18 Historical Hedged Equity Returns REDACTED: CONTAINS CONFIDENTIAL INFORMATION PROVIDED BY A VENDOR 1

19 Additional Hedged Equity Goals Maximize transparency Minimize absolute and relative correlations Evaluate monetizing longer investment horizon with lower fees Focus on creative fee structures that maximize alignment of interests Preference for managed account or fund of one structure 19

20 Hedge Fund Investment Structures Fund of Funds Commingled Fund of One Managed Account Infrastructure Investment Considerations Maximum manager universe Minimum tracking error? Ability to exclude illiquid or undesired exposure? Maximum fee/term flexibility?? Additional fees bps None bps bps Risk Considerations Treasurer controls assets Reduces hedge fund operational risk? Not affected by actions of other LPs? Full transparency??? Minimum investor operational burden? Maximum loss is invested capital Yes? Uncertain No 20 Note: Additional fees are estimates based on discussions.

21 Forms of Strategic Partnership Customized Fund of Funds Hybrid (Class A and Class B) Hybrid (Joint Investment Committee) Advisory Fiduciary liability Partner Partner (A)/NCRS (B) NCRS NCRS Discretionary portfolio Yes Yes (A), No (B) No No Housed in legal entity Yes Yes Yes No NCRS invests directly No No (A), Yes (B) Yes Yes Benefit from partner s scale Yes Yes Yes No Source investments Partner Partner (A)/Both (B) Both Both Portfolio management Partner Partner (A)/Both (B) Both NCRS Manage liquidations Partner Partner Partner NCRS Investment/ODD monitoring Operational support Legal support Portfolio and risk analytics Reporting NCRS operational burden Low Low Low High NCRS legal burden Low Low Low High Portability Low Low High High Cost High Medium Medium Medium 21 Note: Information is indicative and to be confirmed during strategic partner evaluation. Provided by Strategic Partner

22 Strategic Partner Considerations 22 Strengths Potentially increased odds of selecting top quartile managers and avoiding underperforming managers Extension of staff resources Access to best practices in portfolio construction, manager selection, ongoing monitoring and operational due diligence Access to industry leading portfolio and risk analytics Experienced fiduciary Access to pre-negotiated fee discounts and advantageous terms for both discretionary and direct portfolios Strategic partner portfolio could be complementary to direct portfolio (e.g. emerging, esoteric) Issues to Consider Double layer of fees Overlap in capabilities with Albourne Overlap between managers in discretionary and direct portfolios Importance of travel budget in achieving knowledge transfer Variability in expected vs. realized knowledge transfer Uncertain alignment of interests in customized vehicle Incremental burden of managing relationship on staff

23 Hedge Fund and Fund of Funds Fee Ratios 100% 90% 80% Underlying fee ratio FoF fee ratio (% of net underlying return) Total fee ratio (% of gross return) 70% 60% Fee Ratio 50% 40% 30% 20% 10% 0% 0.00% 2.00% 4.00% 6.00% 8.00% 10.00% 12.00% 14.00% Gross Return Below 6% gross return, underlying fees absorb over 40% of returns and double layer fees absorb over half of returns. 23 Note: Assumes 1.5% management fee, 20% performance fee, and 0.75% fund of funds fee.

24 Hedged Equity Discussion Topics Portfolio goals: Beta, risk, return, transparency, liquidity, etc. Pace of implementation: Managing equity market risk versus cost of implementation Implementation Direct driven by staff and consultant Strategic Partner versus Traditional Fund of Funds Mix of larger/mature hedge funds versus emerging/smaller/niche managers Preference for managed accounts and funds of one versus commingled 24