Current Portfolio Structure as of September 30, 2014

Transcription

1 State Universities Retirement System of Illinois Serving Illinois Community Colleges and Universities 1901 Fox Drive Champaign, IL (217) (217) (FAX) To: Investment Committee From: SURS Investment Staff Date: January 23, 2015 Re: Fixed Income Asset Class Portfolio Review Investment Department As of September 30, 2014, the SURS fixed income portfolio is valued at approximately $4.0 billion, or 23.4% of the total portfolio. The fixed income portfolio consists of five major components, as shown in the following chart and defined below. Current Portfolio Structure as of September 30, 2014 Core (Active and Passive) 30% TIPS 17% Unconstrained 11% Short Term 5% Core Plus 37% 1. Passive Core - Replicates the risk-return profile of the Barclays Capital Aggregate Bond Index. 2. Active Core Attempts to add modest amounts of excess return over time with the modest use of non-index securities such as high yield, and non-u.s. securities. 3. Core Plus attempts to add significant value over the index with higher tracking error due to the use of non-index sectors such as high yield, and non-u.s. securities. 4. Unconstrained - A strategy that takes a flexible approach to capturing global opportunities and managing risk. It strives to actively mitigate downside risk, provide attractive risk-adjusted returns and add diversification to an overall portfolio. 5. Treasury Inflation-Protected Securities (TIPS) portfolio aims to protect purchasing power against the effects of inflation by seeking real (inflation-adjusted) returns primarily from TIPS.

2 Estimated Tracking Error Exhibit 14 The following chart displays the fixed income portfolio s allocation as of September 30, 2014, and the estimated tracking error, as a proxy for relative risk within each portion of the portfolio. 5.0 Risk Exposure of SURS Fixed Income Portfolio % 10% 20% 30% 40% 50% % of Portfolio STIF Unconstrained TIPS Core (Active and Passive) Core Plus Managers within each segment of the fixed income portfolio Unconstrained Core Managers Core Plus Managers PIMCO Chicago Equity PIMCO Garcia Hamilton TCW TIPS Managers Pugh Neuberger Berman PIMCO Smith Graham LM Longfellow Progress TCH New Century SSGA (Passive) Investment Performance (net of fees) as of September 30, 2014: 1 YR 3 YR 5 YR 10 YR SURS Fixed Income 3.77% 3.42% 4.92% 5.42% Performance Benchmark 3.96% 2.43% 4.12% 4.72% SURS TIPS 1.78% 1.83% 4.91% 5.13% Performance Benchmark 1.59% 1.34% 4.48% 4.53% The fixed income portfolio underperformed the benchmark while the TIPS portfolio performed well relative to its benchmark during the year ending September 30, The core fixed income portfolio, excluding TIPS, returned 3.77%, lagging the 3.96% benchmark return by 19 basis points. The TIPS portfolio returned 1.78% for the year ending September 30, 2014, exceeding the benchmark return by 19 basis points. Over longer time periods, the fixed income portfolio continues to perform well. For the threeyear period, the SURS fixed income portfolio returned 3.42%, exceeding the benchmark return by 99 basis points annually. For the five-year period, the portfolio returned 4.92% compared to the benchmark return of 4.12%.

3 SURS fixed income assets are distributed among 14 external managers. The SURS total fixed income assets under management are distributed as follows: Account Mandate SURS Assets under Management in $MM As of September 30, 2014 PIMCO Total Return Core Plus $433 TCW MetWest Core Plus 473 Neuberger Berman Core Plus 315 Taplin, Canida & Habacht Core Plus 128 LM Capital Group Core Plus 149 Total Core Plus $1,498 State Street Global Core - Passive 399 Chicago Equity Partners Core 314 Pugh Capital Core 150 Progress Investment Core 118 Smith Graham Core 96 Garcia Hamilton & Associates Core 98 Total Core $1,175 PIMCO Unconstrained Absolute Return 436 Total Absolute Return $436 Cash Flow Account Short-Term 209 Total Short Term $209 PIMCO U.S. TIPS TIPS 330 Longfellow Investment TIPS 165 New Century Advisors TIPS 163 Total TIPS $658 Total Fixed Income $3,976 The Progress Investment Management manager of emerging managers program will be reviewed at the April 2015 Investment Committee meeting. The State Street Global Advisors passive, core fixed income account was reviewed at the December 2014 Investment Committee meeting as part of the review of all index managers.

4 SURS Fixed Income Portfolio Excluding TIPS The following charts are from NEPC s September 30, 2014 performance book, representing various return and risk measures of the prior three-year period (annualized as of 9/30/14). The first chart displays the portfolio s annualized return and peer ranking the portfolio ranked in the 49 th percentile and provided a return 125 basis points greater than the benchmark. The second chart displays the portfolio s annualized standard deviation and peer ranking; the portfolio ranked in the 52 nd percentile and the absolute level of risk was slightly higher than the benchmark. The third chart displays the portfolio s annualized alpha and peer ranking; the portfolio ranked in the 49 th percentile. The fourth chart displays the portfolio s tracking error relative to the benchmark; the portfolio ranked in the 13 th percentile. The final chart displays the portfolio s Sharpe ratio and peer ranking; the portfolio ranked in the 59 th percentile and provided a risk-adjusted return that was more efficient (earning more return per level of risk) than the benchmark. Standard Deviation is a statistical term that describes the distribution of results. It is a commonly used measure of the volatility of returns of a portfolio. The higher the standard deviation, the more volatile the returns. Tracking Error measures the degree to which a portfolio tracks its benchmark. It is also a measure of consistency of excess returns. The lower the tracking error, the more consistent the returns match those of the benchmark.

5 Sharpe Ratio measures risk adjusted performance. The greater a portfolio s Sharpe ratio, the better its risk-adjusted performance. The chart below plots the portfolio s three-year annualized return and standard deviation against the benchmark and a universe of other funds (as of 9/30/14). The shaded area of the risk return graph is one standard deviation and the cross hairs are the universe median. The next chart plots the portfolio s three-year style analysis against the benchmark and a universe of other funds (as of 9/30/14).

6 Lastly, the following charts show the portfolio s characteristics, in blue, versus the benchmark, in red, (as of 9/30/14). Exhibit 14

7 SURS TIPS Portfolio The following charts are from NEPC s September 30, 2014 performance book, representing various return and risk measures of the prior three-year period (annualized as of 9/30/14). The first chart displays the portfolio s annualized return and peer ranking the portfolio ranked in the 21 st percentile and provided a return 64 basis points greater than the benchmark. The second chart displays the portfolio s annualized standard deviation and peer ranking; the portfolio ranked in the 89 th percentile and the absolute level of risk was slightly higher than the benchmark. The third chart displays the portfolio s annualized alpha and peer ranking; the portfolio ranked in the 22 nd percentile. The fourth chart displays the portfolio s tracking error relative to the benchmark; the portfolio ranked in the 37 th percentile. The final chart displays the portfolio s Sharpe ratio and peer ranking; the portfolio ranked in the 20 th percentile and provided a risk-adjusted return that was more efficient (earning more return per level of risk) than the benchmark. Standard Deviation is a statistical term that describes the distribution of results. It is a commonly used measure of the volatility of returns of a portfolio. The higher the standard deviation, the more volatile the returns. Tracking Error measures the degree to which a portfolio tracks its benchmark. It is also a measure of consistency of excess returns. The lower the tracking error, the more consistent the returns match those of the benchmark. Sharpe Ratio measures risk adjusted performance. The greater a portfolio s Sharpe ratio, the better its risk-adjusted performance.

8 The chart below plots the portfolio s three-year annualized return and standard deviation against the benchmark and a universe of other funds (as of 9/30/14). The shaded area of the risk return graph is one standard deviation and the cross hairs are the universe median. The next chart plots the portfolio s three-year style analysis against the benchmark and a universe of other funds (as of 9/30/14).

9 Lastly, the following charts show the portfolio s characteristics, in blue, versus the benchmark, in red, (as of 9/30/14). Exhibit 14