Agenda Investment Advisory Council (IAC)
Tuesday, March 31, 2020, 1:00 P.M.*
Hermitage Room, First Floor 1801 Hermitage Blvd., Tallahassee, FL 32308
1:00 – 1:05 P.M. 1. Welcome/Call to Order/Election of Bobby Jones, Chair Officers/Approval of Minutes (See Attachments 1A – 1B)
(Action Required)
1:05 – 1:10 P.M. 2. Opening Remarks/Legislative Update/ Ash Williams Reports Executive Director & CIO (See Attachments 2A – 2E)
1:10 – 2:10 P.M. 3. Florida Growth Fund Investment Hamilton Lane Review Nayef Perry (See Attachments 3A – 3B) Katie Moore Ankur Dadhania Daniel Felman
J.P. Morgan Robert Cousin Tyler Jayroe Patrick Miller
Investment Advisory Council – Agenda March 31, 2020 Page 2
2:10 – 3:10 P.M. 4. Real Estate Review Steve Spook, SIO (See Attachments 4A – 4B) Lynne Gray, Senior Portfolio Manager Michael Fogliano, Senior Portfolio Manager
Townsend Group Richard Brown Seth Marcus
3:10 – 3:40 P.M. 5. Corporate Governance Review Michael McCauley (See Attachment 5) Senior Officer, Investment Programs & Governance
3:40 – 4:10 P.M. 6. Review Changes to Florida Aon Hewitt Retirement System Investment Plan Katie Comstock Investment Policy Statement Aaron Chastain (See Attachments 6A – 6C)
(Action Required)
4:10 – 5:10 P.M. 7. Asset Class SIO Update s Tim Taylor, SIO DC Programs Chief Update Global Equity (See Attachments 7A – 7E) Katy Wojciechowski, SIO Fixed Income John Bradley, SIO Private Equity Trent Webster, SIO Strategic Investments Daniel Beard, Chief, Defined Contribution Programs
5:10 – 5:25 P.M. 8. Major Mandate Performance Review Aon Hewitt (See Attachment 8) Katie Comstock
5:25 – 5:30 P.M. 9. Audience Comments/2020 Meeting TBD, Chair Dates/Closing Remarks/Adjourn (See Attachment 9)
*All agenda item times are subject to change.
December 17, 2019 December 17, 2019
Page 2 APPEARANCES:
IAC MEMBERS:
STATE BOARD OF ADMINISTRATION OF FLORIDA BOBBY JONES, CHAIR PETER COLLINS PETER JONES GARY WENDT CHUCK COBB TERE CANIDA JOHN GOETZ · ·INVESTMENT ADVISORY COUNCIL MEETING
SBA EMPLOYEES:
ASH WILLIAMS, EXECUTIVE DIRECTOR and CIO KENT PEREZ ALISON ROMANO JOHN BENTON TIM TAYLOR · · · ·Tuesday, December 17, 2019 KATY WOJCIECHOWSKI STEVE SPOOK · · · · · 1:00 p.m. - 3:52 p.m. JOHN BRADLEY TRENT WEBSTER DANIEL BEARD MICHAEL MCCAULEY · · · · · · · PAGES 1 - 156 SUBHASIS DAS
CONSULTANTS:
KRISTEN DOYLE - Aon Hewitt HUGH MERKEL - Mercer RICHARD BROWN - Townsend Group · · · · 1801 HERMITAGE BOULEVARD SETH MARCUS - Townsend Group · · · ·HERMITAGE ROOM, FIRST FLOOR JIM MNOOKIN - Cambridge Associates · · · ·TALLAHASSEE, FLORIDA 32308 ANDRE MEHTA - Cambridge Associates SAMIT CHHABRA - Cambridge Associates SHEILA RYAN - Cambridge Associates
· · · Stenographically Reported By: CERTIFICATE OF REPORTER· · · · · · · · · · · · 156 www.phippsreporting.com www.phippsreporting.com · · · · · · ·TRACY L. BROWN
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Page 3 Page 4 ·1· · · · MR. CHAIR:· First, I would like to welcome ·1· ·investment community. ·2· ·everyone to our December 17th Investment ·2· · · · Tere was a founder of Taplin, Canida, ·3· ·Advisory Council meeting. ·3· ·Habacht, a fixed-income firm that the SBA ·4· · · · And before we get started, the first thing ·4· ·invested with a number of years ago with great ·5· ·I'd like to do is entertain a motion to accept ·5· ·success.· The firm got bigger and bigger and ·6· ·the minutes that have been offered from our ·6· ·bigger and was eventually sold to the Bank of ·7· ·September 11th meeting. ·7· ·Montreal, leaving Tere in the difficult spot of ·8· · · · MR. JONES:· So moved. ·8· ·managing her own family office, a problem many ·9· · · · MR. CHAIR:· Do we have a second? ·9· ·of us would aspire to.· And so she is coming to 10· · · · MS. CANIDA:· Second. 10· ·us with deep expertise, deep roots in Florida, 11· · · · MR. CHAIR:· Got a second. 11· ·and no conflicts, which is an excellent 12· · · · All in favor, please say aye. 12· ·combination. 13· · · · (Members reply aye.) 13· · · · Tere, would you have anything to add to 14· · · · MR. CHAIR:· Okay.· Minutes are approved. 14· ·that? 15· · · · First, we have two wonderful new council 15· · · · MS. CANIDA:· Thank you.· I'm honored and I 16· ·members.· And I'd like to welcome, but I want 16· ·look forward to working with everyone. 17· ·Ash to make his executive director's report 17· · · · MR. WILLIAMS:· Thank you. 18· ·first so he can tell you something about both 18· · · · And then we also have John Goetz.· There's 19· ·of them. 19· ·John.· John is a founder and -- co-founder and 20· · · · So, Ash, I'm going to turn it over to you, 20· ·chief investment officer of Pzena Asset 21· ·sir. 21· ·Management in New York City, but like any wise 22· · · · MR. WILLIAMS:· Thank you, sir. 22· ·person with an appreciation of climate and tax 23· · · · So, let me welcome Tere Canida and John 23· ·laws, he also has a home in Florida and will 24· ·Goetz to the Investment Advisory Council.· Both 24· ·soon be a full-time Florida resident as he 25· ·of them are very distinguished members of the 25· ·leaves the full-time management of a private
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Page 5 Page 6 ·1· ·investment firm and joins others as a retiree ·1· ·financial officer, the governor, and the ·2· ·in Florida with many things still going on. ·2· ·attorney general have consistently, for more ·3· · · · So, John, anything to add to that? ·3· ·than a decade, picked really top professionals ·4· · · · MR. GOETZ:· Yeah.· I want to thank you for ·4· ·for this Board, and we're delighted that ·5· ·inviting me to join this group.· I've heard a ·5· ·they've continued with our two new appointees. ·6· ·lot about it, so I'm excited to participate. ·6· · · · MR. WILLIAMS:· Thank you. ·7· ·And hopefully do a little bit of help along the ·7· · · · Wanted to also note, and I believe all of ·8· ·way. ·8· ·you were copied on the email, Alison Romano has ·9· · · · MR. WILLIAMS:· Well, no doubt that will be ·9· ·stepped up.· She was previously co-senior 10· ·the case. 10· ·investment officer for the Global Equity Asset 11· · · · MR. WENDT:· You really can't take -- what 11· ·class, our largest asset class and one of our 12· ·people have been telling you.· That's not fair, 12· ·top performing.· Alison has been with the board 13· ·Bobby's a very good Chairman. 13· ·for a number of years, has also been on the 14· · · · MR. WILLIAMS:· Well, I didn't share the 14· ·private side, was with Goldman Sachs, and went 15· ·history either, that if anything goes wrong, 15· ·to a little school in Pennsylvania that's 16· ·the newest members are commonly blamed, so 16· ·reasonably well known for turning out financial 17· ·there's that. 17· ·professionals. 18· · · · Mr. Chair, if I may, a couple other 18· · · · Alison, anything you want to add to the 19· ·opening comments -- 19· ·mix on that? 20· · · · MR. COBB:· Mr. Chairman, I'd like to just 20· · · · Great.· Thank you. 21· ·add to your comment about how fortunate we are 21· · · · Tim Taylor, who is the other co-SIO in 22· ·to have these two superstars.· We just met with 22· ·Global Equity, is now SIO without the co in 23· ·the chief financial officer, and one of the 23· ·Global Equity.· And no doubt, he will do a fine 24· ·themes of our communication was that -- how 24· ·job there. 25· ·much we appreciate the fact that chief 25· · · · Also wanted to welcome Robert Tornillo and
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Page 7 Page 8 ·1· ·Tanya Cooper from the CFO's office who are with ·1· · · · To put a little better light on what a ·2· ·us this afternoon. ·2· ·16.8 percent gain means, the fund is up 18 and ·3· · · · Anybody from other trustees' offices that ·3· ·a half billion dollars over where it started ·4· ·I've missed?· Apparently not. ·4· ·the calendar year, and that's net of ·5· · · · We have legislative staff with us.· Thank ·5· ·distributing $600 million a month in cash.· So ·6· ·you for being here.· We're going to touch on ·6· ·it's been a very sweet year. ·7· ·something that's relevant to you in just a ·7· · · · Another thing indicating the sweetness of ·8· ·moment. ·8· ·the year is that the current asset balance in ·9· · · · Let's jump into performance update if I ·9· ·the Florida Retirement System trust fund, 10· ·may.· Looking through last night's close, the 10· ·$169.1 billion, is an all-time high.· And to 11· ·Florida Retirement Trust Fund is at a gain of 11· ·put it in perspective, at the bottom of the 12· ·16.82 percent.· That is 133 basis points behind 12· ·market in March of '09, that number was 13· ·target.· We would be quick to add, as I do at 13· ·83 billion.· Pretty significant difference. 14· ·every trustee's meeting, this is not, I think, 14· ·And when you consider also, though, that very, 15· ·anything to do with relative performance.· This 15· ·very long period of time, we've paid out many 16· ·is a function of mark to market that's hitting 16· ·hundreds of millions of dollars every month in 17· ·two asset classes especially hard, strategic 17· ·cash for benefits, it makes that gain in size, 18· ·investments and private equity.· And I think 18· ·I think, all the more remarkable. 19· ·when those are fully marked, that deficit would 19· · · · You will recall that legislatively a 20· ·go away. 20· ·couple of years ago, the legislature, with our 21· · · · Would you gentlemen agree with that? 21· ·support, changed the default preference. 22· · · · MR. WEBSTER:· We certainly hope. 22· ·Meaning that when a new employee comes into the 23· · · · MR. WILLIAMS:· That's -- that's what's 23· ·Florida Retirement System, they have a choice 24· ·known as a lukewarm response.· But at any rate, 24· ·of going into the defined benefit plan or the 25· ·I think it's a self-curing problem. 25· ·defined contribution plan, that is, the pension
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Page 9 Page 10 ·1· ·plan or the investment plan.· In the old days, ·1· ·October, went to a meeting of the National ·2· ·if they did nothing, and a surprisingly large ·2· ·Association of State Investment Officers, which ·3· ·number of employees do nothing and they just go ·3· ·is a, as its name implies, a small group. ·4· ·whichever way the default blows them, they ·4· ·They're basically people from the 50 states who ·5· ·would have all gone into the DB.· That was ·5· ·manage state pension plans on the investment ·6· ·changed to DC. ·6· ·side.· It's a very small gathering.· There's no ·7· · · · As a consequence, what we have since seen ·7· ·sponsorship, there's no glitz, there's no ·8· ·is that the investment plan now has nearly ·8· ·entertainment.· We get together, we divvy up ·9· ·27,000 people in it, more than it did last ·9· ·the costs among the different plans, pay the 10· ·year.· That's an increase of 14 percent in 10· ·bills ourselves.· So it's very private, very 11· ·headcount, and its assets have expanded over 11· ·nice.· And we just trade ideas for a few days 12· ·the calendar year through November 30, not 12· ·and talk about shared challenges and strategies 13· ·through last night's close, by over a billion 13· ·for dealing with them. 14· ·dollars, and are now 11.625 billion. 14· · · · NASIO, as the group is known, episodically 15· · · · So the defined contribution plan is 15· ·awards what's known as the Richard L. Stoddard 16· ·growing very healthily and doing just fine, 16· ·Award, which is for an individual who has done 17· ·thank you. 17· ·something to meaningfully change the level of 18· · · · So that performance and those records 18· ·expertise in public fund investment.· And I was 19· ·reflect, obviously I would say, culture that is 19· ·surprised and honored to receive the Richard 20· ·working, and our successes have not gone 20· ·Stoddard Award, which has only been given a 21· ·unnoticed.· So I wanted to share with you a few 21· ·handful of times over the time that NASIO has 22· ·indications of external appreciation of the 22· ·existed. 23· ·good work that this team is doing with your 23· · · · And as I told the gathering of investment 24· ·guidance here at the Florida State Board. 24· ·officers, thank you for the recognition, but I 25· · · · So, the first thing would be back in 25· ·would see this purely as a reflection on the
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Page 11 Page 12 ·1· ·excellence of our team.· Because as anybody ·1· ·bow tie.· And I thought, hmm.· So, he ends up ·2· ·that knows this organization knows, the group ·2· ·making a very nice speech about our successes ·3· ·of people sitting across the table here do ·3· ·here at the SBA, and I pick up the chief ·4· ·magnificent work.· And, yes, I might have some ·4· ·investment officer of the year award. ·5· ·coaching role in there somewhere, but at the ·5· · · · So, you know, I -- all these things ·6· ·end of the day, that's where the work's getting ·6· ·reflect magnificently on what the organization ·7· ·done and that's where the credit needs to go. ·7· ·has done.· I don't see them as personal things, ·8· · · · So then roll the clock forward a little ·8· ·I see them as validation of the collective ·9· ·bit, and last week I was in New York at the ·9· ·cultural strength of the institution we're all 10· ·Industry Innovation Awards, which is an event 10· ·a part of, and I thank you all for that and 11· ·put on by COO Magazine.· We had been nominated, 11· ·congratulate you on your success. 12· ·we the Florida SBA, had been nominated for an 12· · · · The other thing one must take away from 13· ·investment innovation award in the category of 13· ·this is, it ain't gonna get any better, it's 14· ·large funds, meaning over a hundred billion 14· ·almost certainly gonna get worse, and that's 15· ·dollars, competing against Texas Teachers and a 15· ·not very encouraging.· One thing I've been able 16· ·number of other very well-known funds, and we 16· ·to rule out is that I do not, in fact, have 17· ·won that.· So that was nice. 17· ·some terminal condition that I'm not aware of, 18· · · · And then the evening wore on, and the 18· ·because usually people pile on stuff like that 19· ·emcee, who's a publisher of the magazine, said, 19· ·if you've got some awful problem.· I don't 20· ·now I'd like to call Chris Ailman, who's the 20· ·think that's there. 21· ·chief investment officer of CalSTRS, forward to 21· · · · So with that, we've established the 22· ·present the chief investment officer of the 22· ·investment engine is hitting on all cylinders, 23· ·year award.· Well, Ailman comes up, and Ailman 23· ·which raises the question, what about the 24· ·had been wearing a tie like this, and he comes 24· ·control environment?· Are we in bounds there? 25· ·up to do the presentation and he switched to a 25· ·And the answer's yes.
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Page 13 Page 14 ·1· · · · A couple things to add, and I think we ·1· ·discussion.· And you were very interested in ·2· ·have got all the right people probably in the ·2· ·authoring a little piece to go to the trustees ·3· ·room, our chief risk and compliance officer is ·3· ·in support of reducing that return assumption. ·4· ·back there.· And our inspector general, Ken ·4· ·We did so, got it to the trustees.· And at the ·5· ·Chambers, may or may not be in here.· He's ·5· ·actuarial investing -- actuarial estimating ·6· ·probably out inspecting somebody in a general ·6· ·conference meeting, which took place right ·7· ·way.· And our chief audit executive, Kim ·7· ·around last week in October, first week in ·8· ·Stirner, is right here.· So, in this building ·8· ·November, they actually reduced the return ·9· ·you can run but you can't hide.· The ·9· ·assumption by twice the amount they've reduced 10· ·oversight's very thorough. 10· ·it in recent prior years.· They went down by 20 11· · · · And I think I can truthfully say our 11· ·basis points, from 7.4 percent to 7.2 percent. 12· ·control environment is in excellent shape.· We 12· ·We still think it should be 6.6, which is the 13· ·had an audit committee meeting on the 25th of 13· ·number Aon is using, but at least now we're 14· ·November that included a nonpublic session on 14· ·below the national average and we made a move 15· ·IT security, and a public session on everything 15· ·in the right direction by a greater increment 16· ·else.· And we had Todd Neville come as a new 16· ·than we have in I don't know how many years but 17· ·member.· Kim Ferrell and Mark Thompson remain 17· ·a lot of years.· So I thank the IAC for your 18· ·on the committee and are doing a good job.· And 18· ·embrace and involvement in that issue.· It was 19· ·I think I can summarize it by saying it was a 19· ·helpful.· And I believe the monetary impact of 20· ·great meeting, everything is fine, and Grant is 20· ·that move is something on the order of 21· ·still buried in Grant's tomb. 21· ·$300 million per year in increased funding for 22· · · · So unless anyone has any -- oh, wait. 22· ·the fund. 23· ·There's one other key thing I want to talk 23· · · · John, does sound right to you as a rough 24· ·about.· At our last meeting, the IAC got very 24· ·number? 25· ·involved in the investment return assumption 25· · · · MR. BENTON:· Yes.· Correct.
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Page 15 Page 16 ·1· · · · MR. WILLIAMS:· Yes.· So, you know, 300 ·1· ·actually -- when the meeting started, it went ·2· ·million bucks, even in this scale world, is ·2· ·on for several hours.· It then adjourned ·3· ·real money, so very helpful.· And that's ·3· ·without a decision.· They came back the ·4· ·recurring money.· That's not a one-time thing. ·4· ·following day and finished it up.· It was not ·5· ·So thank you for that. ·5· ·cooked in advance by any means. ·6· · · · All right. ·6· · · · And the parties basically are the ·7· · · · MR. COBB:· A question -- a question, ·7· ·Governor's Office, the House and the Senate, ·8· ·Mr. Chairman. ·8· ·more or less.· And the Governor's Office took ·9· · · · MR. CHAIR:· Yeah. ·9· ·the lead on this and stayed with it.· And I 10· · · · MR. COBB:· Was it -- 10· ·think it -- it ended very, very constructively. 11· · · · MR. WENDT:· I want to congratulate you on 11· ·So it was a good thing. 12· ·all these awards you've won.· Have any of them 12· · · · MR. COBB:· Good. 13· ·included cash? 13· · · · MR. CHAIR:· Any other questions for our 14· · · · MR. WILLIAMS:· Regrettably, no. 14· ·executive director? 15· · · · MR. WENDT:· All right. 15· · · · Okay.· The moment everybody's been waiting 16· · · · MR. COBB:· I would also like to add my 16· ·for.· Is it a duck or not?· Strategic 17· ·congratulations to both you and the firm. 17· ·investments, everything you've always wanted to 18· · · · But my question is, did our letter that 18· ·know, starring Trent Webster. 19· ·you -- that our chair sent urging this 19· · · · MR. WEBSTER:· Well, the first thing you 20· ·reduction expected returns, did that have 20· ·have to know for the newer members in the room 21· ·anything to do with the final decision or had 21· ·today, is that this duck called strategic 22· ·the final decision been pretty much made before 22· ·investments is just another way of saying 23· ·our email arrived? 23· ·alternative investments. 24· · · · MR. WILLIAMS:· I think it absolutely had 24· · · · So, the pension plan total fund is 25· ·plenty to do with it.· That discussion, it 25· ·organized, like a typical pension plan where
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Page 17 Page 18 ·1· ·you've got allocations to stocks, bonds, real ·1· ·good, we would take a look at that.· And we ·2· ·estate, and private equity.· And if an ·2· ·actually have some strategies that do run ·3· ·investment idea doesn't fit into one of those ·3· ·across the different asset classes in our ·4· ·asset classes, it comes to us, strategic ·4· ·portfolio. ·5· ·investments. ·5· · · · The next thing is is that we're a ·6· · · · And we have four objectives in policy. ·6· ·repository for investments and funds that may ·7· ·The first one is to generate over a long period ·7· ·not fit well in the other asset classes.· So ·8· ·of time, the real return target of the total ·8· ·hypothetically, let's say an ambitious young ·9· ·fund.· And that's currently CPI plus 4 percent. ·9· ·man or woman from the Midwest came to us and 10· ·Our second objective is to dampen the 10· ·said, I've got a good idea for an equity 11· ·volatility and improve the risk adjusted 11· ·portfolio, we're going to invest in four to six 12· ·returns of the FRS.· Our third objective is to 12· ·stocks, we might hold a hundred percent cash 13· ·outperform the total fund significant market 13· ·and we'll take 25 percent of the profits above 14· ·declines.· And finally, we have the objective 14· ·6 percent. 15· ·of being able to invest flexibly, 15· · · · I started in the -- what was then the 16· ·opportunistically and in new strategies as they 16· ·domestic equities asset class, and we wouldn't 17· ·come about.· So that makes us, we think, quite 17· ·have looked at that, because that would have 18· ·an interesting place to be. 18· ·blown up our risk budget and violated our cash 19· · · · But we play other roles in the 19· ·guidelines.· But that's the original terms of 20· ·organization as well.· The first one is, well, 20· ·the Warren Buffett partnership.· And I would 21· ·what if you have a cross-asset class strategy, 21· ·think that if we could find another Warren 22· ·so your typical -- you know, your stereotypical 22· ·Buffett, we'd probably find a place somewhere 23· ·strategy might be a 60/40 manager, but where 23· ·in the Board to investment with them.· So, 24· ·would you stick that if there's no place for 24· ·unfortunately we haven't found that person yet, 25· ·it?· So if there was a 60/40 manager who's very 25· ·so if you happen to know of that person,
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Page 19 Page 20 ·1· ·please, you know, we'd be interested in talking ·1· ·alternatives is difficult, we like to look at ·2· ·to them. ·2· ·ourselves on multiple levels.· Obviously we ·3· · · · And finally, we also act as an incubator ·3· ·have to have official performance, but we like ·4· ·for potential new asset classes.· Now, in the ·4· ·to look at other things as well.· One of them ·5· ·10 or 12 years or so that strategic investments ·5· ·is whether or not we're returning above or ·6· ·has existed, we haven't had any new asset ·6· ·below our long-term target.· And the other one ·7· ·classes, but when we talk through our different ·7· ·is to look at how we're doing against the rest ·8· ·substrategies, you'll see that we have some ·8· ·of the FRS. ·9· ·things in our portfolio that in other pension ·9· · · · So the green bar is the FRS performance, 10· ·plans, in other endowments or whatever, they 10· ·excluding strategic investments.· So we would 11· ·exist as different asset classes, and it's 11· ·not expect to beat the rest of the FRS over 12· ·possible that they could get elevated at some 12· ·time, because the risk in the FRS is primarily 13· ·time in the future. 13· ·equities.· And the risk in strategic is 14· · · · So I'll briefly talk about performance. 14· ·primarily not equities.· We would expect 15· ·The blue bars are our performance, the red bars 15· ·equities to do better over time.· So we don't 16· ·is the performance of our benchmark, and the 16· ·expect to keep -- to beat the FRS over long 17· ·yellow bar, that's the real return target that 17· ·periods of time, but we should be somewhere in 18· ·we're required to hit over time.· Being an 18· ·the ballpark. 19· ·alternative investment, benchmarking is 19· · · · So, for example, our three-year 20· ·problematic.· That -- this graph with the red 20· ·performance of the FRS was about eight and 21· ·bars, this is the benchmark that you look at 21· ·three-quarter percent.· Our performance was 22· ·that gets rolled up into the total fund.· And 22· ·about seven and a quarter.· That's roughly 23· ·this is an aggregation of all the individual 23· ·okay.· I would be more concerned if the FRS was 24· ·fund targets.· I'm sorry, fund benchmarks. 24· ·at eight and three-quarters and we were at two 25· · · · But because invest -- or benchmarking 25· ·and a quarter, that might set off a few alarm
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Page 21 Page 22 ·1· ·bells, so -- but this is just another way of ·1· ·8.4 percent.· We've been kind of hanging around ·2· ·looking at how we're doing and whether or not ·2· ·this eight, eight and a half percent for a ·3· ·we're performing in the way that we're supposed ·3· ·while.· That's not by design.· One of the ·4· ·to. ·4· ·reasons why we haven't been getting -- gotten ·5· · · · So our policy target is 12 percent of the ·5· ·up to 12 percent is because Tim and our new ·6· ·the total fund.· We're currently at ·6· ·deputy CIO, Alison, have done an excellent job, ·7· ·8.4 percent.· We have an allocation range ·7· ·global equities have been a hard rabbit to keep ·8· ·between zero and 16 percent.· We can be ·8· ·up to. ·9· ·zero percent of the fund, we can be 12 or even ·9· · · · Also, because we have a lot of private 10· ·up to 16.· So in theory, if there were things 10· ·structures, we have found that the cash coming 11· ·that we did not like, because we have this 11· ·back to us from our funds has been greater than 12· ·mandate to invest opportunistically, we could 12· ·the amount of cash that's been going out. 13· ·liquidate everything and give it back to the 13· ·We're sort of running to stand still.· And 14· ·rest of the fund.· Practically that's not going 14· ·finally, we've had net redemptions in hedge 15· ·to happen.· Practically, in the next few years, 15· ·funds about a billion dollars.· Now, we've had 16· ·we expect to be up at 12 percent.· But what 16· ·a very busy year last year and this year.· We 17· ·that enables us to do is to be able to allocate 17· ·would expect that in the next few years, to get 18· ·capital across a wide variety of different 18· ·back near to our 12 percent target. 19· ·strategies and not feel like we ever have to 19· · · · Currently our net asset value is just over 20· ·force capital into a market.· So if there's 20· ·13 and a half billion dollars.· We manage 93 21· ·things that we don't like, we would rather put 21· ·relationships amongst 146 funds, more or less. 22· ·our capital into things which we think are more 22· ·We're split roughly between private markets and 23· ·attractive from a risk adjusted return. 23· ·what we call liquid.· We expect that over the 24· · · · Now, our current rate -- or weight, I'm 24· ·next few years as we get up to near our 25· ·sorry, as of the end of the third quarter is 25· ·12 percent target, we'll probably be around 120
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Page 23 Page 24 ·1· ·relationships and 200 funds, which sounds like ·1· ·the portfolio, which we'll discuss in a minute. ·2· ·a lot on the surface, but it's not as much as ·2· · · · And finally, we haven't done a whole lot ·3· ·you see -- as it seems as we go through this ·3· ·of co-investing.· This is something that we're ·4· ·presentation. ·4· ·looking at.· We may do something.· It's a ·5· · · · So we invest primarily in fund and ·5· ·little more difficult in our asset class ·6· ·fund-like structures.· So we're not -- other ·6· ·because of the flexible nature of it.· And ·7· ·than in GP investments, we're not doing direct ·7· ·there isn't really a whole lot of empirical ·8· ·investments in individual securities or ·8· ·evidence that we're aware of, of whether or not ·9· ·individual opportunities.· So, we aren't ·9· ·this is a -- you know, if this is something we 10· ·particularly good at being able to assess the 10· ·should do.· But we're going to see if we can 11· ·viability of a power plant in southern 11· ·gather a little bit of that empirical evidence 12· ·California versus a power plant in Sussex, 12· ·and go forward with that. 13· ·right?· But we're very good at assessing a 13· · · · So we invest primarily in funds.· And so 14· ·manager who invests in power and can assess 14· ·how do we do that?· The very first thing we 15· ·between, you know, investments in southern 15· ·look at is the ethical standards of the 16· ·California and Sussex.· So that's what we do. 16· ·managers.· So we're not interested in investing 17· · · · We have no liquidity demands.· All the 17· ·with anybody who has a bad reputation or seems 18· ·liquidity demand for the FRS comes from our 18· ·unethical.· The very first thing we look at 19· ·good friends in global equities and fixed 19· ·for -- or we want to understand before we look 20· ·income.· We do supply equities through the 20· ·at anything else.· We don't care what the 21· ·distri -- or liquidity through the 21· ·performance is, we don't care if they're a rock 22· ·distribution, but Mr. Benton has not yet called 22· ·star.· If we think that funny things are going 23· ·me up and asked for a couple hundred million 23· ·on in the firm or behavior is not acceptable to 24· ·dollars to fund the liabilities.· And that 24· ·us, we won't invest with them. 25· ·makes a difference in terms of how we construct 25· · · · Then the second thing we want to
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Page 25 Page 26 ·1· ·understand is whether or not the firm is ·1· ·between 50 and $300 million.· So, our target ·2· ·institutional.· The FRS is the fifth largest ·2· ·currently is around 200 million.· So our ·3· ·public pension plan in the country, and so can ·3· ·average check we're trying to get out is about ·4· ·they take -- can they meet the demands of a ·4· ·200 million.· So that's about what we're ·5· ·large institutional client like us? ·5· ·looking at. ·6· · · · And then and only then, after those two ·6· · · · So, in our process, our philosophy is that ·7· ·hurdles have been cleared, do we assess the ·7· ·it's a concept proof of concept strategy. ·8· ·performance.· Ultimately this is a business of ·8· ·There are other funds and there are other pools ·9· ·performance.· You can have the smartest guy in ·9· ·of capital out there which make it a point of 10· ·the room with the best credentials, went to the 10· ·funding new startups and seed capital.· We 11· ·best schools, but if they can't produce, we 11· ·don't do a lot of that.· We want to see if 12· ·can't, you know -- we wouldn't find a place for 12· ·there's a track record, if they're actually 13· ·them in the corporation. 13· ·good at what they do.· We have invested in 14· · · · MR. CHAIR:· Trent, I had one question 14· ·first-time funds.· We typically don't, but if 15· ·before we move from this. 15· ·we do it, it's usually in a unique or 16· · · · MR. WEBSTER:· Yes. 16· ·compelling idea.· Or it's with a manager which 17· · · · MR. CHAIR:· Because of your size, you 17· ·we're very familiar.· So we've probably made 18· ·know, 13-plus billion, you look at the 18· ·about 160, 170 funds -- or fund investments. 19· ·commitments.· On that selection, is there some 19· ·You could count the number of the first-time 20· ·kind of size criteria?· Because it takes a lot 20· ·funds on one hand.· But we do do it 21· ·to move the needle when you have 13 billion. 21· ·occasionally. 22· ·Do you just say, I'm not gonna look at anything 22· · · · We like to get to know a manager between 23· ·under X?· I'm just curious. 23· ·when they're fundraising -- and this is 24· · · · MR. WEBSTER:· Yeah.· So typically on -- 24· ·important, the manager's more important than 25· ·typically our fund size, our check size is 25· ·the strategy.· One of our managers who we've --
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Page 27 Page 28 ·1· ·on successive funds they -- they had -- they ·1· ·asset allocation process that we do once a year ·2· ·were investing into a strategy where the market ·2· ·where we're looking forward for three to five ·3· ·had fallen by 40 percent.· And they'd been able ·3· ·years on where we want to allocate capital. ·4· ·to -- they'd been able to create value and ·4· ·This process is a -- we do this once a year and ·5· ·generate positive returns even though their ·5· ·it's meant to be a road map or a guide.· It's ·6· ·market had been crushed. ·6· ·not meant to be set in stone.· Because of our ·7· · · · So that's the type of thing that we like ·7· ·flexible mandate, what we may see, we may -- ·8· ·to look for. ·8· ·things may pop up every -- you know, in between ·9· · · · MR. JONES:· Trent, one quick question: ·9· ·our asset allocation meetings and we may move a 10· ·Are most of your new ideas coming from the 10· ·different direction or certain way. 11· ·consultants or internally sourced or a 11· · · · But this is the output, so we have this 12· ·combination or -- 12· ·big giant spreadsheet, you know, this big 13· · · · MR. WEBSTER:· We work in consultation with 13· ·model.· We talk to our consultants, we have 14· ·our consultants, so we're out there and we're 14· ·internal meetings.· And this is what comes out 15· ·very, very active and we're seeing a lot of 15· ·of it.· And we do this every year.· So this was 16· ·different things.· We get a lot of in-bound 16· ·done in the spring of this year.· The current 17· ·calls.· But we talk to our consultants every 17· ·weight was the weight of each sub-asset class 18· ·week, and so it's a very active dialogue. I 18· ·in March, and then the target weight was the 19· ·don't know what the split would be, but 19· ·determination of where we'd like to go.· And 20· ·oftentimes when we have a new manager that have 20· ·then we look forward five to ten years on where 21· ·come on the radar, we're typically talking to 21· ·we think we're going to allocate capital and 22· ·them very -- to our consultants very early in 22· ·see what the target weights are five years from 23· ·our process. 23· ·now.· And then we can make an approximation of 24· · · · So we're going to see here a whole bunch 24· ·how much capital we want to allocate to the 25· ·of different asset classes.· We do have an 25· ·different strategies.
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Page 29 Page 30 ·1· · · · So, this is a model and so we -- all the ·1· · · · A couple years later, the foreign equities ·2· ·caveats of a model.· What it does is it ·2· ·and the domestic equities asset class merged to ·3· ·provides us a framework so we don't get too far ·3· ·become what was now called global equities. ·4· ·off track where one day we wake up and we have, ·4· ·And then we had a global equities portfolio ·5· ·say, 30 percent in the sub-strategy we don't ·5· ·within strategic investments and that didn't ·6· ·necessarily mean to. ·6· ·make a lot of sense, so that was transferred to ·7· · · · These are our strategy allocations over ·7· ·the new stra -- or the new the global equities ·8· ·time.· So this asset class began in 2007.· And ·8· ·asset class.· And we consider the beginning of ·9· ·it was originally funded -- and correct me if ·9· ·July 2010 is really where we, as an asset 10· ·I'm wrong, John, but this was originally funded 10· ·class, as an alternative asset class, came 11· ·with the global equities asset class, which is 11· ·before.· Because for the first three years, our 12· ·different than the global equities asset class 12· ·average allocation of global equities was about 13· ·from today.· I think it was a 5 percent 13· ·75 percent.· And we behaved like a global 14· ·allocation of the total fund. 14· ·equities asset class.· So during the financial 15· · · · MR. BENTON:· Yes, correct. 15· ·crisis, we dropped down significantly and then 16· · · · MR. WEBSTER:· Right.· And so we had -- the 16· ·we bounced up significantly.· So we look more 17· ·decision was made to transfer the funds from 17· ·like a global equities asset class. 18· ·the global equities asset class at that time 18· · · · But you can see here over time that when 19· ·into strategic investments.· This asset class 19· ·the global equities asset class was transferred 20· ·was managed by the foreign equities asset 20· ·out, we were actually given a $2.2 billion high 21· ·class, which was different from the domestic 21· ·yield investment from fixed income, which we 22· ·equities asset class.· I know it's all a little 22· ·then proceeded to liquidate.· And most of what 23· ·confusing.· But the global equities asset class 23· ·we did was in debt, which is that navy blue 24· ·came into us, which we managed and began to 24· ·part of the graph.· And then over time, we 25· ·sell down to invest in alternative investments. 25· ·started investing in a whole bunch of other
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Page 31 Page 32 ·1· ·things. ·1· ·right, with masking tape? ·2· · · · And the emphasis over the last five or six ·2· · · · MR. WENDT:· This is better. ·3· ·years, apart from our normal course of ·3· · · · MR. COLLINS:· In all seriousness, though, ·4· ·business, has been investing in that purple ·4· ·for those of us that don't deal in these charts ·5· ·part of the graph, which is called diversifying ·5· ·every day, this is a very difficult chart. ·6· ·strategies.· And that diversifying strategies ·6· ·Just saying. ·7· ·is the part of the portfolio which should help ·7· · · · MR. WEBSTER:· This chart -- this chart is ·8· ·us fulfill the policy objective of ·8· ·our three-year performance.· And you're going ·9· ·outperforming the FRS where there's a ·9· ·to see a bunch of three-year performance charts 10· ·significant market decline. 10· ·in this presentation, because that's where 11· · · · MR. WENDT:· Trent, I've raised this 11· ·we've got the most data for our sub-asset 12· ·before. 12· ·classes.· You can see here is that the other 13· · · · MR. WEBSTER:· Yeah. 13· ·four, like the four strategies which are 14· · · · MR. WENDT:· I had the opportunity to 14· ·levered to the economy have done better.· The 15· ·attend Art Basel just a couple weeks ago.· This 15· ·diversifying strategies have been a little 16· ·would have been one of the better works.· Don't 16· ·worse than we'd expected, but if you -- this 17· ·you guys think this is very nice?· I'm going to 17· ·was a three-year performance, say, in 2002, 18· ·get a copy of it at some point. 18· ·when the stock market had gone down three years 19· · · · MR. WILLIAMS:· Wait.· Should we take a 19· ·in a row, we'd expect that to be flipped, where 20· ·minute, Mr. Chairman, and see if there's an 20· ·everything else would -- if it's all upside 21· ·offer on the table? 21· ·down, the purple part would be upside down a 22· · · · MR. WENDT:· I'll give you $20 for it. 22· ·whole lot less than everything else.· That's 23· · · · MR. WILLIAMS:· There may be some action 23· ·the role that that plays. 24· ·around this. 24· · · · And these are the sub-asset classes, which 25· · · · MR. CHAIR:· Commodities are bananas, 25· ·we're all going to talk about here in a minute.
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Page 33 Page 34 ·1· ·So we got 21, I think, active sub-asset classes ·1· ·the reason for this, and maybe I can, you know, ·2· ·that we're investing in. ·2· ·sell it to the Museum of Modern Art and do ·3· · · · MR. COLLINS:· Can I ask a question, ·3· ·something better, but that -- the dark blue is ·4· ·Mr. Chairman? ·4· ·all the original investments that we went into. ·5· · · · MR. CHAIR:· Yes, sir. ·5· ·And so what we were investing back in that ·6· · · · MR. COLLINS:· A little easier to ·6· ·time -- ·7· ·understand this chart. ·7· · · · MR. COLLINS:· All that tells me is that ·8· · · · I remember in the origins of strategic ·8· ·there was a lot. ·9· ·investments, and it was a little bit of, hey, ·9· · · · MR. WEBSTER:· There was a what? 10· ·let's grab this and let's grab that, let's put 10· · · · MR. COLLINS:· There was a lot of dark 11· ·all this stuff together and we're going to call 11· ·blue. 12· ·it strategic investments.· How much of that 12· · · · MR. WEBSTER:· There's a lot of dark blue. 13· ·chart is a result of the initial sort of 13· ·So what we were doing is that during the 14· ·pooling together of all those disparate 14· ·financial crisis, we were investing in hung 15· ·investments that then made up strategic 15· ·bridge loans and distressed assets.· That's 16· ·investments?· Or do you really sit around and 16· ·what we were doing, and that's what most of 17· ·say, well, you know, we're going to have 17· ·that is in that dark blue. 18· ·2 percent here and one and a half percent here? 18· · · · So when we talk about, we want to act 19· ·I mean, are you -- how molecular are you 19· ·opportunistically, we're trying to act in a 20· ·getting with it? 20· ·contrarian manner.· So we want to go to where 21· · · · MR. WEBSTER:· Well, we'll go back to this 21· ·capital is scarce.· We want to maybe be 22· ·chart that you really don't like.· This one 22· ·cautious where there's a lot of capital.· And 23· ·right here. 23· ·so during the financial crisis, we were putting 24· · · · MR. COLLINS:· I can't look at it. 24· ·capital to work in some of the worst parts of 25· · · · MR. WEBSTER:· That blue -- the dark -- and 25· ·the credit market.
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Page 35 Page 36 ·1· · · · Now, it's a little more difficult today, ·1· ·is that we generally are cautious on debt ·2· ·but we'll talk a little bit about some of the ·2· ·because of the -- it's a very late cycle ·3· ·things that we're doing.· It's a little bit ·3· ·credits.· It's very late cycle in the credit ·4· ·more difficult today because everyone's happy ·4· ·cycle.· So we've been generally cautious. ·5· ·and there's a flood of liquidity and we're ·5· ·We've been more focused on protecting capital. ·6· ·never ever, ever going to go down again, et ·6· ·But we are finding some interesting things to ·7· ·cetera, et cetera, et cetera.· But a lot of the ·7· ·do.· So I'd said earlier about some markets we ·8· ·stuff that happened back in that time period, ·8· ·don't like if there are managers we really like ·9· ·most of that's run off, Peter. ·9· ·and markets we don't like, we'll go ahead and 10· · · · MR. CHAIR:· And, Trent, I had a question, 10· ·invest with the manager. 11· ·kind of to follow-up on Peter's.· Would you 11· · · · So distressed is our largest allocation. 12· ·kind of -- particularly for Tere and John -- 12· ·And again, this is -- you can actually see 13· ·describe both the investment and the time frame 13· ·here.· Peter, it's over there.· You can see 14· ·of Lexington Partners, which to me is a great 14· ·some here, Peter, on this graph, there are some 15· ·example of an opportunistic deal, and when did 15· ·original investments during that time.· Most of 16· ·that happen and what bucket does that fit in? 16· ·those have since run off or they're small net 17· · · · MR. WEBSTER:· Can I get that in a minute? 17· ·asset values, a few things left there.· This is 18· · · · MR. CHAIR:· Sure. 18· ·a strategy we generally really like, but the 19· · · · MR. WEBSTER:· That's actually on the board 19· ·problem is, there's not a whole lot of 20· ·here. 20· ·distressed like there was, you know, even five 21· · · · MR. CHAIR:· Okay. 21· ·years ago. 22· · · · MR. WEBSTER:· So we'll get that in a 22· · · · So this has morphed a little bit.· So what 23· ·minute as we go through here. 23· ·we call distressed, Cambridge would now call 24· · · · So we've got five broad strategies.· The 24· ·credit opportunity.· So that includes stressed, 25· ·first one is debt.· Our broad opinion of debt 25· ·distressed, and other sort of eclectic lending
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Page 37 Page 38 ·1· ·strategies. ·1· ·some of the private debt stuff here in ·2· · · · There is opportunities abroad.· We've been ·2· ·distressed, a lot of this -- and when we talk ·3· ·doing some work in India, which is a very ·3· ·about lending, some of these lending strategies ·4· ·interesting market.· And China's really ·4· ·were showing up here in some of the hedge ·5· ·interesting.· Whether or not we can ever play ·5· ·funds, literally some of the same assets.· And ·6· ·in there, I'm not sure, but -- and the other ·6· ·oftentimes they were long only. ·7· ·observational half about the market is before ·7· · · · So the question that we had, well, if ·8· ·five years ago, we talked to distressed ·8· ·we're paying really high fees in hedge funds ·9· ·managers and, you know, they were very bullish ·9· ·and more attractive fees in the private 10· ·on Spain and what was going on in Spain.· And 10· ·markets, why would we have the same assets in 11· ·we'd ask them about Italy and they'd say, 11· ·the hedge funds that we're getting in the 12· ·oh, no, we never want to go in Italy because it 12· ·private markets?· We actually found that the 13· ·takes forever to get anything done.· You know, 13· ·performance in the private markets, even 14· ·it's all -- you know, the laws are archaic and 14· ·adjusting for fees, was better in the private 15· ·the judges are really slow.· And now they're 15· ·markets than they were in the liquid markets. 16· ·all into Italy.· So, you know, we're a little 16· ·Now, that doesn't mean we wouldn't invest in a 17· ·cautious on some of that stuff. 17· ·good credit hedge fund, because we will look at 18· · · · So evergreen debt is what we generally 18· ·any good manager and any strategy, no matter 19· ·call -- it's what people might call hedge funds 19· ·what they do.· But we've chosen to take most of 20· ·and credit hedge funds.· But we have some 20· ·our credit exposure in the private markets. 21· ·other -- a few things in there.· It might be 21· · · · And that includes in lending.· And we're 22· ·something that wouldn't fit into Katy's 22· ·kind of cautious on lending currently because 23· ·program, might come into here.· Our experience 23· ·of some of the things that are going on in -- 24· ·in this sub-asset class, and we've had direct 24· ·with no covenants and silly add backs and 25· ·experience in this, is that when we look to 25· ·adjustments that you're seeing right now in the
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Page 39 Page 40 ·1· ·lending market, so we're cautious here. ·1· · · · MR. COLLINS:· Would you take -- I'm sorry, ·2· · · · MR. COLLINS:· What was the vintage of the ·2· ·Mr. Chairman. ·3· ·last fund that you went into in this space? ·3· · · · MR. CHAIR:· Go, please. ·4· · · · MR. WEBSTER:· Looking at that, I think ·4· · · · MR. COLLINS:· So on this end and on the ·5· ·2016, '17, somewhere in there.· Now, we'll look ·5· ·distressed, I mean, as you look at distressed ·6· ·at those. ·6· ·debt right now, you'd say, well, not a great ·7· · · · So these managers, we -- the managers that ·7· ·place to be but we've got a bunch of managers ·8· ·we have, most of the managers, we'll re-up ·8· ·there and we'll re-up with them because they're ·9· ·with, but we won't necessarily go and find new ·9· ·going to raise another fund, or would you look 10· ·managers unless we find managers that we like. 10· ·at it and say, well, we're gonna skip this 11· ·So if there are managers that we don't like on 11· ·vintage?· Or would you say, we're gonna cut our 12· ·this list and we find managers we like, we 12· ·allocation down by 50 percent to this vintage? 13· ·can -- we can change -- we can swap them out. 13· · · · How -- how much discretion are you guys 14· ·But usually we're looking for some sort of 14· ·exercising there on particular vintages? 15· ·twist on it. 15· · · · MR. WEBSTER:· A fair amount.· I mean, 16· · · · So, just straight-up lending, you know, 16· ·the -- if there's a market that we don't like 17· ·we've got a manager that's pretty conservative, 17· ·but if there's a manager that we like, we'll 18· ·pretty high in the capital stack, very low 18· ·support them.· If there's a manager that we're 19· ·default rate, we're happy with them and we 19· ·kind of eee on and we don't like, we won't 20· ·think they've got a lot of experience.· They 20· ·re-up with them. 21· ·can weather deep economic crisis,so we're happy 21· · · · So, this is a -- this is something that we 22· ·with them.· But in terms of doing a massive 22· ·have a conversation with -- we have a 23· ·expansion in this asset class -- or in this 23· ·conversation about a lot, right, on what -- 24· ·sub-asset class, that's not gonna happen in 24· ·where we like different areas of the market and 25· ·this environment. 25· ·where we don't like, right.· What you won't see
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Page 41 Page 42 ·1· ·is that you won't see all these suddenly ·1· ·question. ·2· ·disappear because we've sold them in the ·2· · · · MR. CHAIR:· Yes, sir. ·3· ·secondary market, 80 cents on the dollar.· That ·3· · · · MR. COBB:· Of the 14 approximate billion ·4· ·won't happen. ·4· ·dollars, what percent do you pay a 15 to ·5· · · · But what's happened in debt -- again, back ·5· ·20 percent performance fee on?· And of that ·6· ·to the chart that we looked at earlier -- is ·6· ·percentage, what percent -- is there a hurdle ·7· ·that debt has become a lesser amount of the ·7· ·or is it a straight -- ·8· ·portfolio, and we haven't been re-upping a ·8· · · · MR. WEBSTER:· Yeah.· So -- ·9· ·whole lot.· So one of the reasons -- so we go ·9· · · · MR. COBB:· Just to generalize on the full 10· ·back to this distressed, there's 30 loans on 10· ·14 billion. 11· ·this page, 23 of them are outside of their 11· · · · MR. WEBSTER:· Yeah.· So most of what we 12· ·investment period.· So when we go back to here, 12· ·do, we pay a carry-on, right.· And then most of 13· ·you'll see that distressed is 10 percent. 13· ·what we do has a hurdle.· So, generally in 14· ·That's gonna fall, right, partly because of 14· ·hedge funds don't have a hurdle.· But in our 15· ·just the lack of opportunities. 15· ·private markets and with our activists, they'll 16· · · · Now, if you go back even further back 16· ·have hurdles.· And so, you know, that's -- I 17· ·here, this says we got to be putting about a 17· ·can't remember, do insurance funds have 18· ·billion dollars a year into distressed just to 18· ·hurdles? 19· ·keep that 12 percent target.· I tell you that 19· · · · MR. DAS:· No, they do not. 20· ·that's the model.· Probably not gonna happen 20· · · · MR. WEBSTER:· No.· So I'm thinking maybe 21· ·unless you get a big recession.· But we're 21· ·two-thirds, roughly. 22· ·never ever going to have another recession 22· · · · MR. COBB:· There'll be a performance fee. 23· ·again, so, you know, we don't have to worry 23· · · · MR. WEBSTER:· And a hurdle in it.· Right. 24· ·about that. 24· · · · MR. COBB:· And a hurdle.· Right.· Thank 25· · · · MR. COBB:· Mr. Chairman, I have a 25· ·you.
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Page 43 Page 44 ·1· · · · MR. COLLINS:· Preferred return. ·1· ·to go up.· It's probably going to be higher, ·2· · · · MR. WEBSTER:· Then our last debt is what ·2· ·and we'll tell you why in a minute.· This is ·3· ·we call subordinated capital.· We've been big ·3· ·the minute. ·4· ·players in mezz for a long period of time. ·4· · · · So, this is -- our activist equity book, ·5· ·This is a strategy where if you're concerned ·5· ·I'm going to get on my soapbox here for a ·6· ·about loans probably should be concerned about ·6· ·minute, so to answer the ambassador's question ·7· ·subordinated capital. ·7· ·about hurdles.· This is a strategy where we ·8· · · · Our focus on this area recently has been ·8· ·will not hire anybody without a hurdle on it. ·9· ·on kind of nichier strategy with managers that ·9· ·We would very -- we very strongly -- when we 10· ·we like.· Broad mezz is an area -- I wouldn't 10· ·talk to managers, we very strongly advise them 11· ·say it's necessarily shrinking or under 11· ·that they should take a market hurdle.· Some of 12· ·pressure, but what we're seeing is that 12· ·them like to take an absolute return hurdle. 13· ·Unitranche, which does the whole debt stack, 13· ·We'll listen to them. 14· ·taking a lot of share from mezzanine.· We 14· · · · But we've probably talked to 50 or 60 15· ·haven't done a Unitranche manager yet, but 15· ·activists around the world.· We probably know 16· ·we're kind of on -- with mezz, we're not 16· ·more about this space than anybody, any of our 17· ·expanding generic mezz.· We do nichier stuff, 17· ·peers.· And I very strongly believe that this 18· ·but we're not doing anything that's broad. 18· ·is a beta-plus strategy and you should pay 19· · · · In equity, so we've got -- we've got these 19· ·carry based on the alpha.· So if the market -- 20· ·five equity strategies.· We're not doing 20· ·if the market's down 40 and the manager's down 21· ·anything in long equity, that's Warren Buffett 21· ·20, we'll pay carry on the 20 percent alpha, if 22· ·number two, if we ever were to do something 22· ·the market's up 40.· The market's up 20, why am 23· ·like that and Tim couldn't take it, that's 23· ·I paying alpha on it?· Right. 24· ·where it would go.· This number, we set our 24· · · · So we pay -- and there's a lot of academic 25· ·medium term target at 16.· It's probably going 25· ·evidence for this.· The academic evidence is
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Page 45 Page 46 ·1· ·that activists create 3 to 400 basis points of ·1· ·Bradley in private equities, they've had a ·2· ·alpha.· The two and 20 structure, they take all ·2· ·long, long relationship with Lexington.· And so ·3· ·the alpha.· Why would I do that?· That makes no ·3· ·we had the opportunity to invest in Lexington ·4· ·sense whatsoever.· And of the 50 or 60, the ·4· ·in 2010.· It's -- we've been very happy with ·5· ·number of funds who are actually worth the two ·5· ·that relationship.· They've been a very good ·6· ·and 20, you can count on one hand and take some ·6· ·partner for us.· We still think the secondary ·7· ·fingers away, right? ·7· ·market in private equity is a good place to be. ·8· · · · So -- but this is an area we actually find ·8· ·We think that that's the market that's going to ·9· ·interesting.· Where there's some changes going ·9· ·continue to grow and get more liquid.· We think 10· ·on in Japan, we find really interesting.· And 10· ·Lexington is probably the -- we're not supposed 11· ·if there is a beta market it's -- I'm sorry, if 11· ·to talk about, you know, individual funds here, 12· ·there's an alpha market, it's Japan.· So you're 12· ·but, you know, just to give them props, they're 13· ·probably going to see some Japanese funds start 13· ·probably the preeminent secondary player in the 14· ·popping up on that list here when we do this 14· ·world.· So we like this.· We haven't done 15· ·next year. 15· ·anything since 2011 because what -- there's 16· · · · We also like what's going on in Europe, 16· ·been a proliferation of funds.· We actually 17· ·not because we necessarily like Europe, but the 17· ·think that they're overpaying generally for GP 18· ·equity performance of the European markets have 18· ·stakes, and really not quite sure what the exit 19· ·been pretty poor and it's putting pressure on 19· ·strategies are in some of these things.· So we 20· ·firms to create value and be more susceptible 20· ·haven't done anything other than these two. 21· ·to activists.· So this has been a strong 21· · · · Long/short equity.· So we think long/short 22· ·performer for us. 22· ·equity as a strategy, before fees -- this is a 23· · · · So the question came up about Lexington. 23· ·group that actually creates value.· After fees, 24· ·And Lexington is here.· This is where we are, 24· ·takes all the value away and more.· So it's a 25· ·here.· So John's group's had a long -- John 25· ·very high hurdle for equity long/short.· And in
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Page 47 Page 48 ·1· ·part also because the beta's pretty -- I'm ·1· ·wound up in private equity.· So we've got funds ·2· ·sorry the correlation is pretty high to the ·2· ·that do private equity in real estate, we've ·3· ·equity markets.· So we've got Tim doing a ·3· ·got funds that do private equity in debt, we've ·4· ·really good job in equity, giving us a lot of ·4· ·got funds that do private equity in public ·5· ·equity exposure.· For us, the bar is very high. ·5· ·equity and they're kind of morphing more into ·6· · · · And so what we're looking for in this is ·6· ·private equity.· So we have funds, if they ·7· ·something that's different, or it's actually ·7· ·morphed completely in private equity, we'll ·8· ·going to -- there's going to be another one on ·8· ·say, well, that's over to John's and private ·9· ·here when we do this again a year from now, ·9· ·equity, we're not going to do that.· But if 10· ·maybe two.· There's generally some sort of -- 10· ·it's mixture of different strategies, then 11· ·there's some sort of specialization that they 11· ·that's where it comes. 12· ·do or they genuinely create value on a 12· · · · This is also where the Florida Growth 13· ·risk-adjusted basis.· We'll always look, even 13· ·Fund -- the equity portion of the Florida 14· ·if it's a -- we don't like long/short equity as 14· ·Growth Fund sits.· The credit portion of the 15· ·a strategy, but we'll look at really good 15· ·Florida Growth Fund fits here in debt 16· ·managers in this strategy if they can prove to 16· ·subordinated capital.· You can actually see 17· ·us that they've done a good job. 17· ·that in about the middle of the list on the 18· · · · So we've got this thing called SI private 18· ·right. 19· ·equity.· Well, Trent, why you got SI private 19· · · · MR. CHAIR:· Trent, I have one question 20· ·equity if you've got this whole private equity 20· ·real quick. 21· ·group?· And this private equity group is one of 21· · · · MR. WEBSTER:· Yeah. 22· ·the best in the country, so why are you doing 22· · · · MR. CHAIR:· We did a deep dive in 23· ·it?· And the reason is because when we go back 23· ·September on the Florida Growth Fund and both 24· ·to one of our roles of going across different 24· ·Hamilton Lane and our JP Morgan new partner and 25· ·asset classes, well, some of this stuff is 25· ·gatekeeper.· Any update there in terms of both
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Page 49 Page 50 ·1· ·JP Morgan and Hamilton Lane?· And more, I'm ·1· · · · MR. COLLINS:· Are we over a billion yet ·2· ·thinking from Tere and John's standpoint, a ·2· ·commitment? ·3· ·real high-level summary on the Florida Growth ·3· · · · MR. WILLIAMS:· Yes.· And I'd say the other ·4· ·Fund real quick. ·4· ·thing we've come across is there's been some ·5· · · · MR. WEBSTER:· Well, I think Ash could ·5· ·interest in some other Florida institutions in ·6· ·probably explain the Florida Growth Fund better ·6· ·participating in the growth fund.· And ·7· ·than I could. ·7· ·depending on how that scales up, we may be able ·8· · · · MR. WILLIAMS:· Well, thank you for that ·8· ·to provide an investable opportunity for some ·9· ·suicide pass, Trent. ·9· ·of the university foundations in state, and 10· · · · MR. CHAIR:· Here are the charts. 10· ·potentially other entities or other clients -- 11· · · · MR. WILLIAMS:· Yeah, just when you thought 11· ·this would be through the JP end of the 12· ·I wasn't paying attention. 12· ·thing -- in a fund format.· That remains to be 13· · · · I don't think there's any major change. I 13· ·seen. 14· ·would say that it's working exactly as we hoped 14· · · · MR. CHAIR:· Thank you so much, Trent. 15· ·it would work, which is JP Morgan has brought 15· · · · MR. WEBSTER:· You're welcome, 16· ·to the party a broader range of sourcing 16· ·Mr. Chairman. 17· ·channels, a broader set of relationships. 17· · · · So we have a real assets allocation.· The 18· ·They've helped us look at some -- look at some 18· ·first one is commodities.· Commodities is an 19· ·existing things in new ways, and it's working 19· ·area that we like, simply because we talked 20· ·really, really well. 20· ·earlier about being contrarian and going where 21· · · · The two firms, Hamilton Lane and JP, 21· ·people aren't and avoiding where people are. 22· ·complement one another nicely, and I think 22· ·There ain't a lot of people right now in 23· ·they're working well.· We've adjusted our 23· ·commodities, especially energy.· And so we have 24· ·processes to accommodate working with the two 24· ·chosen to do most of our -- well, all of our 25· ·of them, as has Cambridge, and it's been good. 25· ·exposures through credit.· And we still think
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Page 51 Page 52 ·1· ·there's a wave of bankruptcies coming into some ·1· ·we have is that there's not a lot in credit ·2· ·of the energy, especially in that energy high ·2· ·that we can invest in.· A lot of that private ·3· ·yield area.· But some of the best risk-adjusted ·3· ·equity is through -- a lot of the private ·4· ·returns that we're seeing right now are in ·4· ·investment is through private equity.· But this ·5· ·energy credit. ·5· ·is an area we like. ·6· · · · We also like some of the metals, ·6· · · · Infrastructure, now, an area we don't like ·7· ·particularly in copper, which we mentioned ·7· ·is core and core-plus infrastructure.· And I'll ·8· ·before, and we think there's a big shortage ·8· ·be the first to tell you, I've been here saying ·9· ·coming in copper several years down the road. ·9· ·this for five or six years, I've been wrong. 10· ·But, again, just looking at the supply and 10· ·Returns have been pretty good.· But our concern 11· ·demand dynamics, there's been very little 11· ·remains the same is that you've got these very 12· ·supply, very little capital going into these 12· ·large buckets of capital have been raised and 13· ·areas for the last four or five years. 13· ·allocated through pension plans to invest in 14· · · · Now, commodity fair markets can last for a 14· ·core and core-plus infrastructure, which are 15· ·long time.· So that's one of the reasons we 15· ·being viewed by some as a bond proxy.· And we 16· ·like going through the credit.· But we think 16· ·think that that's -- that's problematic.· And 17· ·that the amount of fear that there is in energy 17· ·we think that if there ever is another 18· ·is right up there with the fear that I remember 18· ·recession, that some of these people are going 19· ·back in 2009 towards the financials.· In fact, 19· ·to be surprised by what they have bought. 20· ·the oil services ETF is down as much as the 20· · · · But we do like some areas of 21· ·banks were in 2009, and more so than what tech 21· ·infrastructure.· We like some of the stuff 22· ·stocks were down in 2002.· So, again, some of 22· ·going on in emerging markets, we like some of 23· ·those are going to go away, at least as 23· ·the nichier areas like build out of 5G.· So 24· ·equities, but we like this area. 24· ·there are some interesting things.· And, in 25· · · · For us, it's a problem.· The problem that 25· ·fact, my -- you know, in the ten years or so
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Page 53 Page 54 ·1· ·that I've been here, I think there's probably ·1· ·return over time. ·2· ·more interest in the group in infrastructure ·2· · · · We've got a lot of internal capabilities ·3· ·than we've seen in a -- you know, in that time. ·3· ·on transportation.· So we've been very active ·4· · · · Okay.· So we got real estate.· I got Steve ·4· ·in aircraft for about ten years.· The newer ·5· ·sitting down here.· You know, he's got real ·5· ·aircraft, we think is probably overvalued. ·6· ·estate, so, Trent, what are you doing here in ·6· ·They're easily securitizable, so there's a lot ·7· ·this real estate thing.· Well, this stuff was ·7· ·of securitization going on there.· The midlifes ·8· ·stuff that wouldn't necessarily fit in Steve's ·8· ·may be a little overvalued.· The end of life is ·9· ·group.· So this is debt and distressed.· And ·9· ·kind of interesting.· For us in aircraft, what 10· ·the debt thus far we've been doing in real 10· ·we've been really interested in are the 11· ·estate has been primarily in the mezz. 11· ·operators.· So there's some very, very good 12· · · · So you talked, Peter, earlier about what 12· ·operators running funds, and we like that. 13· ·happens in terms of the allocations, this has 13· ·People who really, really know the nuts and 14· ·been falling.· So it was about 12 percent. 14· ·bolts of the business. 15· ·It's about 6 now.· It will probably go up a 15· · · · We have -- we've got an investment in 16· ·little bit. 16· ·railcars.· We love our manager there.· That's 17· · · · So timber, we've got two allocations. I 17· ·an area that is not -- we don't think is 18· ·think it's 400,000 acres, I think, we have in 18· ·overvalued. 19· ·timber in this country in the Southeast, the 19· · · · We think shipping's been a pretty big bear 20· ·Northwest, New York State, and in Chile, 20· ·market for a long period of time.· We think 21· ·southern Chile.· So we're a big timber 21· ·it's coming out.· We've actually made an 22· ·investor.· We own that directly.· We have two 22· ·investment in there through the credit. 23· ·managers managing it.· Returns have been a 23· · · · Diversifying strategies, these are the 24· ·little disappointing over the last few years, 24· ·strategies that should do well in a down 25· ·but we think that it will generate its real 25· ·market, relatively speaking.· One that hasn't
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Page 55 Page 56 ·1· ·done particularly well is global macro.· Most ·1· · · · MR. COLLINS:· Is that down from a peak? ·2· ·of what we have is discretionary. ·2· · · · MR. WEBSTER:· Yeah, it is down from the ·3· ·Discretionary global macro has been very ·3· ·peak.· And probably going to continue, to be ·4· ·difficult.· We think that this market may have ·4· ·honest. ·5· ·been changed permanently by technology and ·5· · · · So we've been very active in the insurance ·6· ·alternative or artificial intelligence, so ·6· ·markets the last 18 months.· So insurance for ·7· ·maybe the machines are the way to go with this ·7· ·us includes reinsurance, retrocession, life ·8· ·group as opposed to the human beings.· But we ·8· ·settlements, and runoff books of business.· Our ·9· ·do think that emerging markets, again, ·9· ·book currently is mostly reinsurance. 10· ·opportunities there, simply because it's a wide 10· ·Retrocession has seen some carnage in that 11· ·variety, a wide diverse opportunity set in 11· ·market.· We've seen people literally wiped out 12· ·emerging markets because there's so many 12· ·there.· And so you're seeing a really good 13· ·countries with so many different central banks, 13· ·hardening and we think you're getting 14· ·and it looks more normal compared to the 0 14· ·attractive returns in the retrocession market. 15· ·percent interest rate environment we're all 15· · · · So I tend to be pretty bearish about 16· ·going to. 16· ·everything, don't like a lot of things.· I like 17· · · · Insurance, we've been putting a lot of 17· ·commodities and we like some of the parts of 18· ·money -- 18· ·the insurance -- 19· · · · MR. COLLINS:· Can I ask a quick question? 19· · · · MR. CHAIR:· Trent, we're embarrassed to 20· · · · MR. WEBSTER:· Yeah. 20· ·ask about retrocession. 21· · · · MR. COLLINS:· What would you say our total 21· · · · MR. WEBSTER:· Reinsurance for reinsurers. 22· ·dollar amount is in that strategy today, in 22· · · · MR. CHAIR:· Okay. 23· ·global macro? 23· · · · MR. COLLINS:· Leverage. 24· · · · MR. WEBSTER:· About 700 million, 6, 24· · · · MR. WEBSTER:· You love that. 25· ·700 million. 25· · · · MR. COLLINS:· That's right.
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Page 57 Page 58 ·1· · · · MR. WEBSTER:· I tried to tell Steve, so -- ·1· ·confusion. ·2· · · · MR. COBB:· I have a question on that.· On ·2· · · · MR. COBB:· The only reason I asked was ·3· ·page 15 on your asset allocation page, you show ·3· ·that you have talked about it so much and the ·4· ·insurance is your fastest growth, 2 percent to ·4· ·commitment seems to be there and the logic ·5· ·8 percent. ·5· ·seems to be there, but I didn't see the ·6· · · · MR. WEBSTER:· Yeah. ·6· ·numbers. ·7· · · · MR. COBB:· You show it also as your only ·7· · · · MR. WEBSTER:· Right.· So if you actually ·8· ·high in terms of priority, but then you show no ·8· ·go way back to the beginning here -- oh, maybe ·9· ·financial commitment.· Why no financial ·9· ·I went too far.· But the allocation currently 10· ·commitment? 10· ·is 7 percent, so that makes it one of our 11· · · · MR. WEBSTER:· Well, what we actually have 11· ·larger -- oh, it says 5 percent.· It's actually 12· ·is that on that graph -- and again, it's a 12· ·7 percent now, I think.· So -- or 6 percent. 13· ·guidebook.· We actually have, at allocating 13· ·Anyways, it's rising.· We're actually making 14· ·where it says liquid funds, we've got two, 14· ·more allocations into the January 1st renewals. 15· ·liquid funds and private market funds.· This is 15· ·We did, I think, it was 400 million.· Was it 16· ·our unique oddity in that we classify insurance 16· ·400 million?· Yeah, 400 million in the June 1st 17· ·as liquid funds.· So you can classify it as 17· ·renewals.· So we've been active.· That's up 18· ·private markets, we classify it as liquid 18· ·from 0 percent 18 months ago. 19· ·because they're really more evergreen and we 19· · · · Okay.· Managed futures, CTAs.· So 20· ·can call the money within six months or -- as 20· ·you're -- in managed futures, most allocation 21· ·long as it's not trapped, we can get it back. 21· ·is long-term trend.· We divide it both equally 22· · · · So if you actually look under liquid 22· ·between short term, medium term, and longer 23· ·funds, you'll see liquid instrument investment 23· ·term trend.· It's the reason why we think we 24· ·capacity, that's 500 million adding two to 24· ·probably outperformed the industry as a whole. 25· ·three managers.· So, my apologies for the 25· ·This is also where our fund of funds sit.· JP
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Page 59 Page 60 ·1· ·Morgan and BlackRock run fund-of-fund ·1· ·manager doing that for us, people who are first ·2· ·strategies for us.· It's the only allocation ·2· ·music people as opposed to financial people. ·3· ·we've done of fund of funds in the last ten ·3· · · · Flexible mandates.· We've got a couple of ·4· ·years has been here.· Simply because when we ·4· ·hedge funds.· This breaks my heart that we've ·5· ·saw the opportunity, we wanted to move fairly ·5· ·only got one event manager here, we've gotten ·6· ·quickly.· It would take us a while to build up ·6· ·rid of a lot of these.· Because I used to be an ·7· ·the expertise, so we just thought we'd go hire ·7· ·event manager, what you'd call an event fund ·8· ·the people who already have the expertise. ·8· ·manager here at the board many years ago, I ·9· · · · We typically don't use fund of funds, we ·9· ·love these strategies.· It's just that it's 10· ·do it direct, but we thought we could get the 10· ·been a really tough area to be, even though you 11· ·allocation quicker this way.· And we've 11· ·can see here in the three years, we've actually 12· ·generally been happy with our fund -- the two 12· ·done pretty well.· A lot of the managers, if 13· ·fund-of-funds relationships. 13· ·you look at the broad industry, has been pretty 14· · · · Relative value, our portfolio currently is 14· ·poor.· High correlation to equity and not much 15· ·in government bond markets where the -- we're 15· ·return. 16· ·across primarily in the G5, and where they are 16· · · · Multi strategies.· So if you'd asked -- 17· ·doing relative value trades between the cash 17· ·this is another hedge fund strategy.· If you 18· ·and the derivatives markets and the treasury, 18· ·had asked me about five, six years ago what 19· ·the national treasury markets. 19· ·this would look like, I would say it would 20· · · · And then royalties, so this is royalties. 20· ·probably be gone and we'd allocating to the 21· ·These are payments from music video and health 21· ·different individual strategies, but this has 22· ·care.· So we've seen a brutal decline in music 22· ·actually done pretty well for us.· And 23· ·videos -- I'm sorry, music royalties.· We think 23· ·Cambridge had done a paper, I don't know, four, 24· ·there's a bottoming occurring in music 24· ·five years ago, which looked at multi strat 25· ·royalties.· We think we've got an excellent 25· ·hedge funds.· The conclusion that they had come
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Page 61 Page 62 ·1· ·up with was that the multi strats actually did ·1· ·things in this. ·2· ·a very good job at allocating capital across ·2· · · · Speaking of managers, this is -- I said we ·3· ·the different strategies to create value. ·3· ·had 93 relationships.· These are our top ten. ·4· · · · In fact, every once in a while, every ·4· ·They account for over a third of our ·5· ·couple years, we run a portfolio optimization. ·5· ·allocation.· I like this thing.· This is kind ·6· ·We put all the different strategies in.· The ·6· ·of fun to look at.· This is our gross net ·7· ·optimizer really likes multi strategy hedge ·7· ·exposure.· The truth is, it doesn't really move ·8· ·funds, so the math is telling us that they add ·8· ·a lot.· If you take out the relative value, ·9· ·value to the portfolio. ·9· ·global macro and managed futures, that causes 10· · · · This thing called open mandate, this is 10· ·all the volatility. 11· ·for primarily private -- because that's all 11· · · · Up until a couple quarters ago, we were 12· ·thus far, private market strategies that run 12· ·actually at 80 percent net long.· That 13· ·across a variety of different investment areas. 13· ·allocation, that going up there above a hundred 14· ·And the commonality of this is that these are 14· ·for the net exposure is driven primarily by our 15· ·groups within large organizations or formerly 15· ·diversifying strategies where they're using a 16· ·large organizations where they're doing things 16· ·fair amount of leverage.· Much of the returns 17· ·across the different verticals of the firm and 17· ·that we've been generating have been with less 18· ·investing in things which may be falling 18· ·than a hundred percent exposure. 19· ·through the cracks or there may be 19· · · · This has changed a little bit.· This is 20· ·co-investment opportunities. 20· ·always a little bit out of date.· We see -- you 21· · · · So sometimes they may have a fund -- say 21· ·know, we talked about earlier why we've been 22· ·one of the managers has a fund, they see the 22· ·around eight -- you know, eight, eight and a 23· ·deal flow, they can't put it in the fund, where 23· ·half percent for the last five years.· We've 24· ·does it go?· So it comes to some of our 24· ·been cash-flow positive this year.· We were 25· ·strategies here.· So we do a lot of interesting 25· ·cash-flow positive in the last quarter.· We did
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Page 63 Page 64 ·1· ·a few redemptions.· We actually have closed on ·1· ·you have much long -- you have some long -- ·2· ·six funds totaling $725 million this quarter. ·2· · · · MR. WEBSTER:· No, but where there is is ·3· ·In our current pipeline is 14 funds at around ·3· ·that -- where the leverage in the portfolio is, ·4· ·2.35, 2.36 billion.· We expect them all to ·4· ·is in our diversifying strategies.· And what ·5· ·close.· If they all close, it will be our ·5· ·you see is you see it diving up and down.· So ·6· ·busiest year ever, following our busiest year ·6· ·the managed futures, they can go to 400 to 800 ·7· ·ever last year, so -- ·7· ·to 600 percent gross, right. ·8· · · · That's all I had. ·8· · · · RV does the same.· So if you're -- so in ·9· · · · Any questions? ·9· ·the government bond market, if you're -- like 10· · · · MR. CHAIR:· Gary? 10· ·you might have a government bond in the cash 11· · · · MR. WENDT:· I have a couple of questions. 11· ·market, there might a three basis point 12· ·First, your slide 46, of all the things that I 12· ·differential between the cash and the 13· ·didn't understand, the slide 46, I -- can you 13· ·derivatives market.· They'll then leverage it 14· ·please help me with that one?· I don't 14· ·up using repo and other liquidity provisions -- 15· ·understand this at all. 15· · · · MR. WENDT:· That's enough.· Thank you. 16· · · · MR. WEBSTER:· Okay.· So let's say -- let's 16· · · · MR. WEBSTER:· There you go. 17· ·take an equity long/short fund.· They might be 17· · · · MR. COBB:· Just to follow up on that 18· ·120 percent long on their capital basis.· They 18· ·question.· So if this is at 200 percent, the 19· ·got a hundred million dollars.· They go to a 19· ·blue line -- 20· ·prime broker, borrow 20 million, they're 20· · · · MR. WEBSTER:· That's gross, yes. 21· ·120 million long, right.· And then they short, 21· · · · MR. COBB:· -- and does that mean that 22· ·they go to the prime broker and they short 60 22· ·you're at risk for $26 billion?· In other 23· ·million. 23· ·words, double the 13 billion? 24· · · · MR. WENDT:· I understand that, but you 24· · · · MR. WEBSTER:· Most of these will be trades 25· ·don't have much of that, do you?· I mean, do 25· ·that offset each other, right.· So it will be
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Page 65 Page 66 ·1· ·things like, if you're short, you may be short ·1· ·producing a return yet on anything?· Are we ·2· ·the cash bond and long the derivative, and it's ·2· ·getting a return? ·3· ·the same exposure.· So in theory, yes.· In ·3· · · · MR. WEBSTER:· On which?· I'm sorry, Gary. ·4· ·practically, no.· Now, in terms -- ·4· · · · MR. WENDT:· Florida Growth Fund. ·5· · · · MR. COLLINS:· Is that the difference ·5· · · · MR. WEBSTER:· Oh, yes.· Yeah.· I think the ·6· ·between the gross and the net lines? ·6· ·net IRR is, what, a 12, I think. ·7· · · · MR. WEBSTER:· Well, the gross -- so the ·7· · · · MR. COBB:· Last time you showed us, 11 or ·8· ·gross is long plus short, net is long minus ·8· ·12 percent return, and it was higher, I think, ·9· ·short, right.· That's the difference.· So the ·9· ·than the rest of the portfolio. 10· ·capital at risk for us is the capital that 10· · · · MR. WENDT:· Would be, yeah -- 11· ·we've invested.· There's no unlimited 11· · · · MR. COBB:· And it created an average job 12· ·liability.· So if the world blew up and these 12· ·paying of 65,000, if I recall.· So, I mean, 13· ·things -- we could -- we wouldn't lose more 13· ·it's a really terrific thing in Florida. 14· ·than our investment. 14· · · · MR. WEBSTER:· We're doing good in 15· · · · Now, for these investments, what's really 15· ·strategic investments. 16· ·important is risk control.· So we -- so we look 16· · · · MR. COLLINS:· Well, the Florida Growth 17· ·very heavily at how these funds have performed 17· ·Fund's doing well. 18· ·during periods of stress in the past.· And 18· · · · MR. WEBSTER:· We've got leverage. 19· ·that's how you'd know, for us anyways, 19· · · · So that's all I had.· I mean, the 20· ·understanding what the risk systems are, 20· ·consultants are here.· Do you want them to say 21· ·understanding what the risk processes are, for 21· ·anything or -- 22· ·these things which cause this variation is 22· · · · MR. CHAIR:· Why don't we have both 23· ·critically important.· Very important. 23· ·Cambridge and Townsend do maybe five minutes 24· · · · MR. WENDT:· My second question had to do 24· ·each, if that's all right, on strategic 25· ·with the Florida Growth Fund.· Are they 25· ·investments.
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Page 67 Page 68 ·1· · · · MR. COLLINS:· Can I ask one more question ·1· · · · MR. BENTON:· Well, being -- ·2· ·first? ·2· · · · MR. COLLINS:· Something. ·3· · · · MR. CHAIR:· Yeah, please. ·3· · · · MR. BENTON:· -- 400 basis points away from ·4· · · · MR. COLLINS:· So, going back to your ·4· ·our policy portfolio target allocation means ·5· ·target.· You're at eight point something, ·5· ·that we have a less of a chance of reaching our ·6· ·target's 12, how much of a risk does that ·6· ·long-term return objective. ·7· ·present to us in the short term that we aren't ·7· · · · MR. COLLINS:· Right. ·8· ·at 12 for our -- relative to our overall risk ·8· · · · MR. BENTON:· Because the long-term return ·9· ·calculation and our asset allocation? ·9· ·objective is based upon the policy target 10· · · · MR. WEBSTER:· Well, I'll defer that to 10· ·weights, reaching those, so that's our greatest 11· ·Mr. Benton because he'd need to do the 11· ·risk. 12· ·calculations.· We've run the numbers, right, so 12· · · · MR. COLLINS:· So the only way to rectify 13· ·our -- we've proxied -- we hired a young Ph.D. 13· ·that risk is to get the money to work, right? 14· ·student a couple years ago as an intern to run 14· ·Which isn't -- you know, it's not like putting 15· ·the proxy analysis on the portfolio.· And what 15· ·an extra $4 billion in the stock market.· We 16· ·we found is that we probably lowered the 16· ·all recognize that you can't go do it tomorrow. 17· ·volatility by somewhere around 40 to 50 basis 17· · · · MR. WEBSTER:· Right. 18· ·points, maybe a little less.· So if you look at 18· · · · MR. COLLINS:· So how do you weigh that 19· ·that, we're at two-thirds of the way there.· It 19· ·risk, which I think is a real risk, right? 20· ·may reduce the volatility by another 20 basis 20· · · · MR. WEBSTER:· Right. 21· ·points, 15 basis points, something like that. 21· · · · MR. COLLINS:· Versus the risk of, you 22· · · · But, John -- 22· ·know, hey, we're at the top of the market or 23· · · · MR. COLLINS:· We just usually aren't 400 23· ·this strategy might not be the right strategy 24· ·basis points away from, you know, our target 24· ·right now.· How do you weigh those, or is it 25· ·allocation. 25· ·just totally on the investment side with no
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Page 69 Page 70 ·1· ·thought to that risk side of it? ·1· ·up here three years ago, and said, we don't ·2· · · · MR. WEBSTER:· Well, so -- yeah, that's a ·2· ·know what to do, there's not a lot to do.· Now ·3· ·good question.· So when we run these models, ·3· ·there's a ton of stuff to do. ·4· ·these longer term models, right, when we look ·4· · · · MR. CHAIR:· Okay.· How about three minutes ·5· ·at our cash-flow models, what it's telling us ·5· ·for Cambridge and three minutes for Townsend. ·6· ·is we've got to increase our allocations to ·6· · · · MR. MEHTA:· Thank you.· I'll just say a ·7· ·funds.· So we've gone -- we're saying about ·7· ·few words, which is that, as Trent mentioned, ·8· ·$200 million is our average ticket.· It used to ·8· ·you know, really spending a lot of time just ·9· ·be about 150.· So that's one of the things that ·9· ·trying to find good ideas, trying to find ideas 10· ·we do. 10· ·that are really diversifying and are different 11· · · · The other thing is that, again, we're 11· ·than what you can get elsewhere in more 12· ·going to put out about 6 and a half billion 12· ·traditional assets.· I think the other 13· ·dollars over two years.· And what you'll see as 13· ·important part is that we are always talking 14· ·that -- as that money starts getting invested, 14· ·about the downside first, so how much can we 15· ·you should see the allocation go up.· Now, the 15· ·lose before how much can we gain, and really 16· ·stock market goes up 20 percent a year, I don't 16· ·trying to think about the tradeoffs between the 17· ·know what -- 17· ·two. 18· · · · MR. COLLINS:· Yeah, yeah.· Pushing against 18· · · · And then last is, thinking about the -- 19· ·the strength.· I get it. 19· ·you know, the balance between the opportunity 20· · · · MR. WEBSTER:· Yeah.· So we just haven't 20· ·costs of being invested in these strategies 21· ·gone down a whole lot.· You go on 20 percent, 21· ·versus trying to generate, you know, good 22· ·our allocation goes like that.· So we're -- 22· ·returns sort of throughout.· So it's a regular 23· ·it's been a very busy 18 months and we foresee 23· ·ongoing process where we speak every Friday and 24· ·it for a while, so -- and again, that's 24· ·have a good partnership with the team. 25· ·surprising to me, Peter, because I think I came 25· · · · So I'll hand it over to Samit for just a
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Page 71 Page 72 ·1· ·few words as well. ·1· ·side, it's been a pretty benign environment for ·2· · · · MR. CHHABRA:· Jim, can you flip forward a ·2· ·credit defaults.· You can see there's a number ·3· ·couple slides?· One more.· Two more.· That one. ·3· ·of market environment slides in the deck, I ·4· · · · I'm just going to touch on this one slide. ·4· ·won't go through one by one. ·5· ·And if there's time -- but you can see up on ·5· · · · But if we just look at page 11 of the next ·6· ·this page, this is the diversifying strategies, ·6· ·section, basically this has been pushing us ·7· ·the hedge fund allocation over time.· The most ·7· ·to -- this one right there.· Go back.· Yeah. ·8· ·interesting part is that bottom chart.· So ·8· · · · We've been really focused on some of these ·9· ·there haven't been many down months in the ·9· ·specialty finance and credit opportunity 10· ·markets recently.· We've seen a nice rally. 10· ·strategies where, you know, on the specialty 11· ·But when there have been down prints in the 11· ·finance, it's aviation finance, it's royalties, 12· ·global equity markets, you can see that's in 12· ·it's railcar finance.· Interesting kind of 13· ·the brown bars.· The blue bars are the 13· ·niche asset plays where you can get attractive 14· ·diversifying strategies' allocation.· And you 14· ·returns and have some underlying core 15· ·can see it's largely protected capital.· So 15· ·collateral.· And we find that that's a pretty 16· ·it's done a nice job in periods of equity 16· ·attractive segment of the market today, given 17· ·market stress.· It's something that we've keyed 17· ·some of the craziness that's going on in the 18· ·on to construct an allocation that does that. 18· ·regular way, direct lending, and mezzanine 19· · · · Going forward, that is part of the 19· ·credit side. 20· ·equation that -- the flip side is, when we see 20· · · · And then credit opportunities is like it 21· ·up markets, we don't participate as much.· But 21· ·says.· It's basically highly opportunistic 22· ·we are trying to stay true to sort of the 22· ·strategies, giving managers a flexible mandate 23· ·primary objective here and thus far, it's been 23· ·to go and invest across a capital stack, across 24· ·working and that's how it's constructed. 24· ·different types of collateral and on a 25· · · · MS. RYAN:· Yeah.· On the private market 25· ·geographic basis.· So really just trying to be
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Page 73 Page 74 ·1· ·thoughtful and careful investing capital in ·1· ·pool gets. ·2· ·this otherwise somewhat benign credit ·2· · · · MR. WEBSTER:· Actually it was -- I think ·3· ·environment. ·3· ·it was like more 2015, 2016 is when we did it. ·4· · · · MR. COLLINS:· Mr. Chairman? ·4· ·So it's been around for -- ·5· · · · MR. CHAIR:· Yes, sir. ·5· · · · MR. COLLINS:· We funded some since then? ·6· · · · MR. COLLINS:· So the specialty finance ·6· · · · MS. RYAN:· Oh, yeah. ·7· ·area is something that we've talked about quite ·7· · · · MR. WEBSTER:· Yes. ·8· ·a bit lately, both for this board and for ·8· · · · MR. COLLINS:· So how much total do you ·9· ·another board that we're -- we both work with. ·9· ·think we have in that strategy today? 10· · · · When did we make that most recent 10· · · · MR. WEBSTER:· Well, what we call -- well, 11· ·commitment to the -- on -- like on the railcar? 11· ·they have a bit of different nomenclature. 12· · · · MS. RYAN:· Oh, this one? 12· ·We're looking at the underlying assets, so we 13· · · · MR. COLLINS:· Yeah. 13· ·have transportation, that's about 3 percent of 14· · · · MS. RYAN:· Well, it's somewhat of an 14· ·our book.· And that will probably grow. 15· ·evergreen type structure.· So it's an ongoing 15· · · · MS. RYAN:· That includes rail, aircraft. 16· ·commitment.· And that was probably two years 16· · · · MR. WEBSTER:· Yeah. 17· ·ago. 17· · · · MR. COLLINS:· But you don't call that 18· · · · MR. WEBSTER:· Last year. 18· ·specialty finance?· Okay.· It's transportation. 19· · · · MS. RYAN:· Was it last year? 19· · · · MR. WEBSTER:· Yeah, we like to be 20· · · · MR. WEBSTER:· It was last year. 20· ·different. 21· · · · MR. COLLINS:· They're not closed-end 21· · · · MS. RYAN:· That's where we would put it 22· ·funds, it's just an open-ended strategy? 22· ·in, yeah. 23· · · · MS. RYAN:· It's an evergreen.· It 23· · · · MR. COLLINS:· And of that three -- I'm 24· ·continues to invest -- you know, more -- the 24· ·just trying to get an idea for scale of that 25· ·longer you stay in, the more diversified the 25· ·business.· So if we're in transportation and
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Page 75 Page 76 ·1· ·you're 3 percent, how -- how bigger of a player ·1· ·shrink.· You start to see -- there's some new ·2· ·are we with the group that's doing it, that ·2· ·environmental regulations coming next year, ·3· ·we're investing -- ·3· ·which they're going to have to be more ·4· · · · MR. WEBSTER:· Well, we're one of the ·4· ·energy-efficient.· And you see the Baltic Dry ·5· ·largest LPs with the GP, but that's usually the ·5· ·Index go boing, like that. ·6· ·case. ·6· · · · And so you're starting to see some signs ·7· · · · MR. COLLINS:· Right. ·7· ·of a bottoming.· And again, we've played it ·8· · · · MR. WEBSTER:· You know, we're usually one ·8· ·through the credit.· And we were looking at ·9· ·of the largest.· And, you know, in that, you ·9· ·this like a year, year and a half ago.· You 10· ·know, the -- in aircraft, in airlines, you 10· ·know, if you take your typical, you know, 11· ·know, what we like about our own portfolios is 11· ·financing structure where you're like 12· ·that we're with operators.· Well, like recently 12· ·50 percent debt, 50 percent equity, a lot of 13· ·we've been going with operators.· We really 13· ·the ships were trading at 2X, the -- you know, 14· ·like that.· We haven't done a whole lot in 14· ·the scrap value.· So if you're coming into the 15· ·shipping.· Shipping's a big market.· It's a lot 15· ·credit at a 50/50 capital structure, you're 16· ·you can do.· And that used to all be financed 16· ·coming in at the scrap value.· There's not a 17· ·by the European banks.· They're all gone. I 17· ·lot of downside to that, you know, so -- 18· ·mean, they're all gone.· So there's a financing 18· · · · And even the ships that we're look -- that 19· ·problem. 19· ·we're going into, the stuff that we're doing, 20· · · · The problem that's been in shipping has 20· ·it tends to be a very good counter parties as 21· ·been just the oversupply has been really big, 21· ·opposed to just, hey, let's just buy a dry 22· ·because a lot of the countries that are big in 22· ·bulker -- 23· ·this look at it as a strategic priority, a 23· · · · MR. MARCUS:· So I will keep this as brief 24· ·national priority.· But you started to see, for 24· ·as possible, just really concentrate on one 25· ·example, the number of shipbuilders in China 25· ·slide.· But thanks again for having us.
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Page 77 Page 78 ·1· · · · For those of you who don't know, so the ·1· ·return back to it, based on 2.2 billion of ·2· ·Townsend Group works with Trent in the ·2· ·funded, so above our funded value.· And there's ·3· ·strategic investments group, and really just a ·3· ·still remaining market value within that debt ·4· ·subset of that big pie chart, just the real ·4· ·portfolio of approximately $900 million. ·5· ·estate debt and timber investments, which ·5· · · · The timber portfolio, as we mentioned, ·6· ·represents approximately 10 percent of the ·6· ·is -- has not performed as well recently. ·7· ·strategic investments portfolio, which is about ·7· ·You'll see that chart on the right-hand side. ·8· ·a billion four of outstanding market value. ·8· ·That is the timber portfolio is in the dark ·9· · · · The real estate debt portfolio is a lower ·9· ·blue with the two different indices on the 10· ·returning asset class with higher income 10· ·right.· You'll see underperformance over the 11· ·components, about 6 percent annualized income 11· ·one-year period. 12· ·return from that real estate debt portfolio on 12· · · · If you recall back in 2017, we also 13· ·a 10 percent total return basis, so high income 13· ·underperformed.· 2018, we were outperforming. 14· ·return from those investments. 14· ·Now once again, there's underperformance.· This 15· · · · Also, as Trent mentioned, this is an 15· ·is really driven by an oversupply in most of 16· ·allocation that's been decreasing.· We've not 16· ·our timber markets.· And it's typically in the 17· ·made a number of new commitments.· The last 17· ·South where we have about 50 percent of our 18· ·commitment in this sector was 2016, but with 18· ·timber exposure.· As well as the West, where 19· ·that said, there's a couple of existing 19· ·about 25 percent of the SBA exposure is.· Both 20· ·investments that we're looking at following on 20· ·of those markets, prices have weakened. 21· ·those new commitments. 21· ·There's a surplus of logs and a surplus of 22· · · · The debt portfolio -- the real estate debt 22· ·supply with less building, less exporting. 23· ·portfolio has experienced significant income as 23· ·There have been log price increases early in 24· ·well as realization, receiving approximately 24· ·the year, but most of those quickly result in 25· ·two and a half billion dollars of capital 25· ·decreases just a month later.
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Page 79 Page 80 ·1· · · · There is some positive news.· The hardwood ·1· ·offices in both the U.S., Europe, and Asia.· We ·2· ·products, hardwood pricing has really ·2· ·are an affiliate of Aon, so a wholly-owned ·3· ·increased.· Inventories have remained stable in ·3· ·affiliate of Aon, so we work together with your ·4· ·that market, so we are seeing some, you know, ·4· ·general consultant in a lot of different ·5· ·positives in the timber market, but has been an ·5· ·matters and have served the board since 2004. ·6· ·underperformer recently for those reasons. ·6· · · · MR. CHAIR:· Well done.· Thank you. ·7· · · · I'll wrap it up there.· I know that was ·7· · · · Any other questions on strategic ·8· ·pretty fast and pretty brief, but -- and I ·8· ·investments? ·9· ·think that's what you asked for.· So if you ·9· · · · Okay.· The exciting world of fixed income. 10· ·have any questions, happy to answer those. 10· ·Katy.· Take it over, and I hope you have better 11· · · · MR. CHAIR:· Seth, real quick for our new 11· ·art. 12· ·members, give us like a 30,000-feet overview 12· · · · Thank you, Trent. 13· ·real quick of Townsend and our relationship and 13· · · · Katy, if it's all right, let's take a 14· ·what you do, not only for the strategic 14· ·one-minute stretch in case anybody wants to get 15· ·investments but the real estate side. 15· ·a cup of coffee or cookie. 16· · · · MR. MARCUS:· Sure, sure.· So Townsend 16· · · · (Recess from 2:20 p.m. to 2:28 p.m.) 17· ·works with Trent and his team on this real 17· · · · MR. CHAIR:· Okay.· If everybody will take 18· ·estate debt and timber portfolio, which is, 18· ·their seat, please. 19· ·like I said, about a billion four of net asset 19· · · · Now we're going to have Katy bring us up 20· ·value. 20· ·to date on fixed income, and then accompanied 21· · · · We also work with Steve Spook and the real 21· ·by our consultants on fixed income. 22· ·estate equity portfolio and their total 22· · · · MS. WOJCIECHOWSKI:· I will apologize in 23· ·portfolio.· So that portfolio includes both 23· ·advance, I have the voice of a 13-year-old boy 24· ·private equity funds, direct investments, and 24· ·today, so it kind of goes in and out from time 25· ·REITs, so Townsend is a global consultant, 25· ·to time.
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Page 81 Page 82 ·1· · · · So this is the fixed income or the ·1· ·diversifier to equity returns over the past 12 ·2· ·sleep-well-at-night asset class.· And I'm just ·2· ·months.· Actually I did it over 2015.· So since ·3· ·going to go a little bit deeper than I do in ·3· ·2015.· So over the past five years or so. ·4· ·general quarters.· Kind of our program ·4· · · · So, just as a reminder, we are made up of ·5· ·overview, what -- how we're set up.· And we ·5· ·bonds.· Our benchmark is the intermediate ag. ·6· ·have a couple of new people.· So hopefully that ·6· ·If you'll recall about four, five years ago, we ·7· ·will be helpful. ·7· ·made the adjustment from the ag, which is a -- ·8· · · · What we do is provide stable returns with ·8· ·roughly a six-year duration universe to a -- ·9· ·very low risk.· So, as you'll see in my later ·9· ·the intermediate ag, which lops off ten years 10· ·risk chart, we do have very low risk.· We've 10· ·in maturities.· So it's still made up roughly 11· ·actually been trying to put on a little bit 11· ·the same, got roughly the same breakdown.· The 12· ·more risk this year and have found it very 12· ·majority is government guaranteed, 40 percent 13· ·difficult. 13· ·treasuries, 30 percent securitized, that's 14· · · · We also provide liquidity on demand. 14· ·agency securities, so quasi-government 15· ·We've provided liquidity four times this year. 15· ·guarantee, and government related.· And then 16· ·We, along with generally global equity are the 16· ·only about 25 percent is credit. 17· ·sources of that liquidity every month because 17· · · · So if you can read the bottom of the chart 18· ·we have greater outflows than inflows every 18· ·on page six, you will see that the duration of 19· ·month. 19· ·that is 3.68 years, roughly a 3 percent coupon 20· · · · We also serve as a diversifier for the 20· ·at a premium price making the yield to maturity 21· ·equity allocation, which is the largest 21· ·only 2 percent.· So if you remember coming into 22· ·allocation in our portfolio.· And I included a 22· ·the year, it was like, my gosh, we were at 23· ·the chart this time that actually proves that 23· ·180ish on tens, how could we possibly have 24· ·theory.· As of today, it was a negative 47 24· ·returns, you know, that would be anything 25· ·correlation.· So it actually has proved as a 25· ·beyond 180 for the year when we're thinking
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Page 83 Page 84 ·1· ·things are terrible?· Well, over the past 12 ·1· ·grade.· We have added some below investment ·2· ·months, we've had about an 8 percent return ·2· ·grade core-plus managers over the past couple ·3· ·through today.· It was 8.83 when I did this at ·3· ·of years.· But that's going to produce ·4· ·the end of October.· So in a 2 percent yield ·4· ·limited -- you know, limited variation to ·5· ·environment, fixed income was a diversifier and ·5· ·returns, and that's what you want. ·6· ·did produce over our target returns for the ·6· · · · So, as I mentioned before, I've said these ·7· ·year, so we can do it. ·7· ·things already, but we're overweight ·8· · · · The annual absolute returns are all ·8· ·corporates, we're overweight CMBS, those are ·9· ·positive for all sectors.· So everything ·9· ·our biggest overweights.· And if you look on 10· ·outperformed treasuries.· So it works well for 10· ·the right on page eight, you'll see that we 11· ·us because we tend to overweight credit the 11· ·have a very tough time creating a lot of risk. 12· ·most and commercial mortgage-backed securities 12· ·Also, volatility is at a five-year low, and 13· ·in second place. 13· ·that produces very low risk, again, kind of 14· · · · If you look on the bottom right on our 14· ·what you're looking for. 15· ·chart, we have outperformed our asset -- our 15· · · · Just a word on our external managers. I 16· ·benchmark over all periods just a little bit. 16· ·don't think I included the chart this time, but 17· ·And we find that to be the case for us.· If you 17· ·we have a stable -- small stable of external 18· ·think about bonds, there's only so many ways to 18· ·managers.· And what we look for from them -- we 19· ·spell fixed income.· We have fairly tight 19· ·manage most of what we do internally.· We have 20· ·duration guidelines and fairly tight limits on 20· ·40 percent roughly in passive funds, and that's 21· ·how far afield we can go from our benchmark. 21· ·all managed internally, and we would not change 22· · · · So, given that, we're going to produce 22· ·that.· If you think about that, that seems -- I 23· ·stable returns, and boring returns, which is 23· ·know that Kristen would probably tell you 24· ·what you want in this asset class.· We do have 24· ·that's high versus our peers, but I would 25· ·off benchmark bets.· We have below investment 25· ·remind you that Trent's group also has a lot of
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Page 85 Page 86 ·1· ·debt and all of that is in active space. ·1· ·best area to be in.· And we find that to be ·2· · · · So when I first came, we had moved that ·2· ·very effective. ·3· ·allocation to high yield and some other ·3· · · · So we have several managers.· A couple are ·4· ·distressed debt, things like that.· We moved it ·4· ·really good at credit.· We like that.· A couple ·5· ·down the hall to Trent's group and they've ·5· ·are really good at securitized assets, and we ·6· ·managed that.· So we consider that still part ·6· ·just kind of play off of each other for that. ·7· ·of the funds debt allocation, if you think ·7· ·And we can fund and defund them within limited ·8· ·about that. ·8· ·areas. ·9· · · · So for our managers that we still have, we ·9· · · · MR. CHAIR:· How many people do you have 10· ·have only five managers.· They manage about 10· ·internally now, Katy? 11· ·25 percent of our -- of our allocation.· And we 11· · · · MS. WOJCIECHOWSKI:· There's about 15 in 12· ·look to managers, while we give them all of the 12· ·the room.· And that would include our middle 13· ·tools, we don't have any dedicated managers. 13· ·office through -- we also -- and I'm not really 14· ·We don't want any dedicated high-yield managers 14· ·talking about it today, but we also manage the 15· ·or dedicated just, you know, debt managers, CLO 15· ·cash for the building and the hurricane 16· ·managers, because then we find it's very 16· ·catastrophe fund and some other ancillary funds 17· ·difficult to fund and defund them. 17· ·that we do, and securities lending, which I do 18· · · · What we'd rather do is have a core, a 18· ·have a slide on that.· So for the entire 19· ·broad mandate, and you can specialize in what 19· ·building.· So the group is dedicated to that. 20· ·you do best.· So if you like CLOs, great, go 20· · · · We have five people dedicated to credit, a 21· ·invest in CLOs.· That's fine.· If you like high 21· ·couple of us are mortgage managers.· And then 22· ·yield, that's great, within limits, you can 22· ·we have a rates team as well.· And so we all 23· ·invest in high yield.· But you're not obligated 23· ·sit in the same room.· You can see us, we 24· ·to do so just because you looked at the best 24· ·all -- it's like a Time-Life -- remember the 25· ·high yield in the world doesn't mean it's the 25· ·old Time-Life with the earpieces?· We all sit
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Page 87 Page 88 ·1· ·and look and talk to each other, so -- we're ·1· ·stable, and I'm okay with that. ·2· ·customer service reps, I guess. ·2· · · · MR. CHAIR:· Out of curiosity, the last ·3· · · · And then we -- so I didn't mention the ·3· ·time we had a meeting in September, there was ·4· ·group that's also dedicated to this, which I'm ·4· ·so much news on negative interest rates, and ·5· ·a part of that team, and we manage those ·5· ·seems like that slowed down a little bit. ·6· ·managers.· And we have dialogues.· We use them ·6· · · · Any comments? ·7· ·as more extension to staff.· So I have daily ·7· · · · MS. WOJCIECHOWSKI:· Did you know that was ·8· ·conversations, more chats on Bloomberg, but ·8· ·my next chart?· Yes, it has gone down a bit. ·9· ·with some of the external managers kind of on ·9· ·We are currently at 11 and a half trillion of 10· ·ideas.· We bounce them off, because they have 10· ·negative yielding debt.· So that's a little 11· ·very deep resources, why not use them?· And 11· ·better.· We have seen yields bottoming 12· ·they've been very open to that. 12· ·globally, but we are still a high yielder for 13· · · · So just a couple of notes on the market. 13· ·the globe. 14· ·If you look at yields over most of the year, 14· · · · We've done some work -- would it make 15· ·they have dropped.· Makes it a challenge. 15· ·sense for us -- why in the world would we 16· ·We've been listening -- as I just mentioned, 16· ·invest in Europe, right?· So we've done some 17· ·we've been talking to all of our external 17· ·work, could we invest in Europe and then just 18· ·managers and research on what do we think going 18· ·hedge it back to US, and the answer is yes. 19· ·into next year, how in the world are we going 19· ·And we found some places where it actually 20· ·to produce great returns next year? 20· ·makes some sense, but then it just becomes a 21· · · · I'm not very excited about it, I'll just 21· ·currency play.· And we find that, you know, Tim 22· ·tell you.· But that said, it's okay to not be 22· ·has currency managers, makes it -- maybe it 23· ·excited about it, right, because I don't see 23· ·makes more sense to just let them do the 24· ·any huge blowups on the horizon either, so -- 24· ·currency.· It's much cleaner in that respect. 25· ·spreads are pretty tight, rates are pretty 25· · · · So, but one area that we found, and I said
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Page 89 Page 90 ·1· ·this -- I've said this early in the year and ·1· ·duration will be spot on.· And if not, we can ·2· ·it's proved true and I think it's still true, ·2· ·look to hedge that as well. ·3· ·if you look at the curve, there's not much ·3· · · · MR. COBB:· I have a question regarding the ·4· ·difference in the yield between the front end ·4· ·securitization portfolio.· I assume that's ·5· ·and the back end.· Even after the fed has ·5· ·mostly real estate?· And if it is -- ·6· ·eased, there's still not much difference.· And ·6· · · · MS. WOJCIECHOWSKI:· Yes. ·7· ·so we found some good opportunities at the ·7· · · · MR. COBB:· -- what percent, or what's the ·8· ·front end of the curve.· To that end, we added ·8· ·weighting between commercial real estate, ·9· ·a short duration credit manager this year, and ·9· ·securitized, and housing? 10· ·we've had good -- only one month in, but we had 10· · · · MS. WOJCIECHOWSKI:· So in the benchmark 11· ·positive results for the month.· And it's 11· ·there's a small sliver that's asset-backed, so 12· ·been -- and we think it's going to be a good 12· ·cars and cards.· Generally some barges.· You 13· ·relationship, that that's a great place to take 13· ·know, Trent mentioned ships.· We looked at 14· ·some credit risk and it rolls down very 14· ·barge asset receivables, royalties, things like 15· ·quickly, so we think that will be a good play. 15· ·that, but those are the more esoteric areas. 16· · · · We are playing that off of a couple of -- 16· ·We have mostly residential credit.· Commercial 17· ·we've expanded guidelines for a couple of our 17· ·real estate's 5 to 7 percent.· So even though 18· ·managers to do core-plus, so they will be in 18· ·that's our biggest overweight, it is a small 19· ·more in the plus sector, the high yield, EM -- 19· ·percentage of the portfolio.· It's just the 20· ·or they don't have to be, it's their option. 20· ·biggest contribution to duration of our 21· ·We also are going to barbell that short 21· ·portfolio. 22· ·duration credit manager with a full ag manager, 22· · · · So we also have some allocation to -- it's 23· ·so that will be two years longer.· That will be 23· ·residential homes, but it's rental.· There was 24· ·their benchmark, which will increase our 24· ·a lot of rental home securitizations a couple 25· ·misfit, but in the barbell, our overall 25· ·of years ago, we have some of the credit pieces
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Page 91 Page 92 ·1· ·in that as well. ·1· ·saying, which is if you thought interest rates ·2· · · · So, as I said, right now, I have nothing ·2· ·were going to go up, what would you do and how ·3· ·exciting to report, and I think that's okay in ·3· ·would you do it? ·4· ·fixed income.· We are continuing to look for ·4· · · · MS. WOJCIECHOWSKI:· Right.· So we do have ·5· ·opportunities.· We're looking for expanded ·5· ·a duration target, it's the benchmark, which ·6· ·opportunities with some of our current ·6· ·about three and a half years, which is -- ·7· ·managers.· We're happy with the current stable ·7· ·that's our duration target.· We can deviate ·8· ·of managers, we don't have any active plans to ·8· ·from that on a limited basis depending on the ·9· ·increase that stable, but we obviously are ·9· ·portfolio.· So our passive portfolio, we do not 10· ·vigilant with that. 10· ·deviate at all.· So what we do is we hedge that 11· · · · We are looking to reduce interest rate 11· ·duration out spot on all the time.· Not daily, 12· ·risks.· Just because you might see a shift, 12· ·but we generally hedge it very frequently. 13· ·there's certainly disparate views on what's 13· · · · Then with our external managers, some of 14· ·going to happen with the fed in the next year 14· ·them have greater duration bands that they can 15· ·and the election in the next year, so we shall 15· ·take.· And that's if they -- you know, if 16· ·see.· And then just acting on some tactical 16· ·that's a specialty of theirs, we would allow 17· ·opportunities in the short term. 17· ·them more latitude to do it, if they're heavier 18· · · · MR. GOETZ:· Mr. Chairman? 18· ·in securitized assets.· Sometimes those are 19· · · · MR. CHAIR:· Yes, sir? 19· ·more about, you're going to get your money back 20· · · · MR. GOETZ:· Could I ask, do you have a 20· ·but you don't know when, so we allow a lot more 21· ·duration target?· And just what you were 21· ·latitude.· I'm a mortgage person, so you just 22· ·talking about in terms of an outlook -- 22· ·let that drift a little bit more, knowing that 23· · · · MS. WOJCIECHOWSKI:· Right. 23· ·that will drift a little more. 24· · · · MR. GOETZ:· -- do you move the duration -- 24· · · · But we hedge our -- so we hedge our 25· ·how do you actually implement what you're just 25· ·duration at the top level within our own
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Page 93 Page 94 ·1· ·internal portfolio.· We may go a little bit ·1· ·and so it gave us less absolute risk than when ·2· ·long or short.· We tend not to be duration ·2· ·we were in the ag.· So on a risk-adjusted ·3· ·managers.· We don't want -- we don't take that ·3· ·return basis, if you use volatility as your ·4· ·bet very often.· We have a curve bet on right ·4· ·risk measure, we have had better returns. ·5· ·now, but we do not have an absolute -- ·5· ·Slightly, but better returns than if we had ·6· · · · MR. GOETZ:· I see.· So in the history, the ·6· ·been just in the aggregate index.· And that ·7· ·longest duration you've ever been versus the ·7· ·gave us the opportunity to spend our risk ·8· ·shortest duration you've ever been? ·8· ·elsewhere in the organization. ·9· · · · MS. WOJCIECHOWSKI:· Well, our benchmark ·9· · · · MR. COLLINS:· We lowered our allocation? 10· ·has changed, certainly.· So it used to be -- it 10· ·We were at 24? 11· ·was probably about five years at the time when 11· · · · MS. WOJCIECHOWSKI:· We were, uh-huh. 12· ·we were -- 12· · · · MR. COLLINS:· That was our target? 13· · · · MR. GOETZ:· So you moved it down? 13· · · · MS. WOJCIECHOWSKI:· Right. 14· · · · MS. WOJCIECHOWSKI:· We did move it down 14· · · · MR. COLLINS:· And we lowered it to -- I 15· ·about five years ago. 15· ·think it was 18? 16· · · · MR. COLLINS:· We were probably a little 16· · · · MS. WOJCIECHOWSKI:· Eighteen.· We are 17· ·early when we moved it down, by a year. 17· ·currently slightly overweight, I think. 18· · · · MS. WOJCIECHOWSKI:· Well, we said at the 18· · · · MR. COLLINS:· Yeah.· And when we lowered 19· ·time -- first of all, it has -- every year it 19· ·it, we also changed the duration. 20· ·has actually lagged returns for the ag.· We've 20· · · · MS. WOJCIECHOWSKI:· Yeah.· So we really -- 21· ·given up about a hundred basis points a year on 21· · · · MR. COLLINS:· -- intermediate. 22· ·average.· We said that going in that that was 22· · · · MS. WOJCIECHOWSKI:· Yeah.· And Kristen can 23· ·what was going to happen, and -- because 23· ·speak to that because we worked together on 24· ·rates -- we didn't see why rates would go up. 24· ·that, how we were going to -- 25· · · · That said, we've had much lower volatility 25· · · · MR. COLLINS:· So as you look at the spread
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Page 95 Page 96 ·1· ·in the -- that you were talking about, the ·1· ·two agents for that? ·2· ·short term and the long term, any thoughts on ·2· · · · MS. WOJCIECHOWSKI:· Well, we only have ·3· ·our bet on the curve today versus three years ·3· ·two. ·4· ·ago? ·4· · · · MR. JONES:· Oh. ·5· · · · MS. WOJCIECHOWSKI:· I don't -- if I'm a ·5· · · · MS. WOJCIECHOWSKI:· It is Bank of New ·6· ·betting man, and I am, I don't know that I see ·6· ·York, who's our custodian and eSecLending.· And ·7· ·what would drive rates significantly higher. ·7· ·so eSecLending has an auction process which we ·8· ·So, there is so much global demand that I don't ·8· ·actually just completed with them yesterday. ·9· ·know that I see rates going up that much.· So, ·9· ·And they lend it out to several -- to various 10· ·that said, the curve is very flat, and you only 10· ·counter parties.· So they handle that for us. 11· ·gain about 15 basis points by going from the 11· · · · MR. JONES:· I was just curious if State 12· ·intermediate ag -- in yield terms -- to the ag, 12· ·Street had been one of them because they've 13· ·so -- 13· ·been going through a lot of cost cutting and 14· · · · MR. COLLINS:· But you'd pick up some risk. 14· ·whether they're -- but that's -- 15· · · · MS. WOJCIECHOWSKI:· And you gain two 15· · · · MS. WOJCIECHOWSKI:· Right.· When I first 16· ·years.· So, you know, is that a risk-reward 16· ·came here, I believe we might have had as many 17· ·benefit I'd take?· I think I'd just stick where 17· ·as five relationships, and we've trimmed that 18· ·we are, personally. 18· ·down over the past couple of years, because we 19· · · · MR. CHAIR:· Before we turn it over to 19· ·found different avenues within those lenders to 20· ·Mercer, any other questions for Katy first? 20· ·go farther afield, so -- 21· · · · MR. JONES:· For your securities lending. 21· · · · MR. JONES:· Thank you. 22· · · · MS. WOJCIECHOWSKI:· Yes.· Oh, yes, I 22· · · · MR. CHAIR:· Mercer. 23· ·didn't -- 23· · · · MR. MERKEL:· Good afternoon.· Thank you 24· · · · MR. JONES:· I'm just curious, you say you 24· ·for having me. 25· ·use multiple agents, who are, like, your top 25· · · · So I just have a couple slides to
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Page 97 Page 98 ·1· ·piggyback off of what Katy reviewed for you ·1· ·So there's a variety of different levels -- ·2· ·all.· So I think the page numbers here -- so ·2· · · · MR. CHAIR:· It's not TUCS, it's -- goes a ·3· ·page 104 on the slides on the screen give a ·3· ·lot smaller included, too, right? ·4· ·quick summary observations that we have with ·4· · · · MR. MERKEL:· Correct, correct, yes. ·5· ·the fixed income portfolio as it stands today. ·5· · · · MR. CHAIR:· So it's a little bit ·6· ·And I think the high-level comment that we ·6· ·misleading.· I was talking to Katy before the ·7· ·would make is the asset class in and of itself ·7· ·meeting. ·8· ·is managed in a prudent and risk-aware and ·8· · · · MR. MERKEL:· Absolutely.· We definitely -- ·9· ·risk-controlled fashion for all the reasons ·9· ·we view it as an apples versus grapefruit kind 10· ·that Katy laid out for you. 10· ·of comparison, really to kind of put some 11· · · · And we do think that her and her staff 11· ·context around it, that what is done here at 12· ·have the appropriate levels of delegation given 12· ·the SBA is very different than compared to 13· ·to them to manage to their objectives.· The one 13· ·what's done elsewhere, driving that difference. 14· ·observation that we do have kind of compared to 14· · · · And then I think the last point that I can 15· ·some peers, you see that in the third bullet 15· ·make for you all is something that Katy did 16· ·there, is that the level of passive management, 16· ·touch on is the level of active return for the 17· ·it is higher than peers, but I think, given the 17· ·measure of risk taken.· So if you look at the 18· ·reasons that you have in your -- lower tracking 18· ·information ratio lines on the following -- on 19· ·area and duration risk, that those make sense. 19· ·the couple following pages here that risk 20· · · · MR. CHAIR:· Hugh, I had a question of how 20· ·that -- that lay that out for you, you see very 21· ·did y'all define peers?· Because that makes a 21· ·strong levels of excess return, again, for the 22· ·huge difference.· You know, I mean, did any of 22· ·levels of risk taken in the portfolio.· So 23· ·those peers have a staff of 15 in fixed income? 23· ·where Katy and her team are given the latitude 24· · · · MR. MERKEL:· So the peer group comes from 24· ·to take some risks in a very tracking-error 25· ·the CEM survey that you see on this page here. 25· ·controlled environment for the portfolio,
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Page 99 Page 100 ·1· ·they've been able to add that value for the ·1· ·haven't figured out that she's phenomenal yet, ·2· ·portfolio in general. ·2· ·you will shortly, because she is outstanding ·3· · · · So this page here lists the entire ·3· ·and we're excited about this new opportunity ·4· ·portfolio.· The subsequent pages have the ·4· ·for her. ·5· ·internal active portfolios as well as the ·5· · · · Hello to everybody.· Hello to our IAC, and ·6· ·passive.· And then finally, the last page has ·6· ·welcome again to our two new members. ·7· ·the external managers as well.· And a similar ·7· · · · Ms. Canida, I've heard a lot of wonderful ·8· ·story permeates across all three of those ·8· ·things about you. ·9· ·pages, again, so that the information ratio, ·9· · · · MS. CANIDA:· Not true. 10· ·well above the median, in the top quartile 10· · · · MR. TAYLOR:· They're not true? 11· ·across the three- and the five-year periods. 11· · · · I've also, Mr. Goetz, heard a lot about 12· ·And then if you look since inception, very 12· ·you, and I actually know you -- 13· ·strong numbers as well. 13· · · · MR. GOETZ:· Right. 14· · · · MR. CHAIR:· All right.· Any questions for 14· · · · MR. TAYLOR:· -- because for those of you 15· ·Mercer on fixed income? 15· ·that don't know, we interviewed in global 16· · · · Okay, Hugh, thank you. 16· ·equity, Pzena, got to know about his 17· · · · We've got a new king of the hill, not 17· ·organization, his firm, and a couple of finals. 18· ·willing to share the limelight anymore.· Tim 18· ·We chose to go another way, so I hope that he 19· ·Taylor, let's talk about global equity. 19· ·is not one that holds a grudge. 20· · · · MR. TAYLOR:· Thank you, Mr. Chairman. 20· · · · MR. COLLINS:· He was so bad, we just put 21· · · · And we're excited about -- 21· ·him on the board. 22· · · · MR. COLLINS:· You look a little taller 22· · · · MR. TAYLOR:· All right.· Let's move on. 23· ·today, Tim. 23· · · · All right.· First page, under tab five, 24· · · · MR. TAYLOR:· Well, we're excited about 24· ·everyone.· The benchmark in Q3 for global 25· ·Alison's new role.· If you haven't -- if you 25· ·markets was marginally negative, but there was
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Page 101 Page 102 ·1· ·a lot of activity below the surface.· During ·1· ·Annualized equity returns of almost 10 percent ·2· ·the period assets perceived as safe were ·2· ·have been realized in almost now a 10-year ·3· ·rewarded by equity investors, markets were led ·3· ·period. ·4· ·by defensive sectors, like utilities, real ·4· · · · Look at the graph on the lower right. ·5· ·estate, and consumer staples.· Materials and ·5· ·Investors might be placing perhaps too much ·6· ·energy lagged. ·6· ·confidence in central bankers to maintain ·7· · · · The top graph, top right graph shows that ·7· ·stability in the markets.· Even though we have ·8· ·stocks defined as higher quality, and those ·8· ·not increased our passive investments over the ·9· ·also with above market yields performed well ·9· ·last three years, you can see that our realized 10· ·along with lower volatility stocks. 10· ·risk levels have fallen from 50 to 30 basis 11· · · · Through the end of the third quarter and 11· ·points.· That's something that could change 12· ·even to today actually, the US continued to 12· ·quickly if we do nothing structurally at all. 13· ·notably beat all other global markets. 13· ·We need to be mindful of that. 14· ·Investors appear to be focusing on US/China 14· · · · The next slide we're -- I'll provide a 15· ·trade negotiations, Hong Kong unrest and weak 15· ·couple of comments on each of our active 16· ·economic outlooks, prompting continued central 16· ·aggregates.· Our largest active group, foreign 17· ·bank accommodation.· And that includes, as 17· ·developed large cap, lagged the benchmark as 18· ·we've discussed just a little while ago, 18· ·emerging market exposure detracted, and value 19· ·negative interest rates in Europe. 19· ·strategies within that aggregate lagged growth 20· · · · So how did we do in this environment? 20· ·mandates.· Our emerging markets aggregate, 21· ·Global equity slightly outperformed the 21· ·however, was quite strong.· It has a quality 22· ·benchmark in Q3.· We're above the benchmark 22· ·bias that protected us well when markets 23· ·over all periods from our 2010 inception.· You 23· ·declined. 24· ·know, let's pause and note the strength of the 24· · · · The US large cap aggregate continues to 25· ·markets from that time, from our inception. 25· ·struggle.· It's smaller, value orientation, and
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Page 103 Page 104 ·1· ·a market that's been defined for a long time by ·1· ·can see a couple of our aggregates' performance ·2· ·mega cap growth has led to its ·2· ·have been challenged.· We have an even closer ·3· ·underperformance, although there was a strong ·3· ·eye on what's happening there. ·4· ·reversal for a short period of time in ·4· · · · The bottom of the page, in everything that ·5· ·September.· We refer to that as the week that ·5· ·we do, we remember that we're a liquidity ·6· ·value outperformed. ·6· ·provider.· We're going to be consistently ·7· · · · Thought you'd appreciate that, Mr. Goetz. ·7· ·called upon to provide beneficiary payments. ·8· · · · On a positive note, it wasn't long ago ·8· ·Through the Q3 this year, we have raised almost ·9· ·that our US small cap aggregate was below the ·9· ·$4 billion to provide to John in cash and 10· ·benchmark over several periods.· You can see 10· ·central custody for that purpose. 11· ·now strong active performance in that group has 11· · · · So, thank you all.· Happy to take any 12· ·pushed returns over all periods that you see 12· ·questions. 13· ·here above the benchmark, so that's a positive 13· · · · MR. CHAIR:· Do we have any questions on 14· ·development. 14· ·global equities? 15· · · · And finally, the last page that I'll 15· · · · Peter? 16· ·discuss today, I'm happy to, of course, take 16· · · · MR. JONES:· Yeah, just curious.· What is 17· ·any questions, provides some updates on our 17· ·the new internal strategy? 18· ·internal -- our important internal initiatives. 18· · · · MR. TAYLOR:· The new internal strategy is 19· ·Structural enhancements that we have completed 19· ·a quantitively driven US small cap growth 20· ·include an emerging markets manager search.· We 20· ·strategy, so it's benchmarked to the Russell 21· ·funded a new internally managed active 21· ·2000 growth and we're managing it to a 22· ·strategy, and we funded two new dedicated China 22· ·Standard&Poor's index where the methodology is 23· ·A-share strategies.· We continue also to 23· ·such where there's quality involved.· It 24· ·research potential internal solutions and 24· ·requires some earnings over a period of time, a 25· ·closely analyze some select aggregates.· You 25· ·particular amount of earnings growth.
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Page 105 Page 106 ·1· · · · So, there's many ways to define quality, ·1· ·value.· We've restructured that in the last ·2· ·but it's an index that has a methodology that ·2· ·couple of years.· We've done a manager search. ·3· ·is trying to screen out nonearners, poor ·3· ·We have one new manager that we have a lot of ·4· ·quality stocks that perhaps have done very well ·4· ·confidence in going forward. ·5· ·despite having no earnings.· So that's what it ·5· · · · A couple of things:· One, we think fees ·6· ·is.· US small cap, quantitively driven. ·6· ·are very important in that space because it is ·7· · · · We've sized it right now.· It's modest for ·7· ·difficult.· In that aggregate, we pay a blended ·8· ·our -- our asset class.· It's around ·8· ·average rate of 12 basis points.· So we've been ·9· ·$50 million.· We'll probably size it up over ·9· ·able to negotiate very, very low fees.· That 10· ·the next few months if trading goes well, if 10· ·doesn't excuse not being able to add alpha.· So 11· ·there are no operational issues.· We've had 11· ·it's an area we continue to look at.· That 12· ·none of those issues thus far. 12· ·area, we are value-oriented, even within our 13· · · · MR. COBB:· Mr. Chairman, I have a question 13· ·growth year managers.· They have a value 14· ·on the poor performance of our large cap 14· ·orientation.· They have a smaller orientation 15· ·active.· Several of us have been skeptical that 15· ·as well in the benchmark.· Both of those things 16· ·in the large cap space, that an active manager 16· ·have been challenged. 17· ·can -- after fees, can beat benchmarks.· And 17· · · · As I said, it's been mega cap and it's 18· ·fortunately, we only have 5 percent in large 18· ·been growth.· It won't always be mega cap and 19· ·cap under active management.· Does this result 19· ·it won't always be growth.· And I think that's 20· ·this year of a minus 5.6 percent convince us 20· ·why we continue to have some patience is that 21· ·that we should be more passive on our large 21· ·that will ultimately pay off and reverse.· It's 22· ·cap? 22· ·not a like for like, but I look at our US small 23· · · · MR. TAYLOR:· It is certainly a subject of 23· ·cap aggregate.· Not long ago, we were 24· ·discussion and debate.· And that is -- that is 24· ·underwater over almost all the periods.· That 25· ·arguably the most challenging area to add 25· ·has changed.· It changed very rapidly because
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Page 107 Page 108 ·1· ·we were patient, we tried to understand where ·1· · · · So we -- to answer your question, we ·2· ·things were not working, we made changes where ·2· ·sized -- we have a greater percentage of active ·3· ·appropriate. ·3· ·management where we think active management has ·4· · · · So, but that -- that, Ambassador, that is ·4· ·a higher probability of being more successful. ·5· ·one of the aggregates that we have the most ·5· · · · So in general, I hope that's responsive to ·6· ·robust debates about internally as to should we ·6· ·your question.· That's how we've tried to size ·7· ·just go passive there.· So we are -- you're ·7· ·it.· And structurally, we always have to ·8· ·right, we've sized it accordingly.· It's a ·8· ·remember we've got our target, our benchmark, ·9· ·modest size.· So the absolute values are big, ·9· ·MSCI ACWI IMI.· We're going to remain 10· ·but we definitely -- that's one of the 10· ·relatively neutral to that because we do have a 11· ·aggregates I mentioned we have even a closer 11· ·risk budget of 75 basis points to operate.· So 12· ·eye on.· Yes, that's one of them. 12· ·we can take some active -- active bets.· But we 13· · · · MR. GOETZ:· Tim, could you talk about the 13· ·have be to mindful that we have to remain 14· ·sizing overall, just the asset allocation?· Is 14· ·within that risk budget.· Ultimately, I mean, 15· ·it return-based, the bigger buckets, are they 15· ·we have to provide the beta of the global 16· ·expected return based, or how do you actually 16· ·equity markets. 17· ·decide on this allocation? 17· · · · So we try to be active where we think 18· · · · MR. TAYLOR:· Yeah.· I think generally 18· ·active has the greatest potential to pay off. 19· ·it's, you know, where do we think we have the 19· · · · MR. GOETZ:· Yeah, just outside of active. 20· ·best probability of positive risk adjusted 20· ·So the risk budget would also dictate whether 21· ·performance, positive alpha.· And so if you 21· ·you even put more emerging market passive in; 22· ·look at it, you know, in our emerging markets, 22· ·is that right?· I mean, because you can have 23· ·it's 11 percent of our asset class.· We're 23· ·active managers where you're trying to beat the 24· ·entirely active in emerging markets.· In US 24· ·benchmark, but you could also move into passive 25· ·large cap, we're mostly passive actually. 25· ·and your risk budget is setting how much in
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Page 109 Page 110 ·1· ·each of these buckets you can have in, you ·1· · · · MR. TAYLOR:· I think some of your question ·2· ·know, as a percentage of the total? ·2· ·gets to asset allocation and, you know, what ·3· · · · MR. TAYLOR:· Yeah, yeah, yeah.· So any off ·3· ·return for the asset allocation study do we ·4· ·benchmark, off target activity, we have to ·4· ·want to key in for global equities.· That's ·5· ·consider how is that going to impact the risk ·5· ·a -- of course, a subset of US returns, non-US ·6· ·budget.· So, you know, we've decided in ·6· ·returns, emerging market returns, I think we ·7· ·emerging markets, we think there's a high ·7· ·believe that -- and what's reflected in our ·8· ·probability of active outperformance, we're ·8· ·target is that emerging markets should have a ·9· ·going to be fully active there.· Still have to ·9· ·higher return potential over time, driven by 10· ·be mindful that we, you know, we can't go 10· ·China, driven by India and the like.· That is a 11· ·outside certain bounds. 11· ·component of our target for global equity. 12· · · · And we also want to be mindful that we 12· · · · So, in terms of, you know, emphasizing 13· ·want to remain diversified and not put 13· ·emerging markets, we would probably not and we 14· ·everything in two or three buckets.· I think if 14· ·never have, we probably wouldn't actually 15· ·we get to a point where every bucket is 15· ·tactfully overweight emerging markets.· That's 16· ·outperforming at the same time, we actually, we 16· ·a tough call to make.· What we would want to do 17· ·get a little concerned about that.· Look, wait 17· ·within emerging markets is, well, we think we 18· ·a minute, maybe we don't understand who we 18· ·can add value on an active basis, so let's be 19· ·hired here. 19· ·active, fully active in emerging markets. 20· · · · MR. GOETZ:· But I think you also answered 20· · · · Does that answer your question? 21· ·the question.· So in emerging markets, your 21· · · · MR. COBB:· It seems to me the debate here 22· ·expected return, not just the alpha, the 22· ·is that this weighted percentage is not an 23· ·manager, but your expected return is higher. 23· ·allocation by itself.· It just happens to be an 24· ·And then you pull them all together and that 24· ·arithmetic result.· In other words, if you take 25· ·equals the target equity return? 25· ·the allocation, which is the most important,
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Page 111 Page 112 ·1· ·and then you take a percentage of that ·1· ·that would affect that weighting? ·2· ·allocation, in the case of emerging markets, ·2· · · · MR. TAYLOR:· The weight of the -- ·3· ·it's nearly a hundred percent he says, and then ·3· · · · MR. COLLINS:· Yeah.· Like, the US large ·4· ·you come down and it just happens to come out ·4· ·cap?· If you're looking at that, I mean, you ·5· ·that emerging markets is 11 percent of the ·5· ·say you're not making those tactical decisions, ·6· ·active managers, but that was never -- that was ·6· ·but in a way you are, because -- ·7· ·never an estimate.· It just happened to be an ·7· · · · MR. TAYLOR:· Yeah. ·8· ·arithmetic answer.· Is that -- did I say it ·8· · · · MR. COLLINS:· -- you're hiring the ·9· ·right? ·9· ·managers, you're deciding whether to go active, 10· · · · MR. TAYLOR:· Thank you for that.· Because 10· ·you're deciding whether to go passive, you're 11· ·I think basically what you can say is, of our 11· ·deciding how much is in the US and how much is 12· ·target that we're given, emerging markets, 12· ·in emerging markets or foreign-developed large 13· ·well, what is its weight in that target, it's 13· ·cap. 14· ·roughly 11 percent.· Well, that's why we have 14· · · · I hear you, that it's not always going to 15· ·11 percent in emerging markets as an asset 15· ·be growth and it's not always going to be, you 16· ·class.· We're going to be structurally neutral 16· ·know, FANG or whatever, but it's been that way 17· ·on a regional basis.· We're not going to 17· ·for a while. 18· ·tactically over or underweight emerging 18· · · · MR. TAYLOR:· So, in terms of the target 19· ·markets. 19· ·we're given, we're regionally, in these 20· · · · So, thank you, I think that's helpful for 20· ·segments, large cap, small cap, US, non-US, 21· ·the answer. 21· ·emerging, we're going to look largely like our 22· · · · MR. COLLINS:· Question. 22· ·target over time.· Within segments of that 23· · · · MR. CHAIR:· Go ahead, Peter. 23· ·target, we'll determine as a group, well, how 24· · · · MR. COLLINS:· So, how -- how often do you 24· ·active would we like to be?· And we are more 25· ·adjust -- how often are you making adjustments 25· ·active in areas where we think we can add
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Page 113 Page 114 ·1· ·value, higher probability. ·1· ·25 percent of their account values.· Now, the ·2· · · · In terms of -- so, in terms of tactical, ·2· ·account values are still decent because the ·3· ·we don't over and underweight regions.· Perhaps ·3· ·market has pushed those account values up ·4· ·we're a little more tactical within those ·4· ·really strong. ·5· ·segments, active passive. ·5· · · · So, to answer your question, I'd say we ·6· · · · In terms of how often, well, one of the ·6· ·periodically, you know, make those types of ·7· ·things -- one of the good things about the ·7· ·changes.· I think one of the -- one of the ·8· ·liquidity bill that we seem to get every month ·8· ·things we're afforded is we can be patient. ·9· ·from John is it's an opportunity to rebalance a ·9· ·And many times, our patience has served us 10· ·little bit.· If we have too much with somebody 10· ·well.· At some point, you can no longer be 11· ·and perhaps we're losing a little confidence or 11· ·patient, you need to make a change.· But I 12· ·they've done perhaps really, really well and 12· ·think one of the mistakes that investors make 13· ·their account's getting pretty weighty, heavy, 13· ·sometimes is they have a knee-jerk reaction, 14· ·it's an opportunity for us to make some 14· ·they're not patient and they make a change at a 15· ·adjustments at the margin.· Maybe bring some 15· ·very wrong time. 16· ·managers down and so forth. 16· · · · So, some of our active aggregates have 17· · · · We have, probably two to three years ago, 17· ·struggled, but I said, well, let's look at the 18· ·we tactically reduced the active component of 18· ·top line.· Top line, we're still outperforming 19· ·our US large cap bucket.· Those managers had 19· ·and we would hope that if some active 20· ·higher account values.· We said, you know, this 20· ·aggregates are underperforming, others are 21· ·is a difficult space.· We think we can be 21· ·picking them up and pushing it up.· So I hope 22· ·successful, but let's size it down a little 22· ·that answers the question. 23· ·bit.· And we did.· So we had four managers at 23· · · · MR. COLLINS:· Yeah. 24· ·the time.· We took some funds from each of 24· · · · MR. CHAIR:· Okay.· Any other questions? I 25· ·them.· And a decent amount, it's probably 25· ·did want to identify, what was the value week
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Page 115 Page 116 ·1· ·this year, which one? ·1· ·we're right there.· Since June, you know, REITs ·2· · · · MR. TAYLOR:· It was in September, and I'm ·2· ·have done pretty good, so -- it's a little wide ·3· ·not sure exactly which week it was.· It was ·3· ·of whack now.· We may rebalance that. ·4· ·about -- actually I don't think it was a week, ·4· · · · Private markets, we have a target of ·5· ·I think it was three days. ·5· ·15 percent noncore, 85 percent core.· We've ·6· · · · MR. CHAIR:· Thank you, Tim. ·6· ·really been targeting more of a 20 percent ·7· · · · MR. TAYLOR:· You're welcome. ·7· ·target for noncore in this environment.· And we ·8· · · · MR. CHAIR:· Moving from value to where ·8· ·have a target allocation of 10 percent and are ·9· ·there's value every day, Steve, take it away. ·9· ·currently at about 9.4 percent. 10· ·Tell us about real estate. 10· · · · The new members will learn that this is 11· · · · MR. SPOOK:· Good afternoon.· I guess one 11· ·a -- leverage is of great interest to this 12· ·of the big differences between real estate and 12· ·council.· So we have several slides in here 13· ·global equities is -- I just heard Tim say that 13· ·to -- several slides in here, you know, I've 14· ·if all his buckets are doing well at the same 14· ·recorded to help you understand where we are on 15· ·time, he gets concerned.· We're doing high 15· ·the leverage. 16· ·fives in real estate. 16· · · · So private market leverage, we're at 17· · · · Likewise, like Tim, welcome to the two new 17· ·29.5 percent.· And when I say private markets, 18· ·IAC members.· This is not the in-depth session 18· ·that's our direct-owned investments, which we 19· ·for real estate, although I'll go as in depth 19· ·call principal investments, in our commingled 20· ·as you want me to.· In March, we'll go further 20· ·fund portfolio.· We break that out further 21· ·in depth and hopefully you'll understand more 21· ·because in principal investments, we can 22· ·then on how we operate. 22· ·control the level of the debt, so we do want to 23· · · · But here on the first slide, kind of shows 23· ·show you what each of the different vehicle 24· ·our positioning.· We have a target of 10 24· ·type pools look like. 25· ·percent to public securities and at 90, so 25· · · · And our closed-end funds tend to be
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Page 117 Page 118 ·1· ·opportunistic and value-add funds, so you're ·1· ·securities allocation.· And you can see ·2· ·going to see a higher leverage there.· The ·2· ·right -- outperformance there as well. ·3· ·open-end funds are all core or core-plus funds. ·3· · · · Property type diversification, you see ·4· · · · And again, we give a little more detail in ·4· ·other -- most of the members of this council ·5· ·principal investments just because that's where ·5· ·understand why because we have been doing a lot ·6· ·staff can control the amount of leverage.· And ·6· ·of things like self-storage, student housing. ·7· ·we do have a limit there of no more than ·7· ·We've historically been in ag.· The benchmark ·8· ·30 percent for the principal investments or ·8· ·is in the process of being revised.· It hasn't ·9· ·direct-owned portfolio.· Individual core assets ·9· ·been revised since 1983, and it's going to 10· ·we can lever up to 50 percent.· And joint 10· ·reflect a little bit more what institutional 11· ·venture assets, we can go up to 70 percent. 11· ·investors are doing nowadays, so self-storage 12· ·But as a portfolio, we're limited to 12· ·is going to become its own slice there which 13· ·30 percent.· You can see our leverage has gone 13· ·will necessarily reduce our, what looks like 14· ·up pretty consistently over the last few years, 14· ·overweight to other.· And, for instance, 15· ·and that is taking advantage of some great 15· ·student housing is going to be included as a 16· ·interest rates as well. 16· ·subsector under multifamily. 17· · · · Performance has been good throughout all 17· · · · Geographic, pretty much where we want to 18· ·time periods, including if you go out ten years 18· ·be on the coastal states, and we have some 19· ·and since inception. 19· ·international whereas the benchmark does not. 20· · · · Here again, we break out the direct-owned 20· · · · I would like to -- in your packages, this 21· ·portfolio.· Again, outperformance over all time 21· ·last slide shows a lot more dispositions.· That 22· ·periods.· And I mentioned our principal 22· ·was a mistake.· I'm sorry.· I would look up at 23· ·investments is a direct-owned portfolio. 23· ·this slide to see what the actual activity has 24· ·Externally managed is comprised of our 24· ·been since the last IAC report.· You will see a 25· ·commingled funds and our 10 percent real estate 25· ·lot more activity on the next meeting.
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Page 119 Page 120 ·1· · · · And I'll take any questions. ·1· ·storage? ·2· · · · MR. CHAIR:· Any questions for Steve in ·2· · · · MR. SPOOK:· On the direct side, it is.· We ·3· ·real estate? ·3· ·entered it several, three, four years ago with ·4· · · · MR. COLLINS:· I might have one or three. ·4· ·a 66-property portfolio purchase in a joint ·5· · · · Ash and I were just talking about storage ·5· ·venture with a public company, and we since ·6· ·in the UK.· You know, they don't really have a ·6· ·have been adding to it.· The value proposition ·7· ·history of self-storage over there.· Relatively ·7· ·there is you're buying from mom and pops who ·8· ·small dwellings, comparatively not a lot of ·8· ·don't have the, you know, computerized -- ·9· ·storage there.· Is there a big growth story ·9· · · · MR. COLLINS:· Right. 10· ·there, in the UK versus the United States? I 10· · · · MR. SPOOK:· -- the algorithms and 11· ·mean, the United States has been a -- it's been 11· ·things -- 12· ·a boom for the last, I don't know, eight to ten 12· · · · MR. COLLINS:· Yeah.· Scale, efficiency, 13· ·years. 13· ·that whole -- yeah. 14· · · · MR. SPOOK:· Yeah, no, no, there's 14· · · · So are those -- on the 66 assets, what was 15· ·definitely a market there.· And Ash and I have 15· ·our share of that purchase?· I mean, give, me a 16· ·been over to Europe and seen the self-storage 16· ·size of the -- or a sense of the size of the 17· ·and the need for it.· Fortunately, one of our 17· ·opportunity there. 18· ·managers, one of our separate account managers, 18· · · · MR. SPOOK:· Oh, that was, you know, north 19· ·Heitman, has been in the self-storage and 19· ·of 400 million. 20· ·alternative space for many, many years and have 20· · · · MR. COLLINS:· Our commitment? 21· ·developed that skill set overseas as well.· So 21· · · · MR. SPOOK:· No.· In total.· I believe we 22· ·we are going to be investing in a vehicle with 22· ·were -- that was a 90/10 or an 80/20 joint 23· ·them that, amongst other alternative property 23· ·venture with us being the majority of the 24· ·types, we'll be looking -- 24· ·equity. 25· · · · MR. COLLINS:· So it's not a pure play in 25· · · · MR. COLLINS:· I got you.· But there's
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Page 121 Page 122 ·1· ·other -- ·1· ·properties.· I thought you meant that was ·2· · · · MR. SPOOK:· But going overseas, we don't ·2· ·Europe. ·3· ·do direct overseas, so that would be through a ·3· · · · MR. WILLIAMS:· Anything else on real ·4· ·fund vehicle. ·4· ·estate? ·5· · · · MR. COLLINS:· Right.· And that's Heitman? ·5· · · · All right.· Why don't we move on to ·6· · · · MR. SPOOK:· Right.· And here ·6· ·private equity if we could. ·7· ·domestically -- ·7· · · · MR. BRADLEY:· Thank you, Ash, and welcome ·8· · · · MR. COLLINS:· Here we do it direct. ·8· ·to our new members. ·9· · · · MR. SPOOK:· We are doing it direct. ·9· · · · I'll start with a quick look at the 10· · · · MR. COLLINS:· And what would you say our 10· ·market.· PE purchase price multiples continue 11· ·size here is?· Or is that part of the -- 11· ·their steady climb.· They've averaged close to 12· · · · MR. SPOOK:· That 66-property portfolio -- 12· ·11 times EBITDA this year, whereas debt 13· · · · MR. COLLINS:· Oh, included -- 13· ·multiples in the market continue to hold steady 14· · · · MR. SPOOK:· It's all here. 14· ·at around five and a half times EBITDA.· So 15· · · · MR. COLLINS:· Okay. 15· ·we're seeing our PE firms are increasingly 16· · · · MR. SPOOK:· We don't have anything 16· ·including more equity into their deals.· The 17· ·internationally yet, but we're looking into it, 17· ·average equity contribution this year has 18· ·as one of the property types that they're 18· ·eclipsed 50 percent. 19· ·allowed to -- 19· · · · Markets outside the US have been mixed. 20· · · · MR. COLLINS:· I see.· So this is a 20· ·Asia has seen a bit of a slowdown in deals and 21· ·relatively new investment that we're making? 21· ·fundraising.· While in Europe, we've seen a bit 22· · · · MR. SPOOK:· Yes. 22· ·of an uptick in both. 23· · · · MR. WILLIAMS:· The European version. 23· · · · The strong performance of our portfolio 24· · · · MR. COLLINS:· The European version, right. 24· ·continues.· We'll see that performance here in 25· ·I thought you said we got into it with 66 25· ·a moment.· And our portfolio return to net cash
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Page 123 Page 124 ·1· ·flow positive during the quarter and for the ·1· ·try and accommodate IAC members whenever we ·2· ·full year of 2019, behind a strong third ·2· ·can, even if it involves predatory wagering. ·3· ·quarter of distributions. ·3· · · · MR. BRADLEY:· Yes.· But I think we can ·4· · · · Here, we see our exposures by sector in ·4· ·take a small victory in that Vinny's not here ·5· ·geography.· There's been no change since last ·5· ·to gloat or to see the result of his wager. ·6· ·quarter. ·6· · · · Now, on a more positive note, the asset ·7· · · · Next is our asset class performance.· And ·7· ·class continues to outperform.· We've exceeded ·8· ·I know these colors are hard to look at for ·8· ·our benchmark over all time periods as of ·9· ·most of us, so Vice Chairman Olmstead and I ·9· ·June 30. 10· ·made a friendly wager on the outcome of the 10· · · · Next here we're looking at our substrategy 11· ·UF/FSU game. 11· ·performance.· We see really strong performance 12· · · · MR. COLLINS:· Why would you do that this 12· ·from our venture and growth equity portfolios 13· ·year?· Why? 13· ·over the short term.· And longer term, all of 14· · · · MR. BRADLEY:· So before you fully question 14· ·our strategies have been positive contributors 15· ·my judgment -- 15· ·to the overall portfolio, with the exception of 16· · · · MR. COLLINS:· Okay.· Sorry, sorry. 16· ·our non-US growth equity portfolio. 17· · · · MR. BRADLEY:· -- the point was made in 17· · · · Then lastly, we have our commitment 18· ·September versus the spread, not straight up. 18· ·activity.· This is through the first nine 19· · · · MR. COLLINS:· Okay. 19· ·months of 2019.· We've made 18 commitments 20· · · · MR. BRADLEY:· The seventeen and a half 20· ·totaling $1.4 billion.· That breaks out as 21· ·points were definitely not enough.· While I 21· ·943 million with the 14 buyout funds, 225 22· ·thought Vice Chairman was going to forget, he 22· ·million allocated to two distressed funds, and 23· ·was sending me emails during the game to make 23· ·186 million allocated to two venture funds. 24· ·sure that I remembered the bet, and so -- 24· · · · That is all I have.· Thank you. 25· · · · MR. WILLIAMS:· It's also important that we 25· · · · MR. GOETZ:· Can I -- John?
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Page 125 Page 126 ·1· · · · MR. BRADLEY:· Oh, yeah. ·1· · · · And so if you were to look at our venture, ·2· · · · MR. GOETZ:· Could I just ask a question? ·2· ·we're at 20 percent today, 10 percent target. ·3· · · · Again, you know, when you look at ·3· ·Our allocation pace is about 8 percent of our ·4· ·substrategies, is there an allocation ·4· ·ongoing commitments have been going to venture, ·5· ·methodology there to the substrategies?· So ·5· ·so that's absolutely an area that we are ·6· ·for -- I mean, like US venture, which has done ·6· ·pulling back from, at least on the margin. ·7· ·really well recently, you know, or if you're in ·7· · · · MR. GOETZ:· I see.· Thank you. ·8· ·a market where SoftBank pays $47 billion for ·8· · · · MR. CHAIR:· Okay.· If there's no further ·9· ·WeWork. ·9· ·questions on private equity, Daniel, let's 10· · · · MR. COLLINS:· That's a good deal. 10· ·bring us up to date on defined contribution 11· · · · MR. GOETZ:· No.· I'm just asking, again, 11· ·plans. 12· ·based upon what's happened or go forward, do 12· · · · MR. BEARD:· Thank you.· Good afternoon. 13· ·the substrategy allocations change? 13· ·Welcome to our new members. 14· · · · MR. BRADLEY:· They do.· So we have soft 14· · · · First slide you see here is just a 15· ·targets for the different categories.· And so 15· ·snapshot of the investment plan as of September 16· ·buyouts and growth equity is 55 percent.· Our 16· ·30th.· Couple of numbers I want to point out is 17· ·venture portfolio today is at 20 percent 17· ·assets, 11.3 billion, which is a 1.8 percent 18· ·allocation with a 10 percent target. 18· ·increase from last September 30th.· And then 19· ·Distressed is 10, secondaries are 10, and then 19· ·our membership, 220,000, which you see is a 20· ·we have a 10 percent allocation to 20· ·15.7 percent increase since last 21· ·co-investments.· And so, within that, we will 21· ·September 30th, which is driven by the default 22· ·absolutely -- we have continuing conversations 22· ·change. 23· ·of valuations, relative value between the 23· · · · We go to the next page, it's a breakdown 24· ·different strategies, and we'll flex up and 24· ·of those assets under management.· As you see, 25· ·down based on the conversations. 25· ·46 percent of total assets are in the
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Page 127 Page 128 ·1· ·retirement date funds.· Again, a lot of that is ·1· ·we oversee the investment plan, but we also ·2· ·driven by just members who go into those funds ·2· ·oversee the My FRS Financial Guidance Program, ·3· ·and then they just take no action.· And that's ·3· ·which is an educational program for both ·4· ·one of the reasons we went to retirement date ·4· ·members in the investment plan as well as in ·5· ·funds is because our membership did not take ·5· ·the pension plan.· As you see for all those ·6· ·any action as far as looking at their ·6· ·numbers, if we look at two as far as our ·7· ·portfolio. ·7· ·workshops, we've had a 6 percent increase in ·8· · · · Here's the performance for the different ·8· ·the number of workshops we've done over the ·9· ·asset classes.· Total fund was .38 percent as ·9· ·past 12 months.· And then as far as attendance 10· ·of September 30th.· However, as of 10· ·for those workshops, we've had a 17 percent 11· ·November 30th, that has risen to 4.25 percent 11· ·increase.· Those workshops are handled by EY. 12· ·total fund return, driven largely by domestic 12· ·EY, they're the financial planners for the FRS, 13· ·equities for us. 13· ·unbiased information that they give to members. 14· · · · Next slide, again, is our membership 14· ·You can call them on the phone or you can chat 15· ·growth.· As you'll see for fiscal year to date, 15· ·with them, if you notice, there are chats -- 16· ·we've increased 3.2 percent.· Again, you're 16· ·are up 16 percent.· So that's a very popular 17· ·going to see that increase quarter over 17· ·feature that our membership are taking 18· ·quarter, mainly because of the default change. 18· ·advantage of. 19· ·What we're seeing as far as election data for 19· · · · And then at the bottom, you see there's 20· ·the -- for election data, defaults are roughly 20· ·annuities.· We have -- MetLife is our exclusive 21· ·about 50 percent, active elections into the 21· ·annuity provider, in-plan annuity provider. 22· ·investment plan are about 16 percent.· Total, 22· ·And so you see there, over the past 12 months. 23· ·we're getting probably about 67 percent of all 23· ·I will say over the last 12 months, we had our 24· ·new hires are coming into the investment plan. 24· ·largest, which was, I believe, close to 25· · · · And then the next slide -- so not only do 25· ·2 million, if not a little bit over a
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Page 129 Page 130 ·1· ·2-million-dollar annuity purchase. ·1· ·know, did they make any reallocation?· The last ·2· · · · So every month, we send -- MetLife sends ·2· ·report I got, we have less than 10 percent of ·3· ·out letters, so we do promote our members ·3· ·those who are defaulting, taking any action on ·4· ·purchasing annuities just so they have some ·4· ·their account. ·5· ·kind of lifetime income.· And hopefully they ·5· · · · MR. WENDT:· Okay.· Thank you. ·6· ·will not outlive it.· So we do promote that. ·6· · · · MR. CHAIR:· Peter, go ahead.· You had a ·7· · · · Happy to answer any questions you may ·7· ·question. ·8· ·have. ·8· · · · MR. JONES:· Just a quick question on -- ·9· · · · MR. WENDT:· Mr. Chairman, I have one. ·9· ·you said EY is your -- offers the financial 10· · · · MR. CHAIR:· Yes, sir.· Go ahead, Gary. 10· ·support to the members.· Who pays them?· How do 11· · · · MR. WENDT:· I have one simple question. 11· ·they make money?· I'm just curious. 12· ·On the third -- your third chart, it looks like 12· · · · MR. BEARD:· So one of the things that all 13· ·about 50,000 new people have been added this 13· ·FRS employers pay is a -- what we call an admin 14· ·year.· And as Ash said earlier, it's because 14· ·fee or educational fee on the salary that -- 15· ·they've changed the default, I guess that's the 15· ·participating members.· So there's .6 basis 16· ·question to -- you go in the investment plan, 16· ·points that they send in.· It goes to the 17· ·the CD as opposed to the other one.· How many 17· ·Division who sends it over to the SBA, and it 18· ·of those have become active?· I mean, have 18· ·goes into what we call our admin trust fund 19· ·said, yes, here's how I want to manage my 19· ·that we use to pay EY.· So they don't sell any 20· ·portfolio, versus saying nothing? 20· ·products.· That's why they can do unbiased 21· · · · MR. BEARD:· So I had our record keeper run 21· ·information, unbiased, you know, information 22· ·a report, because I wanted to see exactly of 22· ·for our members.· They're not selling anything, 23· ·those people who default, how many have taken 23· ·they're not gearing them to one plan or the 24· ·any kind of action.· And I had them look to 24· ·other.· All they're there to do is give 25· ·say, you know, did they add a beneficiary, you 25· ·unbiased information.· So they're paid by, you
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Page 131 Page 132 ·1· ·can say, the FRS-participating employers. ·1· ·bit more clarity on some of those votes that ·2· · · · MR. JONES:· Thank you. ·2· ·fall in that category. ·3· · · · MR. CHAIR:· Daniel, thank you as always. ·3· · · · So, even though it was fairly light from a ·4· · · · Now, one area for both Tere and John's ·4· ·voting perspective, there was a fairly notable ·5· ·information that all of us on the council have ·5· ·event that occurred early last month when the ·6· ·always been very proud of is the role that the ·6· ·SEC passed a pretty significant proposed ·7· ·SBA takes in corporate governance, which Mike ·7· ·change.· It's not final yet, but it's out for ·8· ·McCauley is in charge of. ·8· ·comment right now.· And it deals with a couple ·9· · · · So, Mike, tell us about corporate ·9· ·of dimensions within the shareowner voting 10· ·governance and what's going on.· Give me an 10· ·protocol and dealing with regulations for proxy 11· ·end, please. 11· ·advisors, all of which we're obviously 12· · · · MR. McCAULEY:· Good afternoon.· And 12· ·well-attuned to and active in the space. 13· ·welcome, Tere and John. 13· · · · So I've kind of laid out some of the 14· · · · So the third quarter's pretty light in 14· ·bullet points.· The -- in the first prong of 15· ·terms of proxy voting activity, and it shifts a 15· ·the proposed rule amendments, the SEC's 16· ·little bit outside the US.· We've included the 16· ·proposed changes to both the ownership and 17· ·normal statistics that we typically have.· And 17· ·holding requirements within what's called Rule 18· ·we've got in the appendix a little bit more 18· ·14a-8, which governs how resolutions can be put 19· ·voting pattern detail, kind of directional 19· ·on corporate ballots and ultimately voted on by 20· ·statistics, that sort of thing. 20· ·shareowners. 21· · · · And based on Ambassador Cobb's question at 21· · · · So you've got the current, which has been 22· ·the last meeting, we've also added a slide 22· ·in place for several decades.· I think it was 23· ·where we actually list out the shareholder 23· ·last changed sometime in the '80s, a very low 24· ·proposals, the actual resolutions, and the 24· ·bar of just $2,000 of stock held continuously 25· ·company-level information to give you a little 25· ·for a year.· Proposal was to move that up
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Page 133 Page 134 ·1· ·fairly dramatically and kind of implement a ·1· ·exactly will happen, and this is proposed.· It ·2· ·tiered approach.· So if you hold the stock for ·2· ·could change in its final form, the numbers ·3· ·shorter periods of time, you would have to own ·3· ·could.· But most market participants have kind ·4· ·a higher dollar level. ·4· ·of had a negative view.· It's received a chilly ·5· · · · And then kind of commensurate with that is ·5· ·reception, I think, on the part of, you know, ·6· ·one that I think would probably affect more ·6· ·institutional investors, some of the large ·7· ·institutional investors, such as ourselves, is ·7· ·passive managers, groups like the CFA ·8· ·a fairly significant increase in the ·8· ·Institute, Council of Institutional Investors ·9· ·resubmission requirements to submit resolutions ·9· ·and the like.· So we'll be weighing in with a 10· ·in years two, three and beyond.· And so I've 10· ·comment letter. 11· ·laid out the three, six, and ten of the current 11· · · · Some market consultants have predicted 12· ·thresholds.· So if a resolution is submitted in 12· ·that if the resolution volume declines 13· ·year one, it has to get at least 3 percent. 13· ·significantly, it will lead to potentially a 14· ·Year two, 6, and likewise.· So those will go up 14· ·knock-on effect where many investors will be 15· ·to 5, 15, and 25. 15· ·kind of almost forced, I guess, in theory to 16· · · · The SEC has proposed kind of a quirky 16· ·increase the level of dissent on individual 17· ·requirement or a caveat, if you will, which 17· ·directors.· And that's -- you're kind of 18· ·kind of is dubbed a momentum trigger, is where 18· ·already seeing that happen in the marketplace 19· ·if at any point in that five-year cycle, a 19· ·over the last few years, but this could 20· ·shareowner resolution, even though it may have 20· ·potentially accelerate that.· It kind of 21· ·met the 5, 15, and 25 support levels from all 21· ·remains to be seen, but some folks have kind of 22· ·shareowners, if there's a decline of 10 percent 22· ·pointed that out as a red flag, that this will 23· ·or more during that period, it can also be 23· ·be kind of an unintended consequence for the 24· ·excluded. 24· ·proposal. 25· · · · It's too early to tell what, you know, 25· · · · And then more significant than the
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Page 135 Page 136 ·1· ·resubmission thresholds, or at least in our ·1· ·that, at least for the nonpaying client.· So ·2· ·view, is the proposed regulations for -- which ·2· ·we're, again, fairly negative on that.· We ·3· ·are new, that will be placed on proxy advisors. ·3· ·don't think that's a good idea.· We don't think ·4· ·And I've just kind of included the three kind ·4· ·it's needed.· A lot of people have ·5· ·of main elements for the proxy advisor ·5· ·characterized this as kind of a solution in ·6· ·proposal.· And the first one is the most ·6· ·search of a problem, but I'll leave that to ·7· ·notable.· This would implement a new ·7· ·others to make up their mind. ·8· ·requirement where as long as companies publish ·8· · · · Second and third elements, bullet points ·9· ·their proxy or file their proxy a certain ·9· ·there, is that it would change the voting 10· ·number of days in advance of the annual 10· ·advice or more formally change it to a 11· ·meeting, 45 days at the lengthiest period, it 11· ·solicitation, which would open up liability and 12· ·would then allow them to review the proxy 12· ·some other kind of enforcement activity on the 13· ·advisor's research before they are actually 13· ·part of the SEC for the proxy advisors if they 14· ·provided to clients.· Where we use Glass Lewis 14· ·ran afoul, you know, factual omissions, that 15· ·and Institutional -- ISS, Institutional 15· ·sort of thing, so it's a fairly key change. 16· ·Shareholder Services as the two main proxy 16· · · · And then not only would it allow them to 17· ·advisors, we've used them for a number of years 17· ·provide a first stage of commentary and 18· ·now, so this would in effect allow companies, 18· ·feedback as long as the deadlines are met, it 19· ·before the vote, to look at that research and 19· ·would actually allow anyone to have a second 20· ·provide commentary and feedback, something 20· ·input or commentary, and actually require the 21· ·that's not really done in any other part of the 21· ·proxy advisors to send out materials that are 22· ·market.· You know, if you think of, you know, 22· ·provided by the companies.· Which again, is not 23· ·kind of the rating agencies and some of the 23· ·really done now, at least not on a formal 24· ·other, you know, consulting or advisory 24· ·basis.· Companies can file solicitation 25· ·portions of the market, kind of unusual to do 25· ·materials, but it's independent and it's just,
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Page 137 Page 138 ·1· ·again, not mandatory on the part of the proxy ·1· ·directly have feedback and commentary.· The ·2· ·advisor to do that. ·2· ·proxy advisor that will be disclosed in some ·3· · · · And then last, they'll require the ·3· ·sense, at least ultimately, or could have an ·4· ·advisors to provide more disclosures related to ·4· ·impact on the advice, the methodology, et ·5· ·conflicts of interest, which we think is ·5· ·cetera, the same thing will apply for the ·6· ·probably a good idea, but for the most part, ·6· ·activist fund.· So this -- again, some people ·7· ·that's already done, so it's not really gonna ·7· ·have said this could have a knock-on effect ·8· ·change dramatically. ·8· ·where it could change the dynamic between the ·9· · · · And kind of like the Rule 14a-8 changes, ·9· ·activist fund and the larger shareowner base, 10· ·some of the kind of market consultants have 10· ·so we'll see what happens. 11· ·opined that this will likely lead to, you know, 11· · · · So we'll be weighing in on a -- from a 12· ·a shorter time for engagement on companies. 12· ·commentary perspective.· And it has a one-year 13· ·Again, it's a negative from a process view.· It 13· ·implementation period, so it would not be 14· ·will shorten the time frame, shorten the 14· ·effective for next year, for 2020 proxy season 15· ·information set that all the actors are 15· ·or really anything during the calendar year, 16· ·involved with. 16· ·but then would be subsequently implemented and 17· · · · Maybe one of the positive or the silver 17· ·applied for the 2021 season. 18· ·lining in this, assuming it goes forward as 18· · · · So, happy to answer any questions. 19· ·proposed, under the new requirement, where 19· · · · MR. CHAIR:· Tere. 20· ·companies can provide commentary and feedback, 20· · · · MS. CANIDA:· I have a question, Michael. 21· ·it will also allow an activist fund to do the 21· · · · Would this put a much greater burden on 22· ·same thing, because they're a soliciting 22· ·the institutional investor if this goes 23· ·entity.· So, when a company approaches, if 23· ·through?· I mean, you know, it could become 24· ·they're in a proxy contest, a company that's 24· ·much more cumbersome. 25· ·targeted will be allowed and availed to 25· · · · MR. McCAULEY:· I think on the proxy
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Page 139 Page 140 ·1· ·advisor prong, it will.· It's not a positive ·1· ·fairly beneficial for most market participants. ·2· ·development. ·2· ·I mean, you can -- debatable, but it's -- I ·3· · · · From the resolution submission point of ·3· ·think you can say it's harming the shareowner's ·4· ·view, it's mixed.· It won't -- we've ·4· ·voice, if you will, you know, at least at the ·5· ·submitted -- you know, we -- for the longer IAC ·5· ·margin, and we don't think that's a good idea ·6· ·members, a couple years ago we were involved ·6· ·necessarily. ·7· ·with an initiative where we advocated for S&P ·7· · · · MS. CANIDA:· Thank you. ·8· ·500 companies to move away from classified ·8· · · · MR. CHAIR:· Any other questions for Mike? ·9· ·boards, and it was very effective.· We ·9· · · · As always, Mike, thank you so much. 10· ·submitted a couple dozen resolutions ourselves. 10· · · · I feel very bad having rushed everybody 11· ·This would not have a material impact or even a 11· ·through so far, so before we start our major 12· ·significant impact on that, because we would 12· ·mandate performance with Kristen Doyle from Aon 13· ·meet the ownership and the dollar levels.· But 13· ·Hewitt, I'd like to say that instead of 15 14· ·it will have an effect on some of the smaller 14· ·minutes, this session will be an hour. 15· ·entities that are very active in submitting 15· · · · Kristen, go ahead. 16· ·resolutions.· In fact, most of the resolutions 16· · · · MS. DOYLE:· Uh-oh. 17· ·are submitted by individuals, and there's some 17· · · · Well, thank you.· Good afternoon.· Great 18· ·debate whether that's good or bad.· But it will 18· ·to be here, as always.· For the benefit of the 19· ·affect at some incremental margin, the types of 19· ·new IAC members, my name is Kristen Doyle from 20· ·resolution and the volume of resolutions that 20· ·Aon.· We're the general consultant for the SBA. 21· ·we ultimately vote on. 21· ·And among other things, every quarter, we do 22· · · · And again, could have that, you know, 22· ·provide an update on performance of the major 23· ·unintended consequence of leading to higher 23· ·mandates that the SBA manages.· So I will walk 24· ·dissent against board members and change the 24· ·through that.· Please stop me with any 25· ·engagement process, which has evolved and been 25· ·questions.· I typically don't spend an hour on
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Page 141 Page 142 ·1· ·this section of the presentation, so don't ·1· ·when we get to the end of the fourth quarter. ·2· ·worry. ·2· · · · So here's a snapshot of the asset ·3· · · · So I'm going to start with the pension ·3· ·allocation.· The quick conclusion here, as it ·4· ·plan.· So here -- and again, all of this data ·4· ·typically is, is that the actual allocations to ·5· ·is through September 30th of 2019.· So this is ·5· ·the major asset classes are right in line with ·6· ·a change in market value.· So third quarter and ·6· ·the targets that have been set through the ·7· ·fiscal year to date for this slide are the ·7· ·asset liability study that we do each year. ·8· ·same, because the fiscal year started at the ·8· · · · Here's performance relative to two ·9· ·beginning of the third quarter. ·9· ·different benchmarks.· The gray bars is the 10· · · · So we started the quarter at about 10· ·actual FRS pension plan returns.· The blue bars 11· ·163 billion in assets.· Ended slightly below 11· ·are -- is the weighted average benchmark for 12· ·that at 162.5 billion.· And the main reason for 12· ·the underlying asset classes at their target 13· ·that was just that the markets -- in 13· ·weights.· And then we have a long -- what we 14· ·particular, the equity markets during the third 14· ·kind of consider a long-term benchmark, which 15· ·quarter, were flat to negative, so that had an 15· ·is the absolute nominal target rate of return, 16· ·impact on the difference between the net 16· ·which Trent talked about, which is the CPI plus 17· ·contributions and withdrawals relative to 17· ·4 percent. 18· ·investment earnings.· But you heard Ash 18· · · · So if you look at just the gray bars 19· ·indicate earlier that the investment return for 19· ·versus the blue bars, you see outperformance 20· ·the FRS has generated 18 and a half billion 20· ·over all trailing periods.· And pretty strong 21· ·after paying about 7 billion during the 21· ·outperformance, I might add.· There's a little 22· ·calendar year in 2019 so far.· So, doing some 22· ·bit of noise with the absolute nominal target 23· ·quick math, the fund is up somewhere around 23· ·rate of return over shorter time periods, given 24· ·4 percent so far in the fourth quarter.· So 24· ·that we've seen some tough equity markets.· We 25· ·likely, these numbers will look a lot different 25· ·saw a tough equity market in the fourth
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Page 143 Page 144 ·1· ·quarter, and then in the third quarter, as I ·1· ·overweight to global equity relative to the top ·2· ·mentioned, which is affecting that one-year ·2· ·ten universe.· And most of that overweight is ·3· ·return relative to the CPI plus 4 percent ·3· ·due to an underweight relative to what TUCS ·4· ·benchmark.· But if you look at the performance ·4· ·defines as alternatives.· And it's basically ·5· ·over much, much longer periods of time, you'll ·5· ·anything that's not global equity, fixed income ·6· ·see that over the 25- and the 30-year period ·6· ·or real estate.· So when we look at that ·7· ·it's quite handily outperforming the CPI plus ·7· ·compared to the FRS, I would lump in strategic ·8· ·4 percent nominal target rate of return. ·8· ·investments and private equity.· So we continue ·9· · · · So we do look at performance relative to ·9· ·to see an underweight there, but we know that 10· ·peers as well.· So it was mentioned CEM 10· ·we're moving towards a much higher allocation 11· ·universe earlier, so this is the TUCS universe, 11· ·in strategic investments than we've seen in the 12· ·which is the Trust Universe Comparison Survey 12· ·past, so that gap tends to narrow. 13· ·created by Wilshire.· And you'll see on the 13· · · · So the performance relative to the median 14· ·left is the FRS target allocations to the 14· ·plan, and again, note that this is gross of 15· ·various asset classes relative to the TUCS top 15· ·fees, because the universe doesn't provide a 16· ·ten defined benefit plans universe.· So this is 16· ·net of fee return, so in order to compare 17· ·mostly public pension plans, because public 17· ·apples to apples, we're including the FRS 18· ·plans are the largest -- tend to be the larger 18· ·gross-of-fee return here. 19· ·pension plans in the US.· There are one or two 19· · · · So underperformed the median plan over the 20· ·very large corporate defined benefit plans in 20· ·quarter and the one-year period -- and a lot of 21· ·this universe as well. 21· ·that again is due to the overweight to equities 22· · · · So a couple quick things I'll just point 22· ·because we saw, you know, two weaker periods 23· ·out because it informs why performance is what 23· ·during the one-year period for equities, and 24· ·it is compared to peers.· There's -- we 24· ·especially non-US equities in particular, but 25· ·continue to see an overweight -- the FRS has an 25· ·then outperforming the median plan over the
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Page 145 Page 146 ·1· ·rest of the longer term periods.· And you can ·1· ·Please reconcile that. ·2· ·just see that in quartiles here.· So in the top ·2· · · · MS. DOYLE:· Okay.· So, again, a lot of ·3· ·quartile for the three-, five-, and the ·3· ·that is going to be driven by the benchmark ·4· ·ten-year period. ·4· ·being a representation of the long-term asset ·5· · · · MR. COBB:· Mr. Chairman, I have a question ·5· ·allocation that we've set for the plan.· And -- ·6· ·on this. ·6· ·but remember that we're not all the way there ·7· · · · MR. CHAIR:· Yes, sir. ·7· ·yet, so we still have a little bit of an ·8· · · · MR. COBB:· So if you go back to slide ·8· ·overweight to equities than we would like to ·9· ·eight where you show we were 4.1 for the year ·9· ·have over the long term.· That was the 10· ·and beat our benchmark considerably, 3.3.· And 10· ·discussion that we had earlier. 11· ·then you look at this slide you now have on the 11· · · · And there's a couple of really important 12· ·board where our 4.1 is in the bottom 12· ·differences that, while it looks extreme when 13· ·13 percent.· And then you -- then if you look 13· ·you have sort of extreme things happening in 14· ·at 3.3, where our benchmark was, and that's 14· ·the market, it really does impact these 15· ·just almost off -- it's way down, way outside. 15· ·numbers.· So we saw negative returns this 16· ·That's three standard deviations from the mean. 16· ·quarter in the non-US equity markets.· And the 17· · · · MS. DOYLE:· Uh-huh. 17· ·FRS has about a 50/50 -- it's got a market 18· · · · MR. COBB:· It's like those -- that fact 18· ·weight to US versus non-US.· And quite frankly, 19· ·pattern doesn't reconcile in my mind, how the 19· ·a lot of your peers still continue to have a 20· ·benchmark could be as low as 3.3 when the very 20· ·home country bias.· And so when the US does 21· ·worst, according to the slide, the very worst 21· ·better than non-US markets, that impacts how 22· ·pension fund of the top ten had basically a 22· ·your performance looks relative to peers over 23· ·4 percent return.· I mean, it was the very 23· ·shorter periods of time. 24· ·bottom.· And so you're saying the benchmark is 24· · · · The other thing to point out is, I think 25· ·3.3, which is -- just seems to be too low. 25· ·that if I remember the last time I looked at
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Page 147 Page 148 ·1· ·this, there were two corporate plans that were ·1· · · · MR. COBB:· Thank you. ·2· ·included in here, and typically corporate DB ·2· · · · MS. DOYLE:· This is why it can be ·3· ·plans, asset allocation, looks very different ·3· ·dangerous to compare yourself to peers as well, ·4· ·to a public pension plan allocation.· They're ·4· ·because sometimes it leads to, you know, maybe ·5· ·going to have more -- they're going to have ·5· ·wrong decision-making.· I mean, we really want ·6· ·higher allocations to long bonds.· And in this ·6· ·to make sure that we -- the asset liability ·7· ·period of time over the quarter and the ·7· ·study is the way that we set policy, not these ·8· ·one-year period, as we've seen interest rates ·8· ·numbers.· But these numbers are interesting to ·9· ·drop, our long credit, long treasury indices ·9· ·look at as well.· I mean, if you look over 10· ·have been the best performing asset over this 10· ·longer periods of time, the FRS has 11· ·period of time.· So that's adding to the -- to 11· ·outperformed pretty consistently peers, even 12· ·that degree of difference that you're seeing. 12· ·when some of these headwinds that I just 13· · · · MR. COBB:· So your numbers are correct, 13· ·mentioned. 14· ·then, that 3.3 was the benchmark -- 14· · · · MR. CHAIR:· One question I had, Kristen, 15· · · · MS. DOYLE:· Yeah, we actually -- 15· ·kind of tied to the ambassador.· I remember 16· · · · MR. COBB:· -- even though that seems 16· ·Ash's opening statement today.· Isn't some of 17· ·such -- 17· ·this kind of a lag in the mark-to-market on 18· · · · MS. DOYLE:· I totally understand.· Yeah, 18· ·strategic investments, hedge funds, and private 19· ·you're right.· It is pretty extreme.· But we 19· ·equity, too, somewhat in this period? 20· ·do, just in terms of the numbers here, we get 20· · · · MS. DOYLE:· Yes, to some extent. 21· ·them from BNY Mellon and then we re-reconcile 21· ·Although -- yes.· I guess the short answer to 22· ·them and we work very, very closely with staff 22· ·that is, yes, that could be driving some of 23· ·to make sure that the performance numbers are 23· ·this, sure. 24· ·right.· So I'm pretty confident that these are 24· · · · MR. CHAIR:· Some of it. 25· ·accurate. 25· · · · MS. DOYLE:· Yeah.
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Page 149 Page 150 ·1· · · · MR. CHAIR:· Any other questions for ·1· ·reimbursement for residential property ·2· ·Kristen? ·2· ·insurers.· And so because of the uncertainty ·3· · · · MS. DOYLE:· Do you want me to touch on any ·3· ·and the potential need for assets very quickly, ·4· ·of the other major mandates? ·4· ·they are invested pretty short-term in the ·5· · · · MR. CHAIR:· Oh, I'm sorry.· No, go ahead. ·5· ·fixed income marketplace, to preserve capital ·6· ·I'm sorry. ·6· ·and reduce risk.· So we have here the CAT ·7· · · · MS. DOYLE:· I'll move quickly here. ·7· ·operating funds composite, which is about ·8· · · · So this is the investment plan, the ·8· ·$13 billion as of the end of September.· And so ·9· ·defined contribution plan.· Really just some ·9· ·you can see that the absolute returns are 10· ·quick performance numbers here.· So we compare 10· ·reflected -- are fairly low, reflecting the 11· ·the actual returns to participants.· So this 11· ·fact that they're invested very conservatively. 12· ·is, again, driven by participant -- the way 12· · · · And then recently, we divided the 13· ·participants allocate their assets, whether 13· ·operating funds into two different pools, the 14· ·they default into the target date funds or 14· ·operating liquidity fund, which is a shorter 15· ·actually choose fund options available to them. 15· ·term fund, so three to six months roughly in 16· ·And then we benchmark that.· Each fund option 16· ·duration.· And then the longer term fund, which 17· ·has its own benchmark.· So we benchmark that to 17· ·is the one to three-year -- benchmarked to the 18· ·a weighted average of those underlying 18· ·one- to three-year corporate treasury, in the 19· ·aggregate benchmarks.· So you can see over long 19· ·treasury index. 20· ·periods of time, the -- collectively, the fund 20· · · · MR. COLLINS:· Kristen, remind me who sets 21· ·options and the defined contribution plan have 21· ·the investment policy for the CAT Fund.· Does 22· ·outperformed their benchmarks. 22· ·the SBA set it or is it set by the legislature? 23· · · · And then the next mandate is the hurricane 23· · · · MS. DOYLE:· So the CAT Fund has -- and, 24· ·catastrophe fund, which we call CAT Fund for 24· ·Ash, you can help me out here, but they have 25· ·short.· So this is the fund that provides 25· ·their own board that --
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Page 151 Page 152 ·1· · · · MR. COLLINS:· Do they do the investment ·1· ·September.· And it's invested fairly ·2· ·policy statement, the CAT Fund, or do we do it ·2· ·aggressively, about 70 percent in global equity ·3· ·for them or does the legislature do it? ·3· ·and the rest in fixed income.· And you can see ·4· · · · MR. WILLIAMS:· Mr. Chairman, may I? ·4· ·the performance on the next slide.· Again, over ·5· · · · MR. CHAIR:· Yes. ·5· ·longer periods of time, very strong ·6· · · · MR. WILLIAMS:· The way the CAT Fund works ·6· ·outperformance relative to its benchmark, which ·7· ·is it really works the same as all the other ·7· ·is just the weighted average of the underlying ·8· ·mandates, which is we essentially draft the ·8· ·asset class benchmarks. ·9· ·investment policy statement and it ultimately ·9· · · · And then the last is Florida PRIME, which 10· ·goes up to the trustees and they adopt it.· And 10· ·is the local government investment pool in 11· ·I want to say the CAT Fund investment statement 11· ·Florida.· Again, managed fairly conservatively, 12· ·comes here, and they do have two different 12· ·somewhat similarly to a money market fund.· But 13· ·advisory boards there, but they are involved in 13· ·we benchmark them to other local government 14· ·things that have nothing to do with the 14· ·investment pools around the country.· And you 15· ·economics of the CAT Fund.· They're more the 15· ·can see that the fund is outperforming, over 16· ·underwriting side and the model building and 16· ·all trailing periods, its peers. 17· ·selection side. 17· · · · That will conclude my comments.· Thanks. 18· · · · MS. DOYLE:· Okay.· I have two more 18· · · · MR. CHAIR:· All right.· Do we have 19· ·mandates.· So the Lawton Chiles Endowment Fund, 19· ·questions for Kristen on our mandates? 20· ·again, was established by the -- just for the 20· · · · Well ahead of time, too.· Thank you. 21· ·new members, by the Florida legislature to use 21· · · · And I think before we talk about our 2020 22· ·the tobacco settlements to provide funding for 22· ·meeting dates, and also entertain a motion for 23· ·health maintenance and research programs in the 23· ·adjournment, Ash has some breaking news.· So, 24· ·State of Florida.· So it's about -- a little 24· ·to our executive director. 25· ·less than $800 million as of the end of 25· · · · MR. WILLIAMS:· I don't know if I'd call it
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Page 153 Page 154 ·1· ·breaking news, Mr. Chairman.· Thank you. ·1· ·costs dropped from 46.2 last year.· And last ·2· · · · I failed to mention an important item that ·2· ·year we were at the 31st percentile, so we ·3· ·I had on my list of initial remarks, and that ·3· ·dropped to 19. ·4· ·is we've recently gotten back the numbers from ·4· · · · So the performance has held up, we've ·5· ·Cost-Effectiveness Measurement, or CEM, the ·5· ·lowered the costs.· There are two main things ·6· ·firm that measures our performance and costs ·6· ·driving it, the first is managing more money ·7· ·relative to other funds.· These are numbers ·7· ·in-house.· The component of our aggregate ·8· ·over a five-year period ending 12-31-18.· They ·8· ·assets that we run in-house is now at about ·9· ·reason they are lagged pretty significantly, a ·9· ·45 percent.· That's up from 36 not too long 10· ·year, is that different funds have different 10· ·ago.· And that is, again, a reflection on the 11· ·years.· They've got to get all the data, 11· ·internal capability of the team. 12· ·normalize it, scrub it, make sure it's legit. 12· · · · And the other thing is the cumulative 13· · · · And basically, our costs all in, this is 13· ·weight of our work with from outside partners, 14· ·across salaries, rents, management fees, legal 14· ·our -- and CEM expressly made this observation, 15· ·fees, anything you can think of that we spend 15· ·the fees and terms that we get in our 16· ·money on, our total operating overhead is 42.5 16· ·relationships with outside investment service 17· ·basis points.· That compares to a benchmark of 17· ·providers are materially better even than our 18· ·46.2 basis points.· And if we look across our 18· ·peers at the large fund level.· So a little 19· ·peer group, the number is higher still.· It's 19· ·extra piece of good news to throw in the pot. 20· ·48, in fact, the median of our peer group of 20· · · · MR. WENDT:· You're to be commended. 21· ·large pension funds. 21· · · · MR. CHAIR:· Bravo.· Well, I think that's 22· · · · And if you look at where that leaves us, 22· ·pretty good news to end a meeting on. 23· ·it puts us at the 19th percentile, meaning 23· · · · One thing I'd like to do first is thank 24· ·toward the bottom of all of the large funds. 24· ·everyone for being in attendance, but 25· ·And that is an improvement over last year.· Our 25· ·particularly to thank the staff.· I mean, great
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Page 155 Page 156 ·1· ·performance as always.· And some of y'all have ·1· · · · · · · · · · · · CERTIFICATE ·2· ·gotten even funnier, Tim. ·2
·3· · · · In talking with Ash, the trustees have ·3 ·4· ·determined their own dates for 2020, which ·4· ·STATE OF FLORIDA ·5· ·means these dates are cut in stone right now ·5· ·COUNTY OF LEON ·6· ·for us.· So, for March 31st, 2020, the council ·6· · · · · · ·I, Tracy Brown, certify that I was ·7· ·will meet.· Again, June 30th, 2020.· Next, ·7· · · · authorized to and did stenographically report ·8· ·September 29th, 2020.· And then December 15th. ·9· ·We know where we're going to be in a year, ·8· · · · the foregoing proceedings, and that the 10· ·almost a year from now, December 15th, 2020. ·9· · · · transcript is a true and complete record of my 11· · · · And with that, I would like to first, 10· · · · stenographic notes.
12· ·again, thank Tere and John, welcome as new 11
13· ·members for years to come as you well know. 12· · · · · · ·Dated this 22nd day of January, 2020. 14· ·And also to entertain a motion to adjourn. 13 15· · · · MR. COBB:· So moved. 14 16· · · · MR. COLLINS:· Second. 15· ·______17· · · · MR. CHAIR:· All in favor say aye. 18· · · · (Members reply aye.) 16· ·TRACY L. BROWN · · ·1551 Forum Place, Suite 200-E 19· · · · MR. CHAIR:· All right.· Let's dance. 17· ·West Palm Beach, FL· 33401 · · ·888-811-3408 20· ·Thank you, everybody. 18 21· · · · (Meeting concluded at 3:52 p.m.) 19
22· · · · · · · · · · *· ·*· ·* 20
23 21 24 22 25 23
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STATE BOARD OF ADMINISTRATION Audit Committee Open Meeting Agenda January 27, 2020 9:30 A.M. – Conclusion of Business
1. Call to Order
2. Approve minutes of closed and open meeting held on November 25, 2019
3. SBA Executive Director & CIO status report SBA Update: investment performance, risks, opportunities and challenges
4. Presentation on the results of the SBA Local Government Surplus Funds Trust Fund (Florida PRIME)
5. Office of Internal Audit Quarterly Report
6. Office of Inspector General Quarterly Report
7. Chief Risk & Compliance Officer Quarterly Report • Policy Administration • Personal Investment Activity
8. Presentation of Real Estate Title Holding Entity audits
9. Approval of the Committee’s Annual Independence Statement
10. Discussion of the Committee’s Chair and Vice Chair
11. Other items of interest
12. Closing remarks of the Audit Committee Chair and Members
13. Adjournment January 27, 2020 • Internal Audit and Advisory Engagements 4
Status of the FY 2019-20 • External Engagement Oversight 5 Annual Audit Plan • Special Projects, Risk Assessment, and Other Activities 6
• FHCF Data Analytics Advisory 8
• Continuous Monitoring – Procurement 9
OIA Projects Completed and Status of • New and Closed Action Plans and Recommendations 10 Management Action Plans/ Recommendations • Details of open items – Audit Projects 11
• Details of open items – Advisory Projects 12
• Status of FY 19-20 Department Goals 14 Other OIA Activities • 2020 Audit Committee Dates and Other Items for Discussion 15
Open Audit Recommendations and Action Plans Appendix A Appendices Periodic Follow-up Audit Report Appendix B
2 33 Internal Audit and Advisory Engagements Planned Projects Status Type Timing Completed Not Yet FHCF ACH Process Flow Update OIA Advisory Q1 Started 6% Continuous Monitoring - Accounts Payable Continuous Monitoring Q1 Continuous Monitoring - P-cards and Travel Continuous Monitoring Q1 Strategic Investments OIA Operational Audit Carryover Periodic Follow-up Audit OIA Follow-up Audit Q1 Periodic Follow-up Audit OIA Follow-up Audit Q2-Q3 Continuous Monitoring - Procurement Continuous Monitoring Q2 FHCF Tableau Assistance OIA Advisory Q1-Q3 In Progress In Progress Completed Continuous Monitoring - General Continuous Monitoring 47% 47% Data Analytics - Strategy Continuous Monitoring Ongoing Action Plan Monitoring Project Management Enterprise-wide KRI Collaboration OIA Advisory Q1-Q3 Procure to Pay Operational Audit OIA Audit Q2-Q4 Proxy Voting Data Analytics - Phase 2 OIA Advisory Q2-Q3 Highlighted: Completed since prior quarterly report. CIS CSC Framework Gap Assessment OIA Advisory Q1-Q3 Real Estate - Direct Owned OIA Operational Audit Q2-Q4 Not Started Continuous Monitoring - Trade Activity Continuous Monitoring Q4 4 External Engagement Oversight
Not Yet Planned Project Status Service Provider Type In Started Timing Progress 11% 22% Completed Network Security, outsourced BDO External IT Audit Q1/Q2 Florida Retirement System (FRS) Trust Fund Crowe External Financial Statement Audit for FY18-19 Q1/Q2 FRS Investment Plan Trust Fund Crowe External Financial Statement Audit for FY18-19 Q1/Q2 Florida Hurricane Catastrophe Fund KPMG External Financial Statement Audit for FY18-19 Q1/Q2 Florida Growth Fund Initiative OPPAGA External Review Q1/Q2 Florida PRIME Auditor General External Financial Statement Audit for FY18-19 Q1/Q2 Completed In Progress 67% AG PRIME and ITGC Operational Audit Auditor General External Operational Audit Q2/Q3 Part of the Statewide CAFR Auditor General External Financial Statement Audit for FY18-19 Q2/Q3 Not Started Auditor General Operational Audit Auditor General External Operational Audit Q3/Q4
Highlighted: Completed since prior quarterly report.
5 Special Projects, Risk Assessments, and Other Activities
Planned Project Status Type Not Yet Timing Started Completed 25% 8% Completed Assistance with Aladdin Implementation OIA Special Projects Carryover Ongoing/In Progress Integrated Risk Management Solution Implementation OIA Special Projects Q1-Q3 Robotics Process Automation Assistance OIA Special Projects Q1-Q4 Data Analytics Tools Enhancements - Tableau OIA Special Projects Complimentary User Entity Control Testing Validation OIA Special Projects Special requests from SBA management and/or Audit Committee OIA Special Projects Ongoing Ongoing / WorkSmart Portal Enhancements OIA Special Projects In Progress Audit Committee Related Activities OIA Audit Committee 67% OIA process improvement initiatives, including QAR identified initiatives OIA Quality Assurance Not Started Highlighted: Completed since Annual Quality Assessment Review - Self-Assessment OIA Quality Assurance Q4 prior quarterly report. Annual Risk Assessment OIA Risk Assessment Q3 Annual Audit Plan OIA Risk Assessment Q3
6 77 The Florida Hurricane Catastrophe Fund (FHCF) engaged the OIA to assist in developing data analytics. Our primary objectives were as follows: 1. Determine how to best obtain data to enable ongoing analyses 2. Develop suggested analytics dashboards using Tableau 3. Identify potential solutions for efficient and effective viewing and distribution of dashboards
The OIA completed this engagement and provided suggested Tableau dashboards and related guidance to FHCF. The dashboards included various analytics, including an overall analysis of outlier companies, year-over-year comparisons, trends and statistics for individual companies, trends and statistics for individual counties, and more.
8 This procurement dashboard enabled management to assess workload and identify risks in the P2P process by integrating and analyzing the data from PeopleSoft Financial system. It provides insight into the overall health of P2P from requisition through payment. By using interactive data filtering and parameter setting, users can slice and dice the data in multiple ways.
Results of these analytics included:
1. The Tableau dashboard integrated tests and scripts into a single consistent data visualization tool, which accelerated the identification of findings and processing of the report.
2. This dashboard includes more than 20 key performance indicators (KPIs) and 12 key risk indicators (KRIs). It also incorporated workload analysis such as P2P life cycle time monitoring, canceled records analysis and Minority Business Enterprise (MBE) analysis.
3. The dashboard has filtering, drill-down and parameter options allowing users to explore multidimensional data by navigating from one level down to a more detailed level.
9 Audit and Advisory Engagements
# of Recs Source New action plans and recommendations: 104 Network Security Assessment 2019 (BDO) (Report was presented at the prior Audit Committee meeting) 104 Total action plans/recommendations added to the database Closed action plans and recommendations:
(1) Externally Managed Derivatives Operational Audit Reported in OIA’s periodic audit report #2020-07 (See (1) Strategic Investments Operational Audit Appendix B) (2) Total action plans/recommendations closed in the database 102 Total change for both audit and advisory action plans/recommendations
10 Risk Rating Status 14
12 Report Title Report Date High Med Low Total NYI PIRP OTV Total
Fixed Income Trading Activities Operational Audit 1/29/2016 0 1 0 1 0 1 0 1 10 Global Equity Internal Trading Operational Audit 1/18/2017 1 0 1 1 1 8 Low Internally Managed Derivatives Operational Audit 3/31/2017 1 1 0 2 2 0 2 Med 6 AG - Operational Audit 2017 11/13/2017 0 1 1 2 0 2 2 High 0 9 0 0 9 4 AG - IT Operational Audit 2017 4/5/2017 9 9 Incentive Compensation Program Operational Audit 4/10/2018 0 2 1 3 1 2 3 2 Report Externally Managed Derivatives Operational Audit 10/31/2018 1 1 2 2 2 0 Performance & Risk Analytics Operational Audit 2/21/2019 1 4 5 4 1 5 NYI PI OTV Strategic Investments Operational Audit 8/19/2019 2 2 1 1 2
6 19 2 27 10 4 13 27 For details, see Appendix A. Legend: 22% 70% 7% 37% 15% 48% NYI - Not Yet Implemented PIRP - Partially Implemented and the Remainder is in Progress OTV - OIA or External Auditor to Verify
Management Action Plans relating to findings from audits performed by internal or external auditors. The OIA monitors and performs follow-up procedures on the management action plans in accordance with the 11 IIA Standard 2500. A1. In certain cases, follow-up procedures are performed by external auditors. Status
Report Title Report Date NYI PI IMP Total Governance, Risk Management, and Compliance Assessment (Funston)1 1/15/2018 18 30 14 62 Network Security Assessment 2018 (BDO)2 11/15/2018 5 5 Review Critical Financial Reporting Spreadsheets1 4/22/2019 7 7 Network Security Assessment 2019 (BDO)2 11/21/2019 103 1 104 133 30 15 178
Legend: NYI - Not yet implemented PI - Partially Implemented, as represented by SBA management IMP - Implemented, as represented by SBA management
Advisory Recommendations made by OIA or external consultants resulting from an assessment of a program or activity such as governance, risk management, compliance, ethics, disaster recovery preparedness program, etc. The OIA monitors the disposition of these recommendations in accordance with the IIA Standard 2500.C1.
1At the advice of the Audit Committee, the OIA closes Advisory Recommendations that management represented as “complete” once the OIA has considered those in the annual risk assessment.
2Recommendations will be reviewed for remediation and closure by BDO as part of the 2020 Network Security Assessment.
12 1313 AS OF QUARTERLY REPORT TOPIC ACTIVITIES IMPLEMENTATION EFFORTS STATUS Develop a process to be used for OIA's continuous risk assessment, for example using data analytics and KRIs. Not started (Process improvement - STD 1220 from QAR) Engaged ITCI for a Direct-Owned RE Engage consultants (co-source or outsource) to assist with high risk areas relating to investments and IT audits. Complete audit; also BDO SOW for 2019-20
Move from Level 2 to Level 3 on the Data Analytics Maturity Model per our Strategic Plan. Complete
Take the initiative to develop a formalized SBA data analytics workgroup. In progress
Develop a five-year audit plan based on the risk-based assessment of the audit universe and develop frequencies of audits based on risk rankings. (Process improvement – STD 2020 from QAR) Instead of 5-year plan, moving toward In progress Note: This has been changed to move toward an ongoing risk assessment vs. a 5-year plan as communicated at the an ongoing risk assessment process. April Audit Committee Meeting. INTERNAL AUDIT PROCESSES Update the risk assessment process to align with the new framework and business model in coordination with RMC In progress and BC. OIA has the Server version and in the Transition to the Server version of Tableau for dashboard and data management. In progress process of transitioning. Request IT manpower resources (Approximately 4 weeks of assistance from applications staff) for the activities Complete related to IIAMS and Tableau. USE OF OF USE In collaboration with ERM and BC to implement the Integrated Risk Management Solution through the vendor LogicManager selected and starting with TECHNOLOGY In progress selected. (Process improvements - STDS 2110, 2340, and 2500 from QAR) implementation of BC plan.
Request training budget based on knowledge gaps in the internal audit staff and develop a training plan for each Approved Complete member of the OIA to close those gaps. Planned to attend Nov 2019 in Lake At least one OIA member attend each APPFA meeting. Tahoe – too expensive; attending May Not started 2020 in DC Have at least one team building event during the fiscal year to enhance the team. Team building event in October 2019 Complete PEOPLE Requested and denied; downgraded Mgr Request an additional FTE for an IT Senior Audit Analyst III. Complete position to this position 14 Based on the AAP, determine whether an intern would be a useful resource throughout the year. Intern to start in January 2020 Complete Introduce intern, Ilia Seleznev 2020 Audit Committee Meeting Dates ◦ Monday, April 27 ◦ Monday, August 3 ◦ Monday, November 30
15
RON DESANTIS STATE BOARD OF ADMINISTRATION GOVERNOR OF FLORIDA CHAIR
JIMMY PATRONIS 1801 HERMITAGE BOULEVARD, SUITE 100 CHIEF FINANCIAL OFFICER TALLAHASSEE, FLORIDA 32308 ASHLEY MOODY (850) 488-4406 ATTORNEY GENERAL
POST OFFICE BOX 13300 ASHBEL C. WILLIAMS EXECUTIVE DIRECTOR & 32317-3300 CHIEF INVESTMENT OFFICER
MEMORANDUM
To: Ash Williams From: Michael McCauley Date: March 6, 2020 Subject: Quarterly Standing Report - Investment Programs & Governance
GLOBAL PROXY VOTING & OPERATIONS During the fourth quarter of 2019 SBA staff cast votes at 1,300 companies worldwide, voting on ballot items including director elections, audit firm ratification, executive compensation plans, mergers & acquisitions, and a variety of other management and shareowner proposals. These votes involved 7,963 distinct voting items—voting 81.5% “For’’ and 17.1% “Against/Withheld”, with the remaining 1.5% involving abstentions. Of all votes cast, 17.6% percent were “Against” the management- recommended vote. SBA proxy voting was conducted across 54 countries, with the top five countries comprised of the China (306), United States (199), Australia (170), India (65 votes), and the United Kingdom (60). The SBA actively engages portfolio companies throughout the year, addressing corporate governance concerns and seeking opportunities to improve alignment with the interests of our beneficiaries. The table below provides the SBA’s global voting breakdown across all major proposal categories during the fourth quarter of 2019.
Proxy voting patterns in the U.S. market were similar to global patterns but deviated in several areas. For example, the level of votes against management came in at 26%, approximately 64% higher than Quarterly Standing Report—March 6, 2020
the ex-U.S. average of 15.9%. As well, the support for all types of proposals submitted by shareowners in the U.S. was 75% points higher than at non-U.S. companies. Another category with a large differential between U.S. and non-U.S. proxy voting was executive compensation, with votes supporting compensation items in the U.S. almost 51% points lower.
CORPORATE GOVERNANCE & PROXY VOTING OVERSIGHT GROUP The most recent meeting of the Corporate Governance & Proxy Voting Oversight Group (Proxy Committee) occurred on December 16, 2019, and the Committee will meet next on March 25, 2020. The Proxy Committee continues to review ongoing governance issues including the volume and trends for recent SBA proxy votes, company-specific voting scenarios, corporate governance policies, governance-related investment factors, major regulatory developments and individual company research related to the Protecting Florida’s Investments Act (PFIA) and other statutory investment requirements related to Israel and Venezuela.
2020 PROXY SEASON PREVIEW Investor groups and market consultants have identified a few key themes for the upcoming 2020 proxy season and related corporate engagement:
Director Elections Increasingly Fragile In 2019, a record level of directors failed to garner a majority level of investor support. Boards will need to underscore their efforts at refreshment (succession), address investor concerns with “over- boarding,” and update their diversity objectives. Among companies in the Russell 3000 stock index, there were 54 directors who failed to receive majority support in 2019, up from 37 in 2016. While this was a small number of the total directors up for election—more than 16,000 directors were up for re- election in 2019--there were 421 directors receiving less than 70% approval, up from only 273 during calendar year 2016. These figures reflect the increasing propensity of many institutional investors scrutiny of director nominees and board composition.
Focus on Small Capitalization Firms The volume of shareowner proposals aimed at small cap companies rose in 2019, with many investors focusing on their relatively poor governance practices. Specifically, majority voting and board chair independence policies at smaller firms have been included in investor engagement activities. Corporate governance practices at smaller firms can deviate significantly when compared to larger companies and often exhibit lower financial performance.
Rise of Exempt Solicitations As the volume of shareowner proposals has declined by about 30 percent from 2010 levels, there has been a concurrent rise in the use of exempt solicitations, mainly at larger companies. The most common type is the so called “just vote no” campaign—when a shareowner solicits other investors to withhold their votes for a director(s) election or to vote against a management proposal. These solicitations do not include the distribution of a dissident proxy card, but have almost doubled since 2016.
SBA Investment Programs & Governance (IP&G) Page 2
Quarterly Standing Report—March 6, 2020
KEY VOTES Intuit, Inc.—at the company’s January 23, 2020 annual general meeting, investors voted down a shareowner proposal that was opposed by company management asking the firm to adopt a mandatory arbitration clause in its bylaws. The SBA voted against the resolution in line with our proxy voting guidelines, which generally oppose restrictions on shareowner ability to pursue options of legal recourse (including binding or forced arbitration, fee shifting, and exclusive forum bylaws). The proposal received only 2.4% support among voted shares. If passed, the proposal would have mandated the adoption of a corporate bylaw stripping investors of their ability to hold the company publicly accountable by forcing all claims into individual arbitration—effectively prohibiting lawsuits against management. The Council of Institutional Investors (CII) sent a letter to the company's board thanking its members for opposing the proposal, and the New York State Common Retirement Fund (NYSCRF) sent an exempt solicitation to Intuit shareowners urging them to vote against the proposal. The letter that CII sent January 9 to Intuit's executive Chairman and lead independent director points to CII's long-standing, member-approved policies stating, "Companies should not attempt to bar shareowners from the courts through the introduction of forced arbitration clauses." In addition, the two largest proxy advisors, Glass, Lewis & Co. and Institutional Shareholder Services, recommended their clients vote against the ballot item. The resolution was the latest iteration in the debate over the legality of mandatory arbitration bylaws in U.S. equity markets. Mandatory arbitration bylaws have been in focus since 2012, when the Securities and Exchange Commission (SEC) blocked Carlyle Group’s IPO due to an arbitration provision in its charter and bylaws.
Enzo Biochem—The company’s February 25, 2020 annual general meeting featured a proxy contest with two candidates nominated to the board by Harbert Management Corporation. Harbert and other investors noted Enzo’s historical legacy of value destruction and underperformance, with the stock on a near 20 year decline. After the conclusion of the annual meeting, Enzo released preliminary results showing that investors elected both dissident candidates, Fabian Blank and Peter Clemens, to the Board of Directors. The SBA also voted in favor of both dissident candidates due to the need for additional perspective and expertise for a board and company that had underperformed peers for such an extended time frame. As noted by Harbert, Enzo Biochem had underperformed relative to both established industry benchmarks and management's own stated strategic and operational objectives. SBA staff also felt that such underperformance related to (or even resulted from) bottom tier corporate governance practices and an executive compensation framework that did not reflect company performance or investor losses. Enzo reported that investors in aggregate did approve the advisory resolution on executive compensation. The SBA voted against this “say-on-pay” proposal due to poor pay for performance, excise tax gross-ups for the CEO, insufficient disclosure, and excessive severance entitlements. Investors also approved the By-Law amendment to implement a majority voting standard in uncontested director elections, which the SBA supported as a needed governance improvement.
ACTIVE OWNERSHIP & CORPORATE ENGAGEMENT From late November 2019 through early March 2020, SBA staff conducted engagement meetings with companies owned within Florida Retirement System (FRS) portfolios, including Amgen, Northrop Grumman, PayPal and Telefonica.
SBA Investment Programs & Governance (IP&G) Page 3
Quarterly Standing Report—March 6, 2020
LEADERSHIP & SPEAKING EVENTS Staff periodically participates in investor and corporate governance conferences. Typically, these events include significant involvement by corporate directors, senior members of management, and other key investor or regulatory stakeholders. The following items detail involvement at events that occurred recently:
• In December, SBA staff participated in a meeting at the CFA Institute reviewing research on short- termism and its impact on equity markets. Topics discussed at the meeting included quarterly financial reporting, securities law, and financial performance of companies. The CFA Institute plans to use the discussion to update its publications on short-term cycles and long-term investing principles. • In February, SBA staff participated in the Council of Institutional Investors (CII) Universal Proxy Working Group (UPWG). Initiated by the Securities and Exchange Commission (SEC), members of the UPWG reviewed current and proposed regulations surrounding the use of a universal proxy in proxy voting. The UPWG may develop a recommendation to the SEC on characteristics of universal proxy mechanisms that could be utilized by companies and dissident investor groups. • In February, SBA staff participated in the Pension Bridge ESG Summit, covering a variety of corporate governance topics such as corporate disclosures on environmental, social and governance (ESG) metrics, proposed SEC regulations on proxy advisors and resolution submission, and data innovation. • In February, SBA staff participated in the National Association of Public Pension Attorneys (NAPPA) spring conference, speaking on a panel focused on the fiduciary elements of ESG investing and the emerging stakeholder model. • In March, SBA staff participated in an event hosted in partnership by Broadridge Financial, the Society for Corporate Governance and the University of Miami (UM) School of Business, speaking on a panel concerning ESG factors in investment and engagement.
NOTABLE RESEARCH & GOVERNANCE TRENDS More Investors Pursuing Activist Investing Asset management firms are increasingly likely to follow the lead of more established activist hedge funds such as Elliot Capital Management and Starboard Value. Forty-three firms employed activist techniques for the very first time in 2019 and a record-level 147 investors launched new activist campaigns in 2019, which targeted 187 companies. Elliott and Starboard were at the top of the activist league tables with 14 and 13 campaigns, respectively, with both accounting for over 10% of all campaigns globally. Younger and less experienced funds may find a chilly reception by target firms, which have become more accommodative towards activist funds with longer and successful records of accomplishment—typically exhibited by higher levels of negotiated settlements between dissidents and management. Market observers also predict activist hedge funds may face competitive pressures from private equity firms who have entered the same space and have started to pursue similar tactics aimed at unlocking value. With large internal resources and high levels of uncommitted capital, private equity funds could begin to own publicly traded companies without even taking them private as minority investors. Within this backdrop, activist funds have broadened investments outside of the U.S., with a notable uptick in Japanese target companies.
SBA Investment Programs & Governance (IP&G) Page 4
Quarterly Standing Report—March 6, 2020
ISS ESG Rating Downgrades knock 1% off Market Value of Companies Research from King’s Business School found that large corporate governance rating downgrades by Institutional Shareholder Services (ISS) were associated with a decrease in their stock prices. The research examined share performance of 3,616 U.S. companies that received a downgrade in their ISS governance rating. ISS ratings are included in proxy voting advisory reports and issued on a standalone basis in between annual meeting dates. Professors Paul Guest and Marco Nerino found that large governance rating downgrades by ISS were associated with an average share price decline of 1.14% over the three days surrounding such announcement. The ISS downgrades were not associated with changes or events that the company had announced to the market. Researchers did not find any statistically significant changes when firms received ratings upgrades. Authors stated, “ISS is influential not just for the voting season, but also in investment decisions.” Governance ratings supplied by other providers, including those that did not offer proxy advisory services, also exhibited the same pattern of negative returns when downgrades resulted.
SBA Investment Programs & Governance (IP&G) Page 5
Statistics
Meeting Date Region 9/1/2019 to 12/31/2019 All
Country of Origin Meeting Type All All
# of Meetings 1,753 Proxy Voting Summary # of Votes 11,443 For Against & Withhold Abstain # of Proxies 1,677 % of Total % of Total % of Total % Votes "For" 79.6% Issue Code Category # of Votes Distinct co.. # of Votes Distinct co.. # of Votes Distinct co.. % Votes "Against"/"Withhold" 18.9% Audit/Financials 1,352 95.2% 50 3.5% 18 1.3% % Votes Not Voted 0.0% Board Related 4,070 74.6% 1,332 24.4% 53 1.0% # of Issues Voted 188 Capital Management 901 80.7% 207 18.5% 9 0.8% # of Companies Voted 1,546 Changes to Company Stat.. 549 89.9% 47 7.7% 15 2.5% # of Customer Account Number Compensation 1,262 75.3% 404 24.1% 9 0.5% 65 M&A 458 93.7% 27 5.5% 4 0.8% # of Countries Voted 56 Meeting Administration 281 87.5% 35 10.9% 5 1.6% % Votes Against Management 19.5% Other 208 81.6% 16 6.3% 31 12.2% % Votes in Favor of Directors 74.2% SHP: Compensation 7 53.8% 1 7.7% 5 38.5% % Votes in Favor of Auditors 97.9% SHP: Environment 4 30.8% 9 69.2% % Votes in Favor of Merger/Acquisition Items 94.6% SHP: Governance 16 37.2% 26 60.5% 1 2.3% % Votes in Favor of Compensation Items 74.6% SHP: Social 4 33.3% 8 66.7% % Votes in Favor of SHP Governance Issues 37.2% Grand Total 9,112 79.8% 2,162 18.9% 150 1.3% % Votes in Favor of SHP Environmental Issues 30.8% % Votes in Favor of SHP Social Issues 33.3% % Votes in Favor of All SHP Issues 38.3%
Top 5 Countries by # of Proposals Percent Changes from Previous Fiscal Note: The calculation for change since previous fiscal year uses the most recent quarter-end and compares to prior Country of Origin Year fiscal year. Fiscal year ending 2020 only includes the first.. United States 1,771.0 FY 2018 FY 2019 FY 2020 China 1,703.0 # of Meetings India 1,369.0 5.56% 2.86% -76.97% # of Votes Australia 980.0 1.51% 4.32% -82.47% # of Proxies United Kingdom 978.0 6.66% 3.19% -77.07% % Votes "For" 0.61% 0.34% -0.41% % Votes "Against"/"Withhold" -1.77% -0.90% 5.27% % Votes Against Management 1.62% -0.24% 3.57% Select a Measure % Votes in Favor of Directors -1.52% -0.05% -7.69% # of Proposals % Votes in Favor of Auditors 0.07% 0.16% -0.16% % Votes in Favor of Merger/Acquisition Items -10.63% 16.05% -1.57% Top N Countries 5 % Votes in Favor of Compensation Items 6.37% 1.57% 9.36% % Votes in Favor of SHP Governance Issues 46.98% 4.71% -17.12% % Votes in Favor of SHP Environmental Issues -9.58% -16.92% -31.93% % Votes in Favor of SHP Social Issues 74.58% 22.94% -23.59% % Votes in Favor of All SHP Issues 43.34% 5.86% -18.89%
Florida Growth Fund Review Investment Advisory Council (IAC) Presentation March 31, 2020 Hamilton Lane Overview
A global leader in the private markets for 28 years
Market Leaders Global
$488.3B 16 26 Assets under Offices globally Languages management spoken & supervision1 121 Investment Professionals $33.7B+ 390+ Capital deployed Employees in 20192
Aligned
$356M+ HLNE Significant 47% Invested alongside our clients Nasdaq listed Employee ownership Women/Minority employees
As of December 31, 2019 1 Inclusive of $66.5B in assets under management and $421.8B in assets under supervision as of December 31, 2019. 2 The 2019 capital invested includes all primary commitments that closed during the year 2019 for which Hamilton Lane retains a level of discretion as well as advisory client commitments for which Hamilton Lane performed due diligence and made an investment recommendation. Direct Investments includes all discretionary direct equity and direct credit investments that closed during 2019. Secondaries includes all discretionary secondary investments with a signing date during 2019.
Hamilton Lane | Global Leader in the Private Markets 2 Florida Growth Fund Dedicated & Platform Resources
Dedicated cross functional team to provide for comprehensive portfolio construction and management
Investment Committees
Fund Investments Direct Equity Direct Credit Secondaries Real Assets
12 Members 10 Members 10 Members 12 Members 9 Members
Florida Growth Fund Team
David Helgerson Nayef Perry Katie Moore Ankur Dadhania Benjamin Eckroth Daniel Felman Managing Director Managing Director Managing Director Senior Associate Senior Associate Analyst
The Florida Growth Fund team leverages the entire Hamilton Lane platform
Andrea Kramer Jeffrey Armbrister Drew Schardt Tom Kerr Brent Burnett Bryan Jenkins Chris Corrao Anthony Donofrio Fred Shaw Head of Fund Head of Direct Equity Head of Direct Credit Head of Secondaries Managing Director Vice President Head of Operations Head of Head of Compliance Investments Transactions Risk Private Market Client Service & Fund Investments Direct Equity Direct Credit Secondaries Real Assets Legal Compliance Analytics Operations 30 Professionals 15 Professionals 6 Professionals 20 Professionals 12 Professionals 7 Professionals 64 Professionals 25 Professionals 13 Professionals As of December 31, 2019 Figures exclude professionals in the Hamilton Lane Analyst Development Program, two professionals who split time between Direct Equity Investments and Secondary Investments, and one professional who splits time between Fund Investments and Secondary Investments Hamilton Lane | Global Leader in the Private Markets 3 Florida Growth Fund Program Overview
Objective Strategy
Fund Investments: Buyout, growth equity, credit, and Florida Growth Fund (“FGF”) venture capital funds with a strong track record and a history of investing in Florida
FGF was launched in 2009 to generate attractive Direct Equity Investments: Across industries private equity returns and invest in technology and alongside a lead sponsor at the same time and in the growth companies in the state of Florida same security in Florida companies Direct Credit Investments: Across industries and debt securities in Florida companies
FGF I ($500M) FGF II ($375M)
Tranche I II Credit I II Size $250M $150M $100M $250M $125M Vintage 2009 2012 2014 2015 2019 Fund Investments 12 11 N/A 13 0 Direct Investments 17 8 14 13 0 % Committed/Fund Size 100% 100% 106% 91% 0%
As of September 30, 2019
Hamilton Lane | Global Leader in the Private Markets 4 FGF Program Highlights
1 Continued FGF Performance and Liquidity
2 Continued Florida Impact
3 Continued Growth in Florida Opportunities
Hamilton Lane | Global Leader in the Private Markets 5 FGF I (Excl. Credit) Overview
Vintage 2009 / 2012 Returns
Fund Size $400M
Fund Investments 23 Direct Equity Investments 25 1.8x 1.6x 14.2% 12.1% 1.0x Total Distributions $379.5M Gross MOIC Net MOIC Gross IRR Net IRR DPI Realized Co-Investments 16
Realized Multiple & IRR 2.4x / 23.8%
Portfolio Diversification¹ FGF I (Excl. Credit) As of 9/30/19
Direct Equity Partnership Investments 49% 51%
Investment Type 12.1% Credit Since Inception VC Early 10% Health Care Industrials Stage 30% 20% 28% 10.2%
Strategy Sector Buyout Other Information 44% 3% Technology 22% Communication VC Services Growth Consumer 9% Consumer 0% 5% 10% 15% 20% 18% Staples Discretionary 3% 13% FGF I (Excl. Credit) Russell 2000 HL/Bison PME
¹ Sector diversification is based on exposed market values. Investment type and strategy diversification are based on committed capital As of September 30, 2019
Hamilton Lane | Global Leader in the Private Markets 6 FGF Credit Overview
Vintage 2014 Returns
Fund Size $100M
Direct Credit Investments 14
Total Distributions $54.3M 1.3x 1.2x 13.7% 8.6% 0.5x Gross MOIC Net MOIC Gross IRR Net IRR DPI Realized Investments 4
Realized Multiple & IRR 1.2x / 22.4%
Portfolio Diversification¹ FGF I – Credit Tranche As of 9/30/19
Consumer Discretionary Materials 7% 7% Consumer Staples 14% Information Technology 8.6% 21% Sector Since Inception
4.2% Communication Services Industrials 16% 15% Health Care 20%
0% 5% 10% 15% 20%
FGF I Credit Credit Suisse LLI HL/Bison PME
¹ Portfolio diversification is based on exposed market values As of September 30, 2019
Hamilton Lane | Global Leader in the Private Markets 7 FGF II Overview
Vintage 2015 Returns
Fund Size $250M Fund Investments 13 1.3x 1.2x 12.3% 8.7% 0.1x Direct Equity Investments 13 Gross MOIC Net MOIC Gross IRR Net IRR DPI Total Distributions $24.4M
Portfolio Diversification¹ FGF II – Tranche I As of 9/30/19 Direct Equity Investments 55% Partnership 45% Investment Type 8.7% Other VC Early Stage 6% Consumer VC Growth Since Inception 7% Credit Consumer Discretionary 4% 10% Staples 15% 11% 7.5%
Information Health Care Technology Sector 17% Strategy 9%
Buyout 79% Industrials 0% 5% 10% 15% 20% 42% FGF II Tranche I Russell 2000 HL/Bison PME
¹ Sector diversification is based on exposed market values. Investment type and strategy diversification are based on committed capital As of September 30, 2019
Hamilton Lane | Global Leader in the Private Markets 8 Direct Investment Deal Flow
Primary capital drives direct investment deal flow
$21.6B $944M Direct equity FGF direct equity $30.6B deal flow in 2019 deal flow in 2019 HL primary commitments in 20191,2 $6.0B $515M Direct credit FGF direct credit deal flow in 2019 deal flow in 2019
Direct Equity Deal Flow Direct Credit Deal Flow
$25,000 600 $7,000 250 552 $6,000 $6.0B 500 $20,000 200 $21.6B $5,000 400 160 150 $15,000 $4,000 300 272 $3,000 $10,000 55 100 200 $2,000 $5,000 31 50 $1.9B 100 $1,000 40 21 22 $497M $0 16 0 $0 0 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2013 2014 2015 2016 2017 2018 2019
Hamilton Lane Opportunity ($M) # of Deals (FGF) # of Deals Hamilton Lane Opportunity ($M) # of Deals # of Deals (FGF) Source: Hamilton Lane Fund Investment Database (2019) Source: Hamilton Lane Fund Investment Database (2019) Please refer to endnotes in appendix
Hamilton Lane | Global Leader in the Private Markets 9 Private Equity Ecosystem in Florida
The private equity ecosystem in Florida continues to grow
Private Equity-Backed Florida-Based Companies Florida-Based Private Equity Firms
80 500 476 72
450 438 70 403 400 382 60 364 56 346 350 330 303 50 47 300 279 41 253 40 250 37 34
200 30
150 20 100 10 50
0 0 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2013 2014 2015 2016 2017 2018
# of PE-Backed Florida-Based Companies # of Florida-Based PE Firms
Source: Pitchbook
Hamilton Lane | Global Leader in the Private Markets 10 Florida Impact
Florida Growth Fund investments continue to have a positive impact on Florida
Job Creation2 Average Annual Salary (‘000s)1,2 Capital Expenditures ($M)2,3
$70 $1,000 $900 $65 $64.8 20,596 $800 $865.0 $700 $60 $754.6 $58.2 $600 14,545 $55 $500 $545.9 $400 $50 $50.1 $300 $354.4 $200 $45 $100 176 $40 $0 2010 2015 2019 2012 2019 2016 2017 2018 2019
Average Annual Salary
As of June 30, 2019 ¹ 2012 was the first year the FGF began tracking average salary 2 Source: OPPAGA; Represents FGF statistics 3 Annual figures represent cumulative capital expenditures since the inception of the FGF program
Hamilton Lane | Global Leader in the Private Markets 11 Delivering Growth to Florida
The Florida Growth Fund continues to perform against its objectives
Leveraging the Florida-based team, the SBA partnership, and the broader 11.9%/8.7% Hamilton Lane platform to access opportunities, resources, and deliver FGF I & II Net IRR1 results
$458.2M The FGF program has provided $458.2M of liquidity to the Florida SBA In Distributions1
20.6K Supporting and growing private investment and economic activity Jobs Created² throughout the Florida economy
¹ As of September 30, 2019 2 As of June 30, 2019; Source: OPPAGA; Represents FGF statistics
Hamilton Lane | Global Leader in the Private Markets 12 Appendix Endnotes
Page 4 1 The 2019 capital invested includes all primary commitments that closed during the year 2019 for which Hamilton Lane retains a level of discretion as well as advisory client commitments for which Hamilton Lane performed due diligence and made an investment recommendation. Direct Investments includes all discretionary direct equity and direct credit investments that closed during 2019. Secondaries includes all discretionary secondary investments with a signing date during 2019. 2 Figures are an approximate amount of total capital invested.
Hamilton Lane | Global Leader in the Private Markets 14 Contact Information
Philadelphia (Headquarters) Miami Rio de Janeiro Sydney One Presidential Blvd. 999 Brickell Avenue Av. Niemeyer 2, Sala 102 Level 36, Governor Phillip Tower, 4th Floor Suite 720 Leblon Rio de Janeiro 1 Farrer Place, Bala Cynwyd, PA 19004 Miami, Florida 33131 Brasil 22450-220 Sydney, NSW 2000 USA USA +55 21 3520 8903 Australia +1 610 934 2222 +1 954 745 2780 +61 2 8823 3741
Hong Kong Munich San Diego Tel Aviv Room 1001-3, 10th Floor Leopoldstrasse 8-10 7817 Ivanhoe Avenue 6 Hahoshlim Street St. George’s Building 80802 Munich Suite 310 Building C 7th Floor 2 Ice House Street Germany La Jolla, CA 92037 Hertzelia Pituach, 4672201 Central Hong Kong, China +49 89 954537901 USA P.O. Box 12279 +852 3987 7191 +1 858 410 9967 Israel +00 972-73-2716610
Las Vegas New York San Francisco Tokyo 3753 Howard Hughes Parkway 610 Fifth Avenue, Suite 401 201 California Street, Suite 550 17F, Imperial Hotel Tower Suite 200 New York, NY 10020 San Francisco, CA 94111 1-1-1, Uchisaiwai-cho, Chiyoda-ku Las Vegas, NV 89169 USA USA Tokyo 100-0011 USA +1 212 752 7667 +1 415 365 1056 Japan +1 702 784 7690 +81 (0) 3 3580 4000
London Portland Seoul Toronto 8-10 Great George Street 15350 SW Sequoia Pkwy 12F, Gangnam Finance Center 150 King St. West London SW1P 3AE Suite 260 152 Teheran-ro, Gangnam-gu Suite 200 United Kingdom Portland, OR 97224 Seoul 06236 Toronto, Ontario +44 (0) 207 340 0100 USA Republic of Korea Canada +1 503 624 9910 +82 2 6191 3200 M5H 1J9 +1 647 715 9457
Hamilton Lane | Global Leader in the Private Markets 15 0903c02a824e8238
Private Equity Group (“PEG”)
March 31, 2020 0903c02a822534d4
Presenters
Rob Cousin, Managing Director, Portfolio Manager, joined J.P. Morgan in 1997 as a founding member of the Private Equity Group. Prior to J.P. Morgan, Mr. Cousin was with AT&T Investment Management Corp.’s team responsible for managing private equity assets. Previously, he was an account manager at The Travelers. Mr. Cousin is a CFA charterholder. He earned his BA from Tulane University and an MBA from the University of Florida. Currently, Mr. Cousin serves on the advisory boards of Austin Ventures, Clarion Capital, Collaborative Fund, Domain Associates, Escalate Capital, Intersouth Partners, GTCR, Kinderhook Capital Partners, Morgenthaler Partners, NextCoast Ventures, and Quad C Partners. He also serves as board member/board observer for ACV Enviro, Goja Digital, Futuri and 8 Minute Energy . Mr. Cousin is a board member of the University of Florida Investment Corp.
Tyler Jayroe, Managing Director, Portfolio Manager, joined the Private Equity Group in 2005. Prior to joining the Group, he worked as an Executive Compensation Consultant for Aon Consulting, where he helped large companies design performance-based pay packages for their top executives. He previously worked in a variety of capacities for Actuarial Sciences Associates, an employee benefits and compensation consulting firm. Mr. Jayroe holds a BA, magna cum laude, from Vanderbilt University and an MBA from the University of Virginia. Currently, Mr. Jayroe serves on the advisory boards of Atlantic Street Capital, CAI Capital Partners, KarpReilly Capital Partners, Parallel Investment Partners, Post Capital Partners, RLH Equity Partners, Rizvi Traverse Management, Southfield Capital, Tailwind Capital Partners and Warren Equity Partners. Mr. Jayroe also serves as a board observer for AEG Vision, Black Mountain Sand, and Icon Holdings.
Patrick Miller, Associate, joined the Private Equity Group in 2014 and has portfolio management, investment due diligence and business development responsibilities for the SBA Florida mandate. Prior to joining J.P. Morgan Investment Management, he received his BA from Northwestern University where he studied Communications and Business. Mr. Miller holds the FINRA Series 3, 7 & 63 certifications. Outside of the office, Mr. Miller is a member of the Emerging Leaders Council for a non-profit sports-based youth development and organization in New York City.
1 0903c02a8259a788 Our Private Equity Group is one of the most experienced teams dedicated to building high quality private equity portfolios Proven strategy and process developed and refined over the past 40 years EXPERIENCED, COHESIVE TEAM SIGNIFICANT PRIVATE EQUITY PROVEN RESULTS AND ALIGNMENT OF INVESTMENT PROFESSIONALS KNOWLEDGE AND INSIGHT WITH OUR INVESTORS PEG was established at JPMorgan Chase & Approximately $27 billion in assets under Opportunistic approach seeking the highest Co. in 1997 management3 conviction investments PEG average tenure1 Meaningful and long-standing private equity Consistent out-performance over multiple 1 – 30 years: 9 founding members investor cycles – 21 years: 17 senior portfolio managers – U.S. private equity: 1980 Dedicated distribution management team to – 16 years: portfolio management team – Europe private equity: 1983 ensure efficient cash returns to investors – Asia private equity: 1985 Located in New York, London, Hong Kong, Transparent reporting and comprehensive Beijing2, and New Delhi – Secondary investments: 1985 servicing platform – Direct investments: 1988 Supported by dedicated resources and Team professionals personally invest 1.25% leveraging the extensive expertise of the Database has more than 10,000 offerings alongside all investments4 broader firm and active data capture of over 1,300 funds Serving on over 200 boards, including funds and direct investments
1 Includes tenure and investing experience at both PEG and AT&T Investment Management Corporation (ATTIMCO). Portfolio Management team average tenure represents voting eligible members of PEG. 2 Beijing Equity Investment Development Management Co., Ltd., a joint venture in China through the PEG’s affiliate JPMorgan Asset Management Private Equity (China) LLC, is located in Beijing. 3 Includes private equity commingled vehicles, managed accounts and trusts within J.P. Morgan Asset Management (JPMAM); includes unfunded commitments awarded subsequent to 9/30/2019. 4 The co-investment percentage for PEG professionals is calculated across PEG’s platform of products and accounts, and may be greater or less than 1.25% for any particular one. The allocation percentage is reviewed each calendar year, and on an aggregate level it has been at or above 1% for the past 13 years and is expected to remain at or above this level going forward. The co-investment by PEG professionals in a particular product or investment may be limited or discontinued if required by law or policy.
Past performance is no guarantee of future results.
2 0903c02a8259a788 We are a cohesive team of experienced professionals, aligned with and dedicated to our clients’ private equity investments and portfolios Years of Years with Name Education (undergraduate/graduate)/Professional related experience PEG Lawrence Unrein1, Head of Private Equity Group 40 40 SUNY Plattsburgh/Wharton, MBA/CFA, CPA Pooja Aier 2 2 American Univ. Team highlights: Naoko Akasaka 26 12 Keio Univ. Fredric Arvinius 14 13 Lund Univ./Lund Univ., MS Eduard Beit1 37 32 Yale Univ./Univ. of Chicago, MBA/CFA Dedicated to servicing clients and sourcing and Gavin Berelowitz 26 17 Univ. of Cape Town/CA Brendan Cameron1 37 24 Dartmouth College/Columbia Univ., MBA/CFA managing investments Stephen Catherwood 19 17 Bucknell Univ./CFA Carina Chai 27 8 Univ. of New South Wales/CFA, CPA Laureen Costa1 30 26 Bucknell Univ./Dartmouth College, MBA/CFA Coverage model revolves around our networks and Robert Cousin1 29 27 Tulane/Univ. of Florida, MBA/CFA Richard Egelhof 13 6 Boston College/Harvard, JD, Series 7 & 63 relationships in the industry Luis Espinal 22 4 Pace Univ. Jarrod Fong1 29 24 UCLA/Univ. of Chicago, MBA Evrard Fraise 21 14 Georgetown Univ./Columbia Univ., MBA Diversity of backgrounds and skill sets with women Mindy Gabler 27 21 Penn St. Univ. Meena Gandhi 19 14 Univ. of Texas/Columbia Univ., MBA/Series 3, 7, 24, 30, & 63 and/or minorities comprising: Dana Haimoff 27 18 Skidmore College/Columbia Univ., MBA Tyler Jayroe 21 15 Vanderbilt Univ./Univ. of Virginia, MBA – 50% of portfolio managers Cindy Kendrot 27 21 College of the Holy Cross/CPA Joseph Knight 9 2 The College of New Jersey/Series 3, 7 & 63 – 58% of PEG team members Avneet Kochar2 24 8 Delhi Univ./The College of William and Mary, MBA Irene Koh 20 12 Natl. Univ. of Singapore/Natl. Univ. of Singapore, MS Spencer Kubin 9 2 Miami University/CFA, CPA/ Series 3, 7, & 63 Team philosophy: Donghoon Lee 1 1 Drexel Univ. Brian McCann 21 15 Lehigh Univ./Columbia Univ., MBA/CFA, CPA Thomas McComb1 35 28 VA Tech/Purdue Univ., MS/Univ. of Chicago, MBA/CFA Built on continuity and experience Courtney Mee 14 11 Princeton Univ./Columbia Univ. MBA/CAIA, Series 3,7, 24 & 63 Ashmi Mehrotra 21 17 Tufts Univ./Series 7 & 63 Patrick Miller 6 6 Northwestern Univ. /Series 3, 7, & 63 Flat organizational structure Rebecca Mitchem 9 5 Cornell Univ./Series 7 & 63/CFA Kristopher Nickol3 19 13 American Univ./Brooklyn Law, JD Brian Pantelich 8 2 Penn St. Univ. Interactive consensus-building investment decision Jaclyn Pizzo 12 7 Siena College/ Series 7 & 63, CFA Robertus Prajogi 22 19 Cornell Univ./Cornell Univ., MS/CFA making Katherine Relle 8 5 Georgetown Univ./LSE, M.Sc./Columbia Univ., MBA Anthony Roscigno1 32 27 Fairleigh Dickinson Univ./Fairleigh Dickinson Univ., MBA Jonathan Ross 18 4 Duke Univ./ NYU, JD Transparent communication and information sharing Todd Smith 7 1 Cornell Univ./Cornell Univ., MBA/Series 7, 63, 79/CFA Mark Sterlacci 15 5 Marist College John Sweeney 23 10 Siena College/CFA Accountable for investment process, client service and Kashif Sweet 13 8 Columbia Univ. overall business management David Taplitz 24 19 Univ. of Virginia/New York State, JD John Varvaro 5 1 The College of William and Mary Charles Willis Jr. 21 20 Syracuse Univ./NYU, MS/Columbia Univ., MBA Amanda Wilson 22 21 Claremont McKenna College/Columbia Univ., MBA Sandra Zablocki1 40 40 Caldwell College
1 Includes tenure at both PEG and ATTIMCO 2 Regional Advisor located in New Delhi, India 3 Includes years employed as a consultant to PEG There can be no assurance that the professionals currently employed will continue to be employed by JPMAM or that the past success of any such professional serves as an indicator of such professional’s future performance.
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Florida Sunshine State Fund Mandate Mandate size: $125 million Objective: construct a return-enhancing private equity portfolio focused on technology, growth and buyout investments in companies with a significant presence in Florida. Investment period: 4 years (with the option of one year extension) Maximum of 50% of the capital to be committed in any one year of the investment period Target ~50% in partnership investments (average bite size of $5 - $10mm) with 8-10 General Partners, single fund exposure limited to 15% of capital committed & General Partner exposure (funds & co-investments) limited to 30% of capital committed Target ~50% in direct investments (average bite size of $5 - $10mm) based in Florida, having a significant presence in Florida, or sponsored by a Florida-based manager in the fund . Not more than 15% in any single direct co-investment . Not more than 30% in credit co-investments Not more than 15% in secondary investments Investment Sector Investment Type Special Situations Secondary Credit 0-10% investments 0-10% 5-15% Partnerships 40-50% Growth Small/mid buyouts 20-30% 40-60%
Direct VC investments 15-20% 35-50% Large buyouts 5-10% . Direct & secondary investments are expected to provide Corporate Finance: Venture Capital / Growth: return and income enhancement to the portfolio, as well . . Focus on small to mid-market and Focus on areas of as potential j-curve mitigation opportunistically larger companies innovation . Target opportunities where we can leverage existing . . Target proven GP teams with sector and Target GPs with domain relationships with fund sponsors strategy focus that can provide an expertise and strong . Consider non-traditional deal sources (e.g. strategic execution and operating advantage entrepreneurial networks family offices, fundless sponsors, JPM’s direct network) . “Emerging mangers” expected to represent significant component of investments The manager seeks to achieve the stated objectives. There can be no guarantee those objectives will be met.
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How we partner with SBA Florida
SBA Florida PEG
Create a return enhancing private equity portfolio – Seek to mitigate J-curve – Provide economic benefits to Florida
Partner with SBA to become a “private equity” extension of your investment staff – Sourcing, due-diligence and investment recommendations – Transparent communication and information sharing (deal memos, global team meetings, etc.) – Senior Portfolio Managers made available for real-time perspective on markets, sectors, investments – Full administrative servicing (reporting, reconciliations, capital calls, etc.) – Commitment modeling and cash flow simulation analysis – Management of distributed securities (PEDM) – Training and education
Provide dedicated team focused on client servicing; additionally, SBA Florida will have access to all deal team Portfolio Managers to discuss individual investments
Proactively assist in a myriad of ways to support SBA’s overall alternatives portfolio – Can foster SBA’s access to large and opportunistic investments pursued by PEG – Act as a sounding board for other potential investments being considered for the broader private equity program
The manager seeks to achieve the stated objectives. There can be no guarantee those objectives will be met.
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PEG has invested over $1bn in companies headquartered in Florida
Representative list of General Partners who Representative map of PEG exposure in have companies headquartered in Florida companies headquartered in Florida*
Source: PEG. Examples included are used solely to illustrate strategies which have been utilized by PEG. There can be no guarantee or assurance that the portfolio will be able to make similar investments on similar terms in the future. The logo presented is registered trademark by its company. *Map does not include those companies that may not be headquartered in Florida, but may still have significant presence in Florida. The yellow dots represents the locations of investments in the Sunshine State Fund.
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PEG has a robust pipeline of opportunities in Florida PEG proactively sources deals and conducts extensive due diligence on Florida-based investment opportunities
Direct investment deal flow Partnership investment deal flow
Reviewed 38 investment opportunities Reviewed 54 investment opportunities
Conducted due diligence on 24 Conducted due diligence on 27 companies companies
Conducted extensive Conducted extensive due diligence on 18 due diligence on 11 companies companies
5 investments 3 investments made made*
• We believe through both our existing relationships and proactive sourcing efforts, PEG has the ability to capture the robust private equity activity located in Florida • New and existing General Partners • Fundless sponsors • Family offices • Extensive personal network
Source: PEG. Pipeline data from November 2018 (inception of SBA mandate) to February 2020. The logo presented is registered trademark by its company. *Includes one investment pending legal close.
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Florida Sunshine State Fund: Snapshot As of March 1, 2020
Fund summary Commitments by investment type
Inception date December 2018 Directs 17% Vintage years 2018 – est. 2021 Uncommitted Mandate size $125.0mm Capital 73% Capital committed (% of mandate)* $40.1mm (32%) Partnerships Capital invested (% of committed) $19.2mm (48%) 15% Distributions received (% of invested) $-
FSSF Commitment Total PEG Platform Investment Name Type ($mm) FSSF Invested ($mm) FSSF Unfunded ($mm) FSSF Reserves ($mm) Commitment Project Pet Direct $3.8 $1.7 $2.1 $0.0 $10.0 Project FPG Direct $4.9 $3.0 $1.9 $0.0 $7.8 Project Pond Direct $4.9 $4.9 $0.0 $0.0 $9.8 Project Commerce Direct $1.5 $1.5 $0.0 $1.5 $10.0 Project Lighthouse Direct $6.0 $4.1 $1.9 $0.0 $188.2 Partnership A Partnership $6.0 $0.7 $5.3 $0.0 $170.0 Partnership B Partnership $7.0 $3.3 $3.7 $0.0 $37.5 Partnership C Partnership $6.0* $0.0 $6.0* $0.0 $35.0* Total: $40.1 $19.2 $20.9 $1.5 $468.3
*Pending legal close. Subject to change.
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Florida Sunshine State Fund: Highlights Albeit early, several investments are tracking well Project Pond Project Lighthouse Project FPG
Boca Raton, FL Boca Raton, FL Orlando, FL . Project Pond provides two software solutions . Project Lighthouse is a leading communications . Project FPG is the 5th largest funeral home operator principally to the broadcast radio industry infrastructure provider with assets across multiple in the US and has a diversified portfolio of . Audience Engagement: enables high growth markets operations broadcasters to distribute content on new . Industry tailwinds support long-term demand growth . Industry participants are expected to benefit from technology platforms (streaming, podcasting) for the industry strong demographic trends . Sales Intelligence: technology-enabled . Transition to 3G/4G/5G . Strong consolidation opportunity; growth opportunity service that provides detailed demographic . Cloud computing adoption in assets weighted towards cremation information about a radio station’s listener- base for use in selling local advertising . Increasing consumption of bandwidth . Cremation growing trend given favorable economic benefits (50-70% discount to burial services Investment update: Investment update: . 2019 revenue and EBITDA ahead of base case . Management is executing on its M&A strategy, with plan 47% annual increase in sites Investment update: . Public comps trading significantly higher than . YTD through 3Q 2019, Project Lighthouse acquired . Recently acquired multiple add-on acquisitions in current valuation 1,767 sites, exceeding managements base case Tampa, FL, expanding its reach to 21 locations in . Strong 2020 pipeline based on new subscription plan FL. based fee model . Public comps trading significantly higher than currently company valuation . Expected to be written up to 1.3x as of 12/31/2019
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Florida Sunshine State Fund: Partnerships
Fund A Fund B Fund C*
Jacksonville Beach, FL West Palm Beach, FL Tampa, FL . Introduction: 2018 . Introduction: 2011 . Introduction: 2019 . Strategy: industrial and business services . Strategy: operationally intensive control investments . Strategy: Focused on operationally intensive, growth companies providing solutions to maintain, operate in lower middle-market companies with $4-$15 oriented business services companies in the micro and upgrade aging infrastructure in North America million of EBITDA cap private equity space (<$5mm EBITDA) . Investment update: Fundamentally sound but undermanaged companies operating in the business Investment update: . The Fund has completed four platform investments services, multi-unit retail, and healthcare . PEG invested with nearly 50% of the fund identified to date that are consistent with the firm’s strategy services industries and core competencies across 6 companies with great visibility to new platform investments and targeted add-on . Prior to PEG’s commitment, the fund had Investment update: acquisitions two investments providing initial visibility into . the portfolio and insight on the firm’s ability Completed 2 platform investments: to source/close attractive deals . Surgical microscopes for ophthalmic, neuro and ENT specialties . Orlando-based distributor of lighting products to the auto repair market
*Pending legal close. Subject to change.
10 0903c02a8259a788
Private Equity Group’s edge: Dedicated team, proven strategy and process
9 founders – 30 year average tenure 40 Years of 17 Senior PMs – 21 year average tenure 1 Experience Full PM team – 16 year average tenure
Ability to construct appropriately Rigorous due diligence - only 5% of 600+ diversified portfolios opportunities reviewed per year, on average, Expertise & Track 2 Select access to oversubscribed and Access Record become investments less available opportunities through Investments have outperformed the MSCI extensive network and database PRIVATE World by 520 bps3 over the past 10 years EQUITY GROUP
Provide broad investment support and Alignment of interest through 1.25% 4 risk management expertise Integrated Significant personal investment by PEG professionals Portfolio construction and modeling, education, Partnership Alignment PMs sit on 200+ Advisory Boards consolidated reporting, administrative expertise
1 Includes tenure at both PEG and AT&T Investment Management Corporation (“ATTIMCO”). 2 PEG representative deal log from 1/1/2008 – 12/31/2018. Time horizon as shown above was chosen for non-performance based reasons. There can be no assurance as to the type or number of investment opportunities that will be made available to the PEG and, even if available, that such investment opportunities would be selected by the PEG. 3 Performance as of 9/30/2019. Net performance is net of underlying fees and expenses, net of Advisor management and Advisor incentive fees. Net performance represents PEG Fund level cash flows and valuations, as experienced by the underlying investors in aggregate, and are inclusive of underlying fees and expenses as well as Advisor management and incentive fees. Vintage years 2008 – YTD 2019. Gredil-Griffiths-Stucke Direct Alpha (“Direct Alpha”) is an IRR-based methodology used to compare private investments to public markets. The IRR calculated is an annualized excess return, representing the relative out-performance or under-performance of the private market investment to the stated index as of the measurement date. 4 The co-investment percentage for PEG professionals is calculated across PEG’s platform of products and accounts, and may be greater or less than 1.25% for any particular one. The allocation percentage is reviewed each calendar year, and on an aggregate level it has been at or above 1% for the past 13 years and is expected to remain at or above this level going forward. The co-investment by PEG professionals in a particular product or investment may be limited or discontinued if
required by law or policy.
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12 State Board of Administration
Real Estate Asset Class Review Steve Spook, Senior Investment Officer-Real Estate Lynne Gray, Senior Portfolio Manager-Principal Investments Michael Fogliano, Senior Portfolio Manager-Externally Managed Investments
Investment Advisory Council Meeting March 31, 2020 Organizational Chart
Ashbel Williams ED & CIO PAUL GROOM Deputy General Counsel Kent Perez Alison Romano Deputy Executive Director Deputy CIO
STEVE SPOOK Sr. Investment Officer-RE
TIFFANY WILLIAMS Administrative Asst.
LYNNE GRAY LAURA FROST MICHAEL FOGLIANO Sr. Portfolio Manager Sr. Investment Sr. Portfolio Manager Principal Investments Analyst III Ext. Managed Investments
TOM PROCTOR CHRIS MARINO JEFF SMITH SARA GEIGER Portfolio Manager II RE Acquisitions Manager Portfolio Manager II Portfolio Manager II
JEFF STAUFFER TED BOLLMANN AMANDA PORTER Sr. Investment Portfolio Manager II Portfolio Manager II Analyst III
KIM BUCKLEY Sr. RE Research Analyst III 3 Governance
• Executive Director & CIO (ED & CIO) • Delegated authority by Trustees to manage the investment of Florida Retirement System assets. • Approves Real Estate Annual Investment Work Plan. • Approves all new investment managers, direct owned acquisitions/dispositions/financings, new commingled fund investments, investment manager agreements, and joint ventures. • Deputy Executive Director (DED)/Deputy Chief Investment Officer (DCIO) • Provide guidance and input for above Real Estate activities. • Concur prior to submission to ED & CIO. • Senior Investment Officer-Real Estate (SIO-RE) • Delegated authority by ED & CIO to effectuate the preceding and perform ownership responsibilities.
4 Real Estate Consultant
• Real Estate Consultant • Prepares quarterly and annual performance reports • Investment provider monitoring and annual review • Fund due diligence • Research • Ad hoc projects
5 Real Estate Benchmark
Core Non-Core Public
(76.5% NFI-ODCE*) + [13.5% (NFI-ODCE + 150 bps)] + (10% REIT Index**)
(Net of fees)
* (NFI) National Council of Real Estate Investment Fiduciaries Fund Index, (ODCE) Open-end Diversified Core Equity ** (REIT Index) Financial Times Stock Exchange, European Public Real Estate Association, National Association of Real Estate Investment Trusts
6 Strategic Role of Real Estate
• Designed to provide:
Risk- – Attractive risk adjusted Adjusted returns Returns – Diversification for total Inflation fund with low correlation Hedge to equities – Income focus Diversificat Income ion – Inflation hedge
7 Broad Strategies PRIVATE REAL ESTATE
84% Core (Strategic) 16% Non-Core (Tactical) • Income focused • Most return from appreciation • Institutional quality • More value (creation) to include: • Stabilized (high occupancy) • Lease-up • Low immediate capital needs • Development • Low leverage (less than 50%) • Redevelopment • Domestic • Repositioning • Recapitalization • Higher leverage • Includes International
8 Real Estate Portfolio
FRS Pension Plan As of 9/30/2019
Real Estate Fixed Income 9.5% 19.0%
Strategic Investments Global Equities 8.4% 54.4% TOTAL FRS $162,510,148,064 Private Equity 7.5% Cash 1.3% 9 Source: 9/30/2019 SBA IBP Report Real Estate Portfolio (as of 9/30/2019) Real Estate Net Asset Value $15,466,021,284
Pooled Principal Externally Funds Investments Managed 26.2% REIT 62.8% 37.2% 10.9%
10 Source: 3Q2019 Townsend Performance Report Private Market Portfolio
Property Type Diversification Allocation Policy Target NFI-ODCE +/- 15% (as of 9/30/2019)
SBA Exposure ODCE Private Portfolio Net Asset Value 40% $13,779,749,224 33.8% 30% 32.0% 25.3% 20% 24.4% 19.3% 17.1% 15.8% 15.2% 10% 12.6% 4.5% 0% Office Apartment Industrial Retail Other * * Other includes Agriculture, Senior Housing, Self-Storage, Hotel, Land
11 Private Market Portfolio
Geographic Diversification Allocation Policy Target NFI-ODCE +/- 15% (as of 9/30/2019) 50% SBA Exposure ODCE Private Portfolio Net Asset Value 41.7% 40% $13,779,749,224 41.2% 30% 30.8% 26.6% 19.0% 20% 22.1% 10% 8.5% 5.5% 4.6% 0% 0% West East South Int'l Midwest
12 Private Market Leverage as of 9/30/2019 Private Portfolio Market Value $19,788 M
Private Market Leverage Private Market Portfolio Leverage
Pooled Funds 40.5% $5,965,412,604
30.1% Principal Investments 24.7%
Pooled Funds Leverage
Closed-End Funds 56.9% Investment Portfolio Guidelines: Private Market Portfolio Leverage Limited To 40% LTV. Open-End Funds 26.3% Principal Investments Leverage Limited to 30% LTV.
13 Real Estate Returns Data Through September 30, 2019
12% 11.0% 10.2% 10% 9.2% 8.5% 8% 7.2% 6.6% 6.5% 5.8% 6%
4%
2%
0% One Year Return Three Year Return Five Year Return Ten Year Return SBA Real Estate Net RE Primary Benchmark
14 2019 Activities Principal Investments Activity
Acquisitions Dispositions • $114 million equity in office development • $50 million equity from industrial • $109 million equity in medical office • $1 million equity from self-storage • $172 million equity in multifamily • $31 million equity from senior housing • $121 million equity in multifamily development portfolio • $97 million equity in student housing • $51 million equity from office • $7 million equity in multifamily partner buyout • $26 million from retail
Total Acquisitions $620 million Total Dispositions $159 million Financing • $808 million in loan activity (acquisitions and existing assets) across twenty properties $684 million New Loan Commitments $124 million Maturities/Payoffs $560 million New Financing 15 2019 Activities
Externally Managed Portfolio Activity Commitments • $50 million add-on commitment to an existing open-end, core U.S. logistics fund • $25 million commitment to a closed-end, U.S. opportunistic fund • $150 million commitment to as open-end, core-plus U.S. logistics fund • $90 million commitment to a global co-investment strategy • $100 million commitment to a closed-end, Pan-Asian strategy focused on logistics • $75 million commitment to a closed-end, opportunistic fund focused on the U.S. and Europe
Total New Commitments $490 million Redemptions • $150 million partial redemption from open-end core fund
16 Real Estate Principal Investments Portfolio
Lynne Gray Senior Portfolio Manager
17 Principal Investments Portfolio
Objective Provide returns that, with an acceptable level of risk, meet or exceed the National Council of Real Estate Investments Fiduciaries Fund Index – Open End Diversified Core Equity (NFI-ODCE).
Investments Primarily high quality, well-located, stable real estate properties: Apartment, Office, Industrial, Retail and Specialty Sector. The specialty sector includes Agriculture, Student Housing, Senior Housing, and Self Storage. Non-core strategies, such as development, are permitted.
18 Principal Investments Portfolio
10.0% 9.0% 8.6% 8.4% 8.0% 7.0% 6.3% 6.3% 6.0% 5.0% 5.0% 4.6% 4.0% 3.0% 2.0% 1.0% 0.0% 1 Year 3 Year 5 Year PI Total Net NFI ODCE Total Net
Data through 09/30/19 19 Investment Portfolio Guidelines Guidelines for Managing and Monitoring Portfolio-Level and Asset-Level Risk
Risk Profile Sector Geography
Investment Single Leverage Manager Investment
20 Risk Profile
NAV $9.7 billion as of 09/30/19
Core Non-Core 95.6% 4.4%
Investment Portfolio Guidelines Target Range Core 92.5% 85% - 100% Non-Core 7.5% 0% - 15% 21 Sector Diversification
Office 33.6% Self Storage Commercial: 30.6% 3.7% Medical: 3.0% Retail Specialty Senior 16.5% Housing 11.7% 1.5% Agriculture 6.5% Industrial Apartment 12.9% 25.3% Multifamily: 21.3% Student Hsg: 4.0%
% of Net Asset Value 22 Principal Investments Leverage
DEBT TYPE WEIGHTED AVG COST OF DEBT PI 5 YR LEVERAGE 09/30/19 09/30/19 $3.5 30.0% 100% 26.3% 24.7% Floating 4.47% 11% $3.0 22.1% 21.7% 25.0% 21.1% Fixed 3.20% $2.5 20.0% 89% 21.3% 21.4% 21.7% Total PI 3.34% $2.0 20.3% 15.0% 80% 17.5% $1.5 Fixed Rate Floating Rate 0.00% 2.50% 5.00% BILLIONS 10.0% $1.0 DEBT MATURITIES 5.0% 09/30/19 $.5 $800 $1.7 $2.2 $2.4 $3.2 $3.2 $- 0.0% $700 09/30/15 09/30/16 09/30/17 09/30/18 09/30/19 $600 PI DEBT PI LTV ODCE LTV $500
$400 PI CORE AND NON CORE LEVERAGE Investment Portfolio Guidelines $697 MILLIONS $300 40.0% $537 - Portfolio Leverage limited to 30% Loan To Value (LTV) $200 30.0% $194 $46 $341 - Individual Asset Level limited to 50% LTV 20.0% $100 $189 24.6% 25.9% $97 $151 $174 $81 $112 10.0% - JV Individual Asset limited to 70% LTV $- $3 $20 0.0% - Nonrecourse to the SBA 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 09/30/19 Fixed Rate Floating Rate Core Non Core 23 Property Locations
Midwest 3.1% West East 44.6% 28.1%
South 24.1%
% of Net Asset Value
Excludes Agriculture 24 Agriculture Locations
West 81.5% Midwest East 1.1% 0%
South 17.4%
% of Net Asset Value 25 Principal Investments vs Benchmark
Property Type Diversification Geographic Diversification % of Net Asset Value % of Net Asset Value 40% 60%
35% 33.8% 50% 30% 41.7% 25.3% 40% 25%
20% 19.3% 30% 30.8% 17.1% 33.6% 44.6% 15% 25.3% 20% 19.0% 10% 28.1% 16.5% 11.7% 24.1% 12.9% 10% 8.5% 5% 4.5% 0% 0% 3.1% Apartment Industrial Retail Office Specialty East Midwest South West PI Exposure ODCE PI Exposure ODCE Investment Portfolio Guidelines Range: ODCE +/- 15% 26 Manager Concentration
29% Principal Externally Mgd Investments Investments 8% 37% 63% 16% 2% 3% 2% 1% 2% % of Net Asset Value 8 Separate Account Managers Investment Portfolio Guidelines < 35% AUM per Manager 27 Metro & Investment Exposure
Top Ten Markets Five Largest Single Investments Metropolitan Division % PI NAV Property Type Location % PI NAV 1 Washington, DC 11.1% 1 Office Los Angeles, CA 6.1% 2 Los Angeles, CA 10.5% 2 Office Atlanta, GA 3.2% 3 San Francisco, CA 9.3% 3 Office Washington, DC 2.9% 4 New York, NY 7.7% 4 Office Washington, DC 2.5% 5 Atlanta, GA 5.9% 5 Apartment San Francisco, CA 2.3% 6 Boston, MA 4.8%
7 Seattle, WA 3.3% Investment Portfolio Guidelines 8 Ft. Lauderdale, FL 3.3% - Metropolitan Division exposure less than 15% of NAV* - Single investment exposure less than 7% of NAV* 9 Ontario, CA 3.0% * at the time of acquisition 10 Denver, CO 2.9%
28 Multifamily Portfolio Key Metrics Investment Strategy 2020-21 Los Angeles, CA Gross Value $ 2,909,350,096 • Acquire Class A, highly amenitized, Net Value $ 2,070,197,377 multifamily communities in urban and infill Leverage $ 797,465,211 suburban locations. LTV% 27.4% • Continue build to core investing through # Markets 13 selective developments to achieve a return # Investments 19.7 premium relative to existing core assets. # Units 7,653 • Continue to reinvest in existing assets Occupancy (1) 94% where renovations and improvements (1) Stabilized Properties result in rent premiums.
Major Metros Multifamily 4% 1% % Multifamily Metro Area # Investments Net Value Portfolio Student Housing 3% 21% 6% San Francisco 3 $ 377,107,726 18.2% Industrial Los Angeles 2 $ 286,852,944 13.9% Retail Ft. Lauderdale 2 $ 245,001,158 11.8% Commercial Office 4% Washington, DC 1.7 $ 203,876,903 9.8% 31% Santa Ana 1 $ 159,857,715 7.7% Medical Office 13% New York 1 $ 134,133,963 6.5% Agriculture Seattle 2 $ 131,964,357 6.4% Self Storage 17% Atlanta 2 $ 131,444,790 6.3% Senior Housing 29 Other Markets 5 $ 399,957,820 19.3% Student Housing Portfolio Key Metrics Investment Strategy 2020-21 Gross Value $ 756,246,504 • Selectively acquire purpose built student Net Value $ 387,631,411 housing at top tier universities that Leverage $ 358,142,788 provide portfolio diversification. LTV% 47.4% • Dispose of non-strategic, # Markets 14 underperforming assets and value-add # Investments 17 investments with executed/completed # Units / # Beds 3,131 / 8,723 investment strategy. Occupancy (1) 92% (1) Stabilized Properties Fort Collins, CO University Exposure Multifamily 4% 1% % Student Housing University # Investments Net Value Portfolio Student Housing 3% 6% University of Central Florida 2 $ 92,411,701 23.8% Industrial 21% Colorado State University 1 $ 49,919,524 12.9% Retail University of Washington 2 $ 48,440,281 12.5% 4% Commercial Office University of Nevada-Reno 1 $ 45,476,401 11.7% 31% Auburn University 2 $ 36,288,982 9.4% Medical Office 13% Michigan State University 1 $ 27,346,037 7.1% Agriculture Kent State University 1 $ 21,288,726 5.5% Self Storage 17% University of Illinois-Champaign 1 $ 20,879,671 5.4% Senior Housing 30 Other Universities 6 $ 45,580,087 11.8% Industrial Portfolio
Key Metrics Investment Strategy 2020-21 Chicago, IL Gross Value $ 1,825,746,832 • Acquire and develop assets close to Net Value $ 1,255,107,926 transportation infrastructure and major Leverage $ 556,577,340 metropolitan areas. LTV% 30.5% • Focus on bulk warehouse, fulfillment/e- # Markets 12 commerce and multi-tenant properties. # Investments 64 Net Square Feet 20,522,349 Occupancy (1) 93% (1) Stabilized Properties
Major Metros Multifamily 4% 1% % Industrial Metro Area # Investments Net Value Portfolio Student Housing 3% 6% Ontario 10 $ 276,061,290 22.0% Industrial 21% New York 11 $ 173,803,154 13.8% Retail Los Angeles 1 $ 142,877,608 11.4% Commercial Office 4% Miami 1 $ 132,266,444 10.5% 31% Medical Office Chicago 3 $ 125,864,252 10.0% 13% Atlanta 7 $ 112,833,563 9.0% Agriculture Denver 13 $ 75,270,515 6.0% Self Storage 17% Ft. Lauderdale 6 $ 72,309,768 5.8% Senior Housing 31 Other Markets 12 $ 143,821,331 11.5% Retail Portfolio Key Metrics Investment Strategy 2020-21 Gross Value $ 1,855,116,721 Greenville, SC • Evaluate mixed-use development Net Value $ 1,606,155,355 opportunities with existing assets. Leverage $ 253,609,897 • Dispose of non-strategic assets with big LTV% 13.7% box component that are more exposed to # Markets 11 tenant right sizing. # Investments 26.1 Net Square Feet 3,664,694 Occupancy (1) 96% (1) Stabilized Properties
Major Metros Multifamily 4% 1% % Retail Metro Area # Investments Net Value Portfolio Student Housing 3% 6% San Francisco 2.8 $ 462,388,209 28.8% Industrial 21% San Diego 2 $ 283,214,724 17.6% Retail Boston 14 $ 279,359,892 17.4% Commercial Office 4% Seattle 1 $ 140,656,695 8.8% 31% Greenville 1 $ 132,055,102 8.2% Medical Office 13% Memphis 1 $ 110,601,602 6.9% Agriculture Austin 1 $ 93,169,020 5.8% Self Storage West Palm Beach 1 $ 63,849,525 4.0% Senior Housing 17% 32 Other Markets 2.3 $ 40,910,587 2.5% Commercial Office Portfolio Key Metrics Investment Strategy 2020-21 Gross Value $ 3,778,179,964 Atlanta, GA Net Value $ 2,976,945,602 • Continue construction activity with existing joint venture developments. Leverage $ 793,487,097 • Execute lease renewals and new leases to LTV% 21.0% increase portfolio occupancy. # Markets 12 • Dispose of non-strategic, older properties. # Investments 16.2 Net Square Feet 6,456,967 Occupancy (1) 85% (1) Stabilized Properties
Major Metros Multifamily 4% 1% % Commercial Metro Area # Investments Net Value Student Housing Office Portfolio 3% Industrial 6% Washington, DC 4 $ 865,057,858 29.1% 21% Los Angeles 1 $ 590,525,255 19.8% Retail New York 2 $ 403,723,923 13.6% Commercial Office 4% Atlanta 1 $ 312,818,254 10.5% Medical Office 31% 13% Denver 1 $ 186,154,759 6.3% Agriculture Boston 1 $ 156,769,893 5.3% Self Storage 17% San Jose 1 $ 127,462,508 4.3% Senior Housing 33 Other Markets 5 $ 334,433,152 11.2% Medical Office Portfolio Key Metrics Investment Strategy 2020-21 Gross Value $ 504,238,346 • Continue assembly of a high-quality Net Value $ 288,877,473 medical office portfolio as a long-term Leverage $ 208,278,736 investment. LTV% 41.3% • Focus on properties providing economic, # Markets 11 tenant, building and geographic # Investments 19 diversification. Net Square Feet 1,095,319 Occupancy (1) 99% (1) Stabilized Properties Norfolk, VA
Major Metros 1% Multifamily 3% 4% % Medical Office Metro Area # Investments Net Value Student Housing Portfolio 6% 21% Milwaukee 3 $ 57,487,490 19.9% Industrial Nashville 1 $ 55,998,924 19.4% Retail Richmond 4 $ 47,257,346 16.4% Commercial Office 4% 31% Norfolk 3 $ 30,680,331 10.6% Medical Office 13% San Francisco 1 $ 27,938,917 9.7% Agriculture Providence 2 $ 19,696,681 6.8% Self Storage 17% Clarksville 1 $ 18,717,934 6.5% 34 Other Markets 4 $ 31,099,851 10.8% Senior Housing Agriculture Portfolio Key Metrics Investment Strategy 2020-21 Gross Value $ 589,498,813 Continue redevelopment of older Net Value $ 629,925,710 • permanent plantings on select properties. Leverage $ 0 • Continued focus on California water LTV% 0.0% issues and implement sustainability # Markets 17 measures in accordance with plans. # Investments 25 Planted Acres 35,992 Permanent Crops 83%
Crop Exposure Almond Trees, CA % Agriculture Crop Type # Investments Net Value Portfolio Multifamily 4% 1% Pistachios 5 $ 177,065,637 28.1% Student Housing 6% Almonds 6 $ 140,530,243 22.3% Industrial 3% Citrus 5 $ 85,123,865 13.5% 21% Walnuts 3 $ 50,236,233 8.4% Retail Wine Grapes 1 $ 22,444,704 3.6% Commercial Office 4% Avocados 1 $ 22,352,150 3.5% Medical Office Table Grapes 1 $ 13,124,243 2.1% 31% 13% Apples 1 $ 8,459,116 1.3% Agriculture Pecans 1 $ 5,403,726 0.9% Self Storage 17% Row Crops 6 $ 105,185,793 16.7% Senior Housing 35 *Some Investments have multiple crop types Self Storage Portfolio Key Metrics Investment Strategy 2020-21 Gross Value $ 596,910,000 • Acquire strategic properties that Net Value $ 354,697,552 complement the existing portfolio. Leverage $ 233,209,283 • Focus on off-market, undermanaged but LTV% 39.1% well maintained assets to capitalize on # Markets 33 operational efficiencies. # Investments 72 # Units 39,392 Occupancy (1) 86% Jacksonville, FL (1) Stabilized Properties
Major Metros Multifamily 4% % Self Storage Metro Area # Investments Net Value 1% Portfolio Student Housing Philadelphia 10 $ 80,740,512 22.8% Industrial 3% 6% Sacramento 5 $ 29,347,071 8.3% Retail 21% Carson City 4 $ 25,494,603 7.2% Commercial Office Ft. Myers 3 $ 20,099,212 5.7% 4% Medical Office Ontario 3 $ 17,955,245 5.1% 31% Camden 3 $ 17,046,139 4.8% Agriculture 13% Decatur 4 $ 13,632,292 3.8% Self Storage New York 2 $ 10,995,987 3.1% 17% Senior Housing 36 Other Markets 38 $ 139,386,490 39.3% Senior Housing Portfolio
Key Metrics Investment Strategy 2020-21 Pittsfield, MA Gross Value $ 149,009,000 • Dispose of remaining assets in portfolio Net Value $ 147,764,997 and dissolve title holding entity upon Leverage $ 0 expiration of post-closing obligations. LTV% 0.0% # Markets 9 # Investments 18 # Beds 1,892 Occupancy (1) 74% (1) Stabilized Properties 1% Major Metros Multifamily % Senior Housing Metro Area # Investments Net Value 4% Portfolio Student Housing Providence 4 $ 27,942,519 18.9% Industrial 3% 6% Boston 4 $ 25,993,041 17.6% Retail 21% Barnstable 3 $ 24,433,458 16.5% Commercial Office Denver 2 $ 22,358,586 15.0% 4% Medical Office Naples 1 $ 10,703,688 7.2% 31% Greenville 1 $ 10,048,360 6.8% Agriculture 13% Tampa 1 $ 9,611,475 6.5% Self Storage St. Petersburg 1 $ 8,737,705 5.9% 17% Senior Housing 37 Pittsfield 1 $ 8,122,825 5.5% Investment Management
PRINCIPAL INVESTMENTS
Active Portfolio Management Entity Board of Directors • Investment Strategy Audit & Tax Program • Acquisitions / Dispositions • Asset Management • Financing Activity SBA General Counsel Legal Matters
Third Party Service Providers Investment Manager Property Management Companies SBA Accounting Leasing Companies Valuation Program Investment Brokers 38 Real Estate Externally Managed Portfolio
Michael Fogliano Senior Portfolio Manager
39 Real Estate Externally Managed Portfolio Investment types • Pooled funds • REIT separate accounts
Objectives • Provide excess returns • Enhance diversification • Access to core and non-core investments
Portfolio make-up: Portfolio value $5.7 billion, 51 investments, 22 investment managers • Open-end funds: $2.7 billion, 11 investments, 8 investment managers • Closed-end funds: $1.3 billion, 36 investments, 16 investment managers
• REITs: $1.7 billion, 4 investments, 4 investment managers 40 Pooled Funds Open-End Pooled Funds Pros Cons • Relatively fast exposure • Little control over execution of strategy • Superior diversification • Lower risk • Liquidity, subject to investor governance and market conditions • Attractive cash returns • Improved transparency
Closed-End Pooled Funds Pros Cons • Greatest number of investment strategies • Least control • Diversification by strategy and manager • Least liquidity • Alignment of interests • Higher fees • Typically target higher returns • Little control of execution of strategy • U.S. and International opportunities • Typically experiences J-curve effect early in fund life 41 Closed-End Funds
• Over 800 closed-end funds are actively raising capital today
Closed-End Private & Real Estate Funds Emerging Americas, 4 Emerging Europe, 3 Developed Asia, Frontier, 34 2
Unidentified, 161 Developed Americas, Emerging Asia, 394 6 Global, 65
Developed Europe, 172
Source: Townsend 42 REITs
A REIT, or Real Estate Investment Trust, is a company that invests in real estate or mortgages. A REIT stock is traded on the exchanges, which allows anyone to gain access to large commercial real estate equity or debt strategies.
REITs Pros Cons
• High liquidity • More volatile • High diversification • Subject to local currency fluctuations • Global exposure • Low fees • Not perfectly correlated with private real estate
43 Externally Managed Portfolio by Investment Type
NAV $5.7 B NAV ($5.7 B + Callable Capital ($1.2 B))
REITs REITs Closed-End 26% 24% Open-End Funds Funds 35% 50% Closed- Open-End End Funds Funds 24% 41%
44 Source: Townsend As of 9/30/19 Externally Managed Portfolio Returns Data through September 30, 2019 12% 10.2% 10% 9.5% 8.7% 8.5% 8.3% 8.4% 8% 6.6% 6.6% 6.5% 6.3% 6% 5.8% 4.6% 4% 2% 0% One Year Three Year Five Year
Externally Managed Externally Managed Portfolio SBAF Primary ODCE Total Portfolio Total Net Return Custom Weighted Index Benchmark Net Return 45 Source: Townsend Externally Managed Pooled Fund Returns Data through September 30, 2019 12% 11.0%
10% 9.1% 8.4% 8% 7.3% 6.3% 6% 4.6% 4%
2%
0% One Year Three Year Five Year
SBA Pooled Funds Portfolio Net NFI-ODCE Net 46 Source: Townsend Externally Managed Pooled Fund Returns (excludes REITs) Data through September 30, 2019 Core vs. Non-Core Performance
Core Returns Non-Core Returns 18% 14% 13.0% 16% 12% 10.8% 14% 10.0% 10% 12% 8.3% 7.9% 9.4% 8% 10% 7.9% 8.4% 6.2% 8% 6.6% 6.3% 6% 6% 4.6% 4% 4% 2% 2% 0% 0% One Year Three Year Five Year One Year Three Year Five Year
Core Externally Managed Net NFI-ODCE Net Non-Core Externally Managed Net NFI-ODCE Value Weight +150 BPS Net
Source: Townsend 47 Pooled Funds
Property Type Exposure Geographic Exposure
Other * Midwest 8% Hotel 11% Office East 4% 29% 23% Domestic West 83% Industrial 34% 22% International 17% Residential Retail 22% South 12% 18%
Source: Townsend 48 *Other includes property types such as data centers, entertainment, for-sale residential, parking, self-storage and senior living. As of 9/30/19 Externally Managed Open-End Commingled Funds Comparison Data through September 30, 2019
Non-Core Exposure Leverage 10% 25% 21.0% 8.1% 20.0% 8% 20% 6.4% 6% 15%
4% 10%
2% 5%
0% 0% SBAF OECF Core (fully funded) ODCE Proxy *
SBAF OECF Core (fully funded) ODCE Proxy * SBAF OECF Core (fully funded) ODCE Proxy *
*ODCE Proxy represents the comparative NFI-ODCE index; however, excludes one NFI-ODCE fund that does not provide detailed data. Source: Townsend 49 Externally Managed Open-End Commingled Funds Comparison Data through September 30, 2019 Property Type Diversification 40% 36.0% 35% 34.0%
30% 27.0% 25% 25.0% 20.0% 19.0% 20% 17.0% 15% 13.0% 10% 5% 3.0% 3.0% 0.0% 0.0% 2.0% 2.0% 0% Apartment Office Industrial Retail Hotel Self-Storage Other
SBAF OECF Core (fully funded) ODCE Proxy *
*ODCE Proxy represents the comparative NFI-ODCE index; however, excludes one NFI-ODCE fund that does not provide detailed data. Source: Townsend 50 Externally Managed Open-End Commingled Funds Comparison Data through September 30, 2019 Geographic Diversification 40% 36.0% 35.0% 35% 30% 25% 22.0% 20% 19.0% 15% 11.0% 10.0% 10.0% 10% 8.0% 9.0% 7.0% 6.0% 7.0% 5% 5.0% 5.0% 1.0% 1.0% 0.0% 0.0% 0% Northeast Mideast East North West North Southeast Southwest Mountain Pacific International Central Central SBAF OECF Core (fully funded) ODCE Proxy *
*ODCE Proxy represents the comparative NFI-ODCE index; however, excludes one NFI-ODCE fund that does not provide detailed data. Source: Townsend 51 Domestic Exposure (excludes REITs) Data through September 30, 2019 Property Type Geography $27.2 M $1.1 M (0.8%) $296.5 M (0.03%) $45.1 M $315.2 M (8.4%) $325.3 M (8.9%) (1.3%) $331.1 M (9.2%) (9.4%) $369.7 M $831.6 M (10.4%) (23.5%) $21.0 M $446.9 M $216.1 M (0.6%) (12.6%) (6.1%) $145.6 M $933.5 M $658.3 M (4.1%) (26.4%) $853.8 M $1,248 M (18.6%) (35.3%) (24.1%)
$14.8 M (0.4%) Apartment Health Care Hotel East North Central Mideast Mountain Industrial Land Office Northeast Pacific Southeast Retail Student Housing Other * Southwest Various ** West North Central * “Other” includes property types such as data centers, entertainment, for-sale manufactured, medical office, self-storage and senior living. 52 ** “Various“ consists of hotel assets in various unspecified locations. Source: Townsend International Exposure (excludes REITs) Data through September 30, 2019
Property Type Geography $0.7 M $0.2 M $5.2 M (0.09%) $0.3 M (0.03%) (0.7%) $14.2 M $12.9 M (0.04%) (1.9%) $75.4 M $107.2 M (1.7%) (10.1%) (14.3%) $23.8 M (3.2%) $153.0 M $135.8 M (18.1%) $127.2 M (20.4%) (17.0%) $82.4 M $6.3 M (11.0%) (0.8%) $0.7 M (0.1%) $318.6 M $435.1 M (58.1%) (42.5%)
Apartment Hotel Industrial Developed Americas Developed Asia Developed Europe Land Office Retail Emerging Americas Emerging Asia Emerging Europe Student Housing Other * Emerging Middle East Frontier Other **
* “Other” includes property types such as medical office, parking, and senior living. 53 ** "Other“ consists of hotel assets in various unspecified locations. Source: Townsend Externally Managed REIT Returns Data through September 30, 2019 16% 15.2% 14% 13.0% 12% 10% 8.1% 8% 7.2% 6.8% 6% 5.6% 4% 2% 0% One Year Three Year Five Year
SBA REIT Portfolio Net SBA Custom REIT Benchmark Source: Townsend 54 REIT Portfolio Data through September 30, 2019 Geographic Exposure Property Type Exposure
0.1% 1.4% 3.2% 1.2% 2.0%
15.6% 17.5% 16.5%
24.4% 58.5% 5.5% 22.5% 16.2% 15.4%
North America Asia Pacific Real Estate Holding & Devel. Industrial & Office REITs Europe Other * Retail REITs Residential REITs Cash Diversified REITs Specialty REITs Hotel & Lodging REITs Other * *Other includes Latin America, Ireland and the Middle East. *Other includes computer services and off benchmark holdings. 55 Source: Mercer Externally Managed Portfolio
Portfolio Management
• Portfolio management decisions begin by researching global property sectors and markets
• Review property type, geographic exposure and risk profile to make appropriate portfolio adjustments and rebalancing decisions
• Evaluate investments on a select basis in order to understand risks and take appropriate actions, if necessary
• Review other options to enhance the portfolio including club deals, co-investments, secondaries, and other related strategies
56 Externally Managed Portfolio
Pooled Funds Process
57 Pooled Fund Life Cycle
ACQUISITIONS - Source Opportunities External SBAF Staff • Real Estate Consultant • Industry contacts • Placement agents (Industry brokers) • Existing partner relationships • Industry conferences and roundtables
58 Pooled Fund Life Cycle
ACQUISITIONS - Screen Opportunities • Starts with a conversation via referral source • Review offering materials • Discussions with real estate consultant • Conference call with manager • Face-to-face meeting • If still interested, initiate underwriting
59 Pooled Fund Life Cycle
ACQUISITIONS –Thorough Underwriting Approach • Engage real estate consultant • Engage third party provider to conduct operational due diligence on the manager • Send the newly created SBAF Supplemental Due Diligence Questionnaire to potential fund manager • Assess fund strategy to current market conditions • Review organizational stability and platform • Review prior fund performance & fund terms • Assess deal pipeline & seed assets (attempt to visit several seed assets)
60 Pooled Fund Life Cycle
ACQUISITIONS –Thorough Underwriting Approach (continued) • Review real estate consultant reports • Review background checks on key employees • Perform reference checks • Create on-site interview questions for face-to-face meeting with manager; (Questions accumulated from all due diligence to that point) • Assess and measure risks for acceptability and attempt to mitigate
61 Pooled Fund Life Cycle
ACQUISITIONS – Negotiate • Management and Incentive fees • Co-investment rights • Accounting & reporting needs (Accounting DDQ) • Transfer rights • Fund restrictions • Advisory Board seat • Legal and business terms with internal and external counsel to vet legal and business issues • Manager confirmation of compliance with SBAF’s policies & Florida statutes
62 Pooled Fund Life Cycle
INVESTMENT MONITORING • Review quarterly financials and manager reports • Compare acquisitions to fund strategy & restrictions/guidelines • Compare fund performance to fund objectives • Evaluate fund amendments, extension requests, etc. • Attend annual investor/advisory board meetings • Review quarterly reports from Townsend • Produce internal quarterly reports for enhanced asset & portfolio management
63 Pooled Fund Life Cycle
INVESTMENT MONITORING (continued) • Quarterly calls with managers • Frequent calls with Townsend on manager issues, market views and potential new managers • Quarterly calls with existing managers and potential managers on their market views • Calls with market research specialists for unbiased market views
64 The State Board of Administration of Florida (“SBAF”)
Real Estate Portfolio Report
March 2020 Table of Contents REAL ESTATE PORTFOLIO MARKET OVERVIEW
APPENDIX: DEFINITIONS AND DISCLOSURES
2 Real Estate Performance Real Estate Portfolio Highlights and Significant Events
PORTFOLIO HIGHLIGHTS ▪ Real estate performance continues to remain strong and outperform the plans benchmark. Portfolio exceeds the benchmark on a net basis over the five-year period by 70 basis points (80 and 140 basis points of outperformance over the ten and fifteen-year periods, respectively). ▪ As of September 30, 2019, on an invested basis, the Real Estate Portfolio represented 9.5% of total plan assets ($15.5 billion). This is a 50 bps increase in allocation compared to last year (approximately $800 million) due to a combination of new investments and undistributed income/appreciation. ▪ SBAF received $833 million of cash flow distributions (gains, refinancing, income, etc…) as well $510 million of capital returned from asset sales (return “of” capital invested) as of the one-year ending September 30, 2019.
SIGNIFICANT EVENTS ▪ During 2019, SBAF made approximately $290 million of Externally Managed fund commitments to non-core; as well as approximately $200 million in core fund commitments/redemptions. Non-core strategies included the following: US opportunistic, Global opportunistic, unique Global co-investment, and Asia value-added. ▪ During 2019, SBAF made 10 Principal Investment new acquisitions requiring approximately $615 million of equity. This includes one office, two multifamily, one student housing, and six medical office investments. Additionally, the Principal Investments allocated an additional $130 million to pay down debt and buy out a JV partner. The Principal Investments portfolio sold eight (smaller) investments during the calendar year and took out new debt on two properties.
All performance is comprised of manager provided data collected by The Townsend Group as of 9/30/19. Townsend’s views are as of the date of this publication and may be changed or modified at any time and without notice. Past performance is not indicative of future results. Investing involves risk, including loss of principal. See back 4 pages for further disclosure and definitions. Real Estate Gross Annual Return
RISK SECTOR AND CONTROL – LONG-TERM 20 YEARS ▪ High-quality real estate income generation has been resilient, even during the toughest of economic times. During the current period, since cap rates are low, investors may benefit from focusing on high-quality assets/income. ▪ Over the period 2000 – 3Q19, approximately 62% of the total return generation of real estate had been through income (driven by Core investments); Non-Core returns tend to be driven more so by appreciation. ▪ Investment expectations are diverging substantially by property sector; for example, PREA consensus return expectations for industrial (11.7%) are nearly 9% higher than retail (2.8%).
Real Estate Gross Annual Return (ODCE vs SBAF) Annualized Gross Real Estate Return Since 2000
30% 12.0%
20% 10.0%
10% Appreciation 8.0% 3.8% 0% Appreciation 2.2% 6.0% -10%
-20% 4.0% Income Income -30% 5.9% 6.2% 2.0% -40% 0.0% ODCE Total Return SBAF Total Return
ODCE Income SBAF Income ODCE Appreciation SBAF Appreciation Income Appreciation
All performance is comprised of manager provided data collected by The Townsend Group as of 9/30/19. Townsend’s views are as of the date of this publication and may be changed or modified at any time and without notice. Past performance is not indicative of future results. Investing involves risk, including loss of principal. See back 5 pages for further disclosure and definitions. Last 15+ Years: SBAF and Townsend Relationship
TIMELINE
• Townsend began working with SBAF’s Real Estate Portfolio • SBAF had a target Real Estate allocation of 7.0% ($7.5 billion) and an actual funded allocation of 5.6% ($6.0 billion) • Portfolio consisted of US only investments - Core separate accounts and funds, Public Securities and Farmland investments
2004 • Created Real Estate Portfolio investment policy and strategic plan that included up to 30% of the portfolio to invest in non-core investments • Allocation targets and investment constraints/risk metrics to be achieved over time • Increased allocation and portfolio size (10.0% target or $16.3 billion; 9.5% fund allocation or $15.5 billion) • Stabilized and mature portfolio with private portfolio allocated 84/16 core (including agriculture) and non-core investments • Public Securities remains approximately 10% of the real estate portfolio ($1.7 billion) and has been transitioned to a global allocation EARS versus US • Exposure to a combination of US separate accounts, core/non-core diversified allocator funds, and core/non-core direct operator funds 15+ Y 15+ • Commitments to 59 unique real estate and agriculture accounts/funds across 29 managers AST
L • Driven fee savings through Townsend client aggregation; annual fee savings of approximately $715,000 • Generating a 15-year net return of 9.0%; outperforming the NFI-ODCE index by 230 bps. • Since inception net return of 8.9% and 1.6x equity multiple over market cycles • SBAF Staff and Townsend evaluate actively managed separate accounts, open-end and closed-end portfolio through rebalancing, and evaluation of new opportunities OOKING
L • SBAF Staff and Townsend continue active oversight of investments and asset management • Enhance portfolio through unique investment opportunities (e.g., new funds, co-investments, pre-seeded portfolio's, embedded value, etc…) ORWARD
F • Continue to grow ex-US exposure while maintaining an overweight to the US Source: Townsend, NFI-ODCE. Townsend’s views are as of the date of this publication and may be changed or modified at any time and without notice. Past performance is not indicative of future results. Investing involves risk, including 6 loss of principal. See back pages for further disclosure and definitions. 15+ Year Impact on Portfolio
Real Estate Portfolio Evolution SBAF Real Estate Performance $18,000 12.0% Core Public Non-Core 11.0% $16,000 10.2% 10.0% 9.2% 9.0% $14,000 8.5% $12,000 8.0% 7.6%
$10,000 6.0% $8,000
4.0% $6,000
2.0% $4,000
$2,000 0.0% Five Year Return Ten Year Return Fifteen Year Return $0
Total Portfolio (net) SBAF Primary Benchmark Dec-83 Dec-84 Dec-85 Dec-86 Dec-87 Dec-88 Dec-89 Dec-90 Dec-91 Dec-92 Dec-93 Dec-94 Dec-95 Dec-96 Dec-97 Dec-98 Dec-99 Dec-00 Dec-01 Dec-02 Dec-03 Dec-04 Dec-05 Dec-06 Dec-07 Dec-08 Dec-09 Dec-10 Dec-11 Dec-12 Dec-13 Dec-14 Dec-15 Dec-16 Dec-17 Dec-18
Real Estate Fund Risk Profile 3Q 2019 Townsend Comment Market Value (% of Total) $15.5 billion (9.5%) Prudently moving towards 10% target allocation through consistent vintage year commitments Control or Liquidity 80% (IMA or Open End) Decreased overtime due to introduction of closed end non-core investments; however, significant control resides with SBAF Leverage 30% (private portfolio) Increased overtime due to non-core commitments and focus on increasing separate account leverage more recently Unfunded Commitments $1.1 billion (0.7%) Unfunded commitments has increased based on recent non-core commitments taking longer to draw down capital 14% in alternatives (student, Property Type Exposure Increased overtime (5% allocation 15+ years ago) as alternative property types become more institutional and income generators senior, self-storage) International Exposure 9.6% Increased overtime (1% allocation 15+ years ago) with exposure focused on developed markets in Europe and Asia 1Percentage of Total Plan Assets All performance is comprised of manager provided data collected by The Townsend Group as of 9/30/19. Townsend’s views are as of the date of this publication and may be changed or modified at any time and without notice. Past performance is not indicative of future results. Investing involves risk, including loss of principal. See back 7 pages for further disclosure and definitions. Total Real Estate Composition
RISK SECTOR AND CONTROL ▪ The SBAF real estate portfolio is invested in Core, Non-Core, and REIT investments. The Portfolio is further allocated between Principal Investments and Externally Managed investments.
‒ Principal Investments - SBAF staff retains key authorities related to approving acquisitions, dispositions, financing activities and annual business plans.
‒ Externally Managed - Investments include those where SBAF has given discretion over these decisions to the investment manager (to include pooled funds and REIT separate accounts).
Total Portfolio Composition Total Portfolio Composition
Public 10.9% Non- Externally Core Managed 14.1% 37.1% Principal Investments Core 62.9% 75.0%
All performance is comprised of manager provided data collected by The Townsend Group as of 9/30/19. Townsend’s views are as of the date of this publication and may be changed or modified at any time and without notice. Past performance is not indicative of future results. Investing involves risk, including loss of principal. See back 8 pages for further disclosure and definitions. Total Real Estate Portfolio Performance
ROLLING FIVE-YEAR RETURN ▪ The Real Estate Portfolio’s five-year total return of 9.2% outperformed the benchmark by 70 basis points. ▪ The Portfolio has consistently outperformed over the five-year measurement period since 2002. ▪ Additionally, the Real Estate Portfolio exceeded the benchmark by 80 and 140 basis points over the 10 and 15-year periods, respectively. Rolling Five Year Return
20% 18% 16% 14% 12% 10% 8% 6% 4% 2% 0% -2% Sep-88 Sep-89 Sep-90 Sep-91 Sep-92 Sep-93 Sep-94 Sep-95 Sep-96 Sep-97 Sep-98 Sep-99 Sep-00 Sep-01 Sep-02 Sep-03 Sep-04 Sep-05 Sep-06 Sep-07 Sep-08 Sep-09 Sep-10 Sep-11 Sep-12 Sep-13 Sep-14 Sep-15 Sep-16 Sep-17 Sep-18 Sep-19
Real Estate Portfolio Total Net Return (net) Real Estate Portfolio Benchmark Total Return (gross)
All performance is comprised of manager provided data collected by The Townsend Group as of 9/30/19. Townsend’s views are as of the date of this publication and may be changed or modified at any time and without notice. Past performance is not indicative of future results. Investing involves risk, including loss of principal. See back 9 pages for further disclosure and definitions. Total Real Estate Portfolio Performance
CONTRIBUTION TO RETURNS ▪ Portfolio diversification and construction continues to drive outperformance. ▪ The total portfolio generated net returns over the five and ten-year periods of 9.2% and 11.0%, respectively. Ten-year performance has increased significantly over the past 12 months, given strong recovery after the GFC. ▪ Core continues to be the driver of performance given size of portfolio and consistent strong returns.
Portfolio Contribution to 5-Year Net Return* Portfolio Contribution to 10-Year Net Return*
Core / Farmland Core / Farmland
Opportunistic Public Portfolio
Public Portfolio Opportunistic
Value-Added Value-Added
0.0% 1.0% 2.0% 3.0% 4.0% 5.0% 6.0% 7.0% 8.0% 9.0% 10.0% 0.0% 1.0% 2.0% 3.0% 4.0% 5.0% 6.0% 7.0% 8.0% 9.0% *Note: performance of each sector adds up to the portfolio’s total performance.
All performance is comprised of manager provided data collected by The Townsend Group as of 9/30/19. Townsend’s views are as of the date of this publication and may be changed or modified at any time and without notice. Past performance is not indicative of future results. Investing involves risk, including loss of principal. See back 10 pages for further disclosure and definitions. Relative Performance
PEER COMPARISON ▪ SBAF’s five-year net performance versus its peers (69 institutional real estate investors) ranks in the 53rd percentile (over the ten-year 73rd percentile and over the fifteen-year 93rd percentile). ▪ It is important to note, peer portfolio's will vary by investment strategy, investment type, risk appetite and portfolio inception dates. ▪ SBAF’s near median ranking is due to peers investing in higher risk/return strategies during a period of significant economic improvement. While peer performance may outperform currently; it will also come with more volatility. Going forward, both historically and the future expectation is for SBAF to have a more stable and outperforming portfolio over market cycles.
Five Year Net of Fee Peer Performance Survey* 100%
75%
SBAF 9.2% Median 9.1%
50% Percentile Rank
25%
0%
Five-Year Net Return Dark blue lines represent investors with over $2 billion of Real Estate Investments *Peer portfolio's will vary by investment strategy, investment type, risk appetite and portfolio inception dates. All performance is comprised of manager provided data collected by The Townsend Group as of 9/30/19. Townsend’s views are as of the date of this publication and may be changed or modified at any time and without notice. Past performance is not indicative of future results. Investing involves risk, including loss of principal. See back 11 pages for further disclosure and definitions. Total Real Estate Performance
GROWTH OVER TIME ▪ Returns are impacted by the starting point of the measurement period. ▪ The shorter term excludes the negative performance experienced during the Global Financial Crisis. ▪ Over the long-term (multiple market cycles), the portfolio continues to generate strong returns.
Growth of $100 in the Real Estate Portfolio
$1,800
$1,600
$1,400 1-Year 6.6% $1,200 3-Year 7.2% $1,000 5-Year 9.2% $800
$600 10-Year $400 Since Inception 11.0% 8.1% 15-Year $200 9.0%
$0
Figures are based on time weighted net returns All performance is comprised of manager provided data collected by The Townsend Group as of 9/30/19. Townsend’s views are as of the date of this publication and may be changed or modified at any time and without notice. Past performance is not indicative of future results. Investing involves risk, including loss of principal. See back 12 pages for further disclosure and definitions. Drivers of Performance
PRINCIPAL INVESTMENTS ▪ Principal Investments exposure is diversified across Core (96%) and Non-Core investments (4%). ▪ While performance over shorter time periods can be volatile, the Principal Investments portfolio has consistently outperformed the NFI-ODCE net benchmark over the time periods measured, including the 10 and 15 year periods.
Principal Investments Performance Principal Investments Sector Performance (net) 12.0% 18.0%
10.5% 15.5%
16.0% 14.6% 9.8% 10.0% 14.0% 13.2% 11.7% 8.6% 8.4% 11.6% 12.0% 10.8% 10.1% 9.3%
8.0% 9.1% 10.0% 8.9% 8.3%
6.3% 6.3% 7.4% 8.0% 7.2% 6.0% 4.9% 5.6% 4.6% 6.0% 4.7% 3.6% 4.0% 3.5% 4.0% 2.0% 1.3% 0.0% 2.0% 0.0% -2.0%
0.0% -4.0% 1.2% - One Year Return Three Year Return Five Year Return Ten Year Return One Year Return Three Year Return Five Year Return Ten Year Return
Principal Investments (net) NFI-ODCE (net) Industrial Multifamily Office Retail Specialty
Source: Townsend, NFI-ODCE. All performance is comprised of manager provided data collected by The Townsend Group as of 9/30/19. Townsend’s views are as of the date of this publication and may be changed or modified at any time and without notice. Past performance is not indicative of future results. Investing involves risk, including loss of principal. See back 13 pages for further disclosure and definitions. Principal Investments
LEVERAGE PROFILE ▪ The chart below shows the historical quarterly leverage of the Principal Investments portfolio over the last 18+ years. ▪ The portfolio’s leverage as of 3Q19 is 24.9% and has remained consistent over the past year. The comparable NFI-ODCE benchmark’s leverage was 21.7%. ▪ SBAF’s leverage has steadily increased since the end of 2012, leveling off over the past year. The NFI-ODCE benchmark leverage has decreased over time and remained flat over the short term. Principal Investment's Leverage Over Time 35.0%
30.0% 26.3% (2Q18 High)
25.0%
20.0% 19.0% (4Q03 Prior Peak)
15.0%
10.0%
7.1% (4Q06 Low) 5.0%
0.0%
Sep-02 Sep-03 Sep-05 Sep-06 Sep-08 Sep-09 Sep-12 Sep-15 Sep-18 Sep-19 Sep-04 Sep-07 Sep-10 Sep-11 Sep-13 Sep-14 Sep-16 Sep-17
Source: Townsend, NFI-ODCE. Sep-01
Mar-01 Mar-04 Mar-05 Mar-07 Mar-08 Mar-11 Mar-14 Mar-17 Mar-18 Mar-02 Mar-03 Mar-06 Mar-09 Mar-10 Mar-12 Mar-13 Mar-15 Mar-16 Mar-19 All performance is comprised of manager provided data collected by The Townsend Group as of 9/30/19. Townsend’s views are as of the date of this publication and may be changed or modified at any time and without notice. Past performance is not indicative of future results. Investing involves risk, including loss of principal. See back 14 pages for further disclosure and definitions. Drivers of Performance
EXTERNALLY MANAGED ▪ The Externally Managed Core (39%), Non-Core (32%), and REIT Portfolio (29%) outperformed the benchmark on a net of fee basis over all time periods measured below. Performance was broad based but significantly driven by opportunistic investments both in the U.S. and Europe. ▪ Both the Core and Non-Core portfolio outperform the NFI-ODCE index individually.
Externally Managed Portfolio Performance Externally Managed Core and Non-Core Performance 14.0% 16.0% 11.6% 13.7% 12.0% 14.0% 13.0% 10.2% 9.5% 9.8% 12.0% 10.8% 10.8% 10.0% 9.8% 8.7% 8.4% 10.0% 9.4% 8.2% 7.9% 8.4% 8.0% 8.0% 6.3% 6.6% 6.3% 6.0% 6.0% 4.6% 4.6% 4.0% 4.0% 2.0% 2.0% 0.0% 0.0% One Year Return Three Year Return Five Year Return Ten Year Return One Year Return Three Year Return Five Year Return Ten Year Return Core Externally Managed Portfoio (net) Non - Core Externally Managed Portfoio (net) Externally Managed Portfoio (net) NFI-ODCE (net) NFI-ODCE (net)
Source: Townsend, NFI-ODCE. All performance is comprised of manager provided data collected by The Townsend Group as of 9/30/19. Townsend’s views are as of the date of this publication and may be changed or modified at any time and without notice. Past performance is not indicative of future results. Investing involves risk, including loss of principal. See back 15 pages for further disclosure and definitions. Drivers of Performance
EXTERNALLY MANAGED – GLOBAL PUBLIC REITS ▪ The Global Public Investments portfolio remains volatile; however, the portfolio has outperformed the benchmark over all measured periods below. ▪ The one-year Global REIT performance was driven by a strong 1Q19 delivering a 14.8% net return (after a poor end to 2018). Fourth quarter 2019 Global REIT returns remained strong, up 3.5%. Calendar year-to-date 2020, the Global REIT index has been impacted by recent volatility in the equity markets; generating a -5.7% total return (as of 3/3/20). Global REIT Performance 16.0% 15.2%
14.0% 13.0% 12.0% 11.2% 10.5% 10.0% 8.1% 8.0% 7.2% 6.8% 5.6% 6.0%
4.0%
2.0%
0.0% One Year Return Three Year Return Five Year Return Ten Year Return
Global REITs (net) REIT Benchmark* *EPRA/NAREIT Global Index. Historical benchmark has adjusted with the availability of additional indices and changing portfolio strategy.
All performance is comprised of manager provided data collected by The Townsend Group as of 9/30/19. Townsend’s views are as of the date of this publication and may be changed or modified at any time and without notice. Past performance is not indicative of future results. Investing involves risk, including loss of principal. See back 16 pages for further disclosure and definitions. Real Estate Portfolio Compliance
POLICY COMPLIANCE ▪ The real estate portfolio’s investment allocation was in compliance as of September 30, 2019. ▪ The portfolio is well diversified by property type and geography while maintaining compliance compared to the NFI-ODCE index. Portfolio Diversification / Compliance
Property1 Range (ODCE +/- 15%) Actual Weight Apartment 10.0% - 40.0% 24.4% Industrial 2.4% - 32.4% 15.8% Retail 3.6% - 33.6% 15.2% Portfolio ComplianceTargetRange Exposure Compliance Office 20% - 50.0% 32.0% Private Investments 90% 85-95% 89% Yes Other 0.0% - 19.1% 12.6% Core Investments 85% 70-100% 84% Yes Geography1 Range (ODCE +/- 15%) Actual Weight Non-Core Investments 15% 0-30% 16% Yes East 16.8% - 46.8% 26.6% Value-Added Investments 7% Midwest 0.0% - 24.0% 4.6% South 3.6% - 33.6% 22.1% Opportunistic Investments 9% West 25.5% - 55.5% 41.2% Public Investments 10% 5-15% 11% Yes International 0.0% 5.5% Exposure Maximum Exposure Actual Weight Single Asset3 7% 4.3% Directed-Owned Manager2 35% 28.5% Pooled Funds2 10% 4.0% REIT Manager2 10% 2.9% Leverage1 40% 30.1% 1 Based on Private Real Estate Portfolio NAV 2 Based on Total Real Estate Portfolio NAV 3 Based on Principal Investments Real Estate Portfolio NAV
Source: Townsend, NFI-ODCE. All performance is comprised of manager provided data collected by The Townsend Group as of 9/30/19. Townsend’s views are as of the date of this publication and may be changed or modified at any time and without notice. Past performance is not indicative of future results. Investing involves risk, including loss of principal. See back 17 pages for further disclosure and definitions. Real Estate Portfolio Compliance
POLICY COMPLIANCE ▪ The portfolio has a strategy of targeting real estate on a global basis. The real estate portfolio’s objective is to diversify SBAF‘s plan versus equities and fixed income, act as a hedge against inflation, and provide meaningful risk-adjusted returns comprised of income and appreciation. Category Plan Requirement Compliance RE Allocation target 2-12% ✓ Return Targets/Benchmark Real Estate 5‐yr net vs. 76.5% ODCE; 13.5% ODCE+150; ✓ 10% EPRA/NAREIT Investment Style Allocations Private (Core, Value, High Return) 90% Private (70-100% Core / 0-30% Non-Core) ✓ Public (or other) 5-15% ✓ Risk Policies Manager Diversification 10% pooled fund; 35% IMA ✓ Maximum LP share of fund 25% ✓ Fund Diversification 7% ✓ Property Diversification +/- 15% from ODCE ✓ Geographic Diversification +/- 15% from ODCE ✓ International Exposure None ✓ Leverage PI 30%; EM 40% ✓
Source: Townsend, NFI-ODCE. All performance is comprised of manager provided data collected by The Townsend Group as of 9/30/19. Townsend’s views are as of the date of this publication and may be changed or modified at any time and without notice. Past performance is not indicative of future results. Investing involves risk, including loss of principal. See back 18 pages for further disclosure and definitions. Market Overview Economic Outlook Positive, But Slowdown Expected Real GDP Growth Forecasts (YoY%) Low Mean High
2.8 2.3 2.5 2.5 2.0 1.7 1.8 1.7 1.7 1.5 1.5 1.6 1.4 1.3 1.2 1.1 1.2 1.3 0.9 0.9 1.0 0.9 0.9 1.0 0.8 0.5 0.5 0.6 0.5 0.3 0.2 0.3 0.3 0.3 -0.8 -1.5
2019F 2020F 2021F 2019F 2020F 2021F 2019F 2020F 2021F 2019F 2020F 2021F UNITED STATES UNITED KINGDOM GERMANY JAPAN INTEREST RATES DECLINED SUBSTANTIALLY DURING 1ST HALF OF 2019 ▪ While economic fundamentals remain positive, the trade war, populist movements, and Brexit have disrupted the market’s recovery ▪ The trade war has resulted in a softening Chinese economy, slowdowns in Europe and Japan, and a moderating U.S. economy ▪ As a result, sovereign bond yields have been compressed by a flight to quality ▪ Globally, the slowdown is bifurcated, with the manufacturing sector getting hit and consumers driving growth ▪ Real estate pricing should benefit from lowering interest rates, and cheap debt should boost income yields ▪ Additional risks to the economy include the Coronavirus, the escalating Middle East conflict, and any additional disruption to the global energy sector ▪ While lower interest rates signal slower economic growth expectations, select investment themes, backed by secular trends, might have a lower correlation to the economic cycle Sources: Bloomberg (September ‘19), RCA. 20 Townsend’s views are as of the date of this publication and may be changed or modified at any time and without notice. Past performance is not indicative of future results. Interest Rates Declining Globally
10-Year Government Bond Yields U.S. British German Japan Australian 3.0%
2.0%
1.0%
0.0%
-1.0% 1/1/2019 2/1/2019 3/1/2019 4/1/2019 5/1/2019 6/1/2019 7/1/2019 8/1/2019 Cap Rate Premium to Bond Yields Spread Cap Rate Govt Yield 6.0% 5.0% 4.0% 3.0% 2.0% 4.1% 4.2% 4.5% 3.9% 1.0% 2.9% 0.0% -1.0% NYC (Manhattan) London Berlin Tokyo Sydney
Sources: Bloomberg (September ‘19), RCA. 21 Townsend’s views are as of the date of this publication and may be changed or modified at any time and without notice. Past performance is not indicative of future results. Global Economic Outlook and Real Estate Investment Opportunities
Macro Factors U.S. Europe Australia Japan
GDP (‘20) 1.7% 1.3% (U.K. 1.1%, DE 0.8%, FR 1.2%) 2.4% 0.3%
Unemployment (’19) 3.6% 6.3% (U.K. 3.7%, DE 3.1%, FR 8.5%) 5.2% 2.4%
Fundamentals diverge significantly across property Levered income returns typically higher Superannuation funds dominate Core real estate Low growth despite easing sectors and submarkets than in the U.S., but low growth market and benefit from lower cost of capital Key environment expected to persist Existing stock old provides attractive repositioning Real Estate Core offers good income and protection against a Non-Core opportunities offer attractive growth opportunities Themes potential slowdown Repositioning opportunities attractive outlook Low debt cost offers good leverage without adding Non-Core selectively mispriced much risk
Select markets offer good rent growth; southern Limited growth potential, but attractive Strong leasing demand driving up rents, with Fundamentals are healthy, but new supply expected to markets witnessing net migration likely to benefit income generation given low cost of limited near-term supply risks temper rent growth debt Office Repositioning and high income-producing investments Sydney cap rates higher than those in NY, Old stock in good locations in Tokyo/ Osaka offers likely to outperform low cap rate opportunities In the U.K., Brexit-related uncertainty London, and Tokyo attractive upgrading opportunities continues to weigh on the market
E-commerce and imports driving demand at record Strong demand from logistic players and Demand for modern buildings fueled by growth Strong demand for modern logistics assets driven by high level e-commerce of e-commerce 3PLs Industrial Supply rising in hotbeds, requiring focus on quality Yields continue to offer attractive cash Core asset pricing bid up by domestic capital, but Supply building in town peripheries that is likely to limit and infill assets returns boosted by low-cost debt Value-Add assets more appropriately priced rent growth
E-commerce reshaping landscape and forcing E-commerce driven reshaping is putting Investor sentiment driving down asset pricing Select repositioning opportunities appear attractive consolidation of retailers’ space retail at risk; U.K. retail is challenged given poor existing asset quality Retail Neighborhood retail presents interesting side play E-commerce usage remains muted on E-commerce likely to be a headwind the continent but projected to increase
Rent affordability remains stretched; evolving Most large cities undersupplied with While demand for housing and rental units is Attractive residential development opportunities in regulatory environment threatens affordable housing dwellings strong, institutional investment opportunities high-growth cities like Tokyo and Osaka rent growth with established operators are limited Residential Evolving regulatory environment may Secular demand growth for aged care Suburban product offers higher yield and stands to limit rent growth benefits from aging millennials 22 Sources: The Townsend Group, Consensus Estimates: Bloomberg (October 2019), OECD (2Q19 Harmonized Unemployment). Actively Pursuing Neutral Selectively Pursuing Townsend’s views are as of the date of this publication and may be changed or modified at any time and without notice. Past performance is not indicative of future results. Definitions and Disclosures Disclosures
This presentation (the “Presentation”) is being furnished to a limited number of sophisticated individuals meeting the definition of a Qualified Purchaser under the Investment Advisors Act of 1940 for informational and discussion purposes only and does not constitute an offer to sell or a solicitation of an offer to purchase any security. This document has been prepared solely for informational purposes and is not to be construed as investment advice or an offer or solicitation for the purchase or sale of any financial instrument. While reasonable care has been taken to ensure that the information contained herein is not untrue or misleading at the time of preparation, The Townsend Group makes no representation that it is accurate or complete. Some information contained herein has been obtained from third-party sources that are believed to be reliable. The Townsend Group makes no representations as to the accuracy or the completeness of such information and has no obligation to revise or update any statement herein for any reason. Any opinions are subject to change without notice and may differ or be contrary to opinions expressed by other divisions of The Townsend Group as a result of using different assumptions and criteria. No investment strategy or risk management technique can guarantee returns or eliminate risk in any market environment. Statements contained in this Presentation that are not historical facts and are based on current expectations, estimates, projections, opinions and beliefs of the general partner of the Fund and upon materials provided by underlying investment funds, which are not independently verified by the General Partner. Such statements involve known and unknown risks, uncertainties and other factors, and undue reliance should not be placed thereon. Additionally, this Presentation contains “forward-looking statements.” Actual events or results or the actual performance of the Fund may differ materially from those reflected or contemplated in such forward-looking statements. Material market or economic conditions may have had an effect on the results portrayed. Neither Townsend nor any of its affiliates have made any representation or warranty, express or implied, with respect to the fairness, correctness, accuracy, reasonableness or completeness of any of the information contained herein (including but not limited to information obtained from third parties unrelated to them), and they expressly disclaim any responsibility or liability therefore. Neither Townsend nor any of its affiliates have any responsibility to update any of the information provided in this summary document. The products mentioned in this document may not be eligible for sale in some states or countries, nor suitable for all types of investors; their value and the income they produce may fluctuate and/or be adversely affected by exchange rates, interest rates, or other factors. Prospective investors in the Fund should inform themselves as to the legal requirements and tax consequences of an investment in the Fund within the countries of their citizenship, residence, domicile, and place of business. There can be no assurance that any account will achieve results comparable to those presented. Past performance is not indicative of future results. Townsend is a wholly owned, indirect subsidiary of Aon plc.
24 Disclosures/Definitions
GENERAL DISCLOSURES There can be no assurance that any account will achieve results comparable to those presented. Past performance is not indicative of future results. Investing involves risk, including possible loss of principal. Returns reflect the equal-weighted returns calculated during the periods indicated. Note: If including Core, this is value-weighted. In addition, the valuations reflect various assumptions, including assumptions of actual unrealized value existing in such investments at the time of valuation. As a result of portfolio customization/blending and other factors, actual investments made for your account may differ substantially from the investments of portfolios comprising any indices or composites presented. Due to the customized nature of Townsend’s client portfolios, the performance stated may be considered “hypothetical” as it does not reflect the experience of individual client portfolios, but rather aggregate client positions in the stated investment strategy. NON REGULATORY ASSETS UNDER MANAGEMENT As of June 30, 2019, Townsend had assets under management of approximately $18.4 billion. When calculating assets under management, Townsend aggregates net asset values and unfunded commitments on a quarterly basis. Townsend relies on third parties to provide asset valuations, which typically takes in excess of 90 days after the quarter end. Therefore, assets under management have been calculated using June 30, 2019 figures where available but may also include March 31, 2019 figures. Assets under management are calculated quarterly and includes discretionary assets under management and non-discretionary client assets where the client’s contractual arrangement provides the client with the ability to opt out of or into particular transactions, or provides other ancillary control rights over investment decision-making (a/k/a “quasi-discretionary”). Regulatory AUM is calculated annually and can be made available upon request. ADVISED ASSETS As of June 30, 2019, Townsend provided advisory services to clients who had real estate/real asset allocations exceeding $138.3 billion. Advised assets includes real estate and real asset allocation as reported by our clients for whom Townsend provides multiple advisory services—including strategic and underwriting advice for the entire portfolio. Advised assets are based on totals reported by each client to Townsend or derived from publicly available information. Advised assets are calculated quarterly. Select clients report less frequently than quarterly in which case we roll forward prior quarter totals.
25 Investment Programs & Governance (IP&G) Michael McCauley Senior Officer
Investment Advisory Council Meeting – March 31, 2020 Investment Programs & Governance (IP&G)
IP&G Mandates:
Corporate Governance • Proxy Voting • Company Engagement • Divestment Research • Regulatory Commentary • Investor Collaboration
Florida PRIME • Program Management • External Inv. Manager Liaison • Investor Reporting
Non-Pension Client Mandates • Client Service • Trust Agreements • Special Corporations
3 Corporate Governance and Firm Performance
Corporate Governance Defined—Framework of legal rules, regulations, and corporate policies that ensures the strategic guidance of the company by the board and its accountability to the company and its shareowners. Focus is on the equitable SBA Perspective—public companies should meet high standards treatment of all shareowners, including minority and foreign of independent and ethical corporate governance practices. The investors. SBA acts as a strong advocate on behalf of FRS members and beneficiaries, retirees and other clients to strengthen shareowner Well governed companies can lead to market confidence and rights and promote leading corporate governance practices at U.S. higher business integrity. and international companies in which the SBA holds stock. Well governed companies typically exhibit lower risk levels and Mitigating governance related risks can lead to higher returns achieve a lower cost of capital. and/or lower risk for our portfolio companies, and it is an National governance codes provide foundation for economic important aspect of fulfilling our fiduciary responsibility. development and investment growth. Governance (“ESG”) factors are increasingly used as key inputs in SBA Activities—focus on enhancing share value and ensuring that investor stock selection (“E” is easier to measure than the “S,” but public companies are accountable to their shareowners, with all data has a grounding in “G”). qualified boards of directors, transparent disclosures, accurate financial reporting, ethical business practices and policies that Companies increasingly communicate their long-term planning protect and enhance the value of trust fund investments. and ESG practices with their largest investors. Failure to integrate ESG factors can lead to increased exposure to various risks within portfolio companies.
4 Proxy Voting and Corporate Engagement
• Focus on drivers of portfolio performance and corporate value Proxy Voting—Proxy voting is the primary means by which Attempt to align interests between investors and management shareholders can influence a company’s operations, its • Emphasis on corporate disclosures and reporting—investors benefit from corporate governance, and even its social and • consistent and accurate corporate disclosures, providing shareowners with environmental responsibility activities. Voting corporate comparable and reliable information that is used to identify drivers of risk and proxies is a fiduciary responsibility and an important way to return and efficiently allocate capital. manage the risks associated with public equity ownership. Voting 11,000+ companies worldwide, voting on ballot items including director Over the course of any fiscal year, staff considers thousands • elections, audit firm ratification, executive compensation plans, mergers & of management proposals and hundreds of shareowner acquisitions, and a variety of other management and shareowner proposals. proposals covering a wide variety of issues. • External active managers’ input and collaboration
Corporate Engagement—Practice of shareowners entering into discussions with company management in order to change or influence the way in which that company is run. • Actively engage ~100 companies annually The topics discussed vary by company and the individual • Corporate (issuer) dialogue: letters, phone, and in-person meetings situation, but can include board practices (director • External investment managers’ input and collaboration qualifications, director classes, etc.), executive • Global shareowner initiatives with member organizations compensation and related equity incentives, company disclosures (environmental, lobbying, etc.), external audit, and corporate bylaw/charter rules and procedures (majority voting, proxy access, etc.)
5 SBA Corp. Gov. Principles & Proxy Voting Guidelines
• Comprehensive and empirically grounded, supporting consistent approach to voting
• SBA policies modeled on best practices, global codes, and state law
• CG Principles – high level, global best practice
• Voting Guidelines – general rationale and specific factors used by staff to aid decision making
• Policies linked to portfolio value and risk mitigation
6 SBA Corp. Gov. Principles & Proxy Voting Guidelines
7 Global Partners
Investor Advocacy Proxy Advisors ESG Analysis and Data
8 Proxy Advisors
Proxy Research and Advice—SBA staff use a variety of news, research and ratings sources to understand the issues that are facing the markets ISS Proxy Voting Research: as a whole, specific industries, and individual companies. This • All U.S. equities / L/C Developed Intl. / Material Non-U.S. information helps SBA staff develop governance policies, make informed • Data Screening—DataDesk, Director Database, ESG Research proxy voting decisions, collaborate with other asset owners and asset Glass Lewis Voting Research and Voting Agency: managers, elevate items of concern at owned companies and weigh in on • SBA’s proxy voting agent since 2016 (ViewPoint system) regulatory issues. The SBA utilizes proxy research from several different • All U.S. and Foreign Equities sources in order to gain high-quality assessments of financially-materially risks and opportunities in ESG.
SBA Voting Procedures Full Review Voting (Direct-voted shares) –SBA staff review/compares GL and ISS research and voting advice
SBA CG Staff Full –Engagement with Review Voting, • Company Mgmt & Board 43% • Activist Investors SBA + GL Policy Based Voting, • SBA Portfolio Managers 57% Policy & Guideline Voting (Auto-voted shares) –SBA Custom + GL Policy – Allows for efficiency in standard proposal meetings 9 Corporate Governance Summary—CY2019
10 Corporate Governance Summary—CY2019
11 Corporate Governance Summary—CY2019
12 2020 Proxy Season Preview
• Director Elections Increasingly Fragile - in 2019, a record level of directors failed to garner a majority level of investor support. Boards will need to underscore their efforts at refreshment (succession), address investor concerns with “over- boarding,” and update their diversity objectives. Among companies in the Russell 3000 stock index, there were 54 directors who failed to receive majority support in 2019, up from 37 in 2016. While this was a small number of the total directors up for election—more than 16,000 directors were up for re-election in 2019—there were 421 directors receiving less than 70% approval, up from only 273 during calendar year 2016. These figures reflect the increasing propensity of many institutional investors scrutiny of director nominees and board composition.
• Focus on Small Capitalization Firms - the volume of shareowner proposals aimed at small cap companies rose in 2019, with many investors focusing on their relatively poor governance practices. Specifically, majority voting and board chair independence policies at smaller firms have been included in investor engagement activities. Smaller companies should be prepared for increasing scrutiny by investors that have addressed the larger companies and now are turning their attention to others whose practices lag the S&P 500. Corporate governance practices at smaller firms can deviate significantly when compared to larger companies and often exhibit lower financial performance.
• Rise of Exempt Solicitations - As the volume of shareowner proposals has declined by about 30 percent from 2010 levels, there has been a concurrent rise in the use of exempt solicitations, mainly at larger companies. The most common type is the so called “just vote no” campaign—when a shareowner solicits other investors to withhold their votes for a director(s) election or to vote against a management proposal. These solicitations do not include the distribution of a dissident proxy card, but have almost doubled since 2016.
13 IP&G Work Plan FY2020-21
Corporate Governance:
• Voting platform—complete automated proxy voting initiative. • ~57% of proxies in CY2019 auto-voted by proxy agent, using SBA voting guidelines as logic rules • Auto-voting based on level of materiality, type of ballot items, value of investment, and voting structure
• Voting research—finish buildout of voting dashboard v2.0, improving ability to analyze voting decisions and correlate with corporate performance, industry/sector peer groups, and quantitative ESG metrics.
• Corporate governance ratings—develop proprietary governance ratings (Aladdin/BNY Mellon).
14 Appendix
SBA Corporate Governance Statistics Proxy Voting Benchmarking—Director Elections
16 Proxy Voting Benchmarking—Director Elections
17 SBA Proxy Voting Summary—4Q 2019
Source: Proxy Insight database as of March 5, 2020. 18 SBA Voting in Proxy Contests—4Q 2019
Contested Meeting Votes (2015-2019)
19 Florida State Board of Administration Investment Plan Structure Review
March 31, 2020
Investment advice and consulting services provided by Aon Hewitt Investment Consulting, Inc., an Aon Company. Table of Contents
▪ Section 1: Executive Summary
▪ Section 2: FRS Investment Plan Review
▪ Section 3: Appendix – Additional Considerations
Investment advice and consulting services provided by Aon Hewitt Investment Consulting, Inc., an Aon Company. 2 Section 1: Executive Summary
Investment advice and consulting services provided by Aon Hewitt Investment Consulting, Inc., an Aon Company. 3 Investment Structure – Why Structure Matters
Defined contribution participants are responsible for key actions that influence their own outcomes
Savings Behavior Investment Choices The structure of a DC investment menu can have a significant impact on the choices people make, and ultimately their success. For these reasons, Aon believes in 2 key principles relating to investment menu structure:
Streamline investment options Streamline as much as possible Investment ▪ Target date funds as default where Facilitate smart decisions Options participants can choose one fund and “forget it” ▪ Participants seek forms of help ▪ for making decisions A core-lineup of passive and/or active strategies for participants ▪ Systems can nudge participants to that want to build customized act in their best long-term interest investment portfolios ▪ Structure can help the move into Facilitate distribution stage Smart Decisions ▪ Good governance leads to a strong investment menu
Investment advice and consulting services provided by Aon Hewitt Investment Consulting, Inc., an Aon Company. 4 Benefits of White Label Funds
▪ FRS Investment Plan uses a fully White Label Approach with several multi-manager portfolios
Features Benefits
Custom Named Funds Reduces participant confusion and reduces No reference to a fund company and allows for naming of funds to be disruption when swapping out managers consistent with the investment strategy or objective
Diversified Portfolio Improve expected return profile with lower Aon believes in the inclusion of diversifying investment strategies volatility reduces correlation with equity markets
Open Architecture Manager Selection Better access to skill from across the Select different managers for each part of the portfolio based on their investment management world strengths
Active/passive blend Fees are controlled to be attractive on an Take active risk in areas where we believe there is the best value, absolute level as well as relative to the using passive in where it is particularly difficult to generate alpha potential returns
Value for Fees Paid Negotiated discounts from investment Leverage scale by using managers in multiple portfolios where managers are passed through to participants appropriate for access at preferred rates
Investment advice and consulting services provided by Aon Hewitt Investment Consulting, Inc., an Aon Company. 5 FRS Investment Plan Review Executive Summary
▪ Detailed review of the FRS Investment Plan with the ODCP team focused on both overall investment structure and construction of the custom multi-manager options
▪ Sophisticated and low cost structure, consistent with overall Aon views of a streamlined structure ▪ Offers a streamlined and diversified set of investment options across asset classes, investment Overall Plan styles (active / passive), and the risk/return spectrum Observations ▪ Covers the necessary and relevant asset classes and investment options; we do not recommend addition of standalone asset classes or investment options at this time ▪ White-label approach provides flexibility, efficiency and significant benefit to participants
▪ Integrate FRS Intermediate Bond Fund within the FRS Core Plus Fund ▪ Consolidate the FRS U.S. Large Cap Stock Fund and FRS U.S. Small/Mid Cap Stock Fund Enhancements ▪ Rename the FRS Inflation Adjusted Multi-Assets Fund to the FRS Inflation Sensitive Fund to help for Immediate members understand its objective Consideration – Integrate private real estate and increase TIPS allocation to enhance its risk/return profile ▪ Modest enhancements to investment manager or asset class weightings
▪ Replace FRS Money Market Fund with a Stable Value Fund which offers higher returns at a similar level of risk as money market strategies Enhancements ▪ Consider an objectives based menu which would allow for the addition of diversifying and additive for Future asset classes to multi-manager options in the future Consideration ▪ Contemplate integration of diversifying strategies within multi-manager options to enhance offerings (ex., multi-asset credit, real estate debt, etc.)
Investment advice and consulting services provided by Aon Hewitt Investment Consulting, Inc., an Aon Company. 6 Section 2: FRS Investment Plan Review
Investment advice and consulting services provided by Aon Hewitt Investment Consulting, Inc., an Aon Company. 7 Defined Contribution Industry Investment Design Evolution
▪ The table below illustrates the general evolution of the DC industry’s investment lineup over time ▪ The FRS Investment Plan has progressed over time and currently falls between historic and modern lineups Objectives Historic Lineup Modern Lineup Emerging Lineup
Asset Allocation Target Date Fund (1) Target Date Fund (1) Target Date Fund (1)
Stable Value (1) Capital Preservation Stable Value (1) Capital Preservation (1) Money Market (1)
Income Core Bond /Core Plus (3) Core Bond / Core Plus Bond (2) Diversified Income (2)
U.S. Large Cap Growth (2)
U.S. Large Cap Value (2) U.S. All Cap (2) U.S. SMID Cap Growth (2) Growth Diversified Growth (2) U.S. SMID Cap Value (2)
Developed Non-U.S. (2) Non-U.S. All Cap (2) Emerging Markets (2)
Retirement Income Retirement Income (1) Retirement Income (1) Retirement Income (1)
Investment advice and consulting services provided by Aon Hewitt Investment Consulting, Inc., an Aon Company. 8 Tiered Investment Structure
▪ The FRS offers four tiers within the investment plan
Target Retirement Funds Tier 1 Professional Portfolio Management & Managed Accounts
Tier 2 Low Cost Access to Global Markets Passive Funds
Tier 3 Sophisticated Investor Active/Multi-Manager Funds
Tier 4 Niche Access (optional) Self Directed Brokerage
▪ Aon is an advocate of a tiered investment structure for DC plans ▪ A tiered investment structure categorizes funds and may help guide both the plan sponsor and participants through their investment policy and option selections
Investment advice and consulting services provided by Aon Hewitt Investment Consulting, Inc., an Aon Company. 9 FRS: Investment Lineup Areas of Focus
Tier 1 Tier 2 Tier 3 Professionally Cost Aware Engaged Managed/Novice
Target Date Funds Fixed Income Index Capital Preservation FRS Retirement Date Funds FRS U.S. Bond Enhanced Index Fund FRS Money Market Fund U.S. Stock Market Index Core Fixed Income FRS U.S. Stock Market Index Fund FRS Intermediate Bond Fund
International Index Core Plus Fixed Income FRS Foreign Stock Index Fund FRS Core Plus Bond Fund
U.S. Large Cap FRS U.S. Large Cap Stock Fund Objective Observations/Recommendations U.S. Small/Mid Cap Asset Allocation Use of customized TDF viewed favorably by Aon FRS U.S. Small/Mid Cap Stock Fund
Non-U.S. Equity Capital Consider stable value fund instead of money market Preservation FRS Foreign Stock Fund Consider integrating intermediate bond fund into core Income Global Equity plus fund and future consolidation of strategies FRS Global Stock Fund
Consider streamlining U.S. Equity funds by Inflation Protection Growth consolidating into a single U.S. Stock Fund FRS Inflation Adjusted Multi-Assets Fund
Retirement Opportunity to enhance by integrating private real Income estate
Investment advice and consulting services provided by Aon Hewitt Investment Consulting, Inc., an Aon Company. 10 FRS Core Plus Bond Fund: Integrate FRS Intermediate Income Bond Fund
Expected to lower investment Fees management cost of overall FRS Core Plus Bond option
Targets Current Proposed Core 50% 30% Further diversify interest rate Intermediate - 10% Interest Rates exposure across the yield curve Core Plus 30% 45% High Yield 20% 15%
Efficiency Similar expected return and lower expected risk Current Proposed Exp. Return 2.9% 2.9% Exp. Risk 4.8% 4.5% Sharpe Ratio 0.25 0.27
Expected risk and return statistics based on AHIC 1Q 20 Capital Market Assumptions
Investment advice and consulting services provided by Aon Hewitt Investment Consulting, Inc., an Aon Company. 11 FRS U.S. Equity Funds: Consolidate Growth Simplicity Enhances the Likelihood of Success
Path to Improve Participant's Decision Making Market Cap $750. B DJ S&P Total Russell 1000 Russell Top U.S. Market Index 50 Mega Cap Index Index 91% of the 4,000 largest U.S. Russell 3000 37% of the stocks Index Russell 3000 Index $90.8 B 99% of the U.S. equity market cap (e.g., FRS $25.7 B U.S. Large ▪ Aon recommends consolidating the FRS Cap Option) Russell 2500 Index U.S. Large Cap Stock Fund and FRS U.S. Small/Mid Cap Stock Fund into a single Current Option 20% of the - FRS U.S. Russell 3000 broad U.S. Stock Fund Stock Market Index Index Fund) ‒ Asymmetry in number of U.S. $3.4 B equity options – Passive: All Cap; (e.g., Russell 2000 FRS U.S. Active: Large and Small/Mid $813.0 M Index Small/Mid Cap Option) ‒ Asymmetry in number of options by 9% of the Russell 3000 region (U.S. vs non-U.S.) Index ‒ Capitalization breakdowns are highly correlated with each other over varying lengths of time $176.7 M ‒ Performance by capitalization size = FRS Current Active Options tends to be cyclical $30.4 M = FRS Current Passive Option Source: Russell Investments and Standard & Poors
Investment advice and consulting services provided by Aon Hewitt Investment Consulting, Inc., an Aon Company. 12 Retirement Income FRS Inflation-Hedging Multi-Assets Fund ▪ A diversified set of public inflation sensitive assets are well represented in the strategy ▪ Aon prefers using private asset classes where possible, such as real estate (currently used in CTDFs) ▪ Recommend renaming to FRS Inflation Sensitive Fund to better reflect the fund’s objective
Public Real Assets Provides inflation sensitive income TIPS provide direct, structural via floating rates protection from inflation Low equity beta Low risk/return profile and low equity beta Exposure via fixed income TIPS Bank Loans allocation Currently represented Consider future allocation as return- seeking diversifier
Listed Commodities REITs Infrastructure Similar to equities, corporate profits serve as primary return driver Diversification and high inflation beta Greater diversification Similar qualities to core real estate with benefits via private Inflation protection can be unreliable potentially higher leverage infrastructure Unfavorable risk/return characteristics Greater correlation to private real estate Currently represented Currently represented + Commodity than equities over longer term linked equities Balance short term volatility with liquidity Currently represented; Aon recommends integrating private real estate
Investment advice and consulting services provided by Aon Hewitt Investment Consulting, Inc., an Aon Company. 13 Expense Ratio Review
▪ The below table provides a comparison of the investments in the Plan versus investments of similar size and mandate
▪ The investment options in the Plan all have reasonable fees compared to similar alternatives\
▪ FRS Investment Plan appropriately uses its size and scale to integrate managers and reduce costs across the core funds and target date funds
Expense Peer Investment Option Ratio Median1 FRS Retirement Funds 0.15% 0.39% - 0.50% FRS Money Market Fund 0.06% 0.35% FRS Infl. Adjt Multi-Assets Fund 0.45% 0.69% FRS U.S. Bond Enhanced Index Fund 0.05% 0.12% FRS Intermediate Bond fund 0.12% 0.41% - 0.50% FRS Core Plus Bond Fund 0.24% 0.49% FRS U.S. Large Cap Stock Fund 0.28% 0.72% FRS U.S. Stock Market Index Fund 0.02% 0.04% FRS Small/Mid Cap Stock Fund 0.58% 0.95% FRS Foreign Stock Index Fund 0.03% 0.11% FRS Foreign Stock Fund 0.49% 0.91% FRS Global Stock Fund 0.49% 0.95%
1 Source: AHIC’s annual mutual fund expense analysis as of 12/31/2018. Dollar weighted median shown for passive mandates.
Investment advice and consulting services provided by Aon Hewitt Investment Consulting, Inc., an Aon Company. 14 FRS Investment Plan Summary Conclusions
▪ Overall, the Investment Plan structure is sophisticated and consistent with many aspects of Aon’s best thinking ▪ Sophisticated and low cost structure, consistent with overall Aon views of a streamlined structure ▪ Offers a streamlined and diversified set of investment options across asset Overall Plan classes, investment styles (active / passive), and the risk/return spectrum Observations ▪ Covers necessary and relevant asset classes and investment options; we do not recommend addition of standalone asset classes or investment options at this time ▪ White-label approach provides flexibility, efficiency and significant benefit to participants
▪ Integrate FRS Intermediate Bond Fund within the FRS Core Plus Fund ▪ Consolidate the FRS U.S. Large Cap Stock Fund and FRS U.S. Small/Mid Cap Stock Fund Enhancements for Consideration ▪ Rename the FRS Inflation Adjusted Multi-Assets Fund to the FRS Inflation Sensitive Fund to help members understand its objective – Integrate private real estate and increase TIPS allocation to enhance its risk/return profile ▪ Modest enhancements to investment manager or asset class weightings
Investment advice and consulting services provided by Aon Hewitt Investment Consulting, Inc., an Aon Company. 15 Section 3: Appendix – Additional Considerations
Investment advice and consulting services provided by Aon Hewitt Investment Consulting, Inc., an Aon Company. 16 Capital Preservation Capital Preservation – Types of Options Compared
Money Market Funds Stable Value Funds
Advantages ▪ Less complex and less oversight typically ▪ Much higher expected returns (net-of-fees) required (however, money market reform with similar risk as a money market fund with new regulations that took effect in October 2016 negates some of this ▪ Increased diversification of instruments, historical advantage) issuer, type, duration, and yield ▪ In normal market environments, no ▪ Can be customized to a sponsor’s views, restrictions on participant transfers preferences, risk tolerance, and plan needs (however, money market reform negates some of this historical advantage) ▪ Able to invest further along the yield curve and also invest in more spread securities ▪ Wrap contracts smooth return volatility by amortizing gains and losses (crediting rate) Disadvantages / ▪ Lower expected return than that of a stable ▪ Typically higher fees (investment value fund management fees and wrap provider costs) Considerations ▪ Possibility of floating NAVs liquidity fees, ▪ Restrictions on participant transfers when and redemption gates due to the SEC making changes to competing fund options, regulations that took effect in October such as short-term fixed income (equity wash 2016 rules) – may not be an issue based on plan design if no competing options are offered ▪ SEC 2a-7 rules on weighted average maturity (WAM; <60 days), weighted ▪ Requirement to notify stable value manager average life (WAL; <90 days), daily liquid of plan design changes assets (10+%), and weekly liquid assets (30%+) create defined opportunity set ▪ Greater complexity and more oversight is typically required (e.g., wrap contracts)
Investment advice and consulting services provided by Aon Hewitt Investment Consulting, Inc., an Aon Company. 17 Multi-Manager Structure Benefits Possible Diversifying Asset Classes To Consider
▪ Target Date Funds are the most natural place to include many diversifying assets ▪ Integration within core line-up funds may also be compelling for multi-asset class strategies ▪ Additional standalone asset classes or investment options are not necessary at this time Generate Low beta return premium above stream with public equity attractive fees Alternative Private Risk Premia Equity market
Equity Insurance Private Real Risk Estate Premium
Global Multi-Asset Access to uncorrelated Improve diversification Equity Credit return stream via options profile and reduce volatility strategies with income focus – could be equity or debt Used today in TDFs. Recommendation to Opportunistically rotate use within multi-asset fund in place of REIT between credit sectors exposure
Investment advice and consulting services provided by Aon Hewitt Investment Consulting, Inc., an Aon Company. 18 Asset Class Implementations to Explore
▪ Table below highlights possible structures to explore for integrating additional asset classes
Asset Class Possible Implementations Rationale
CTDFs Inflation-Adjusted Multi-Assets Currently used in CTDFs (equity) Private Real Estate Fund Possible use as inflation hedge in place of REIT (Equity or Debt) Objective-Based Income and/or exposure and/or income generator Growth Funds* (*Future line-up consideration) CTDFs FRS Core Plus Bond Fund Possible fixed income diversifier to complement or Multi-Asset Credit Objective-Based Income Fund* in place of current dedicated high yield allocation (*Future line-up consideration)
CTDFs Equity beta profile leads to fit within multi-asset Equity Insurance Risk Premia Objective-Based Growth Fund* (*Future line-up consideration) class structures rather than pure equity funds
CTDFs Equity beta profile leads to fit within multi-asset Alternative Risk Premia Objective-Based Growth Fund* class structures rather than pure equity funds (*Future line-up consideration)
CTDFs Implementation requirements coupled with required Private Equity Objective-Based Growth Fund* time horizon may make it difficult to utilize within (*Future line-up consideration) core line-up
Investment advice and consulting services provided by Aon Hewitt Investment Consulting, Inc., an Aon Company. 19 Private Equity in Defined Contribution Plans Benefits & Considerations
▪ The primary hurdles that generally prevent plans from implementing private equity are lack of liquidity/daily NAV, performance reporting methodology, and high fees
Overview Description Benefits ▪ Expected return ▪ Private equity can tap into the illiquidity premium and can provide a higher expected return versus public equity markets ▪ Return profile ▪ Skill-based returns – Returns are driven primarily by company selection and development rather than by public equity beta, providing diversification of returns and alpha potential ▪ Long-term horizon ▪ Decision making is based on longer term horizon (3-, 5-, 7-years, or longer), rather than focusing on shorter term market environment, which is consistent with participant objectives ▪ Unique opportunity ▪ Able to invest with high conviction in companies with unique business sets outlooks (comes with increased risk) Considerations ▪ Vehicle Structure ▪ Lack of open-ended vehicles – needed for liquidity and daily NAV; plans that have implemented have not been able to use daily liquid fund ▪ Cash flow ▪ Pacing schedules can create tracking error from benchmark – frequent management contributions can take significant time to be invested ▪ Rebalancing ▪ Inability to rebalance allocations due to illiquid vehicle structure ▪ Position sizing ▪ If large allocation is not achievable, benefits may not be material ▪ Fee structure ▪ High cost fee structure with incentive fees (e.g. 2% and 20%) can add large fee load to expense ratio ▪ Performance ▪ Internal Rate of Return (IRR) is usual method of performance reporting calculation for private equity, rather than time-weighted rate of return methodology (TWR) typical of traditional investments. IRR calculations can be significantly lagged due to lags in valuations
Investment advice and consulting services provided by Aon Hewitt Investment Consulting, Inc., an Aon Company. 20 ESG Investment Options
▪ Industry-wide there has been an increasing focus on Environmental, Social and Governance (ESG) investing, including some stats that indicate a growing demand in DC plans ▪ However, there is low prevalence of these types of options in DC plans due to fiduciary considerations, and when offered, participants generally do not allocate significant assets to them ▪ Aon does not believe that ESG options are necessary in a best in class institutional lineup – Appropriate structure and governance should be the primary focus: ESG options often create investment structure challenges due to overlapping mandates, implicit or explicit constraints and biases within the investment options – Performance (financial prudence) and stakeholder needs should be the primary considerations for investment option inclusion – consistent with guidance from the DOL highlighted below
Both the 2015 and 2018 DOL memos assert that ESG cannot stand on its own as satisfaction of fiduciary duty
The 2018 memo reminds fiduciaries that they still have to fulfill their ERISA fiduciary duties when selecting investments and reviewing ESG funds for possible investment.
Although plans may invest in ESG funds, plan fiduciaries still have their fiduciary responsibilities when considering ESG funds and “checking the box” in fulfillment of a desired/approved ESG policy does not eliminate those fiduciary responsibilities.
NB that the 2015 memo (interpretive bulletin) would likely trump the 2018 memo (field assistance bulletin), although clearly ERISA, which defines fiduciary duty, trumps both.
Investment advice and consulting services provided by Aon Hewitt Investment Consulting, Inc., an Aon Company. 21 Global Equity Update Tim Taylor, Senior Investment Officer
Investment Advisory Council March 31, 2020 Equity Markets Race Ahead
Strong Equity Returns Across Regions Q419: Markets Favored Quality and Value Regional Returns 10%
5% 31.01%
22.91% 0% 17.65% 11.59% 9.09% 8.36% -5%
-10%
US Developed ex-US Emerging Markets ReturnsActive (MSCI ACWI) Low Vol Yield Quality Momentum Value Low Size
Q4 2019 Q4 2019 Cyclicals Lead Markets Q419: Risk Taking Increased 2019 Global Market Dynamics
50% 47% ACWI IMI Returns by Sector • Stocks rocketed ahead during 2019 as major central banks continued
40% or expanded stimulative measures, and investors shook off concerns related to trade negotiations. 30% 27% 27% 25% 24% 23% 23% • The U.S. Federal Reserve pivoted notably early in the year from 21% 21% 20% 20% 14% 14% signaling interest rate increases to accommodative measures as the 12% 8% 8% 8% 9% 10% 10% 6% outlook for economic growth softened. 4% 2% 3% • Once again the U.S. outperformed non-U.S. securities, driven by a 0% Info Tech Cons Disc Industrials Real Estate Comm Health Financials Utilities Staples Materials Energy surging IT sector. All 11 MSCI sectors, except Energy which was up Services Care 12%, posted returns of 20% or higher. Q4 '19 2019 2 Note: As of December 31, 2019. Regional benchmark returns: FTSE Russell – US; MSCI IMI - Developed ex-U.S. and Emerging. Factor returns based on MSCI ACWI single factor indexes. Aggregate Performance Summary
Q419 FYTD 1 Yr 3 Yr 5 Yr Incept Total Asset Class Return 9.16 9.09 26.96 12.73 8.87 11.23 Benchmark 9.05 8.87 26.38 12.10 8.35 10.41 Excess Return 0.11 0.21 0.59 0.63 0.52 0.82 Tracking Error 0.35 0.47 0.48 Return / Risk (IR) 1.59 0.99 1.50
Cummulative Monthly Benchmark vs Total Asset Class Excess Returns Realized vs Predicted 1 Year Risk 0.75 60.00% 0.60%
50.00% 0.50%
40.00% 0.40% 0.50 0.46
30.00% 0.30%
20.00% 0.20% 0.25 10.00% 0.10% GE Excess Return 0.26
Custom MSCI ACWI IMI Return 0.00% 0.00%
-10.00% -0.10% 0.00
Custom MSCI ACWI IMI GE Excess Returns Realized Predicted
Note: All returns through 12/31/2019. Inception 7/1/10. Benchmark is Custom Iran Sudan Free ACWI IMI Index. Realized Risk is compared to prior 1 year Predicted Risk. 3 Active Strategy Performance Summary
Excess Returns by Aggregate What Happened Weight (% of Active Strategy Group Asset Class) Q4 2019 1 Year 3 Year 5 Year Q4 Performance Drivers Foreign Developed Large Cap 21% 1.12% 1.07% 2.04% 1.56% Outperformance driven by long-term growth and off-benchmark holdings. Investors bid up quality stocks as defined by strong cash- flow allocation practices. Emerging Markets 11% 0.12% 4.46% 0.43% 0.35% Modest outperformance of a strong 11.44% benchmark due to stocks in Brazil and underweights to Thailand and Saudi Arabia. Dedicated Global 7% -1.25% -1.81% 0.00% -0.03% Defensive managers lagged as markets surged, with cash holdings and low beta securities detracting. Foreign Developed Small Cap 5% 0.49% 0.59% -0.11% -0.35% Broad outperformance by several aggregate managers, with smaller cap stocks racing ahead in a surging market. US Large Cap 5% -0.35% -5.21% -1.86% -1.97% A surging 9% benchmark proved hard to match as biases to value and momentum drug down active performance. Currency 3% -0.43% 0.82% -0.20% 0.30% Positive global trade and Brexit news spurred risk-on selling of safe haven USD, the most notable long FX program position. US Small Cap 2% -1.97% -0.49% 0.76% -0.06% Risk-on rally left behind quality and value stocks, pushing up biotech and pharmaceutical valuations. Total Active Aggregate 52% 0.17% 0.65% 0.70% 0.38%
Note: All returns through 12/31/2019. Excess returns are relative to strategy group benchmark. Currency weight reflects passively managed equity notional. Weights are relative to total equity assets under management. 4 Global Equity Team Initiatives
Provide Alpha • Continue to implement aggregate structural enhancements – Completed funding of two new Emerging Markets managers – Finalized restructuring of Emerging Market aggregate in Q1 2020 • Completed funding of new dedicated China A-share strategy in Q4 2019 • Ongoing analysis and oversight of active aggregates
Provide Liquidity • Global Equity continues to be significant provider of liquidity to support beneficiary payments – We raised $1.8 billion during Q4 2019 for benefit payments, and almost $6 billion during calendar year 2019
5 State Board of Administration Fixed Income Update Katy Wojciechowski Senior Investment Officer Fixed Income
Investment Advisory Council March 31, 2020 Fixed Income Review and Outlook March 2020 • 12 Month Returns for the Fixed Income benchmark – Barclays Intermediate Aggregate through 1/31/2020 were 7.05%. – Annual Absolute Returns were positive for all sectors – Treasury yields have been rallying, both from global demand for yield and flight to safety–hitting a low of 2.00 at the end of June, hitting a near term low of 0.92 on 3/5/2020. The 30 yr bond hit an all time low of 1.50% on 3/2. – Yield on the entire Benchmark is only 1.32% with a 3.42yr duration – slightly higher than 3 month LIBOR and Fed Funds currently at 1.00 – Asset class outperformed Benchmark over ALL time periods with low risk and high Information Ratio Fixed Income Asset Class Returns 10 1/31/2020
5
0 Fixed Income Benchmark Value Added 3 Fiscal YTD 1 Year 3Yr Ann 5Yr Ann Benchmark Comparison as of 2/28/2020
Benchmark Returns Risk Adjusted Returns
14.00% 4.00% 3.50% 12.00% 3.00% 10.00% 2.50% 8.00% 2.00%
6.00% 1.50%
4.00% 1.00% 0.50% 2.00% 0.00% 0.00% 1 Year 3 Year 5 Year 1 Year 3 Year 5 Year Risk Adj. Returns Returns Int Agg Agg Int Agg Agg
4 Fixed Income Review March 2020 Yields fell off in the quarter as geo-political Spreads to Treasuries widened significantly from very headwinds begin to show up and Coronavirus tight levels with virus fears spreads – flow of funds into US Treasuries for safety Intermediate Aggregate Yield to Maturity Option Adjusted Spread
5 Fixed Income Review March 2020 • Bigger Picture: Global negative yielding debt • Central Banks Globally pumping cash stock continues at elevated levels
Source: Bloomberg 6 Fixed Income Review March 2020 • Portfolio trimmed but continues to • But overall Active Risk continues low at total overweight Spread Product allocation level
Fixed Income Sector Allocation 1/31/2020
-11.00% Treasuries
MBS 0.90%
CMBS 2.10%
ABS 2.00%
Government Related-2%
Corporates 8.00%
-15.00% -10.00% -5.00% 0.00% 5.00% 10.00%
7 Fixed Income Review March 2020 Looking Forward: Pockets of Value • Continue to increase active allocation • Add exposure to out of benchmark structured products or other in a dedicated strategy • Expanded guidelines with several managers – Consider opportunity to reduce risk to a rising rate environment within overall allocation • Short Duration Credit manager funded/transitioning Core Conservative manager to Full Aggregate Core Plus mandate – Execute on tactical opportunities, especially in shorter duration securities • Continuing purchase of short duration securities within Active Core portfolio
8 State Board of Administration
Private Equity Asset Class Update John Bradley, SIO Private Equity
Investment Advisory Council March 31, 2020 Market/Portfolio Update • Market/Portfolio Update:
– Market • Global PE fundraising hit a record high in 2019 • Solid recovery in transaction volumes in Q4 • Purchase multiples continue to increase while leverage multiples held steady – Portfolio • Returns through Q3 2019 remain strong, led by growth and venture • 2019 net cash flow: $332 million
3 Sector and Geographic Exposure As of September 30, 2019
100% 100% 7% 8% Other 90% 90% 10% 9% 9% 16% 14% 20% 80% 80% 16% 12% 5% Financials 15% 18% 70% 12% 70% 19% Africa 13% 60% 14% Energy/Natural 60% Middle East 19% Resources 50% 13% 50% Latin America 16% Healthcare 40% 40% Asia 19% 72% 30% 30% 64% 59% Mfg/Industrial Europe 20% 44% 20% 37% North America 25% 10% Consumer/Retail 10% 0% 0% PE NAV Cambridge MSCI ACWI IT/Media PE NAV Cambridge MSCI ACWI IMI PE/VC Bmrk IMI PE/VC Bmrk
Source: Cambridge Associates 4 Private Equity Asset Class Performance Asset Class - Net Managed and Benchmark Returns (IRRs) as of September 30, 2019
20.0% 16.4% 15.5% 14.5% 15.0% 14.1% 13.1% 12.1% 12.1% 11.6%
10.0% 9.4%
5.0% 1.8%
0.0%
-5.0% 1 Year 3 years 5 years 10 years Since Inception
Private Equity Asset Class Benchmark
Note: Asset class IRR performance data is provided by Cambridge Associates. Benchmark IRRs are provided by the Florida State Board of Administration. The PE benchmark is currently the Custom Iran- and Sudan-free ACWI IMI + 300bps. From July 2010 through June 2014 the benchmark was the Russell 3000 + 300 bps. Prior to July 2010 , the benchmark was the Russell 3000 + 450 bps. Prior to November 1999, Private Equity was part of the Domestic Equities asset class and its benchmark was the Domestic Equities target index + 750 bps. 5 Sub-strategy Performance As of September 30, 2019
1yr 3yr 5yr 10yr Since Inception Benchmark U.S. Buyouts 12.5% 18.3% 15.1% 16.2% 12.5% 11.5% Non-U.S. Buyouts 9.5% 15.8% 14.5% 14.6% 11.4% 10.5% U.S. Venture 18.4% 16.7% 15.3% 15.2% 12.5% 10.9% U.S. Growth Equity 12.9% 16.8% 16.7% 16.4% 14.0% 13.5% Non-U.S. Growth Equity 5.7% 9.0% 8.9% 7.5% 7.2% 12.1% Distressed/Turnaround 4.8% 10.4% 11.5% 15.5% 19.3% 9.7% Secondaries 1.9% 12.8% 10.2% 13.0% 15.4% 14.2%
Total PE Asset Class 12.1% 16.4% 14.5% 15.5% 13.1% 11.4%
Sub-strategy returns and benchmark returns provided by Cambridge Associates and are calculated net of all fees and expenses. The Cambridge benchmark is the median return for the respective sub-strategy.
6 2019 Commitment Activity • Commitments totaling $2.0 billion to 26 funds through December 31, 2019 – $1.3 billion to 18 buyout funds • Small 44%, Middle-Market 37%, Large 19% – $515 million to 5 distressed funds – $216 million to 3 venture funds
– Geographic Focus • US 64%, Europe 16%, Asia 11%, Global 10%
7 Appendix Private Equity Aggregates Dollar-Weighted Performance (IRRs) as of September 30, 2019
Market Value Since Inception Date (in Millions) 1yr 3yr 5yr 10yr Inception Total Private Equity 1/27/1989 $12,445.3 12.1% 16.4% 14.5% 14.5% 9.8% Custom Iran- and Sudan-free ACWI IMI +300bps 1.9% 12.2% 9.4% 14.1% 10.6%
Private Equity Legacy Portfolio 1/27/1989 $2.6 -7.4% -6.0% -10.0% -9.4% 3.7% Custom Iran- and Sudan-free ACWI IMI +300bps 3.5% 13.0% 9.3% 14.7% 9.9%
Private Equity Asset Class Portfolio 8/31/2000 $12,442.7 12.1% 16.4% 14.5% 15.5% 13.1% Custom Iran- and Sudan-free ACWI IMI +300bps 1.8% 12.1% 9.4% 14.1% 11.6%
Note: Asset class IRR performance data is provided by Cambridge Associates. Benchmark IRRs are provided by the Florida State Board of Administration. The PE benchmark is currently the Custom Iran- and Sudan-free ACWI IMI + 300bps. From July 2010 through June 2014 the benchmark was the Russell 3000 + 300 bps. Prior to July 2010 , the benchmark was the Russell 3000 + 450 bps. Prior to November 1999, Private Equity was part of the Domestic Equity asset class and its benchmark was the Domestic Equity target index + 750 bps.
9 State Board of Administration
Strategic Investments Asset Class Review
Trent Webster Senior Investment Officer – Strategic Investments
Investment Advisory Council Meeting March 31, 2020 Portfolio
3 Portfolio
4 Performance
Strategic Investments Performance 10%
8%
6%
4%
2%
0% Quarter 1 Year 3 Year 5 Year 10 Year
Strategic Investments Benchmark Real Return Target 5 Recent Activity
• Quarterly cash outflow was $337 million • Calendar year cash outflow was $94 million • Ten funds totaling $1.284 billion were closed in the most recent quarter • Four funds totaling $625 million have been closed this quarter • Thirteen funds totaling $2.25 billion are in the pipeline
6 Pipeline
• Eight Debt funds – Three Subordinated Capital, three Distressed, two Loans • Two Real Asset funds – One Infrastructure, one Commodities • Two Flexible Mandates funds – Both Multi-Strategy • One Equity fund – Activist Equity
• Nine new relationships • Ten private markets strategies • Two hedge funds
7 Investment Themes
• Volatility is back! (For now) • Insurance markets hardening • Covenants? What covenants? • Lack of capital in commodities • Idiosyncratic opportunities in Emerging Markets
8 FRS INVESTMENT PLAN FRS Investment Plan Snapshot (as of December 31, 2019) • Assets: $11.9 B (19.4% increase since December 31, 2018) 6.24% - 4th Quarter 2019 Return 20.55% - Calendar Year 2019 Return 6.65 % - Fiscal Year to date (Jul 19 – Dec 19) • Members: 225,229 (up 14.6% since December 31, 2018) Active – 156,437 Inactive – 68,792 • Average Acct Balance: $52,790 (4.1% increase since December 31, 2018) • Average Age: 45 Males – 46 (36% of members) Females – 44 (64% of members) • Average Yrs of Service: 5 Years (active members) • Retirees: 145,095 (8.8% increase since December 31, 2018) • Distributions: $13.7 B Lump Sum Payouts – 40% Rollovers – 60% 3 FRS Investment Plan AUM by Asset Class (as of December 31, 2019 in $ millions)
Total Assets: $11.9 Billion International/Global Equity Domestic Equity Funds, Funds, $768 (6%) $3,229 (27%)
Fixed Income Funds, $669 (6%)
Inflation Adjusted Multi- Assets Fund, $122 (1%) Money Market Fund, $920 (8%)
Retirement Date Funds, Self-Directed Brokerage $5,426 (46%) Accounts, $755 (6%)
Asset allocation is a result of member investment selection 4 FRS Investment Plan Performance by Asset Class (as of December 31, 2019)
QTD FYTD 1 Year 3 Years 5 Years Inception
Total Fund 6.24% 6.65% 20.55% 9.78% 7.74% 7.14% Money Market 0.48% 1.08% 2.41% 1.93% 1.32% 1.60% Inflation Adjusted 1.13% Assets & TIPS 2.95% 3.40% 12.18% 4.06% 2.29% (7/1/14) Fixed Income 0.60% 2.75% 9.83% 4.61% 3.75% 4.86% Domestic Equities 9.03% 9.49% 30.07% 13.69% 10.97% 10.41%
Global & Intl Equities 9.41% 7.75% 23.71% 11.26% 6.99% 8.21% Retirement Date Funds 5.96% 6.52% 19.76% 9.64% 6.96% 6.03% 7.00% TF x RDFs 6.52% 6.77% 21.26% 9.93% 7.43% (7/1/14) 5 FRS Investment Plan Membership Growth Percent Membership Growth Year to Year
250,000
225,000 225,229 5.6% 213,213 200,000 11.8%
190,664 175,000 7.6% 177,218 169,576 4.5% 3.7% 150,000 FY 15-16 FY 16-17 FY 17-18 FY 18-19 FY 19-20 (thru Decmber 2019)
6 MyFRS Financial Guidance Program (as of December 31, 2019)
INVESTMENT EDUCATION
EY FINANCIAL # FINANCIAL ATTENDANCE WEBSITE PLANNER PLANNING FINANCIAL WEBSITE HITS CALLS WORKSHOPS WORKSHOPS CHATS 2,648,610 319,038 594 23,598 73,829
+7% +13% +25% +6% +23%
(% change from previous 12 months)
23 Annuities purchased last 12 months ($4.5 million) 142 Total Annuities purchased inception to date ($19.1 million)
7 Questions? State Board of Administration of Florida
Major Mandate Review Fourth Quarter 2019
Aon Hewitt | Retirement and Investment Inv estment advice and consulting services provided by Aon Hewitt Investment Consulting, Inc., an Aon Company. 1
Table of Contents
1. Executive Summary 2. Pension Plan Review 3. Investment Plan Review 4. CAT Fund Review 5. Lawton Chiles Endowment Fund Review 6. Florida PRIME Review 7. Appendix
Aon Hewitt | Retirement and Investment Inv estment advice and consulting services provided by Aon Hewitt Investment Consulting, Inc., an Aon Company. 2 Executive Summary
The major mandates each produced generally strong returns relative to their respective benchmarks over both short- and long-term time periods ending December 31, 2019. The Pension Plan outperformed its Performance Benchmark over the trailing, three-, five-, ten-, and fifteen-year periods. – Over the trailing five-year period, Global Equity is the leading source of value added, followed by Private Equity and Strategic Investments. The FRS Investment Plan outperformed the Total Plan Aggregate Benchmark over the trailing three-, five-, and ten-year periods. The Lawton Chiles Endowment Fund outperformed its benchmark over the trailing three-, five-, and ten-year periods. The CAT Funds’ performance is strong over both short-term and long-term periods, outperforming the benchmark over the trailing three-, five-, and ten-year periods. Florida PRIME has continued to outperform its benchmark over both short- and long-term time periods.
Aon Hewitt | Retirement and Investment Inv estment advice and consulting services provided by Aon Hewitt Investment Consulting, Inc., an Aon Company. 3
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Aon Hewitt | Retirement and Investment Inv estment advice and consulting services provided by Aon Hewitt Investment Consulting, Inc., an Aon Company. 4 Pension Plan: Executive Summary
The Pension Plan assets totaled $169.7 billion as of December 31, 2019 which represents a $7.2 billion increase since last quarter. The Pension Plan, when measured against the Performance Benchmark, outperformed over the trailing three-, five-, ten-, and fifteen-year periods. Relative to the Absolute Nominal Target Rate of Return, the Pension Plan outperformed over the trailing one-, three-, five-, ten-, fifteen-, twenty-five-, and thirty-year periods, and underperformed over the trailing twenty-year time period. The Pension Plan is well-diversified across six broad asset classes, and each asset class is also well-diversified. – Public market asset class investments do not significantly deviate from their broad market-based benchmarks, e.g., sectors, market capitalizations, global regions, credit quality, duration, and security types. – Private market asset classes are well-diversified by vintage year, geography, property type, sectors, investment vehicle/asset type, and investment strategy. – Asset allocation is monitored on a daily basis to ensure that the actual asset allocation of the Pension Plan remains close to the long-term policy targets set forth in the Investment Policy Statement. Aon Hewitt Investment Consulting and SBA staff revisit the plan design annually through informal and formal asset allocation and asset liability reviews. Adequate liquidity exists within the asset allocation to pay the monthly obligations of the Pension Plan consistently and on a timely basis.
Aon Hewitt | Retirement and Investment Inv estment advice and consulting services provided by Aon Hewitt Investment Consulting, Inc., an Aon Company. 5
FRS Pension Plan Change in Market Value Periods Ending12/31/2019
Summary of Cash Flows
Fourth Quarter Fiscal YTD*
Beginning Market Value $162,510,148,064 $163,135,205,913
+/- Net Contributions/(Withdrawals) $(1,720,764,639) $(3,757,283,061)
Investment Earnings $8,933,103,437 $10,344,564,011 = Ending Market Value $169,722,486,862 $169,722,486,862
Net Change $7,212,338,798 $6,587,280,949
*Period July 2019 –December 2019
Aon Hewitt | Retirement and Investment Inv estment advice and consulting services provided by Aon Hewitt Investment Consulting, Inc., an Aon Company. 6 Asset Allocation as of 12/31/2019 Total Fund Assets = $169.7 Billion
Aon Hewitt | Retirement and Investment Inv estment advice and consulting services provided by Aon Hewitt Investment Consulting, Inc., an Aon Company. 7
FRS Pension Plan Investment Results Periods Ending 12/31/2019
Total FRS Pension Plan Performance Benchmark Absolute Nominal Target Rate of Return
20.0 19.1 17.8
15.0
10.2 9.6 10.0 8.8 7.8 8.0 7.2 7.0 6.8 6.1 6.4 6.5 6.5 6.6 6.4 5.5 5.0
1.1 0.0 Quarter 1-Year 3-Year 5-Year 10-Year 15-Year
Aon Hewitt | Retirement and Investment Inv estment advice and consulting services provided by Aon Hewitt Investment Consulting, Inc., an Aon Company. 8 FRS Pension Plan Investment Results Periods Ending 12/31/2019
Long-Term FRS Pension Plan Performance Results vs. SBA's Long-Term Investment Objective
Total FRS Pension Plan Absolute Nominal Target Rate of Return
12.0
10.0 8.5 8.5 8.0 6.8 6.8 7.0 5.9 6.0
Annualized Return (%) Return Annualized 4.0
2.0
0.0 Last 20 Years Last 25 Years Last 30 Years
Aon Hewitt | Retirement and Investment Inv estment advice and consulting services provided by Aon Hewitt Investment Consulting, Inc., an Aon Company. 9
Comparison of Asset Allocation (TUCS Top Ten) As of 12/31/2019
FRS Pension Plan vs. Top Ten Defined Benefit Plans
FRS TOTAL FUND TUCS TOP TEN Cas h Cas h Strategic Investments 2.5% 1.2% 8.3%
Alternatives 19.3%
Private Equity 7.2%
Real Estate 9.2% Real Estate Global Equity** 7.7% 50.0% Fixed Income 18.3% Global Equity* 55.7%
Fixed Income 20.5% *Global Equity Allocation: 26.8% Domestic Equities; 22.6% Foreign Equities; **Global Equity Allocation: 30.8% Domestic Equities; 19.3% Foreign 5.3% Global Equities; 1.0% Global Equity Liquidity Account. Percentages are Equities of the Total FRS Fund.
Note: The TUCS Top Ten Universe includes $1,605.9 billion in total assets. The median fund size w as $120.8 billion and the average fund size w as $160.6 billion. Note: Due to rounding, percentage totals displayed may not sum perfectly.
Aon Hewitt | Retirement and Investment Inv estment advice and consulting services provided by Aon Hewitt Investment Consulting, Inc., an Aon Company. 10 FRS Results Relative to TUCS Top Ten Defined Benefit Plans Periods Ending 12/31/2019
Total FRS (Gross) Top Ten Median Defined Benefit Plan Fund (Gross)
25.0
20.0 18.2 17.7
15.0
10.6 10.4 9.2 9.1 10.0 8.2 8.0 5.6 4.7 5.0
Rate of Return (%) Return of Rate 0.0
-5.0
-10.0
-15.0 Quarter 1-Year 3-Year 5-Year 10-Year
Note: The TUCS Top Ten Universe includes $1,605.9 billion in total assets. The median fund size w as $120.8 billion and the average fund size w as $160.6 billion.
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Top Ten Defined Benefit Plans FRS Universe Comparison (TUCS) Periods Ending 12/31/2019
Total FRS Top Ten Median Defined Benefit Plan Universe
20.0
18.0
16.0
14.0
12.0
10.0
8.0 Rateof Return (%) 6.0
4.0
2.0
0.0
-2.0 1-Year 3-Year 5-Year 10-Year
FRS Percentile Ranking 37 5 25 37
Note: The TUCS Top Ten Universe includes $1,605.9 billion in total assets. The median fund size w as $120.8 billion and the average fund size w as $160.6 billion.
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The FRS Investment Plan outperformed the Total Plan Aggregate Benchmark over the trailing one-, three-, five-, and ten-year periods. This suggests strong relative performance of the underlying fund options in which participants are investing.
The FRS Investment Plan’s total expense ratio is slightly higher, on average, when compared to a defined contribution peer group and is lower than the average corporate and public defined benefit plan, based on year-end 2017 data. The total FRS Investment Plan expense ratio includes investment management fees, as well as administration, communication and education costs. Communication and education costs are not charged to FRS Investment Plan members; however, these and similar costs may be charged to members of plans within the peer group.
Management fees are lower than the median as represented by Morningstar’s mutual fund universe for every investment category.
The FRS Investment Plan offers an appropriate number of fund options that span the risk and return spectrum.
The Investment Policy Statement is revisited periodically to ensure that the structure and guidelines of the FRS Investment Plan are appropriate, taking into consideration the FRS Investment Plan’s goals and objectives.
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Total Investment Plan Returns & Cost
Periods Ending 12/31/2019*
One-Year Three-Year Five-Year Ten-Year FRS Investment Plan 20.5% 9.8% 7.2% 7.7% Total Plan Aggregate Benchmark** 20.0% 9.3% 6.9% 7.4% FRS Investment Plan vs. Total Plan Aggregate 0.5 0.5 0.3 0.3 Benchmark
Periods Ending 12/31/2018*** Five-Year Average Five-Year Net Expense Return**** Value Added Ratio FRS Investment Plan 4.2% 0.1% 0.32%***** Peer Group 4.6 0.1 0.28 FRS Investment Plan vs. Peer Group -0.4 0.0 0.04
*Returns shown are net of fees. **Aggregate benchmark returns are an average of the individual portfolio benchmark returns at their actual weights. ***Source: 2018 CEM Benchmarking Report. Peer group for the Five-Year Average Return and Value Added represents the U.S. Median plan return based on the CEM 2018 Survey that included 134 U.S. defined contribution plans with assets ranging from $89.0 million to $59.0 billion. Peer group forthe Expense Ratio represents a custom peer group for FSBA of 17 DC plans including corporate and public plans with assets between $2.2 -$21.0 billion. ****Returns shown are gross of fees. *****The total FRS Investment Plan expense ratio includes investment management fees, as well as administration, communicatio n and education costs. These latter costs are not charged to FRS Investment Plan members; however, these and similar costs may be charged to members of plans within the peer group utilized above.
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Returns on an absolute basis continue to be modest given the current low interest rate environment.
All CAT Funds are adequately diversified across issuers within the short-term bond market.
The Investment Portfolio Guidelines appropriately constrain the CAT Funds to invest in short-term and high quality bonds to minimize both interest rate and credit risk.
Adequate liquidity exists to address the cash flow obligations of the CAT Funds.
The Investment Portfolio Guidelines are revisited periodically to ensure that the structure and guidelines of the CAT Funds are appropriate, taking into consideration the CAT Funds’ goals and objectives.
Over long-term periods, the relative performance of the CAT Operating Funds has been favorable as they have outperformed the Performance Benchmark over the trailing three-, five- and ten-year time periods.
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CAT Operating Funds Investment Results Periods Ending 12/31/2019
5.00
4.00 3.35 3.43
3.00 2.19 2.08 CAT Operating Funds Composite* 2.00 1.50 1.43 Performance Benchmark** 0.95 0.75 1.00 0.54 0.55
0.00 1 Quarter 1 Year 3 Years 5 Years 10 Years 5.00
4.00
3.00 2.41 2.44 CAT Operating Liquidity Fund 1.77 2.00 1.67 1.25 1.19 BoA Merrill Lynch 3-6 month U.S. 0.83 1.00 0.49 0.50 0.63
0.00 1 Quarter 1 Year 3 Years 5 Years 10 Years 5.00 3.84 3.94 4.00
3.00 CAT Operat ing C laims Payin g F und 2.00 65% Treasury 35% Corporate Bond 1.00 0.56 0.57
0.00 1 Quarter 1 Year
*CAT Operating Funds: Beginning March 2008, the returns for the CAT Operati ng Funds refl ect m arked -to-m arket returns. Pri or to that time, cost-based returns are used. Beginning February 2018, the CAT Operating Funds were split into two different sub funds, the CAT Fund Operating LiquidityFund and the CAT Fund Operating Claims Paying Fund. Performance for each sub fund is shown below. **Performance Benchmark: Beginning February 2018, the CAT Fund Operating Liquidity Fund was benchmarked to the B of A Merrill Lynch 3-6 M onth U.S. T reasury Bill Index, and the CAT Fund Operating Claims Paying Fund benchmark is a blend of 35% of the Bank of America Merrill Lynch 1-3 Year AA U.S. Corporate Bond Index and 65% of Bank of America Merrill Lynch 1-3 Year U.S. Treasury Index. Additional benchmark history can be found in the appendix.
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Established in July 1999, the Lawton Chiles Endowment Fund (LCEF) was created to provide a source of funding for child health and welfare programs, elder programs and research related to tobacco use. – The investment objective is to preserve the real value of the net contributed principal and provide annual cash flows for appropriation. – The Endowment’s investments are diversified across various asset classes including global equity, fixed income, inflation-indexed bonds (TIPS) and cash. The Endowment assets totaled $848.8 million as of December 31, 2019. The Endowment’s return outperformed its Target over the quarter, trailing three-, five-, and ten-year time periods and underperformed its Target over the trailing one-year.
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Asset Allocation as of 12/31/2019 Total LCEF Assets = $848.8 Million
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Total LCEF Performance Benchmark
25.0 21.2 20.1 20.0
15.0
10.2 9.9 10.0 8.6 7.5 7.8 6.8 6.5 6.9 5.0
Annualized Return (%) Return Annualized 0.0
-5.0
-10.0
-15.0 Quarter 1-Year 3-Year 5-Year 10-Year
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Florida PRIME: Executive Summary
The purpose of Florida PRIME is safety, liquidity, and competitive returns with minimal risk for participants. The Investment Policy Statement appropriately constrains Florida PRIME to invest in short-term and high quality bonds to minimize both interest rate and credit risk. Florida PRIME is adequately diversified across issuers within the short-term bond market, and adequate liquidity exists to address the cash flow obligations of Florida PRIME. Performance of Florida PRIME has been strong over short- and long-term time periods, outperforming its performance benchmark during the quarter and over the trailing one-, three-, five-, and ten-year time periods. As of December 31, 2019, the total market value of Florida PRIME was $16.1 billion. Aon Hewitt Investment Consulting, in conjunction with SBA staff, compiles an annual best practices report that includes a full review of the Investment Policy Statement, operational items, and investment structure for Florida PRIME.
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FL PRIME Yield 30-Day Average S&P AAA & AA GIP All 30-Day Net Yield Index**
3.0 2.57 2.5 2.41 2.36 2.21 1.95 2.0 1.66 1.5 1.35 1.09 1.0 0.79 0.59 Rate of Return (%) Return of Rate 0.49 0.45 0.5
0.0 Fourth Quarter* 1-Year 3-Years 5-Years 10-Years Since Jan. 1996
*Returns less than one year are not annualized. **S&P AAA & AA GIP All 30-Day Net Yield Index for all time periods shown.
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Florida PRIME Risk vs. Return 3 Years Ending 12/31/2019
2.50%
2.00% Florida PRIME
1 M LIBOR 90-Day T-Bill S&P US AAA & AA Rated GIP All 30-Day Net 1.50%
1.00% Return Annualized Annualized
0.50%
0.00% 0.00% 0.05% 0.10% 0.15% 0.20% 0.25% 0.30%
Annualized Standard Deviation
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1.60%
1.40% Florida PRIME
1 M LIBOR 1.20%
S&P US AAA & AA Rated GIP All 30-Day Net 90-Day T-Bill 1.00%
0.80%
Return 0.60% Annualized
0.40%
0.20%
0.00% 0.00% 0.05% 0.10% 0.15% 0.20% 0.25% 0.30%
Annualized Standard Deviation
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Return Distribution Periods Ending 12/31/2019
Return Distribution 2.70% 2.50% 95th, 2.35% 2.30% 75th, 2.24% 2.10% 50th, 2.06% 25th, 1.87% 1.90% 95th, 1.82% 75th, 1.73% 1.70% 50th, 1.54% 1.50% 5th, 1.48% 25th, 1.34% 1.30% 95th, 1.20% 75th, 1.13% 1.10% 5th, 0.96% 50th, 0.96%
Rate of Return (%) 0.90% 25th, 0.81% 0.70% 5th, 0.58% 0.50% 0.30% 0.10% -0.10% 1-Year 3-Year 5-Year
FL PRIME S&P US AAA & AA Rated GIP All 30-Day Net 1 mo LIBOR Citigroup 90-day T-Bill
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Standard Deviation Distribution 0.28% 95th, 0.26% 0.26% 75th, 0.25% 50th, 0.24%
0.24% 25th, 0.23% 0.22%
0.20% 95th, 0.19% 5th, 0.19% 75th, 0.18% 0.18% 50th, 0.17% 25th, 0.17% 0.16% 5th, 0.16% 0.14% 0.12% 0.10% 0.08%
Standard Deviation (%) 0.06% 95th, 0.03% 75th, 0.03% 0.04% 50th, 0.03% 25th, 0.02% 0.02% 5th, 0.02% 0.00% -0.02% 1-Year 3-Year 5-Year
FL PRIME S&P US AAA & AA Rated GIP All 30-Day Net 1 mo LIBOR Citigroup 90-day T-Bill
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FRS Investment Plan Costs
Average Mutual Fund Investment Category Investment Plan Fee* Fee**
Large Cap Equity 0.16% 0.79%
Small-Mid Cap Equity 0.58% 0.99%
International Equity 0.31% 0.94%
Diversified Bonds 0.15% 0.53%
Target Date 0.15% 0.60%
Money Market 0.06% 0.39%
*Average fee of multiple products in category as of 12/31/2019. **Source: AHIC’s annual mutual fund expense analysis as of 12/31/2018.
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By Fiscal Year ($ millions) $14,000
$11,890 $12,000 $11,241 $10,825 $9,967 $10,000 $9,035 $9,129 $8,918 $7,879 $8,000 $7,136 $6,733
$6,000 $5,048 $4,365 $4,075 $4,000 $3,688
$2,306 $2,000 $1,426 $706 $333 $0 FY FY FY FY FY FY FY FY FY FY FY FY FY FY FY FY FY FY 02-03 03-04 04-05 05-06 06-07 07-08 08-09 09-10 10-11 11-12 12-13 13-14 14-15 15-16 16-17 17-18 18-19 19-20*
*Period Ending 12/31/2019
Source: Investment Plan Administrator
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Investment Plan Membership
240,000 225,229 220,000 213,213
200,000 190,664 177,218 180,000 169,576 163,456 157,227 160,000 150,721 144,299 136,661 140,000 127,940 116,531 121,522 120,000 98,070 100,000 75,377 80,000 56,034 60,000 38,347 40,000
20,000
0 FY FY FY FY FY FY FY FY FY FY FY FY FY FY FY FY FY 03-04 04-05 05-06 06-07 07-08 08-09 09-10 10-11 11-12 12-13 13-14 14-15 15-16 16-17 17-18 18-19 19-20*
*Period Ending 12/31/2019
Source: Investment Plan Administrator
Aon Hewitt | Retirement and Investment Inv estment advice and consulting services provided by Aon Hewitt Investment Consulting, Inc., an Aon Company. 30 Florida Hurricane Catastrophe Funds Background and Details
The purpose of the Florida Hurricane Catastrophe Fund (FHCF) is to provide a stable, ongoing and timely source of reimbursement to insurers for a portion of their hurricane losses.
The CAT Operating Funds, along with CAT 2016 A Fund and CAT 2013 A Fund are internally managed portfolios.
As of December 31, 2019, the total value of: − The CAT Operating Funds was $13.5 billion − The CAT 2016 A Fund was $0.7 billion − The CAT 2013 A Fund was $1.0 billion
History of the CAT Funds Benchmarks: The CAT Operating Funds were benchmarked to the IBC First Tier through February 2008. From March 2008 to December 2009, it was the Merrill Lynch 1-Month LIBOR. From January 2010 to June 2010, it was a blend of the average of the 3-Month Treasury Bill rate and the iMoneyNet First Tier Institutional Money Market Funds Gross Index. From July 2010 to September 2014, it was a blend of the average of the 3-Month Treasury Bill rate and the iMoneyNet First Tier Institutional Money Market Funds Net Index. Effective October 2014, it is a blend of the average of the Merrill Lynch 1-Yr U.S. Treasury Bill Index and the iMoneyNet First Tier Institutional Money Market Funds Net Index. Beginning February 2018, the CAT Operating Funds were split into two different sub funds, the CAT Fund Operating Liquidity Fund and the CAT Fund Operating Claims Paying Fund. Beginning February 2018, the CAT Fund Operating Liquidity Fund was benchmarked to the B of A Merrill Lynch 3-6 Month U.S. Treasury Bill Index, and the CAT Fund Operating Claims Paying Fund benchmark is a blend of 35% of the Bank of America Merrill Lynch 1-3 Year AA U.S. Corporate Bond Index and 65% of Bank of America Merrill Lynch 1-3 Year U.S. Treasury Index.
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CAT 2013 A and 2016 A Funds Investment Results Periods Ending 12/31/2019
5.00
4.00 2.84 2.84 3.00 CAT Fu nd 2013A 1.94 1.82 2.00 1.36 1.28 Performance Benchmark* 1.00 0.55 0.55
0.00 1 Quarter 1 Year 3 Years 5 Years
5.00
4.00 3.18 3.18 3.00 2.10 1.95 CAT Fu nd 2016A 2.00 Performance Benchmark* 1.00 0.59 0.59
0.00 1 Quarter 1 Year 3 Years
*Perf ormance Benchmark: Beginning February 2018, the CAT 2013 A and 2016 A Funds were benchmarked to themselves.
Aon Hewitt | Retirement and Investment Inv estment advice and consulting services provided by Aon Hewitt Investment Consulting, Inc., an Aon Company. 32 CAT Operating Funds Characteristics Period Ending 12/31/2019
Maturity Analysis 1 to 30 Days 0.48% 31 to 60 Days 1.52 61 to 90 Days 10.45 91 to 120 Days 10.32 121 to 150 Days 9.57 151 to 180 Days 0.22 181 to 270 Days 0.30 271 to 365 Days 7.43 366 to 455 Days 5.75 >= 456 Days 53.96 Total % of Portfolio: 100.00%
Bond Rating Analysis AAA 74.75% AA 21.50 A 3.75 Baa 0.00 Other 0.00 Total % of Portfolio 100.00%
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CAT 2013 A Fund Characteristics Period Ending 12/31/2019
Maturity Analysis 1 to 30 Days 1.75% 31 to 60 Days 3.00 61 to 90 Days 3.39 91 to 120 Days 0.97 121 to 150 Days 8.84 151 to 180 Days 5.19 181 to 270 Days 76.86 271 to 365 Days 0.00 366 to 455 Days 0.00 >= 456 Days 0.00 Total % of Portfolio: 100.00%
Bond Rating Analysis AAA 91.93% AA 6.19 A 1.88 Baa 0.00 Other 0.00 Total % of Portfolio 100.00%
Aon Hewitt | Retirement and Investment Inv estment advice and consulting services provided by Aon Hewitt Investment Consulting, Inc., an Aon Company. 34 CAT 2016 A Fund Characteristics Period Ending 12/31/2019
Maturity Analysis 1 to 30 Days 0.24% 31 to 60 Days 2.64 61 to 90 Days 3.90 91 to 120 Days 0.00 121 to 150 Days 2.06 151 to 180 Days 2.22 181 to 270 Days 4.81 271 to 365 Days 12.68 366 to 455 Days 17.20 >= 456 Days 54.25 Total % of Portfolio: 100.00%
Bond Rating Analysis AAA 55.20% AA 31.35 A 13.45 Baa 0.00 Other 0.00 Total % of Portfolio 100.00%
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Florida PRIME Characteristics Quarter Ending 12/31/2019
Cash Flows as of 12/31/2019 Fourth Quarter Fiscal YTD* Opening Balance $11,887,497,987 13,435,399,194 Participant Deposits $13,261,743,421 $17,402,991,308 Gross Earnings $63,087,078 $140,529,077 Participant Withdrawals ($9,111,881,042) ($14,877,447,522) Fees ($1,044,593) ($2,069,206) Closing Balance (12/31/2019) $16,099,402,852 $16,099,402,852
Change $4,211,904,865 $2,664,003,658 *Period July 2019 – December 2019
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Portfolio Composition
0.2% 5.2% 4.6% 24.4% Bank Instrument-Fixed
Repurchase Agreements
17.8% Corporate Commercial Paper- Fixed Bank Instrument-Floating
Mutual Funds-Money Market
Asset Backed Commercial Paper-Fixed Corporate Notes-Floating 4.9% Corporate CP-Floating
18.8% Asset Backed Commercial 19.5% Paper-Floating 4.7%
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Florida PRIME Characteristics Period Ending 12/31/2019
Effective Maturity Schedule 1-7 Days 53.3% 8 - 30 Days 12.3% 31 - 90 Days 26.4% 91 - 180 Days 7.6% 181+ Days 0.5% Total % of Portfolio: 100.1%
S & P Credit Quality Composition A-1+ 68.4% A-1 31.6% Total % of Portfolio: 100.0%
Aon Hewitt | Retirement and Investment Inv estment advice and consulting services provided by Aon Hewitt Investment Consulting, Inc., an Aon Company. 38 FRS Pension Plan | Fourth Quarter 2019 Quarterly Investment Review Visit the Retirement and Investments Thought Leadership Site (https://retirement-investment-insights.aon.com); sharing our best thinking.
(This page is left blank intentionally) Table of Contents
1 Market Environment 1 2 Total Fund 17 3 Global Equity 27 4 Domestic Equities 29 5 Foreign Equities 33 6 Global Equities 37 7 Fixed Income 39 8 Private Equity 43 9 Real Estate 47 10 Strategic Investments 51 11 Cash 53 12 Appendix 55
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1
Market Highlights
SHORT TERM RETURNS Fourth Quarter 2019 One-Year AS OF 12/31/2019 35.0% 31.5% 30.0% 25.5% 23.4% 25.0% 22.0% 18.4% 20.0% 14.7% 14.3% 11.8% 15.0% 9.9% 9.1% 8.2% 8.7% 10.0% 7.7% 4.4% 2.6% 5.0% 0.2% 1.2% 0.0% -5.0% -4.1% -10.0% S&P 500 Russell 2000 MSCI EAFE MSCI Emerging Bloomberg Bloomberg Bloomberg Bloomberg Bloomberg Source: Russell, MSCI, Bloomberg Barclays, Bloomberg. Markets Barclays U.S. Barclays U.S. Barclays U.S. Barclays U.S. Commodity Index MSCI Indices show net total returns throughout this report. All other indices show gross total returns. Aggregate Long Gov't Long Credit High Yield
LONG TERM ANNUALIZED RETURNS Five-Year Ten-Year AS OF 12/31/2019
15.0% 13.6% 11.7% 11.8%
10.0% 8.2% 8.0% 7.0% 7.6% 5.7% 5.5% 5.6% 6.3% 6.1% 4.2% 5.0% 3.7% 3.0% 3.7%
0.0%
-5.0% -3.9% -4.7% -10.0% S&P 500 Russell 2000 MSCI EAFE MSCI Emerging Bloomberg Bloomberg Bloomberg Bloomberg Bloomberg Markets Barclays U.S. Barclays U.S. Barclays U.S. Barclays U.S. Commodity Index Aggregate Long Gov't Long Credit High Yield Source: Russell, MSCI, Bloomberg Barclays, Bloomberg
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2 Market Highlights
Returns of the Major Capital Markets Period Ending 12/31/2019
1 1 1 Fourth Quarter 1-Year 3-Year 5-Year 10-Year Equity MSCI All Country World IMI 9.05% 26.35% 12.09% 8.34% 8.91% MSCI All Country World 8.95% 26.60% 12.44% 8.41% 8.79% Dow Jones U.S. Total Stock Market 9.04% 30.90% 14.52% 11.18% 13.43% Russell 3000 9.10% 31.02% 14.57% 11.24% 13.42% S&P 500 9.07% 31.49% 15.27% 11.70% 13.56% Russell 2000 9.94% 25.52% 8.59% 8.23% 11.83% MSCI All Country World ex-U.S. IMI 9.20% 21.63% 9.84% 5.71% 5.21% MSCI All Country World ex-U.S. 8.92% 21.51% 9.87% 5.51% 4.97% MSCI EAFE 8.17% 22.01% 9.56% 5.67% 5.50% MSCI EAFE (Local Currency) 5.19% 21.67% 7.66% 6.73% 7.24% MSCI Emerging Markets 11.84% 18.42% 11.57% 5.61% 3.68% Fixed Income Bloomberg Barclays Global Aggregate 0.49% 6.84% 4.27% 2.31% 2.48% Bloomberg Barclays U.S. Aggregate 0.18% 8.72% 4.03% 3.05% 3.75% Bloomberg Barclays U.S. Long Gov't -4.06% 14.75% 6.95% 4.16% 6.97% Bloomberg Barclays U.S. Long Credit 1.18% 23.36% 8.88% 6.31% 7.99% Bloomberg Barclays U.S. Long Gov't/Credit -1.12% 19.59% 8.07% 5.42% 7.59% Bloomberg Barclays U.S. TIPS 0.79% 8.43% 3.32% 2.62% 3.36% Bloomberg Barclays U.S. High Yield 2.61% 14.32% 6.37% 6.13% 7.57% Bloomberg Barclays Global Treasury ex U.S. -0.02% 5.04% 4.40% 1.98% 1.49% JP Morgan EMBI Global (Emerging Markets) 2.09% 14.42% 6.06% 5.88% 6.57% Commodities Bloomberg Commodity Index 4.42% 7.69% -0.94% -3.92% -4.73% Goldman Sachs Commodity Index 8.31% 17.63% 2.35% -4.32% -5.44% Hedge Funds 2 HFRI Fund-Weighted Composite 3.50% 10.38% 4.52% 3.55% 4.04% 2 HFRI Fund of Funds 3.04% 8.34% 3.87% 2.36% 2.83% Real Estate NAREIT U.S. Equity REITS -0.76% 26.00% 8.14% 7.21% 11.94% NCREIF NFI - ODCE 1.52% 5.35% 7.10% 8.97% 11.42% FTSE Global Core Infrastructure Index 3.75% 26.26% 13.50% 8.12% 10.74% Private Equity 3 Burgiss Private iQ Global Private Equity 11.61% 14.89% 11.58% 13.92%
MSCI Indices show net total returns throughout this report. All other indices show gross total returns. 1 Periods are annualized. 2 Latest 5 months of HFR data are estimated by HFR and may change in the future. 3 Burgiss Private iQ Global Private Equity data is as at June 30, 2019
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3
Global Equity Markets
GLOBAL MSCI IMI INDEX RETURNS (USD) Fourth Quarter 2019 One-Year AS OF 12/31/2019 35% 30.4% 30% 27.9% 26.4% 25.0% 25% 23.2% 21.6% 21.5% 19.6% 20% 18.3% 17.6% 15% 11.4% 11.6% 9.0% 9.2% 8.9% 9.0% 10% 7.7% 7.3% 5.6% 5.7% 5%
0% ACWI IMI 45.1% 54.9% 5.0% 7.6% 3.0% 0.2% 13.6% 3.6% 12.0% ACWI ex-U.S. USA IMI UK IMI Japan IMI Canada IMI Israel IMI Europe ex-UK Pacific ex-Japan Emergi ng Source:MSCI IMI IMI IMI Markets IMI The announcement of a “phase one” U.S.-China trade deal, progress on the U.S.-Mexico-Canada agreement (USMCA) and easing Brexit fears led to a resurgence in risk appetite and boosted equity markets. Accommodative monetary policies from major central banks meanwhile continue to provide further support for risk assets. In local currency terms, the MSCI AC World Investable Market Index returned 7.8% in Q4 2019 and the depreciation of the U.S. dollar provided an additional boost to 9.0% in USD terms. Previous laggards in terms of 2019 performance, Emerging Markets (EM) equities, were the strongest performers (11.6%) over the quarter benefiting from the “risk-on” environment and the thawing of trade tensions. With the exception of Indian equities, all other major EM regions delivered double-digit returns. This did, however, come against a backdrop where China recorded the slowest economic growth rate in nearly 30 years as their economy expanded by 6.0% year-on-year in the third quarter. Canadian equities markets returned the least with a still respectable quarterly return of 5.6% in USD-terms. Canadian Prime Minister Justin Trudeau’s Liberal party retained power after winning the general election but fell short of a majority.
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4 Global Equity Markets
MSCI ALL COUNTRY WORLD IMI INDEX MSCI ALL COUNTRY WORLD EX-U.S. IMI INDEX GEOGRAPHIC ALLOCATION AS OF 12/31/2019 GEOGRAPHIC ALLOCATION AS OF 12/31/2019 Pacific ex-Japan 3.6% Israel Canada Japan 0.5% Latin 3.0% 7.6% Latin America Is rael America Europe ex-UK 0.2% 3.1% UK Europe ex-UK 1.4% 30.2% 5.0% 13.6%
Emerging Asia Emerging Asia Markets Markets 8.8% Japan 19.5% 26.6% 12.0% 16.9% Eastern Eastern Europe, Europe, USA Middle Middle 54.9% Eas t & East & Pacific ex-Japan Canada Africa Africa 7.9% 6.7% UK 4.0% 1.8% 11.2% Source: MSCI Source: MSCI
The two exhibits on this slide illustrate the percentage that each country/region represents of the global and international equity markets as measured by the MSCI All Country World IMI Index and the MSCI All Country World ex-U.S. IMI Index, respectively.
Aon Proprietary Investment advice and consulting services provided by Aon Hewitt Investment Consulting, Inc., an Aon Company.
5
U.S. Equity Markets
RUSSELL STYLE RETURNS Fourth Quarter 2019 RUSSELL GICS SECTOR RETURNS Fourth Quarter 2019 AS OF 12/31/2019 One-Year AS OF 12/31/2019 One-Year
50.0% 46.7% 40.0% 36.5% 35.5% 35.0% 31.0% 28.5% 40.0% 30.0% 26.4% 27.1% 32.9% 31.0% 30.7% 28.7% 25.0% 22.4% 30.0% 27.1% 22.1% 25.5% 20.0% 23.8% 20.0% 15.0% 11.3% 11.4% 14.3% 14.9% 9.1% 8.2% 10.0% 8.0% 8.5% 9.1% 9.6% 6.4% 10.0% 7.6% 6.3% 5.7% 7.0% 6.4% 5.0% 4.7% 1.5% 0.0% 0.0% Russell 21.4% 13.9% 14.4% 5.7% 5.1% 3.4% 10.5% 20.4% 5.1% Russell 30.1% 38.1% 15.2% 10.0% 3.2% 3.3% 3000 Te chnology Healthcare Cons. Disc Cons. Energy Materials & Produ cer Financial Utilities 3000 Large Large Medium Medium Small Small Staples Processing Durables Services Value Growth Value Growth Value Growth Source: Russell Indexes Source: Russell Indexes Three major U.S. equity indices (S&P 500, Dow Jones Industrial Average and Nasdaq Composite) touched record highs over the quarter; the truce in the U.S.-China trade war providing a significant tailwind. The Russell 3000 Index rose 9.1% during the fourth quarter and 31.0% over the one-year period. Healthcare (14.9%) and Technology (14.3%) were the best performers over the quarter. The former benefited from the falling popularity of Democratic Presidential candidate Elizabeth Warren who advocated significant healthcare reform which has previously been a headwind for pharmaceuticals. As economic data stabilized over the quarter, more defensive sectors underperformed with Utilities (1.5%) and Consumer Staples (4.7%) the worst performing sectors. Performance was positive across the market capitalization spectrum over the quarter. Small cap stocks outperformed both large and medium cap stocks over the quarter. Growth stocks outperformed their Value counterparts in Q4 2019 and over the last year.
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6 U.S. Fixed Income Markets
BLOOM BERG BARCLAYS AGGREGATE RETURNS BY SECTOR BLOOM BERG BARCLAYS AGGREGATE RETURNS BY AS OF 12/31/2019 MATURITY AS OF 12/31/2019 25.0% 16.0% 14.5% 19.6% 14.0% 20.0% 12.0% 15.0% 10.0% 8.7% 8.3% 9.8% 8.0% 6.8% 6.4% 10.0% 6.3% 7.3% 4.5% 6.0% 4.0% 4.0% 5.0% 0.6% 0.5% 0.5% 2.0% 1.2% 0.7% 0.4% 0.2% 0.0% 0.0% 0.0% -0.3% -1.1% -2.0% -0.8% -5.0% Barclays Agg. 42.8% 26.3% 28.3% 0.5% 2.2% 1-3 Yr. 3-5 Yr. 5-7 Yr. 7-10 Yr. >10 Yr. Bond Govt Corp. MBS ABS CMBS
Source: FactSet Fourth Quarter 2019 One-Year Source:FactSet Fourth Quarter 2019 One-Year Against a backdrop of rising yields, the Bloomberg BLOOM BERG BARCLAYS AGGREGATE RETURNS BY QUALITY AND HIGH YIELD RETURNS AS OF 12/31/2019 Barclays U.S. Aggregate Bond Index rose by 0.2% over 18.0% 16.4% the quarter. Corporate bonds were the best performers, 16.0% 14.3% returning 1.2% while Government bonds underperformed 14.0% 13.0% 12.0% with a return of -0.8%. 9.5% 10.0% Within credit, greater risk appetite led to outperformance 8.0% 6.7% of lower quality corporate bonds. High yield bonds 6.0% 4.0% returned 2.6% with spread narrowing offsetting the impact 1.7% 2.6% of higher underlying government bond yields while AAA- 2.0% 0.7% rated bonds underperformed with a return of -0.2%. 0.0% -2.0% -0.2% 0.0% Short-maturity bonds outperformed intermediate and Aaa Aa A Baa High Yield long-maturity bonds over the quarter. Short-maturity Fourth Quarter 2019 One-Year Source: FactSet bonds returned 0.6% while long-maturity bonds fell by 1.1% in Q4 2019.
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7
U.S. Fixed Income Markets
U.S. TREASURY YIELD CURVE U.S. 10-YEAR TREASURY AND TIPS YIELDS 3.5% 5.0% 10Y TIPS Yield 4.0% 10Y Treasury Yield 3.0% 3.0%
2.5% 2.0%
2.0% 1.0% 12/31/2018 0.0% 1.5% 9/30/2019 12/31/2019 -1.0%
1.0% -2.0% 0 5 10 15 20 25 30 Dec 09 Dec 11 Dec 13 Dec 15 Dec 17 Dec 19 Maturity (Years) Source: U.S. Department of Treasury Source: U.S. Department of Treasury The U.S. nominal yield curve steepened over the quarter with yields falling at the short end of the curve and rising at longer maturities. As a result, the yield curve is no longer inverted. The 10-year U.S. Treasury yield retraced most of the prior quarter’s fall with a 24bps increase over the quarter to 1.92%. The 10-year TIPS yield remained unchanged over the quarter at 0.15%. With real yields broadly unchanged over the quarter, it became evident that yield movements were triggered not by growth expectations (which remain low) but instead by increasing inflation expectations. This follows sustained central bank easing, prospects of debt-financed fiscal stimulus and potential changes to inflation-targeting policies; all of which are supportive for higher inflation. The U.S. Federal Reserve (Fed) cut the interest rate by 25bps to 1.50% from 1.75%. Meanwhile, in the latest "dot plot", the majority of the Federal Open Market Committee believed that interest rates will stay at current levels for at least the next year, with the next 25bps hike not anticipated until 2021.
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8 European Fixed Income Markets
EUROZONE PERIPHERAL BOND SPREADS (10-YEAR SPREADS OVER GERMAN BUNDS) 15%
13% Spain Italy Portugal
11% Greece Ireland
9%
7%
5%
3%
1%
-1% 2013 2014 2015 2016 2017 2018 2019 Source: FactSet German government bund yields rose in line with over developed market government bond yields, rising by 40bps to -0.19% over the quarter. Germany unexpectedly avoided a recession after growing by 0.1% in Q3, buoyed by increased consumer and public sector spending, which mitigated the impact of a weakening manufacturing sector. Italian government bond yields rose by 60bps to 1.42% over the quarter. Greek government bond yields rose by comparatively less than other European government bond yields. An increase in the country’s sovereign credit rating to BB- from B+ lessened the risk of default and led to a relatively modest 9bps increase in government bond yields to 1.43%. Spanish government bond yields rose by 33bps to 0.46% over a quarter in which Pedro Sanchez’s Socialist party won the most seats in the general election, but fell short of a majority. European government bond spreads over 10-year German bunds generally fell across the Euro Area with the exception of Italian government bonds. The European Central Bank (ECB) kept its monetary policy unchanged over the quarter. In what was Christine Lagarde’s first rate-setting meeting as President, she sought to calm fears that the Euro Area could have ultra low rates, growth and inflation for an extended period.
Aon Proprietary Investment advice and consulting services provided by Aon Hewitt Investment Consulting, Inc., an Aon Company.
9
Credit Spreads
One-Year Change Spread (bps) 12/31/2019 09/30/2019 12/31/2018 Quarterly Change (bps) (bps) U.S. Aggregate 39 46 54 -7 -15
Long Gov't 0 1 2 -1 -2
Long Credit 139 167 200 -28 -61
Long Gov't/Credit 79 95 113 -16 -34
MBS 39 46 35 -7 4
CMBS 72 70 86 2 -14
ABS 44 37 53 7 -9
Corporate 93 115 153 -22 -60
High Yield 336 373 526 -37 -190
Global Emerging Markets 287 312 330 -25 -43
Source: FactSet, Bloomberg Barclays Credit spreads over U.S. Treasuries generally narrowed over the quarter. Greater risk appetite saw spreads fall across the board but mostly in non-investment grade areas such as high yield and emerging market debt where greater yields are on offer. High yield bond spreads narrowed significantly by 37bps over the quarter. This was followed by long-duration corporate bond spreads, which narrowed by 28bps. Areas within securitized credit in the U.S. underperformed in comparison. While credit spreads in general narrowed over the quarter, spreads on CMBS and ABS securities widened by 2bps and 7bps, respectively.
Aon Proprietary Investment advice and consulting services provided by Aon Hewitt Investment Consulting, Inc., an Aon Company.
10 Currency
TRADE WEIGHTED U.S. DOLLAR INDEX U.S. DOLLAR RELATIVE TO EUR, GBP AND JPY (1973 = 100) REBASED TO 100 AT 12/31/2013 125 140 Stronger Dollar 120 130 Weaker Dollar 115 110 120 105 110 100 95 100 EUR/USD 90 90 GBP/USD 85 JPY/USD 80 80 Dec 13 Dec 14 Dec 15 Dec 16 Dec 17 Dec 18 Dec 19 Dec 13 Dec 14 Dec 15 Dec 16 Dec 17 Dec 18 Dec 19 Source: Federal Reserve Source: FactSet The upward trend in the U.S. dollar was halted with cyclical supports of higher interest rates and relative economic strength fading to some extent. Returning risk appetite also upended the 'greenback' which had benefited from safe- haven activity. The U.S. dollar slipped by 2.8% on a trade-weighted basis over the quarter with notable underperformance against sterling. The removal of Hard Brexit risks following a sizeable majority gained by the incumbent Conservative Party in the UK general election led sterling significantly higher over the quarter. Sterling appreciated by 7.5% against the U.S. dollar. Economic data releases stabilized in the Euro Area over the quarter but the outlook for the manufacturing sector still appears murky with activity shrinking for the eleventh successive month. Despite these economic headwinds, the euro found support against the U.S. dollar from tighter interest rate differentials, appreciating by 2.9% against the U.S. dollar. The U.S. dollar moderately appreciated against the Japanese yen, which had appreciated during risk-off episodes earlier in the year. The yen weakened by 0.6% against the U.S. dollar over the quarter.
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11
Commodities
COMMODITY RETURNS Fourth Quarter 2019 AS OF 12/31/2019 One-Year -10.0% -5.0% 0.0% 5.0% 10.0% 15.0% 20.0% 4.4% Bloomberg Commodity Index 7.7% 3.8% Ex-Energy 6.0% Energy 5.8% 11.8% -0.2% Industrial Metals 7.0% Prec. Metals 3.7% 7.1% 17.0% Agric. 1.7% 13.9% Softs 4.3% 3.6% Grains -1.1% Livestock 0.1% -6.0% Source: Bloomberg Note: Softs and Grains are part of the wider Agriculture sector Additional supply cuts proposed by OPEC+ as well as a less pessimistic economic outlook helped crude oil prices rebound while the latter also provided firmer footing for commodity prices which saw Bloomberg Commodity Index return 4.4%. The price of Brent crude oil rose by 8.6% to $66/bbl and WTI crude oil spot prices rose by 12.9% to $61/bbl. Higher crude oil prices helped the Energy sector return 5.8%. Industrial Metals was the worst performing sector to post a negative return over the quarter. Remaining headwinds of declines in manufacturing output depressed prices and ultimately led to a return of -0.2%. Agriculture (7.1%) was the best performing sector in Q4 2019. Within the Agriculture sector, Softs rose by 13.9% while Grains rose by 3.6%.
Aon Proprietary Investment advice and consulting services provided by Aon Hewitt Investment Consulting, Inc., an Aon Company.
12 Hedge Fund Markets Overview
HEDGE FUND PERFORMANCE Fourth Quarter 2019 AS OF 12/31/2019 One-Year -2.0% 0.0% 2.0% 4.0% 6.0% 8.0% 10.0% 12.0% 14.0% 16.0% 2.4% Fixed Income/Convertible Arb. 10.4% -0.5% Global Macro 6.2% 5.7% Equity Hedge 13.7% 5.0% Emerging Markets 11.6% 2.9% Event-Driven 7.5% -0.5% Distressed-Restructuring 2.5% 2.0% Relative Value 7.6% 3.5% Fund-Weighted Composite Index 10.4% 3.0% Fund of Funds Composite Index 8.3% Note: Latest 5 months of HFR data are estimated by HFR and may change in the future. Source: HFR Hedge fund performance was generally positive across all strategies in the fourth quarter. HFRI Fund-Weighted Composite Index and the HFRI Fund of Funds Composite Index produced returns of 3.5% and 3.0%, respectively. Over the quarter, Equity Hedge and Emerging Markets strategies were the best performers with returns of 5.7% and 5.0%, respectively, with these strategies benefiting from long equity positions amidst an equity market rally. Conversely, Global Macro and Distressed-Restructuring were the only strategies to generate negative returns of -0.5% each. Trend-following Global Macro strategies experienced a difficult quarter, while their discretionary counterparts performed better.
Aon Proprietary Investment advice and consulting services provided by Aon Hewitt Investment Consulting, Inc., an Aon Company.
13
Private Equity Market Overview – Q3 2019
LTM Global Private Equity-Backed Buyout Deal Volume
$600 Deal Value ($ Billions) 7,000
Number of Deals $500 6,000
5,000
$400 # of Deals 4,000 $300 3,000 $200 Value ($Billions) 2,000
$100 1,000
$0 0 Source: Preqin 1Q11 4Q11 3Q12 2Q13 1Q14 4Q14 3Q15 2Q16 1Q17 4Q17 3Q18 2Q19 Fundraising: In Q3 2019, $174.3 billion was raised by 323 funds, which was an increase of 25.0% on a capital basis but a decrease of 12.9% by number of funds over the prior quarter. Dry powder stood at nearly $2.1 trillion at the end of the quarter, a modest increase compared to the previous quarter.1 Buyout: Global private equity-backed buyout deals totaled $92.0 billion in Q3 2019, which was down 12.6% on a number of deals basis and up 2.5% on a capital basis from 2Q 2019.1 Through the end of Q3 2019, the average purchase price multiple for all U.S. LBOs was 11.5x EBITDA, an increase of 0.9x over year-end 2018 and up from the five-year average (10.2x).2 Large cap purchase price multiples stood at 11.3x, up compared to the full-year 2018 level of 10.6x.2 The weighted average purchase price multiple across all European transaction sizes averaged 11.1x EBITDA for Q3 2019, flat with the 11.1x multiple seen at the end of 2Q 2019. Purchase prices for transactions of €1.0 billion remained at 11.3x at the end of Q3 2019, a drop from the 11.7x seen at year-end 2018. Transactions between €500.0 million and €1.0 billion were down 0.3x from the end of 2018, and stood at 11.0x at the end of the quarter.2 Globally, exit value totaled $78.2 billion from 432 deals during the third quarter, down from the $104.7 billion in exits from 453 deals during 2Q 2019.1 Venture: During the third quarter, 1,304 venture-backed transactions totaling $26.0 billion were completed in the U.S., which was a decrease on a capital and deal basis over the prior quarter’s total of $30.4 billion across 1,555 deals. This was 21.9% higher than the five-year quarterly average of $21.3 billion.3 Total U.S. venture-backed exit activity totaled approximately $35.4 billion across 189 completed transactions in Q3 2019, down significantly on a capital basis from the $141.1 billion across 248 exits in Q2 2019.4 Mezzanine: Nine funds closed on $1.4 billion during the third quarter. This was flat with the prior quarter’s total of $1.4 billion raised by five funds, but represented a decrease of 73.2% from the five-year quarterly average of $5.2 billion. Estimated dry powder was $47.5 billion at the end of Q3 2019, down from the $51.5 billion seen at the end of 2Q 2019.1
Sources: 1 Preqin 2 Standard & Poor’s 3 PwC/CB Insights MoneyTree Report 4 PitchBook/NVCA Venture Monitor 5 Fitch Ratings 6 Thomson Reuters 7 UBS Notes: FY=Fiscal year ended 12/31; YTD=Year to date; LTM=Last 12 months (aka trailing 12 months); PPM=Purchase Price Multiples: Total Purchase Price ÷ EBITDA. Aon Proprietary Investment advice and consulting services provided by Aon Hewitt Investment Consulting, Inc., an Aon Company.
14 Private Equity Market Overview – Q3 2019
U.S. LBO Purchase Price Multiples – All Transactions Sizes
12.0 x 11.5x 10.3x 10.6x 10.6x 9.8x 10.0x 10.0 x 8.5 x 8.8 x 8.7x 8.8x 8.0 x
6.0 x
4.0 x
2.0 x
0.0 x
Se nior Debt/E BITDA Su b Debt /EBITDA Equity/EBITDA Others Source: S&P
Distressed Debt: The LTM U.S. high-yield default rate was 2.6% as of November 2019, which was up from year-end 2018’s LTM rate of 2.4%.5 During the quarter, $3.8 billion was raised by seven funds, lower than both the $15.5 billion raised by 17 funds in 2Q 2019 and the five-year quarterly average of $11.2 billion.1 Dry powder was estimated at $110.7 billion at the end of Q3 2019, which was down slightly from the $119.4 billion seen at the end of 2Q 2019. This remained above the five-year annual average level of $104.1 billion.1 Secondaries: Seven funds raised $14.6 billion during the quarter, up significantly from the $1.7 billion raised by five funds in Q2 2019 and the $4.0 billion raised by eight funds in Q3 2018.1 At the end of Q3 2019, there were an estimated 63 secondary and direct secondary funds in market targeting roughly $65.9 billion.1 The average discount rate for all private equity sectors finished the quarter at 9.4%, higher than the 9.2% discount at the end of Q2 2019.6 Infrastructure: $9.9 billion of capital was raised by 21 funds in Q3 2019 compared to $22.6 billion of capital raised by 29 partnerships in 2Q 2019. At the end of the quarter, dry powder stood at an estimated $203.1 billion, down from Q2 2019’s total of $217.0 billion. Infrastructure managers completed 593 deals with an estimated aggregate deal value of $87.8 billion in Q3 2019 compared to 618 deals totaling $175.8 billion a quarter ago.1 Natural Resources: During Q3 2019, four funds closed on $1.5 billion compared to five funds totaling $5.7 billion in 2Q 2019. Energy and utilities industry managers completed approximately 119 deals totaling an estimated $17.1 billion through Q3 2019, which represents 49.9% of the full year capital deployment in 2018.1
Sources: 1 Preqin 2 Standard & Poor’s 3 PwC/CB Insights MoneyTree Report 4 PitchBook/NVCA Venture Monitor 5 Fitch Ratings 6 Thomson Reuters 7 UBS Notes: FY=Fiscal year ended 12/31; YTD=Year to date; LTM=Last 12 months (aka trailing 12 months); PPM=Purchase Price Multiples: Total Purchase Price ÷ EBITDA. Aon Proprietary Investment advice and consulting services provided by Aon Hewitt Investment Consulting, Inc., an Aon Company.
15
U.S. Commercial Real Estate Markets
PRIVATE VS. PUBLIC REAL ESTATE RETURNS Private (NFI-ODCE CAPITALIZATION RATES BY SECTOR AS OF 12/31/2019 Gross)* 10.0% Public (NAREIT 30.0% 26.0% Gross) 9.0% 25.0% 8.0% 20.0% 7.0% 15.0% 11.4% 11.9% 9.0% 6.0% 7.1% 8.1% 7.2% 10.0% 5.4% 5.0% 1.5% 5.0% 0.0% 4.0% -5.0% -0.8% '08 '09 '10 '11 '12 '13 '14 '15 '16 '17 '18 '19 Q4 2019 1-Year 3-Years 5-Years 10-Years Office Industrial Retail Apartment *Fourth quarter returns are preliminary Sources: RCA, AON HEWITT 9/30/2019 Sources: NCREIF, FactSet
U.S. Core Real Estate returned 1.5%* over the fourth quarter, equating to a 5.4% total gross return year-over-year, including a 4.2% income return. Debt mark to market was flat for the quarter. The industrial sector was once again the best performing sector, while retail continues to perform poorly relative to other major property types. E-commerce continues to be the primary force driving the bifurcation of performance between the industrial and retail sectors. Going forward, income and income growth are expected to be the larger drivers of return, given the current point of the real estate cycle. Global property markets, as measured by the FTSE EPRA/NAREIT Developed Real Estate Index, returned 2.0% (USD) in aggregate during the fourth quarter. REIT market performance was driven by Asia Pacific (6.4% USD), North America (-0.9% USD) and Europe (13.8% USD). The U.S. REIT markets (FTSE NAREIT Equity REITs Index) declined -0.8% in the fourth quarter. The U.S. 10-year treasury bond yield increased 25bps to 1.92%. According to RCA through November 2019, the U.S. property market has experienced price growth of 8.7% year-over-year across major sectors. The industrial sector pricing appreciated 13.6% year-over-year, leading all sectors. The apartment sector was the second strongest, appreciating 9.3% year- over-year. Transaction volume was down -3% over the same period. Return expectations have normalized, with go forward expectations in line with historical norms. During 2019, the market benefited from three rate cuts by the Federal Reserve, and declining interest rates led to a rally across asset classes. According to Preqin, there remains a record amount of dry powder ($338 billion) in closed-end vehicles seeking real estate exposure, which should continue to lend support to valuations and liquidity in the commercial real estate market. Aon prefers investments that offer relatively strong rental income growth, or value-add potential with near-term income generation prospects. It is critical to identify secular driven investment themes in the current environment. Real estate is uniquely positioned in this economic environment, because high quality real estate has the ability to leverage an improving economy, while at the same time high quality income generation offers downside protection.
*Indicates preliminary NFI-ODCE data gross of fees Aon Proprietary Investment advice and consulting services provided by Aon Hewitt Investment Consulting, Inc., an Aon Company.
16 Total Fund
17
As of December 31, 2019 Highlights
Executive Summary x Performance of the Pension Plan, when measured against the Performance Benchmark, has been strong over short- and long-term time periods. x Performance relative to peers is also competitive over short- and long-term time periods. x The Pension Plan is well-diversified across six broad asset classes, and each asset class is also well-diversified. x Public market asset class investments do not significantly deviate from their broad market based benchmarks, e.g., sectors, market capitalizations, global regions, credit quality, duration, and security types. x Private market asset classes are well-diversified by vintage year, geography, property type, sectors, investment vehicle/asset type, or investment strategy. x Asset allocation is monitored on a daily basis to ensure the actual asset allocation of the plan remains close to the long-term policy targets set forth in the Investment Policy Statement. x Aon Hewitt Investment Consulting and SBA staff revisit the plan design annually through informal and formal asset allocation and asset liability reviews. x Adequate liquidity exists within the asset allocation to pay the monthly obligations of the Pension Plan consistently and on a timely basis.
Performance Highlights x The Total Fund underperformed the Performance Benchmark over the quarter and trailing one-year period. The Total Fund outperformed the Performance Benchmark during the trailing three-, five-, and ten-year periods.
Asset Allocation x The Fund assets total $169.7 billion as of December 31, 2019, which represents a $7.2 billion increase since last quarter. x Actual allocations for all asset classes were within their respective policy ranges and in line with the current policy at quarter-end.
18 Total Fund As of December 31, 2019 Total Plan Asset Summary
Change in Market Value From October 1, 2019 to December 31, 2019 $240,000.0
$180,000.0 $162,510.1 $169,722.5
$120,000.0
$60,000.0
Millions ($) $8,933.1 $0.0 ($1,720.8)
($60,000.0)
($120,000.0) Beginning Market Value Net Additions / Withdrawals Investment Earnings Ending Market Value
Summary of Cash Flow
1 Fiscal Quarter YTD* Total Fund Beginning Market Value 162,510,148,064 163,135,205,913 + Additions / Withdrawals -1,720,764,639 -3,757,283,061 + Investment Earnings 8,933,103,437 10,344,564,011 = Ending Market Value 169,722,486,862 169,722,486,862
*Period July 2019 - December 2019
19
Total Fund As of December 31, 2019 Total Plan Performance Summary
Return Summary
27.0
24.0
21.0
19.1
18.0 17.8
15.0 Return 12.0
10.2 9.6 9.0 8.8 7.8 8.0 7.2 6.4 6.4 6.5 6.5 6.6 6.1 6.4 6.0 5.5
3.0 2.3
1.1
0.0 1 Fiscal 1 3 5 10 Quarter YTD Year Years Years Years Total Fund Performance Benchmark Absolute Nominal Target Rate of Return
20 As of December 31, 2019 Asset Allocation & Performance
Allocation Performance(%) Market 1 Fiscal 1 3 5 10 Value % Policy(%) Quarter YTD Year Years Years Years ($) Total Fund 169,722,486,862 100.0 100.0 5.5 (27) 6.4 (15) 17.8 (29) 10.2 (10) 7.8 (7) 8.8 (10) Performance Benchmark 6.1 (9) 6.4 (15) 19.1 (16) 9.6 (28) 7.2 (31) 8.0 (43) Absolute Nominal Target Rate of Return 1.1 (97) 2.3 (97) 6.4 (98) 6.5 (88) 6.5 (62) 6.6 (86) All Public Plans > $1B-Total Fund Median 4.9 5.5 16.8 8.9 6.7 7.9 Global Equity* 94,614,452,716 55.7 54.7 9.2 9.1 27.0 12.8 8.9 9.9 Asset Class Target 9.1 8.9 26.4 12.1 8.4 9.0 Domestic Equities 45,485,032,380 26.8 9.0 (34) 10.2 (18) 30.4 (35) 14.5 (24) 11.0 (21) 13.4 (18) Asset Class Target 9.1 (29) 10.4 (17) 31.0 (24) 14.6 (21) 11.2 (20) 13.4 (18) All Public Plans > $1B-US Equity Segment Median 8.6 9.3 29.8 13.3 10.2 12.7 Foreign Equities 38,388,401,216 22.6 9.8 (40) 8.0 (43) 23.1 (50) 10.9 (35) 6.5 (39) 6.4 (19) Asset Class Target 9.2 (63) 7.4 (67) 21.7 (75) 9.8 (76) 5.7 (72) 5.3 (84) All Public Plans > $1B-Intl. Equity Segment Median 9.6 7.9 23.1 10.6 6.3 5.9 Global Equities 9,050,124,294 5.3 7.7 8.3 26.3 12.7 8.8 9.3 Benchmark 8.6 9.1 27.6 12.6 8.7 9.3 Fixed Income 31,048,670,321 18.3 19.2 0.5 (48) 1.8 (86) 6.7 (88) 3.4 (85) 2.7 (85) 3.9 (79) Asset Class Target 0.5 (48) 1.9 (80) 6.7 (88) 3.3 (86) 2.6 (86) 3.3 (86) All Public Plans > $1B-US Fixed Income Segment Median 0.5 2.4 9.0 4.2 3.4 4.6 Private Equity 12,268,563,373 7.2 7.3 2.7 7.5 14.0 17.1 14.7 14.6 Asset Class Target 11.0 9.6 29.4 15.1 11.4 14.1 Real Estate 15,665,634,395 9.2 9.4 1.3 (67) 3.2 (58) 7.3 (41) 7.5 (60) 8.8 (59) 10.8 (24) Asset Class Target 1.2 (73) 2.4 (71) 6.5 (49) 6.8 (67) 8.3 (65) 10.1 (36) All Public Plans > $1B-Real Estate Segment Median 1.7 3.3 6.5 8.0 9.1 9.7 Strategic Investments 14,161,181,180 8.3 8.4 1.6 3.2 6.2 7.0 6.1 8.5 Short-Term Target 2.1 3.4 10.0 6.1 4.9 5.9 Cash 1,963,984,877 1.2 1.0 0.5 1.0 2.3 1.7 1.2 0.7 Bank of America Merrill Lynch 3-Month US Treasury Index 0.5 1.02.31.71.10.6
Benchmark and universe descriptions can be found in the Appendix. * Global Equity became an asset class in July 2010. The historical return series prior to July 2010 was derived from the underlying Domestic Equities, Foreign Equities, and Global Equities components.
21
As of December 31, 2019 Plan Sponsor Peer Group Analysis
All Public Plans > $1B-Total Fund 32.0
26.0
20.0
14.0
8.0
Return 2.0
-4.0
-10.0
-16.0
-22.0 1 Fiscal 1 3 5 10 2018 2017 2016 Quarter YTD Year Years Years Years Total Fund 5.5 (27) 6.4 (15) 17.8 (29) 10.2 (10) 7.8 (7) 8.8 (10) -3.0 (40) 17.2 (8) 7.1 (63) Performance Benchmark 6.1 (9) 6.4 (15) 19.1 (16) 9.6 (28) 7.2 (31) 8.0 (43) -5.2 (80) 16.5 (25) 7.1 (65)
5th Percentile 6.2 6.8 20.6 10.6 7.9 9.1 0.5 17.7 9.2 1st Quartile 5.6 6.0 18.1 9.6 7.2 8.4 -1.9 16.4 8.1 Median 4.9 5.5 16.8 8.9 6.7 7.9 -3.5 15.6 7.5 3rd Quartile 4.0 5.0 15.2 8.2 6.2 7.2 -4.6 14.2 6.6 95th Percentile 2.8 3.4 12.1 5.2 3.6 5.1 -6.7 10.3 3.9
Population 148 148 147 145 144 136 127 101 104 Parentheses contain percentile rankings.
22 Total Fund As of December 31, 2019 Universe Asset Allocation Comparison
Total Fund BNY Mellon Public Funds > $1B Net Universe
Cash Cash Strategic Investments 1.7% 8.3% 1.2%
Alternatives 21.1%
Private Equity 7.2%
Global Equity** 48.2%
Real Estate Real Estate 9.2% 7.1%
Fixed Income 18.3% Global Equity* 55.7%
Fixed Income 21.8%
*Global Equity Allocation: 26.8% Domestic Equities; **Global Equity Allocation: 28.2% Domestic Equities; 22.6% Foreign Equities; 5.3% Global Equities; 20.0% Foreign Equities. 1.0% Global Equity Liquidity Account. Percentages are of the Total FRS Fund.
23
Total Fund As of December 31, 2019 Attribution
Global Equity 39 Global Equity 36
Fixed Income 1 Fixed Income 2
Real Estate 8 Real Estate 2
-108 Private Equity Private Equity 20
-28 Strategic Investments Strategic Investments 9
-3 Cash AA* -2 Cash AA*
-41 TAA -3 TAA
Other** 0 Other** 0
-132 Total Fund Total Fund 64
-150 -100 -50 0 50 100 150 -150 -100 -50 0 50 100 150 Basis Points Basis Points
1-Year Ending 12/31/2019 5-Year Ending 12/31/2019
*Cash AA includes Cash and Central Custody, Securities Lending Account income from 12/2009 to 3/2013 and unrealized gains and losses on securities lending collateral beginning June 2013, TF STIPFRS NAV Adjustment Account, and the Cash Expense Account. **Other includes legacy accounts and unexplained differences due to methodology.
24 Total Fund As of December 31, 2019 Asset Allocation Compliance
Market Current Target Minimum Maximum Value Allocation Allocation Allocation Allocation ($) (%) (%) (%) (%) Total Fund 169,722,486,862 100.0 100.0 Global Equity 94,614,452,716 55.7 54.7 45.0 70.0 Fixed Income 31,048,670,321 18.3 19.2 10.0 26.0 Private Equity 12,268,563,373 7.2 7.3 2.0 9.0 Real Estate 15,665,634,395 9.2 9.4 4.0 16.0 Strategic Investments 14,161,181,180 8.3 8.4 0.0 16.0 Cash 1,963,984,877 1.2 1.0 0.3 5.0
54.7% Global Equity $94,614,452,716 55.7% 1.1%
19.2% Fixed Income $31,048,670,321 18.3% -0.9 %
7.3% Private Equity $12,268,563,373 7.2% -0.1 %
9.4% Real Estate $15,665,634,395 9.2% -0.2 %
8.4% Strategic Investments $14,161,181,180 8.3% -0.1 %
1.0% Cash $1,963,984,877 1.2% 0.2%
-30.0 % -15.0 % 0.0% 15.0% 30.0% 45.0% 60.0% 75.0% 90.0%
Target Allocation Actual Allocation Allocation Differences
25
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26 Global Equity
27
Global Equity* As of December 31, 2019 Global Equity* Portfolio Overview
Current Allocation December 31, 2019 : $94,614M
GE Liquidity 1.5% Global Equity Currency Program 0.3% Global Equities 9.6%
Domestic Equities 48.1%
Foreign Equities 40.6%
Return Summary 40.0
30.0 27.0 26.4
20.0 Return
12.8 12.1 9.9 10.0 9.2 9.1 9.1 8.9 8.9 8.4 9.0
0.0 1 Fiscal 1 3 5 10 Quarter YTD Year Years Years Years Global Equity Asset Class Target
* Global Equity became an asset class in July 2010. The historical return series prior to July 2010 was derived from the underlying Domestic Equities, Foreign Equities, and Global Equities components.
28 Domestic Equities
29
Domestic Equities As of December 31, 2019 Domestic Equities Portfolio Overview
Current Allocation December 31, 2019 : $45,485M
Internal Active 0.5% External Active 14.7%
Internal Passive 84.8%
Return Summary 45.0
30.4 31.0 30.0 Return
15.0 14.5 14.6 13.4 13.4 10.4 11.0 11.2 9.0 9.1 10.2
0.0 1 Fiscal 1 3 5 10 Quarter YTD Year Years Years Years Domestic Equities Asset Class Target
30 As of December 31, 2019 Plan Sponsor Peer Group Analysis
All Public Plans > $1B-US Equity Segment 50.0
40.0
30.0
20.0
10.0 Return
0.0
-10.0
-20.0
-30.0 1 Fiscal 1 3 5 10 2018 2017 2016 Quarter YTD Year Years Years Years Domestic Equities 9.0 (34) 10.2 (18) 30.4 (35) 14.5 (24) 11.0 (21) 13.4 (18) -5.2 (22) 21.2 (21) 11.9 (64) Asset Class Target 9.1 (29) 10.4 (17) 31.0 (24) 14.6 (21) 11.2 (20) 13.4 (18) -5.2 (25) 21.1 (25) 12.7 (46)
5th Percentile 10.5 11.1 32.2 15.2 12.2 15.4 -3.4 23.2 16.0 1st Quartile 9.2 9.9 30.9 14.4 10.8 13.2 -5.3 21.1 13.6 Median 8.6 9.3 29.8 13.3 10.2 12.7 -6.1 19.9 12.6 3rd Quartile 8.0 8.2 27.3 12.5 9.1 12.1 -7.1 18.3 11.3 95th Percentile 6.7 7.0 23.8 10.4 7.6 10.7 -9.4 16.4 8.0
Population 56 56 54 51 49 34 54 59 60 Parentheses contain percentile rankings.
31
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32 Foreign Equities
33
Foreign Equities As of December 31, 2019 Foreign Equities Portfolio Overview
Current Allocation December 31, 2019 : $38,388M
China A Shares 0.6% Developed Passive 8.9% Frontier Active 0.9%
Emerging Active 26.1%
Developed Active 63.6%
Return Summary 40.0
30.0
23.1 21.7 20.0 Return
10.9 9.8 9.2 9.8 10.0 8.0 7.4 6.5 6.4 5.7 5.3
0.0 1 Fiscal 1 3 5 10 Quarter YTD Year Years Years Years Foreign Equities Asset Class Target
34 As of December 31, 2019 Plan Sponsor Peer Group Analysis
All Public Plans > $1B-Intl. Equity Segment 50.0
35.0
20.0
5.0 Return
-10.0
-25.0
-40.0 1 Fiscal 1 3 5 10 2018 2017 2016 Quarter YTD Year Years Years Years Foreign Equities 9.8 (40) 8.0 (43) 23.1 (50) 10.9 (35) 6.5 (39) 6.4 (19) -14.9 (72) 30.2 (19) 4.1 (37) Asset Class Target 9.2 (63) 7.4 (67) 21.7 (75) 9.8 (76) 5.7 (72) 5.3 (84) -14.8 (71) 27.9 (62) 4.3 (33)
5th Percentile 10.8 9.5 27.2 12.8 7.4 7.0 -11.3 32.7 8.0 1st Quartile 10.2 8.3 24.9 11.4 6.7 6.4 -13.5 29.8 4.7 Median 9.6 7.9 23.1 10.6 6.3 5.9 -14.0 28.6 3.4 3rd Quartile 8.8 7.2 21.6 9.9 5.7 5.5 -15.0 27.1 2.5 95th Percentile 7.5 6.3 19.4 9.2 5.1 4.4 -15.9 24.3 -0.9
Population 55 54 53 53 50 33 55 60 61 Parentheses contain percentile rankings.
35
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36 Global Equities
37
Global Equities As of December 31, 2019 Global Equities Performance Summary
Return Summary
44.0
40.0
36.0
32.0
28.0 27.6 26.3
24.0
Return 20.0
16.0
12.7 12.6 12.0
9.1 9.3 9.3 8.6 8.3 8.8 8.7 8.0 7.7
4.0
0.0 1 Fiscal 1 3 5 10 Quarter YTD Year Years Years Years Global Equities Benchmark
38 Fixed Income
39
Fixed Income As of December 31, 2019 Fixed Income Portfolio Overview
Current Allocation December 31, 2019 : $31,049M
Other 0.0% Fixed Income Liquidity 4.3% Active Internal 21.8%
Passive Internal 38.8%
Active External 35.1%
Return Summary 12.0
9.0
6.7 6.7 6.0 Return 3.9 3.4 3.3 3.3 3.0 2.7 2.6 1.8 1.9 0.5 0.5 0.0 1 Fiscal 1 3 5 10 Quarter YTD Year Years Years Years Fixed Income Asset Class Target
40 As of December 31, 2019 Plan Sponsor Peer Group Analysis
All Public Plans > $1B-US Fixed Income Segment 20.0
16.0
12.0
8.0
4.0 Return
0.0
-4.0
-8.0
-12.0 1 Fiscal 1 3 5 10 2018 2017 2016 Quarter YTD Year Years Years Years Fixed Income 0.5 (48) 1.8 (86) 6.7 (88) 3.4 (85) 2.7 (85) 3.9 (79) 1.0 (9) 2.4 (93) 2.3 (89) Asset Class Target 0.5 (48) 1.9 (80) 6.7 (88) 3.3 (86) 2.6 (86) 3.3 (86) 0.9 (9) 2.3 (94) 2.0 (93)
5th Percentile 1.2 3.1 11.2 5.5 4.9 6.5 1.7 7.4 8.3 1st Quartile 0.7 2.7 10.0 4.7 4.0 5.1 0.0 5.5 6.2 Median 0.5 2.4 9.0 4.2 3.4 4.6 -0.5 4.6 4.6 3rd Quartile 0.2 2.1 7.8 3.6 2.9 3.9 -1.2 3.6 3.5 95th Percentile -1.0 1.3 5.8 1.8 1.0 1.6 -4.0 2.1 1.0
Population 56 56 55 53 52 35 57 62 64 Parentheses contain percentile rankings.
41
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42 Private Equity
43
Private Equity As of December 31, 2019 Overview
FRS Private Equity by Market Value* Preqin Private Equity Strategies Other*** by Market Value** 10.7%
LBO Other**** 43.3% 44.1% Venture Capital 23.1% LBO 66.2%
Venture Capital 12.6%
*Allocation data is as of December 31, 2019. **Allocation data is as of June 30, 2019, from the Preqin database. ***Other for the FRS Private Equity consists of Growth Capital, Secondary, PE Cash, and PE Transition. ****Other for the Preqin data consists of Distressed PE, Growth, Mezzanine, and other Private Equity/Special Situations. Preqin universe is comprised of 10,000 private equity funds representing $4.8 trillion.
44 Private Equity Time-Weighted Investment Results
Private Equity Return Summary as of December 31, 2019 45.0
30.0 29.4 17.1 14.0 15.1 14.7 14.6 14.1 Return 15.0 11.4
0.0 1 3 5 10 Year Years Years Years
Private Equity Asset Class Target
Private Equity Legacy Return Summary as of December 31, 2019 60.0 40.0 29.4 20.0 15.1 11.4 14.1 0.0 Return -5.1 -20.0 -6.4 -12.1 -9.1 -40.0 1 3 5 10 Year Years Years Years
Private Equity Legacy Asset Class Target
Private Equity Post Asset Class Return Summary as of December 31, 2019 45.0
30.0 29.4 17.2 14.1 15.1 14.8 15.8 14.1 Return 15.0 11.4
0.0 1 3 5 10 Year Years Years Years
Private Equity Post Asset Class Asset Class Target
45
Private Equity Dollar-Weighted Investment Results As of December 31, 2019
Since Inception
25.0 20.0 13.7 15.0 9.7 10.9 10.0 11.9 10.0 4.4 5.0 0.0 -5.0
Rate of Return (%) Private Equity Legacy Portfolio* Post-AC Portfolio**
Private Equity Target
As of December 31, 2019
Since Inception 25.0 20.0 13.2 13.4 13.7 12.6 15.0 9.7 10.0 4.4 5.0 0.0 -5.0
Rate of Return (%) Private Equity Legacy Portfolio* Post-AC Portfolio**
Private Equity Secondary Target***
*The Inception Date for the Legacy Portfolio is January 1989. **The Inception Date for the Post-AC Portfolio is September 2000. ***The Secondary Target is a blend of the Cambridge Associates Private Equity Index and the Cambridge Associates Venture Capital Index based on actual ABAL weights. Secondary Target data is on a quarterly lag.
46 Real Estate
47
Real Estate As of September 30, 2019 Overview
FRS* NFI-ODCE Index*
Other** Other*** 12.8% 4.5% Apartment Apartment 24.4% 25.3%
Office 33.8%
Office 32.4% Industrial 15.4% Industrial 19.3%
Retail Retail 17.1% 15.1%
*Property Allocation data is as of September 30, 2019. The FRS chart includes only the FRS private real estate assets. Property type information for the REIT portfolios is not included. **Other for the FRS consists of Hotel, Land, Preferred Equity, Agriculture, Self-Storage and Senior Housing. ***Other for the NFI-ODCE Index consists of Hotel, Senior Living, Healthcare, Mixed Use, Single Family Residential, Parking, Timber/Agriculture, Land and Infrastructure.
48 Real Estate As of December 31, 2019 Real Estate Portfolio Overview
Current Allocation December 31, 2019 : $15,666M
REITs 11.0% Externally Managed Joint Ventures 0.0%
Pooled Funds 26.0%
Principal Investments 63.0%
Return Summary 16.0
12.0 10.8 10.1 8.8 8.3 8.0 7.3 7.5 6.8
Return 6.5
4.0 3.2 2.4 1.3 1.2 0.0 1 Fiscal 1 3 5 10 Quarter YTD Year Years Years Years Real Estate Asset Class Target
49
Real Estate
Principal Investments Return Summary as of December 31, 2019 16.0 12.0 10.2 9.8 8.3 8.3 8.0 6.4 6.3
Return 4.8 4.6 4.0 0.0 1 3 5 10 Year Years Years Years
Principal Investments NCREIF NPI Index
Pooled Funds Return Summary as of December 31, 2019 20.0 15.0 11.9 10.4 9.9 10.0 9.2 8.4 7.6 6.3 Return 5.0 4.6 0.0 1 3 5 10 Year Years Years Years
Pooled Funds NFI-ODCE Index Net of Fees
REITs Return Summary as of December 31, 2019 40.0 30.0 24.0 21.9 20.0
Return 10.0 8.3 10.4 9.7 10.0 7.0 5.6 0.0 1 3 5 10 Year Years Years Years
REITs FTSE EPRA/NAREIT Developed Index
50 Strategic Investments
51
Strategic Investments As of December 31, 2019 Strategic Investments Portfolio Overview
Current Allocation December 31, 2019 : $14,161M
SI Cash AA 0.0%
SI Diversifying Strategies 25.9% SI Debt 24.0%
SI Flexible Mandates 10.0% SI Equity 19.2%
SI Real Assets 21.0%
Return Summary 16.0
12.0 10.0 8.5 8.0 7.0 Return 6.2 6.1 6.1 5.9 4.9
4.0 3.2 3.4 2.1 1.6
0.0 1 Fiscal 1 3 5 10 Quarter YTD Year Years Years Years Strategic Investments Short-Term Target
52 Cash
53
Cash As of December 31, 2019 Cash Performance Summary
Return Summary
3.3
3.0
2.7
2.4 2.3 2.3
2.1
1.8 1.7 1.7
Return 1.5
1.2 1.2 1.1 1.0 1.0
0.9 0.7
0.6 0.6 0.5 0.5
0.3
0.0 1 Fiscal 1 3 5 10 Quarter YTD Year Years Years Years Cash Bank of America Merrill Lynch 3-Month US Treasury Index
54 Appendix
55
As of December 31, 2019 Appendix
Total FRS Assets Performance Benchmark- A combination of the Global Equity Target, the Barclays Capital U.S. Intermediate Aggregate Index, the Private Equity Target Index, the Real Estate Investments Target Index, the Strategic Investments Target Benchmark, and the Bank of America Merrill Lynch 3-Month US Treasury Index. The short-term target policy allocations to the Strategic Investments, Real Estate and Private Equity asset classes are floating and based on the actual average monthly balance of the Global Equity asset class. Please refer to section VII. Performance Measurement in the FRS Defined Benefit Plan Investment Policy Statement for more details on the calculation of the Performance Benchmark. Prior to October 1, 2013, the Performance benchmark was a combination of the Global Equity Target, the Barclays Aggregate Bond Index, the Private Equity Target Index, the Real Estate Investments Target Index, the Strategic Investments Target Benchmark, and the iMoneyNet First Tier Institutional Money Market Funds Net Index. The short-term target policy allocations to the Strategic Investments, Real Estate and Private Equity asset classes are floating and based on the actual average monthly balance of the Global Equity asset class. Prior to July 2010, the Performance Benchmark was a combination of the Russell 3000 Index, the Foreign Equity Target Index, the Strategic Investments Target Benchmark, the Barclays Aggregate Bond Index, the Real Estate Investments Target Index, the Private Equity Target Index, the Barclays U.S. High Yield Ba/B 2% Issuer Capped Index, and the iMoneyNet First Tier Institutional Money Market Funds Gross Index. During this time, the short-term target policy allocations to Strategic Investments, Real Estate and Private Equity asset classes were floating and based on the actual average monthly balance of the Strategic Investments, Real Estate and Private Equity asset classes. The target weights shown for Real Estate and Private Equity were the allocations that the asset classes were centered around. The actual target weight floated around this target month to month based on changes in asset values.
Total Global Equity Performance Benchmark- A custom version of the MSCI All Country World Investable Market Index, adjusted to exclude companies divested under the provisions of the Protecting Florida's Investments Act (PFIA). Prior to July 2010, the asset class benchmark is a weighted average of the underlying Domestic Equities, Foreign Equities and Global Equities historical benchmarks.
Total Domestic Equities Performance Benchmark- The Russell 3000 Index. Prior to July 1, 2002, the benchmark was the Wilshire 2500 Stock Index. Prior to January 1, 2001, the benchmark was the Wilshire 2500 Stock Index ex-Tobacco. Prior to May 1, 1997, the benchmark was the Wilshire 2500 Stock Index. Prior to September 1, 1994, the benchmark was the S&P 500 Stock Index. Total Foreign Equities Performance Benchmark- A custom version of the MSCI ACWI ex-U.S. Investable Market Index adjusted to exclude companies divested under the PFIA. Prior to April 1, 2008, it was the MSCI All Country World Index ex-U.S. Investable Market Index. Prior to September 24, 2007, the target was the MSCI All Country World ex-U.S. Free Index. Prior to November 1, 1999, the benchmark was 85% MSCI Europe, Australasia and Far East (EAFE) Foreign Stock Index and 15% IFCI Emerging Markets Index with a half weight in Malaysia. Prior to March 31, 1995, the benchmark was the EAFE Index.
Total Global Equities Performance Benchmark- Aggregated based on each underlying manager's individual benchmark. The calculation accounts for the actual weight and the benchmark return. The benchmarks used for the underlying managers include both the MSCI FSB All Country World ex-Sudan ex-Iran Net Index and MSCI FSB All Country World ex-Sudan ex-Iran Net Investable Market Index (IMI).
56 As of December 31, 2019 Appendix
Total Fixed Income Performance Benchmark- The Barclays Capital U.S. Intermediate Aggregate Index. Prior to October 1, 2013, it was the Barclays U.S. Aggregate Bond Index. Prior to June 1, 2007, it was the Fixed Income Management Aggregate (FIMA). Prior to July 1, 1999, the benchmark was the Florida High Yield Extended Duration Index. Prior to July 31, 1997, the benchmark was the Florida Extended Duration Index. Prior to July 1, 1989, the Salomon Brothers Broad Investment- Grade Bond Index was the benchmark. For calendar year 1985, the performance benchmark was 70% Shearson Lehman Extended Duration and 30% Salomon Brothers Mortgage Index.
Total Private Equity Performance Benchmark- The MSCI All Country World Investable Market Index (ACWI IMI), adjusted to reflect the provisions of the Protecting Florida's Investments Act, plus a fixed premium return of 300 basis points per annum. Prior to July 1, 2014, the benchmark was the domestic equities target index return (Russell 3000 Index) plus a fixed premium return of 300 basis points per annum. Prior to July 1, 2010, it was the domestic equities target index return plus a fixed premium return of 450 basis points per annum. Prior to November 1, 1999, Private Equities was part of the Domestic Equities asset class and its benchmark was the domestic equities target index return plus 750 basis points.
Total Real Estate Performance Benchmark- The core portion of the asset class is benchmarked to an average of the National Council of Real Estate Investment Fiduciaries (NCREIF) Fund Index- Open-ended Diversified Core Equity, net of fees, weighted at 76.5%, and the non-core portion of the asset class is benchmarked to an average of the National Council of Real Estate Investment Fiduciaries (NCREIF) Fund Index- Open-ended Diversified Core Equity, net of fees, weighted at 13.5%, plus a fixed return premium of 150 basis points per annum, and the FTSE EPRA/NAREIT Developed Index, in dollar terms, net of withholding taxes on non-resident institutional investors, weighted at 10%. Prior to July 1, 2014, the benchmark was a combination of 90% NCREIF ODCE Index, net of fees, and 10% FTSE EPRA/NAREIT Developed Index, net of fees. Prior to July 1, 2010, it was a combination of 90% NCREIF ODCE Index, gross of fees, and 10% Dow Jones U.S. Select RESI. Prior to June 1, 2007, it was the Consumer Price Index plus 450 basis points annually. Prior to July 1, 2003, the benchmark was the Dow Jones U.S. Select Real Estate Securities Index Un-Levered. Prior to November 1, 1999, the benchmark was the Russell-NCREIF Property Index.
Total Strategic Investments Performance Benchmark- Long-term, 4.0% plus the contemporaneous rate of inflation or CPI. Short-term, a weighted aggregation of individual portfolio level benchmarks.
Total Cash Performance Benchmark- Bank of America Merrill Lynch 3-Month US Treasury Index. Prior to July 1, 2018 it was the iMoneyNet First Tier Institutional Money Market Funds Net Index. Prior to July 1, 2010, it was the iMoneyNet First Tier Institutional Money Market Funds Gross Index. Prior to June 1, 2007, it was the return of the Merrill Lynch 90-Day (Auction Average) Treasury Bill Yield Index.
57
As of December 31, 2019 Appendix
Description of Benchmarks
Bank of America Merrill Lynch 3-Month US Treasury Index- Consists of U.S. Treasury Bills maturing in 90 days.
Barclays Capital U.S. Intermediate Aggregate Bond Index- A market value-weighted index consisting of U.S. Treasury securities, corporate bonds and mortgage-related and asset-backed securities with one to ten years to maturity and an outstanding par value of $250 million or greater.
Consumer Price Index (CPI)- The CPI, an index consisting of a fixed basket of goods bought by the typical consumer and used to measure consumer inflation.
FTSE EPRA/NAREIT Developed Index- An index designed to represent general trends in eligible real estate equities worldwide. Relevant real estate activities are defined as the ownership, disposure and development of income-producing real estate. This index covers the four primary core asset classes (Industrial, Retail, Office, and Apartment).
MSCI All Country World Investable Market Index- A free float-adjusted market capitalization-weighted index that is designed to measure the equity market performance of developed and emerging markets. This investable market index contains constituents from the large, mid, and small cap size segments and targets a coverage range around 99% of free-float adjusted market capitalization.
NCREIF ODCE Property Index- The NCREIF ODCE is a capitalization-weighted, gross of fee, time-weighted return index. The index is a summation of open- end funds, which NCREIF defines as infinite-life vehicles consisting of multiple investors who have the ability to enter or exit the fund on a periodic basis, subject to contribution and/or redemption requests.
Russell 3000 Index- A capitalization-weighted stock index consisting of the 3,000 largest publicly traded U.S. stocks by capitalization. This represents most publicly traded, liquid U.S. stocks.
58 As of December 31, 2019 Appendix
Description of Universes
Total Fund- A universe comprised of 157 total fund portfolio returns, net of fees, of public defined benefit plans calculated and provided by BNY Mellon Performance & Risk Analytics and Investment Metrics. Aggregate assets in the universe comprised $3.0 trillion as of quarter-end and the average market value was $29.7 billion.
Domestic Equity- A universe comprised of 54 total domestic equity portfolio returns, net of fees, of public defined benefit plans calculated and provided by BNY Mellon Performance & Risk Analytics. Aggregate assets in the universe comprised $1.3 trillion as of quarter-end and the average market value was $24.2 billion.
Foreign Equity- A universe comprised of 54 total international equity portfolio returns, net of fees, of public defined benefit plans calculated and provided by BNY Mellon Performance & Risk Analytics. Aggregate assets in the universe comprised $1.2 trillion as of quarter-end and the average market value was $22.7 billion.
Fixed Income- A universe comprised of 55 total fixed income portfolio returns, net of fees, of public defined benefit plans calculated and provided by BNY Mellon Performance & Risk Analytics. Aggregate assets in the universe comprised $1.2 trillion as of quarter-end and the average market value was $22.3 billion.
Real Estate- A universe comprised of 40 total real estate portfolio returns, net of fees, of public defined benefit plans calculated and provided by BNY Mellon Performance & Risk Analytics. Aggregate assets in the universe comprised $1.2 trillion as of quarter-end and the average market value was $29.7 billion.
Private Equity- An appropriate universe for private equity is unavailable.
Strategic Investments- An appropriate universe for strategic investments is unavailable.
59
As of December 31, 2019 Appendix
Explanation of Exhibits
Quarterly and Cumulative Excess Performance- The vertical axis, excess return, is a measure of fund performance less the return of the primary benchmark. The horizontal axis represents the time series. The quarterly bars represent the underlying funds' relative performance for the quarter.
Ratio of Cumulative Wealth Graph- An illustration of a portfolio's cumulative, un-annualized performance relative to that of its benchmark. An upward-sloping line indicates superior fund performance versus its benchmark. Conversely, a downward-sloping line indicates underperformance by the fund. A flat line is indicative of benchmark-like performance.
Performance Comparison - Plan Sponsor Peer Group Analysis- An illustration of the distribution of returns for a particular asset class. The component's return is indicated by the circle and its performance benchmark by the triangle. The top and bottom borders represent the 5th and 95th percentiles, respectively. The solid line indicates the median while the dotted lines represent the 25th and 75th percentiles.
60
x The rates of return contained in this report are shown on an after-fees basis unless otherwise noted. They are geometric and time-weighted. Returns for periods longer than one year are annualized.
x Universe percentiles are based upon an ordering system in which 1 is the best ranking and 100 is the worst ranking.
x Due to rounding throughout the report, percentage totals displayed may not sum to 100%. Additionally, individual fund totals in dollar terms may not sum to the plan total.
61
Disclaimer
Past performance is not necessarily indicative of future results.
Unless otherwise noted, performance returns presented reflect the respective fund’s performance as indicated. Returns may be presented on a before-fees basis (gross) or after- fees basis (net). After-fee performance is net of each respective sub-advisor’s investment management fees and includes the reinvestment of dividends and interest as indicated on the notes page within this report or on the asset allocation and performance summary pages. Actual returns may be reduced by AHIC’s investment advisory fees or other trust payable expenses you may incur as a client. AHIC’s advisory fees are described in Form ADV Part 2A. Portfolio performance, characteristics and volatility also may differ from the benchmark(s) shown.
The information contained herein is proprietary and provided for informational purposes only. It is not complete and does not contain certain material information about making investments in securities including important disclosures and risk factors. All securities transactions involve substantial risk of loss. Under no circumstances does the information in this report represent a recommendation to buy or sell stocks, limited partnership interests, or other investment instruments.
The data contained in these reports is compiled from statements provided by custodian(s), record-keeper(s), and/or other third-party data provider(s). This document is not intended to provide, and shall not be relied upon for, accounting and legal or tax advice. AHIC has not conducted additional audits and cannot warrant its accuracy or completeness. We urge you to carefully review all custodial statements and notify AHIC with any issues or questions you may have with respect to investment performance or any other matter set forth herein.
The mutual fund information found in this report is provided by Thomson Reuters Lipper and AHIC cannot warrant its accuracy or timeliness. Thomson Reuters Lipper Global Data Feed provides comprehensive coverage of mutual fund information directly to Investment Metrics, AHIC’s performance reporting vendor, via the PARis performance reporting platform. Thomson Reuters Lipper is the data provider chosen by Investment Metrics, and as such, AHIC has no direct relationship with Thomson Reuters Lipper.
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1 FRS Investment Plan 1 2 Appendix 11
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1
As of December 31, 2019 Asset Allocation & Performance
Allocation Performance(%) Market 1 1 3 5 10 Value % Quarter Year Years Years Years ($) FRS Investment Plan 11,889,845,563 100.0 6.2 20.5 9.8 7.2 7.7 Total Plan Aggregate Benchmark 6.0 20.0 9.3 6.9 7.4 Blank Retirement Date 5,426,297,943 45.6 Blank FRS Retirement Fund 395,026,309 3.3 3.6 (48) 14.8 (39) 7.0 (37) 4.9 (48) 5.7 (73) Retirement Custom Index 3.5 (52) 14.5 (42) 6.8 (40) 4.9 (48) 5.5 (78) IM Retirement Income (MF) Median 3.6 13.8 6.5 4.7 6.7 FRS 2015 Retirement Date Fund 304,370,756 2.6 3.8 (44) 15.1 (62) 7.4 (51) 5.2 (81) 6.1 (90) 2015 Retirement Custom Index 3.5 (68) 14.8 (77) 7.1 (74) 5.1 (85) 5.8 (92) IM Mixed-Asset Target 2015 (MF) Median 3.6 15.2 7.4 5.5 7.0 FRS 2020 Retirement Date Fund 619,758,504 5.2 4.3 (36) 16.3 (56) 8.3 (38) 5.9 (49) 6.8 (64) 2020 Retirement Custom Index 4.1 (48) 16.0 (60) 7.9 (48) 5.8 (56) 6.6 (68) IM Mixed-Asset Target 2020 (MF) Median 4.0 16.6 7.8 5.9 7.2 FRS 2025 Retirement Date Fund 798,706,373 6.7 5.2 (32) 18.2 (58) 9.2 (36) 6.7 (34) 7.6 (75) 2025 Retirement Custom Index 5.0 (40) 17.8 (67) 8.8 (57) 6.4 (56) 7.3 (77) IM Mixed-Asset Target 2025 (MF) Median 4.8 18.6 8.9 6.5 8.1 FRS 2030 Retirement Date Fund 744,198,282 6.3 5.9 (38) 19.8 (68) 9.9 (46) 7.3 (35) 8.3 (59) 2030 Retirement Custom Index 5.7 (50) 19.4 (72) 9.6 (58) 7.0 (55) 8.0 (67) IM Mixed-Asset Target 2030 (MF) Median 5.7 20.4 9.7 7.1 8.6 FRS 2035 Retirement Date Fund 706,088,313 5.9 6.5 (50) 21.1 (77) 10.6 (47) 7.8 (37) 9.0 (63) 2035 Retirement Custom Index 6.4 (61) 20.8 (82) 10.2 (63) 7.4 (62) 8.7(66) IM Mixed-Asset Target 2035 (MF) Median 6.5 22.4 10.5 7.5 9.2 FRS 2040 Retirement Date Fund 625,473,607 5.3 7.2 (47) 22.5 (70) 11.0 (54) 8.1 (40) 9.2 (59) 2040 Retirement Custom Index 7.0 (55) 22.1 (82) 10.8 (61) 7.7 (54) 8.9(70) IM Mixed-Asset Target 2040 (MF) Median 7.1 24.0 11.1 7.9 9.3 FRS 2045 Retirement Date Fund 613,186,546 5.2 7.6 (47) 23.4 (72) 11.3 (59) 8.3 (39) 9.3 (69) 2045 Retirement Custom Index 7.5 (50) 23.0 (84) 11.1 (64) 8.0 (53) 9.0(78) IM Mixed-Asset Target 2045 (MF) Median 7.5 24.8 11.4 8.1 9.3 FRS 2050 Retirement Date Fund 370,397,304 3.1 7.9 (37) 24.0 (75) 11.4 (51) 8.3 (46) 9.3 (78) 2050 Retirement Custom Index 7.8 (48) 23.6 (78) 11.2 (61) 8.0 (65) 9.0(81) IM Mixed-Asset Target 2050 (MF) Median 7.7 25.0 11.4 8.2 9.5 FRS 2055 Retirement Date Fund 201,877,688 1.7 8.0 (37) 24.1 (80) 11.4 (55) 8.3 (51) - 2055 Retirement Custom Index 7.9 (48) 23.7 (83) 11.2 (72) 8.0 (65) - IM Mixed-Asset Target 2055 (MF) Median 7.8 25.1 11.7 8.3 - FRS 2060 Retirement Date Fund 47,214,261 0.4 8.0 (37) 24.2 (79) - - - 2060 Retirement Custom Index 7.9 (48) 23.7 (83) - - - IM Mixed-Asset Target 2055 (MF) Median 7.8 25.1 - - -
2 As of December 31, 2019 Asset Allocation & Performance
Allocation Performance(%) Market 1 1 3 5 10 Value % Quarter Year Years Years Years ($) Cash 920,075,488 7.7 0.5 (1) 2.4 (1) 1.9 (1) 1.3 (1) 0.8 (1) IM U.S. Taxable Money Market (MF) Median 0.4 2.0 1.5 0.9 0.5 FRS Money Market Fund 920,075,488 7.7 0.5 (1) 2.4 (1) 1.9 (1) 1.3 (1) 0.8 (1) iMoneyNet 1st Tier Institutional Net Index 0.4 (25) 2.1 (23) 1.6 (18) 1.0 (19) 0.5 (20) IM U.S. Taxable Money Market (MF) Median 0.4 2.0 1.5 0.9 0.5 Real Assets 122,767,651 1.0 FRS Inflation Adjusted Multi-Assets Fund 122,767,651 1.0 3.4 13.0 4.9 2.4 3.3 FRS Custom Multi-Assets Index 3.0 13.0 4.9 3.1 3.1 Fixed Income 669,423,160 5.6 0.6 (42) 9.8 (1) 4.6 (1) 3.8 (1) 4.2 (4) Total Bond Index 0.5 (48) 9.2 (1) 4.3 (1) 3.4 (3) 4.0 (14) IM U.S. Intermediate Investment Grade (MF) Median 0.5 5.8 2.9 2.3 3.0 FRS U.S. Bond Enhanced Index Fund 233,684,846 2.0 0.1 (5) 8.7 (33) 4.1 (32) 3.1 (26) 3.8 (36) Blmbg. Barc. U.S. Aggregate 0.2 (4) 8.7 (33) 4.0 (33) 3.0 (27) 3.7 (36) IM U.S. Long Term Treasury/Govt Bond (MF) Median -0.8 6.6 3.2 2.4 3.1 FRS Intermediate Bond Fund 106,458,719 0.9 0.4 (62) 7.5 (1) 3.5 (7) 2.9 (10) 3.5 (23) Blmbg. Barc. U.S. Intermediate Aggregate 0.5 (56) 6.7 (21) 3.3 (17) 2.6 (26) 3.2 (41) IM U.S. Intermediate Investment Grade (MF) Median 0.5 5.8 2.9 2.3 3.0 FRS Core Plus Bond Fund 329,279,595 2.8 0.8 (28) 11.0 (17) 5.2 (15) 4.2 (15) 5.2 (25) FRS Custom Core-Plus Fixed Income Index 0.7 (35) 10.0 (40) 4.5 (47) 3.7 (33) 4.9 (37) IM U.S. Broad Market Core+ Fixed Income (SA+CF) Median 0.4 9.7 4.5 3.5 4.7 Domestic Equity 3,228,543,066 27.2 9.0 (34) 30.1 (40) 13.7 (43) 11.0 (26) 13.6 (17) Total U.S. Equities Index 8.9 (37) 30.0 (40) 13.3 (47) 10.7 (30) 13.1 (28) IM U.S. Multi-Cap Equity (MF) Median 8.2 28.8 12.7 9.4 12.0 FRS U.S. Stock Market Index Fund 1,183,908,200 10.0 9.1 (45) 31.1 (47) 14.6 (55) 11.3 (45) 13.5 (31) Russell 3000 Index 9.1 (46) 31.0 (48) 14.6 (55) 11.2 (47) 13.4 (33) IM U.S. Large Cap Equity (MF) Median 8.9 30.6 15.0 11.0 12.7 FRS U.S. Large Cap Stock Fund 1,073,591,500 9.0 9.8 (22) 28.9 (54) 14.6 (41) 11.0 (38) 13.7 (24) Russell 1000 Index 9.0 (35) 31.4 (32) 15.0 (34) 11.5 (29) 13.5 (26) IM U.S. Large Cap Equity (SA+CF) Median 8.6 29.4 13.9 10.4 12.7 FRS U.S. Small/Mid Cap Stock Fund 971,043,366 8.2 8.1 (39) 29.1 (47) 11.3 (40) 10.3 (23) 14.0 (14) FRS Custom Small/Mid Cap Index 8.5 (31) 27.8 (56) 10.3 (45) 9.0 (41) 11.1 (74) IM U.S. SMID Cap Equity (SA+CF) Median 7.5 28.6 9.8 8.2 12.0
3
As of December 31, 2019 Asset Allocation & Performance
Allocation Performance(%) Market 1 1 3 5 10 Value % Quarter Year Years Years Years ($) International/Global Equity 768,132,357 6.5 9.4 (53) 23.7 (37) 11.3 (32) 7.0 (28) 6.7 (27) Total Foreign and Global Equities Index 9.1 (57) 22.3 (46) 10.2 (44) 6.1 (43) 6.0 (39) IM International Equity (MF) Median 9.6 21.8 9.8 5.7 5.4 FRS Foreign Stock Index Fund 299,529,836 2.5 9.2 (56) 22.3 (46) 10.2 (44) 6.1 (42) 5.8 (42) MSCI All Country World ex-U.S. IMI Index 9.2 (56) 21.6 (52) 9.8 (50) 5.7 (50) 5.5 (48) IM International Equity (MF) Median 9.6 21.8 9.8 5.7 5.4 FRS Global Stock Fund 297,681,388 2.5 10.1 (28) 30.5 (20) 16.8 (12) 11.4 (10) 11.1 (18) MSCI All Country World Index Net 9.0 (43) 26.6 (44) 12.4 (38) 8.4 (37) 8.9 (45) IM Global Equity (MF) Median 8.5 25.6 11.1 7.4 8.7 FRS Foreign Stock Fund 170,921,133 1.4 10.1 (25) 27.4 (5) 12.5 (2) 7.4 (1) 6.7 (1) MSCI All Country World ex-U.S. Index 8.9 (51) 21.5 (55) 9.9 (22) 5.7(23) 5.3(39) IM International Large Cap Core Equity (MF) Median 9.0 21.8 8.7 4.6 4.9 FRS Self-Dir Brokerage Acct 754,605,898 6.3
The returns for the Retirement Date Funds, Inflation Adjusted Multi-Assets Fund, Core Plus Bond Fund, U.S. Large Cap Stock Fund, and U.S. Small/Mid Cap Stock Fund use prehire data for all months prior to 7/1/2014, actual live data is used thereafter. Note: The SDBA opened for members on 1/2/14. No performance calculations will be made for the SDBA.
4 As of December 31, 2019 Asset Allocation & Performance
Performance(%) 2019 2018 2017 2016 2015 2014 2013 2012 2011 FRS Investment Plan 20.5 -5.7 16.4 8.0 -0.9 4.9 15.2 10.5 0.7 Total Plan Aggregate Benchmark 20.0 -5.8 15.5 8.5 -1.3 4.9 14.6 9.7 0.9 Blank Retirement Date Blank FRS Retirement Fund 14.8 (39) -3.7 (53) 10.8 (52) 6.2 (59) -2.6 (100) 4.4 (82) 3.5 (96) 10.7 (59) 3.4 (10) Retirement Custom Index 14.5 (42) -3.8 (55) 10.4 (58) 6.2 (59) -1.8 (98) 3.6 (89) 3.4 (96) 8.5 (78) 5.0 (1) IM Retirement Income (MF) Median 13.8 -3.7 10.8 6.7 -0.1 5.7 12.8 11.0 -0.5 FRS 2015 Retirement Date Fund 15.1 (62) -3.8 (54) 12.0 (39) 6.7 (44) -2.5 (98) 4.4 (78) 5.5 (89) 11.3 (43) 2.1 (20) 2015 Retirement Custom Index 14.8 (77) -3.9 (57) 11.2 (60) 6.5 (52) -1.8 (90) 3.7 (92) 5.7 (88) 9.6 (88) 3.2 (1) IM Mixed-Asset Target 2015 (MF) Median 15.2 -3.7 11.5 6.6 -0.7 4.9 11.5 11.0 0.9 FRS 2020 Retirement Date Fund 16.3 (56) -4.4 (53) 14.0 (24) 7.4 (22) -2.1 (91) 4.4 (79) 9.6 (75) 12.4 (38) 0.6 (38) 2020 Retirement Custom Index 16.0 (60) -4.5 (55) 13.3 (47) 7.1 (32) -1.6 (80) 3.9 (88) 9.7 (75) 11.0 (74) 1.5 (21) IM Mixed-Asset Target 2020 (MF) Median 16.6 -4.3 13.1 6.7 -0.8 5.1 13.0 11.8 0.2 FRS 2025 Retirement Date Fund 18.2 (58) -5.2 (46) 16.1 (26) 8.0 (14) -1.7 (80) 4.5 (86) 13.7 (74) 13.5 (43) -0.7 (35) 2025 Retirement Custom Index 17.8 (67) -5.3 (51) 15.5 (39) 7.6 (20) -1.5 (77) 4.2 (91) 13.8 (74) 12.4 (73) -0.3 (26) IM Mixed-Asset Target 2025 (MF) Median 18.6 -5.3 15.2 7.2 -1.0 5.5 16.1 13.3 -1.0 FRS 2030 Retirement Date Fund 19.8 (68) -6.0 (44) 18.0 (30) 8.5 (18) -1.3 (63) 4.5 (83) 18.1 (54) 14.6 (34) -2.1 (50) 2030 Retirement Custom Index 19.4 (72) -6.0 (45) 17.3 (48) 8.0 (33) -1.5 (67) 4.4 (83) 18.2 (52) 13.8 (53) -2.0 (49) IM Mixed-Asset Target 2030 (MF) Median 20.4 -6.2 17.2 7.5 -1.0 5.7 18.2 14.0 -2.2 FRS 2035 Retirement Date Fund 21.1 (77) -6.7 (37) 19.8 (27) 9.1 (17) -1.4 (51) 4.4 (84) 22.0 (38) 15.8 (23) -3.0 (46) 2035 Retirement Custom Index 20.8 (82) -6.8 (38) 18.9 (54) 8.3 (43) -1.7 (67) 4.3 (85) 22.0 (38) 15.2 (46) -3.1 (47) IM Mixed-Asset Target 2035 (MF) Median 22.4 -7.2 18.9 8.3 -1.3 5.7 20.8 15.1 -3.1 FRS 2040 Retirement Date Fund 22.5 (70) -7.5 (39) 20.9 (28) 9.2 (17) -1.4 (55) 4.4 (83) 22.3 (48) 15.8 (36) -3.0 (38) 2040 Retirement Custom Index 22.1 (82) -7.5 (39) 20.4 (45) 8.6 (43) -1.7 (69) 4.3 (84) 22.4 (48) 15.2 (50) -3.1 (38) IM Mixed-Asset Target 2040 (MF) Median 24.0 -7.9 20.3 8.4 -1.1 5.9 21.7 15.2 -3.7 FRS 2045 Retirement Date Fund 23.4 (72) -8.0 (49) 21.5 (26) 9.4 (18) -1.5 (53) 4.4 (82) 22.3 (60) 15.8 (38) -3.0 (26) 2045 Retirement Custom Index 23.0 (84) -8.0 (49) 21.2 (39) 8.9 (36) -1.7 (64) 4.3 (83) 22.4 (60) 15.2 (68) -3.1 (26) IM Mixed-Asset Target 2045 (MF) Median 24.8 -8.0 21.0 8.5 -1.3 5.8 23.1 15.7 -3.9 FRS 2050 Retirement Date Fund 24.0 (75) -8.4 (55) 21.6 (32) 9.5 (20) -1.5 (58) 4.4 (82) 22.3 (53) 15.8 (36) -3.0 (20) 2050 Retirement Custom Index 23.6 (78) -8.4 (55) 21.3 (52) 8.9 (37) -1.7 (65) 4.3 (82) 22.4 (53) 15.2 (58) -3.1 (20) IM Mixed-Asset Target 2050 (MF) Median 25.0 -8.3 21.3 8.4 -1.3 6.0 23.3 15.6 -4.0 FRS 2055 Retirement Date Fund 24.1 (80) -8.4 (53) 21.5 (47) 9.3 (27) -1.4 (54) 4.4 (81) 22.3 (72) 15.8 (45) - 2055 Retirement Custom Index 23.7 (83) -8.4 (53) 21.3 (55) 8.9 (33) -1.7 (63) 4.3 (81) 22.4 (71) 15.2 (75) - IM Mixed-Asset Target 2055 (MF) Median 25.1 -8.3 21.5 8.5 -1.3 5.7 23.2 15.7 - FRS 2060 Retirement Date Fund 24.2 (79) -8.3 (52) ------2060 Retirement Custom Index 23.7 (83) -8.4 (53) ------IM Mixed-Asset Target 2055 (MF) Median 25.1-8.3------
5
As of December 31, 2019 Asset Allocation & Performance
Performance(%) 2019 2018 2017 2016 2015 2014 2013 2012 2011 Cash 2.4 (1) 2.2 (1) 1.2 (1) 0.6 (1) 0.2 (1) 0.1 (1) 0.2 (1) 0.3 (1) 0.2 (1) IM U.S. Taxable Money Market (MF) Median 2.0 1.7 0.7 0.2 0.0 0.0 0.0 0.0 0.0 FRS Money Market Fund 2.4 (1) 2.2 (1) 1.2 (1) 0.6 (1) 0.2 (1) 0.1 (1) 0.2 (1) 0.3 (1) 0.2 (1) iMoneyNet 1st Tier Institutional Net Index 2.1 (23) 1.8 (17) 0.9 (17) 0.3 (19) 0.0 (20) 0.0 (24) 0.0 (23) 0.1 (23) 0.1 (23) IM U.S. Taxable Money Market (MF) Median 2.0 1.7 0.7 0.2 0.0 0.0 0.0 0.0 0.0 Real Assets FRS Inflation Adjusted Multi-Assets Fund 13.0 -5.5 8.1 6.0 -7.9 3.2 -9.1 9.1 7.4 FRS Custom Multi-Assets Index 13.0 -5.5 8.1 6.2 -5.0 1.8 -8.9 6.6 4.6 Fixed Income 9.8 (1) -0.1 (94) 4.4 (2) 4.7 (8) 0.3 (81) 4.7 (1) -1.1 (84) 6.0 (36) 6.7 (1) Total Bond Index 9.2 (1) -0.1 (94) 3.9 (3) 4.3 (9) 0.1 (89) 4.9 (1) -1.2 (87) 4.8 (62) 7.4 (1) IM U.S. Intermediate Investment Grade (MF) Median 5.8 1.0 2.1 2.3 0.7 1.9 0.1 5.5 3.9 FRS U.S. Bond Enhanced Index Fund 8.7 (33) 0.0 (66) 3.6 (32) 2.7 (3) 0.7 (40) 6.2 (36) -2.0 (17) 4.4 (13) 7.9 (67) Blmbg. Barc. U.S. Aggregate 8.7 (33) 0.0 (66) 3.5 (32) 2.6 (3) 0.5 (48) 6.0 (37) -2.0 (18) 4.2 (14) 7.8 (68) IM U.S. Long Term Treasury/Govt Bond (MF) Median 6.6 0.5 2.2 1.0 0.5 5.1 -3.4 2.9 9.8 FRS Intermediate Bond Fund 7.5 (1) 0.7 (63) 2.4 (20) 3.1 (22) 0.9 (25) 3.4 (13) -0.5 (63) 4.9 (59) 5.9 (12) Blmbg. Barc. U.S. Intermediate Aggregate 6.7 (21) 0.9 (53) 2.3 (33) 2.0 (68) 1.2 (9) 4.1 (1) -1.0 (82) 3.6 (79) 6.0 (11) IM U.S. Intermediate Investment Grade (MF) Median 5.8 1.0 2.1 2.3 0.7 1.9 0.1 5.5 3.9 FRS Core Plus Bond Fund 11.0 (17) -0.5 (48) 5.3 (25) 5.7 (27) 0.1 (48) 4.6 (87) 0.8 (21) 11.1 (16) 4.6 (89) FRS Custom Core-Plus Fixed Income Index 10.0 (40) -0.4 (41) 4.2 (61) 4.9 (40) 0.2 (42) 5.1 (78) 0.8 (20) 7.8 (51) 7.6 (33) IM U.S. Broad Market Core+ Fixed Income (SA+CF) Median 9.7 -0.7 4.5 4.4 0.0 5.9 -0.8 7.8 7.2 Domestic Equity 30.1 (40) -6.5 (45) 20.8 (49) 13.7 (29) 0.7 (34) 11.5 (42) 35.2 (43) 16.9 (33) 0.3 (38) Total U.S. Equities Index 30.0 (40) -6.5 (45) 19.6 (56) 14.9 (23) -0.5 (45) 11.1 (47) 34.0 (54) 16.5 (37) -0.1 (41) IM U.S. Multi-Cap Equity (MF) Median 28.8 -7.0 20.6 10.2 -1.1 10.8 34.3 15.8 -1.0 FRS U.S. Stock Market Index Fund 31.1 (47) -5.2 (57) 21.2 (56) 12.9 (26) 0.6 (54) 12.6 (34) 33.6 (40) 16.5 (39) 1.0 (39) Russell 3000 Index 31.0 (48) -5.2 (58) 21.1 (57) 12.7 (27) 0.5 (55) 12.6 (35) 33.6 (40) 16.4 (40) 1.0 (39) IM U.S. Large Cap Equity (MF) Median 30.6 -4.6 21.9 9.5 1.0 11.4 32.7 15.6 -0.2 FRS U.S. Large Cap Stock Fund 28.9 (54) -7.0 (64) 25.5 (24) 9.3 (58) 2.7 (29) 12.8 (42) 36.4 (22) 17.2 (24) 1.2 (46) Russell 1000 Index 31.4 (32) -4.8 (39) 21.7 (43) 12.1 (34) 0.9 (43) 13.2 (33) 33.1 (47) 16.4 (31) 1.5 (42) IM U.S. Large Cap Equity (SA+CF) Median 29.4 -5.7 21.0 10.4 0.4 12.2 32.7 15.1 0.7 FRS U.S. Small/Mid Cap Stock Fund 29.1 (47) -8.2 (33) 16.3 (55) 19.9 (26) -1.1 (35) 8.6 (28) 37.1 (47) 18.7 (26) -0.9 (37) FRS Custom Small/Mid Cap Index 27.8 (56) -10.0 (45) 16.8 (51) 19.6 (27) -4.2 (69) 7.7 (34) 22.0 (98) 15.3 (53) 1.1 (22) IM U.S. SMID Cap Equity (SA+CF) Median 28.6 -11.0 16.8 15.4 -2.4 6.1 36.4 15.6 -2.5
6 As of December 31, 2019 Asset Allocation & Performance
Performance(%) 2019 2018 2017 2016 2015 2014 2013 2012 2011 International/Global Equity 23.7 (37) -13.5 (28) 28.6 (50) 4.5 (42) -2.6 (49) -3.2 (42) 21.6 (33) 18.6 (53) -11.3 (23) Total Foreign and Global Equities Index 22.3 (46) -14.0 (33) 27.3 (60) 4.9 (38) -4.4 (56) -3.0 (41) 20.6 (39) 16.6 (72) -11.3 (23) IM International Equity (MF) Median 21.8 -15.7 28.6 2.8 -2.9 -4.2 17.0 18.8 -14.8 FRS Foreign Stock Index Fund 22.3 (46) -14.7 (40) 28.3 (53) 5.3 (37) -4.4 (56) -4.5 (55) 20.5 (39) 17.6 (63) -11.8 (27) MSCI All Country World ex-U.S. IMI Index 21.6 (52) -14.8 (41) 27.8 (56) 4.4 (42) -4.6 (56) -4.2 (51) 21.0 (36) 16.4 (72) -12.2 (30) IM International Equity (MF) Median 21.8 -15.7 28.6 2.8 -2.9 -4.2 17.0 18.8 -14.8 FRS Global Stock Fund 30.5 (20) -5.6 (20) 29.3 (18) 2.2 (81) 5.6 (13) 3.7 (44) 27.1 (41) 21.0 (15) -7.4 (46) MSCI All Country World Index Net 26.6 (44) -9.4 (46) 24.0 (40) 7.9 (46) -2.4 (56) 4.2 (39) 22.8 (60) 16.3 (38) -5.5 (35) IM Global Equity (MF) Median 25.6 -9.7 22.1 7.4 -1.8 2.7 25.2 14.6 -7.8 FRS Foreign Stock Fund 27.4 (5) -14.9 (48) 31.2 (5) 1.0 (60) -0.5 (20) -2.3 (16) 20.6 (60) 19.6 (37) -13.3 (59) MSCI All Country World ex-U.S. Index 21.5 (55) -14.2 (30) 27.2 (23) 5.0 (10) -5.3 (73) -3.4 (18) 15.8 (80) 17.4 (67) -13.3 (60) IM International Large Cap Core Equity (MF) Median 21.8 -15.1 23.9 1.8 -2.7 -5.6 20.8 18.8 -13.0 FRS Self-Dir Brokerage Acct
The returns for the Retirement Date Funds, Inflation Adjusted Multi-Assets Fund, Core Plus Bond Fund, U.S. Large Cap Stock Fund, and U.S. Small/Mid Cap Stock Fund use prehire data for all months prior to 7/1/2014, actual live data is used thereafter. Note: The SDBA opened for members on 1/2/14. No performance calculations will be made for the SDBA.
7
FRS Investment Plan As of December 31, 2019 Asset Allocation
Asset Allocation as of 12/31/2019 U.S. Equity Non-U.S. Equity U.S. Fixed Income Real Assets Cash Brokerage Total % of Total FRS Retirement Fund 58,068,867 53,328,552 129,568,629 154,060,261 395,026,309 3.3% FRS 2015 Retirement Date Fund 46,568,726 42,916,277 97,703,013 117,182,741 304,370,756 2.6% FRS 2020 Retirement Date Fund 116,514,599 107,837,980 180,969,483 214,436,442 619,758,504 5.2% FRS 2025 Retirement Date Fund 198,877,887 183,702,466 212,455,895 203,670,125 798,706,373 6.7% FRS 2030 Retirement Date Fund 224,003,683 206,142,924 172,654,001 141,397,674 744,198,282 6.3% FRS 2035 Retirement Date Fund 243,600,468 224,536,084 139,099,398 98,852,364 706,088,313 5.9% FRS 2040 Retirement Date Fund 241,432,812 222,668,604 98,824,830 62,547,361 625,473,607 5.3% FRS 2045 Retirement Date Fund 255,085,603 235,463,634 71,742,826 50,894,483 613,186,546 5.2% FRS 2050 Retirement Date Fund 160,752,430 148,158,922 29,631,784 31,854,168 370,397,304 3.1% FRS 2055 Retirement Date Fund 88,220,550 81,356,708 14,737,071 17,563,359 201,877,688 1.7% FRS 2060 Retirement Date Fund 20,632,632 19,027,347 3,446,641 4,107,641 47,214,261 0.4% Total Retirement Date Funds $ 1,633,125,625 $ 1,506,112,149 $ 1,147,386,931 $ 1,092,458,978 $ - $ - $ 5,426,297,943 45.6% FRS Money Market Fund 920,075,488 920,075,488 7.7% Total Cash $ - $ - $ - $ - $ 920,075,488 $ - $ 920,075,488 7.7% FRS Inflation Adjusted Multi-Assets Fund 122,767,651 - 122,767,651 1.0% Total Real Assets $ - $ - $ - $ 122,767,651 $ - $ - $ 122,767,651 1.0% FRS U.S. Bond Enhanced Index Fund 233,684,846 233,684,846 2.0% FRS Intermediate Bond Fund 106,458,719 106,458,719 0.9% FRS Core Plus Bond Fund 329,279,595 329,279,595 2.8% Total Fixed Income $ - $ - $ 669,423,160 $ - $ - $ - $ 669,423,160 5.6% FRS U.S. Stock Market Index Fund 1,183,908,200 1,183,908,200 10.0% FRS U.S. Large Cap Stock Fund 1,073,591,500 1,073,591,500 9.0% FRS U.S. Small/Mid Cap Stock Fund 971,043,366 971,043,366 8.2% Total Domestic Equity $ 3,228,543,066 $ - $ - $ - $ - $ - $ 3,228,543,066 27.2% FRS Foreign Stock Index Fund 299,529,836 299,529,836 2.5% FRS Global Stock Fund 297,681,388 297,681,388 2.5% FRS Foreign Stock Fund 170,921,133 170,921,133 1.4% Total International/Global Equity $ - $ 768,132,357 $ - $ - $ - $ - $ 768,132,357 6.5% FRS Self-Dir Brokerage Acct 754,605,898 754,605,898 6.3% Total Self-Dir Brokerage Acct $ 754,605,898 $ 754,605,898 6.3% Total Portfolio $ 4,861,668,691 $ 2,274,244,506 $ 1,816,810,091 $ 1,215,226,629 $ 920,075,488 $ 754,605,898 $ 11,889,845,563 100.0% Percent of Total 41.0% 19.1% 15.3% 10.2% 7.7% 6.3% 100.0% The returns for the Retirement Date Funds, Inflation Adjusted Multi-Assets Fund, Core Plus Bond Fund, U.S. Large Cap Stock Fund, and U.S. Small/Mid Cap Stock Fund use prehire data for all months prior to 7/1/2014, actual live data is used thereafter. Note: The SDBA opened for members on 1/2/14. No performance calculations will be made for the SDBA.
8 As of December 31, 2019 Multi Timeperiod Statistics
3 3 3 3 3 3 3 Years Years Years Years Years Years Years Up Down Standard Sharpe Tracking Information Return Market Market Deviation Ratio Error Ratio Capture Capture FRS Investment Plan 9.78 8.21 0.98 0.43 1.14 103.53 101.05 Total Plan Aggregate Benchmark 9.27 7.98 0.94 0.00 N/A 100.00 100.00 FRS Retirement Fund 6.99 4.62 1.13 0.35 0.65 103.17 102.55 Retirement Custom Index 6.75 4.46 1.12 0.00 N/A 100.00 100.00 FRS 2015 Retirement Date Fund 7.41 4.84 1.16 0.36 0.96 103.95 101.72 2015 Retirement Custom Index 7.05 4.68 1.13 0.00 N/A 100.00 100.00 FRS 2020 Retirement Date Fund 8.26 5.61 1.15 0.35 0.98 103.51 101.64 2020 Retirement Custom Index 7.90 5.45 1.12 0.00 N/A 100.00 100.00 FRS 2025 Retirement Date Fund 9.20 6.63 1.11 0.35 1.00 102.69 100.43 2025 Retirement Custom Index 8.83 6.47 1.08 0.00 N/A 100.00 100.00 FRS 2030 Retirement Date Fund 9.93 7.53 1.08 0.36 0.91 102.00 99.72 2030 Retirement Custom Index 9.59 7.39 1.05 0.00 N/A 100.00 100.00 FRS 2035 Retirement Date Fund 10.62 8.37 1.05 0.39 0.96 102.16 99.84 2035 Retirement Custom Index 10.23 8.23 1.02 0.00 N/A 100.00 100.00 FRS 2040 Retirement Date Fund 11.05 9.15 1.01 0.39 0.67 101.34 99.79 2040 Retirement Custom Index 10.77 9.01 1.00 0.00 N/A 100.00 100.00 FRS 2045 Retirement Date Fund 11.30 9.68 0.98 0.40 0.43 100.65 99.47 2045 Retirement Custom Index 11.13 9.57 0.98 0.00 N/A 100.00 100.00 FRS 2050 Retirement Date Fund 11.39 10.05 0.96 0.41 0.50 100.79 99.40 2050 Retirement Custom Index 11.18 9.93 0.95 0.00 N/A 100.00 100.00 FRS 2055 Retirement Date Fund 11.39 10.05 0.96 0.42 0.46 100.71 99.36 2055 Retirement Custom Index 11.19 9.94 0.95 0.00 N/A 100.00 100.00 FRS 2060 Retirement Date Fund N/A N/A N/A N/A N/A N/A N/A 2060 Retirement Custom Index N/A N/A N/A N/A N/A N/A N/A FRS Money Market Fund 1.93 0.17 4.34 0.03 12.16 120.50 N/A iMoneyNet 1st Tier Institutional Net Index 1.60 0.17 -1.10 0.00 N/A 100.00 N/A FRS Inflation Adjusted Multi-Assets Fund 4.89 5.34 0.61 1.15 0.01 103.44 107.95 FRS Custom Real Assets Index 4.91 4.89 0.67 0.00 N/A 100.00 100.00 FRS U.S. Bond Enhanced Index Fund 4.07 2.91 0.84 0.07 0.53 100.49 99.72 Blmbg. Barc. U.S. Aggregate 4.03 2.91 0.82 0.00 N/A 100.00 100.00 FRS Intermediate Bond Fund 3.52 2.01 0.94 0.43 0.58 101.23 85.69 Blmbg. Barc. U.S. Intermediate Aggregate 3.26 2.07 0.79 0.00 N/A 100.00 100.00 FRS Core Plus Bond Fund 5.16 2.67 1.31 0.59 1.02 109.80 98.88 FRS Custom Core-Plus Fixed Income Index 4.53 2.53 1.14 0.00 N/A 100.00 100.00 FRS U.S. Stock Market Index Fund 14.64 12.39 1.04 0.06 1.03 100.31 100.13 Russell 3000 Index 14.57 12.38 1.03 0.00 N/A 100.00 100.00 FRS U.S. Large Cap Stock Fund 14.57 13.28 0.97 1.97 -0.14 103.08 110.40 Russell 1000 Index 15.05 12.22 1.08 0.00 N/A 100.00 100.00 FRS U.S. Small/Mid Cap Stock Fund 11.31 15.02 0.68 1.40 0.66 103.92 100.33 FRS Custom Small/Mid Cap Index 10.33 14.79 0.63 0.00 N/A 100.00 100.00 FRS Foreign Stock Index Fund 10.20 11.65 0.75 0.95 0.37 101.20 99.22 MSCI World ex USA 9.84 11.50 0.73 0.00 N/A 100.00 100.00 FRS Global Stock Fund 16.78 11.97 1.22 3.01 1.29 112.87 89.70 MSCI All Country World Index Net 12.44 11.38 0.94 0.00 N/A 100.00 100.00 FRS Foreign Stock Fund 12.45 12.25 0.88 2.66 0.92 108.61 95.23 MSCI All Country World ex-U.S. Index 9.87 11.50 0.73 0.00 N/A 100.00 100.00
The returns for the Retirement Date Funds, Inflation Adjusted Multi-Assets Fund, Core Plus Bond Fund, U.S. Large Cap Stock Fund, and U.S. Small/Mid Cap Stock Fund use prehire data for all months prior to 7/1/2014, actual live data is used thereafter.
9
As of December 31, 2019 Multi Timeperiod Statistics
5 5 5 5 5 5 5 Years Years Years Years Years Years Years Up Down Standard Sharpe Tracking Information Return Market Market Deviation Ratio Error Ratio Capture Capture FRS Investment Plan 7.21 8.12 0.77 0.47 0.65 102.23 100.20 Total Plan Aggregate Benchmark 6.90 7.94 0.75 0.00 N/A 100.00 100.00 FRS Retirement Fund 4.85 4.91 0.78 0.46 -0.04 101.66 104.01 Retirement Custom Index 4.88 4.77 0.80 0.00 N/A 100.00 100.00 FRS 2015 Retirement Date Fund 5.21 5.27 0.79 0.45 0.20 102.17 102.62 2015 Retirement Custom Index 5.13 5.12 0.80 0.00 N/A 100.00 100.00 FRS 2020 Retirement Date Fund 5.92 6.12 0.80 0.42 0.36 102.20 101.72 2020 Retirement Custom Index 5.76 6.03 0.79 0.00 N/A 100.00 100.00 FRS 2025 Retirement Date Fund 6.70 7.08 0.80 0.43 0.57 101.32 98.72 2025 Retirement Custom Index 6.44 7.05 0.77 0.00 N/A 100.00 100.00 FRS 2030 Retirement Date Fund 7.29 8.00 0.79 0.44 0.67 101.44 98.82 2030 Retirement Custom Index 6.98 7.99 0.75 0.00 N/A 100.00 100.00 FRS 2035 Retirement Date Fund 7.81 8.95 0.77 0.48 0.87 102.20 99.16 2035 Retirement Custom Index 7.37 8.90 0.73 0.00 N/A 100.00 100.00 FRS 2040 Retirement Date Fund 8.06 9.58 0.75 0.49 0.62 101.08 98.66 2040 Retirement Custom Index 7.73 9.58 0.72 0.00 N/A 100.00 100.00 FRS 2045 Retirement Date Fund 8.25 9.94 0.74 0.56 0.42 100.17 97.79 2045 Retirement Custom Index 7.99 10.02 0.71 0.00 N/A 100.00 100.00 FRS 2050 Retirement Date Fund 8.30 10.17 0.73 0.56 0.47 100.35 97.92 2050 Retirement Custom Index 8.02 10.23 0.70 0.00 N/A 100.00 100.00 FRS 2055 Retirement Date Fund 8.30 10.17 0.73 0.56 0.44 100.23 97.86 2055 Retirement Custom Index 8.02 10.23 0.70 0.00 N/A 100.00 100.00 FRS 2060 Retirement Date Fund N/A N/A N/A N/A N/A N/A N/A 2060 Retirement Custom Index N/A N/A N/A N/A N/A N/A N/A FRS Money Market Fund 1.32 0.25 4.55 0.03 9.94 128.30 N/A iMoneyNet 1st Tier Institutional Net Index 1.03 0.24 -0.83 0.00 N/A 100.00 N/A FRS Inflation Adjusted Multi-Assets Fund 2.41 5.87 0.26 1.57 -0.40 104.96 119.44 FRS Custom Real Assets Index 3.10 5.14 0.41 0.00 N/A 100.00 100.00 FRS U.S. Bond Enhanced Index Fund 3.11 3.06 0.68 0.08 0.77 100.84 99.41 Blmbg. Barc. U.S. Aggregate 3.05 3.06 0.66 0.00 N/A 100.00 100.00 FRS Intermediate Bond Fund 2.90 2.23 0.83 0.54 0.56 106.80 98.92 Blmbg. Barc. U.S. Intermediate Aggregate 2.59 2.15 0.72 0.00 N/A 100.00 100.00 FRS Core Plus Bond Fund 4.23 2.89 1.10 0.54 0.93 109.64 102.61 FRS Custom Core-Plus Fixed Income Index 3.72 2.72 0.98 0.00 N/A 100.00 100.00 FRS U.S. Stock Market Index Fund 11.33 12.24 0.85 0.05 1.59 100.34 99.92 Russell 3000 Index 11.24 12.23 0.85 0.00 N/A 100.00 100.00 FRS U.S. Large Cap Stock Fund 11.03 13.25 0.78 2.33 -0.11 104.84 112.47 Russell 1000 Index 11.48 12.07 0.88 0.00 N/A 100.00 100.00 FRS U.S. Small/Mid Cap Stock Fund 10.33 14.59 0.68 1.49 0.83 103.07 96.50 FRS Custom Small/Mid Cap Index 9.01 14.42 0.60 0.00 N/A 100.00 100.00 FRS Foreign Stock Index Fund 6.14 12.35 0.46 1.28 0.31 99.75 96.86 MSCI World ex USA 5.71 12.47 0.42 0.00 N/A 100.00 100.00 FRS Global Stock Fund 11.44 11.96 0.88 3.00 0.93 106.70 87.47 MSCI All Country World Index Net 8.41 11.78 0.66 0.00 N/A 100.00 100.00 FRS Foreign Stock Fund 7.41 12.16 0.56 3.50 0.45 97.57 85.64 MSCI All Country World ex-U.S. Index 5.70 12.53 0.42 0.00 N/A 100.00 100.00
The returns for the Retirement Date Funds, Inflation Adjusted Multi-Assets Fund, Core Plus Bond Fund, U.S. Large Cap Stock Fund, and U.S. Small/Mid Cap Stock Fund use prehire data for all months prior to 7/1/2014, actual live data is used thereafter.
10 Appendix
11
As of December 31, 2019 Benchmark Descriptions
Retirement Date Benchmarks - A weighted average composite of the underlying components' benchmarks for each fund. iMoneyNet 1st Tier Institutional Net Index - An index made up of the entire universe of money market mutual funds. The index currently represents over 1,300 funds, or approximately 99 percent of all money fund assets.
FRS Custom Multi-Assets Index - A monthly weighted composite of underlying indices for each TIPS and Real Assets fund. These indices include Barclays U.S. TIPS Index, MSCI AC World Index and the Bloomberg Commodity Total Return Index, NAREIT Developed Index, S&P Global Infrastructure Index, S&P Global Natural Resources Index.
Total Bond Index - A weighted average composite of the underlying benchmarks for each bond fund.
Barclays Aggregate Bond Index - A market value-weighted index consisting of government bonds, SEC-registered corporate bonds and mortgage-related and asset-backed securities with at least one year to maturity and an outstanding par value of $250 million or greater. This index is a broad measure of the performance of the investment grade U.S. fixed income market.
Barclays Intermediate Aggregate Bond Index - A market value-weighted index consisting of U.S. Treasury securities, corporate bonds and mortgage-related and asset-backed securities with one to ten years to maturity and an outstanding par value of $250 million or greater.
FRS Custom Core-Plus Fixed Income Index - A monthly rebalanced blend of 80% Barclays U.S. Aggregate Bond Index and 20% Barclays U.S. High Yield Ba/B 1% Issuer Constrained Index.
Total U.S. Equities Index - A weighted average composite of the underlying benchmarks for each domestic equity fund.
Russell 3000 Index - A capitalization-weighted index consisting of the 3,000 largest publicly traded U.S. stocks by capitalization. This index is a broad measure of the performance of the aggregate domestic equity market.
Russell 1000 Index - An index that measures the performance of the largest 1,000 stocks contained in the Russell 3000 Index.
FRS Custom Small/Mid Cap Index - A monthly rebalanced blend of 25% S&P 400 Index, 30% Russell 2000 Index, 25% Russell 2000 Value Index, and 20% Russell Mid Cap Growth Index.
Total Foreign and Global Equities Index - A weighted average composite of the underlying benchmarks for each foreign and global equity fund.
MSCI All Country World ex-U.S. IMI Index - A capitalization-weighted index of stocks representing 22 developed country stock markets and 24 emerging countries, excluding the U.S. market.
MSCI All Country World Index - A capitalization-weighted index of stocks representing approximately 47 developed and emerging countries, including the U.S. and Canadian markets.
MSCI All Country World ex-U.S. Index - A capitalization-weighted index consisting of 23 developed and 24 emerging countries, but excluding the U.S.
12 As of December 31, 2019 Descriptions of Universes
Retirement Date Funds - Target date universes calculated and provided by Lipper.
FRS Money Market Fund - A money market universe calculated and provided by Lipper.
FRS U.S. Bond Enhanced Index Fund - A long-term bond fixed income universe calculated and provided by Lipper.
FRS Intermediate Bond Fund - A broad intermediate-term fixed income universe calculated and provided by Lipper.
FRS Core Plus Bond Fund - A core plus bond fixed income universe calculated and provided by Lipper.
FRS U.S. Stock Market Index Fund - A large cap blend universe calculated and provided by Lipper.
FRS U.S. Large Cap Stock Fund - A large cap universe calculated and provided by Lipper.
FRS U.S. Small/Mid Cap Stock Fund - A small/mid cap universe calculated and provided by Lipper.
FRS Foreign Stock Index Fund - A foreign blend universe calculated and provided by Lipper.
FRS Global Stock Fund - A global stock universe calculated and provided by Lipper.
FRS Foreign Stock Fund - A foreign large blend universe calculated and provided by Lipper.
13
x The rates of return contained in this report are shown on an after-fees basis unless otherwise noted. They are geometric and time-weighted. Returns for periods longer than one year are annualized.
x Universe percentiles are based upon an ordering system in which 1 is the best ranking and 100 is the worst ranking.
x Due to rounding throughout the report, percentage totals displayed may not sum to 100%. Additionally, individual fund totals in dollar terms may not sum to the plan total.
14 Disclaimer
Past performance is not necessarily indicative of future results.
Unless otherwise noted, performance returns presented reflect the respective fund’s performance as indicated. Returns may be presented on a before-fees basis (gross) or after- fees basis (net). After-fee performance is net of each respective sub-advisor’s investment management fees and includes the reinvestment of dividends and interest as indicated on the notes page within this report or on the asset allocation and performance summary pages. Actual returns may be reduced by AHIC’s investment advisory fees or other trust payable expenses you may incur as a client. AHIC’s advisory fees are described in Form ADV Part 2A. Portfolio performance, characteristics and volatility also may differ from the benchmark(s) shown.
The information contained herein is proprietary and provided for informational purposes only. It is not complete and does not contain certain material information about making investments in securities including important disclosures and risk factors. All securities transactions involve substantial risk of loss. Under no circumstances does the information in this report represent a recommendation to buy or sell stocks, limited partnership interests, or other investment instruments.
The data contained in these reports is compiled from statements provided by custodian(s), record-keeper(s), and/or other third-party data provider(s). This document is not intended to provide, and shall not be relied upon for, accounting and legal or tax advice. AHIC has not conducted additional audits and cannot warrant its accuracy or completeness. We urge you to carefully review all custodial statements and notify AHIC with any issues or questions you may have with respect to investment performance or any other matter set forth herein.
The mutual fund information found in this report is provided by Thomson Reuters Lipper and AHIC cannot warrant its accuracy or timeliness. Thomson Reuters Lipper Global Data Feed provides comprehensive coverage of mutual fund information directly to Investment Metrics, AHIC’s performance reporting vendor, via the PARis performance reporting platform. Thomson Reuters Lipper is the data provider chosen by Investment Metrics, and as such, AHIC has no direct relationship with Thomson Reuters Lipper.
Refer to Hedge Fund Research, Inc. www.hedgefundresearch.com for information on HFR indices.
FTSE International Limited (“FTSE”) © FTSE 2017. “FTSE®” and “FTSE4Good®” are trademarks of the London Stock Exchange Group companies and are used by FTSE International Limited under license. The FTSE indices are calculated by FTSE International Limited in conjunction with Indonesia Stock Exchange, Bursa Malaysia Berhad, The Philippine Stock Exchange, Inc., Singapore Exchange Securities Trading Limited and the Stock Exchange of Thailand (the "Exchanges"). All intellectual property rights in the FTSE/ASEAN Index vest in FTSE and the Exchanges. Neither FTSE nor its licensors accept any liability for any errors or omissions in the FTSE indices and / or FTSE ratings or underlying data. No further distribution of FTSE Data is permitted without FTSE’s express written consent.
Aon Hewitt Investment Consulting, Inc. (“AHIC”) is a federally registered investment advisor with the U.S. Securities and Exchange Commission (“SEC”). AHIC is also registered with the Commodity Futures Trade Commission as a commodity pool operator and a commodity trading advisor, and is a member of the National Futures Association. The AHIC Form ADV Part 2A disclosure statement is available upon written request to:
Aon Hewitt Investment Consulting, Inc. 200 East Randolph Street Suite 1500 Chicago, IL 60601 ATTN: AHIC Compliance Officer
15
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4XDUWHUO\([FHVV3HUIRUPDQFH 5DWLRRI&XPXODWLYH:HDOWK 1.10 1.0% 1.07 1.05 0.0% -1.0 % 1.00 -2.0 % 0.95 12/14 6/15 12/15 6/16 12/16 6/17 12/17 6/18 12/18 6/19 12/19 12/09 12/10 12/11 12/12 12/13 12/14 12/15 12/16 12/17 12/18 12/19 Quarterly Out Performance Quarterly Under Performance LCEF Total Fund Benchmark 3 $VRI'HFHPEHU $VVHW$OORFDWLRQ 3HUIRUPDQFH $OORFDWLRQ 3HUIRUPDQFH 0DUNHW 9DOXH 3ROLF\ )<7' 4XDUWHU Benchmark and universe descriptions are provided in the Appendix. *Global Equity became an asset class in September 2012 by merging the Domestic Equities and Foreign Equities asset classes. The return series prior to September 2012 is a weighted average of Domestic Equities' and Foreign Equities' historical performance. 4 $VRI'HFHPEHU &DOHQGDU 3HUIRUPDQFH /&()7RWDO)XQG Total Endowment Target -7.0 (79) 17.7 (9) 7.0 (39) -1.6 (51) 4.3 (59) 12.8 (57) 12.2 (45) 1.5 (24) 13.7 (17) 19.6 (52) All Endowments-Total Fund Median -5.3 14.6 6.7 -1.5 4.9 13.8 12.0 -0.7 12.0 20.0 Global Equity* -8.5 24.5 11.4 -1.9 5.3 27.1 20.4 -1.1 17.0 30.8 Global Equity Target -9.8 24.1 8.4 -2.4 3.9 24.1 19.4 -2.2 16.1 30.5 %ODQN Fixed Income 0.1 (47) 3.7 (33) 2.7 (62) 0.6 (33) 6.0 (16) -1.8 (72) 4.6 (85) 7.6 (45) 7.0 (78) 4.6 (96) Blmbg. Barc. U.S. Aggregate 0.0 (48) 3.5 (40) 2.6 (62) 0.5 (35) 6.0 (18) -2.0 (74) 4.2 (89) 7.8 (43) 6.5 (82) 5.9 (87) All Endowments-US Fixed Income Segment Median -0.2 3.2 2.8 0.0 4.0 -0.9 8.5 6.9 7.8 12.6 TIPS -1.1 3.2 4.8 -1.2 3.5 -8.7 7.2 13.6 6.1 13.3 Barclays U.S. TIPS -1.3 3.0 4.7 -1.4 3.6 -8.6 7.0 13.6 6.3 11.4 %ODQN Cash Equivalents 2.3 1.2 0.7 0.5 0.2 0.2 1.3 0.1 2.0 2.6 S&P US AAA & AA Rated GIP 30D Net Yield Index 1.8 0.9 0.4 0.1 0.0 0.1 0.1 0.2 0.3 0.7 *Global Equity became an asset class in September 2012 by merging the Domestic Equities and Foreign Equities asset classes. The return series prior to September 2012 is a weighted average of Domestic Equities' and Foreign Equities' historical performance. 5 $VRI'HFHPEHU 3ODQ6SRQVRU3HHU*URXS$QDO\VLV $OO(QGRZPHQWV7RWDO)XQG 36.0 28.0 20.0 12.0 5HWXUQ 4.0 -4.0 -12.0 -20.0 )<7' 4XDUWHU 5th Percentile 6.8 7.1 21.6 10.4 7.7 8.8 1.5 18.3 9.9 1st Quartile 5.9 6.3 19.4 9.2 6.5 7.8 -3.4 16.0 7.8 Median 5.1 5.5 17.3 8.4 5.9 7.1 -5.3 14.6 6.7 3rd Quartile 4.1 4.6 15.0 7.6 5.1 6.1 -6.8 12.8 5.3 95th Percentile 1.3 2.1 7.0 4.6 3.1 4.3 -8.5 6.5 2.5 Population 331 330 323 293 265 200 378 478 505 Parentheses contain percentile rankings. 6 LCEF Total Fund As of 'HFHPEHU 3, 2019 Universe Asset Allocation Comparison LCEF Total Fund BNY Mellon Endowment Universe Cash Cash 2.0% TIPS 1.0% Real Estate 9.8% 4.7% Alternative Investments 14.7% Fixed Income 15.4% Fixed Income 24.3% Global Equity 54.3% Global Equity 73.8% 7 LCEF Total Fund As of December 31, 2019 Attribution -95 Global Equity Global Equity 64 Fixed Income 0 Fixed Income 1 TIPS 1 TIPS 2 Cash 1 Cash 1 -12 TAA -5 TAA -1 Other* Other* -1 -106 Total Fund Total Fund 62 -200 -150 -100 -50 0 50 100 150 200 -200 -150 -100 -50 0 50 100 150 200 Basis Points Basis Points 1-Year Ending 12/31/2019 5-Year Ending 12/31/2019 *Other includes differences between official performance value added due to methodology and extraordinary payouts. 8 $SSHQGL[ 9 $VRI'HFHPEHU %HQFKPDUN'HVFULSWLRQV /&()7RWDO)XQG Total Endowment Target - A weighted blend of the individual asset class target benchmarks. 7RWDO*OREDO(TXLW\ MSCI ACWI IMI ex-Tobacco - From 7/1/2014 forward, a custom version of the MSCI ACWI IMI excluding tobacco-related companies. From 10/1/2013 to 6/30/2014, a custom version of the MSCI ACWI IMI adjusted to reflect a 55% fixed weight in the MSCI USA IMI and a 45% fixed weight in the MSCI ACWI ex-USA IMI, and excluding certain equities of tobacco-related companies. From 9/1/2012 to 9/30/2013, a custom version of the MSCI ACWI IMI excluding tobacco-related companies. Prior to 9/1/2012, the benchmark is a weighted average of both the Domestic Equities and Foreign Equities historical benchmarks. 7RWDO'RPHVWLF(TXLWLHV Russell 3000 Index ex-Tobacco - Prior to 9/1/2012, an index that measures the performance of the 3,000 stocks that make up the Russell 1000 and Russell 2000 Indices, while excluding tobacco companies. 7RWDO)RUHLJQ(TXLWLHV MSCI ACWI ex-US IMI ex-Tobacco - Prior to 9/1/2012, a capitalization-weighted index representing 46 countries, but excluding the United States. The index includes 23 developed and 24 emerging market countries, and excludes tobacco companies. 7RWDO)L[HG,QFRPH Barclays Aggregate Bond Index - A market value-weighted index consisting of the Barclays Credit, Government, and Mortgage-Backed Securities Indices. The index also includes credit card, auto, and home equity loan-backed securities. This index is the broadest available measure of the aggregate investment grade U.S. fixed income market. 7RWDO7,36 Barclays U.S. TIPS - A market value-weighted index consisting of U.S. Treasury Inflation-Protected Securities with one or more years remaining until maturity with total outstanding issue size of $500 million or more. 7RWDO&DVK(TXLYDOHQWV S&P U.S. AAA & AA Rated GIP 30-Day Net Yield Index - An unmanaged, net-of-fees, market index representative of the Local Government Investment Pool. On 10/1/2011, the S&P U.S. AAA & AA Rated GIP 30-Day Net Yield Index replaced the S&P U.S. AAA & AA Rated GIP 30-Day Gross Yield Index, which was previously used from 4/30/08 - 9/30/11. Prior to 4/30/08, it was the average 3-month T-bill rate. 10 $VRI'HFHPEHU 8QLYHUVH'HVFULSWLRQV /&()7RWDO)XQG A universe comprised of 483 total endowment portfolio returns, net of fees, calculated and provided by BNY Mellon Performance & Risk Analytics and Investment Metrics. Aggregate assets in the universe comprised $386.5 billion as of quarter-end and the average market value was $800.1million. 7RWDO)L[HG,QFRPH A universe comprised of 45 total fixed income portfolio returns, net of fees, of endowment plans calculated and provided by BNY Mellon Performance & Risk Analytics and Investment Metrics. Aggregate assets in the universe comprised $317.6 billion as of quarter-end and the average market value was $7.1 billion. 11 $VRI'HFHPEHU ([SODQDWLRQRI([KLELWV 4XDUWHUO\DQG&XPXODWLYH([FHVV3HUIRUPDQFH - The vertical axis, excess return, is a measure of fund performance less the return of the primary benchmark. The horizontal axis represents the time series. The quarterly bars represent the underlying funds' relative performance for the quarter. 5DWLRRI&XPXODWLYH:HDOWK*UDSK - An illustration of a portfolio's cumulative, un-annualized performance relative to that of its benchmark. An upward-sloping line indicates superior fund performance versus its benchmark. Conversely, a downward-sloping line indicates underperformance by the fund. A flat line is indicative of benchmark-like performance. 3HUIRUPDQFH&RPSDULVRQ3ODQ6SRQVRU3HHU*URXS$QDO\VLV - An illustration of the distribution of returns for a particular asset class. The component's return is indicated by the circle and its performance benchmark by the triangle. The top and bottom borders represent the 5th and 95th percentiles, respectively. The solid line indicates the median while the dotted lines represent the 25th and 75th percentiles. 12 5HSRUW0HPEHU1DPH! $VRI'HFHPEHU 1RWHV x The rates of return contained in this report are shown on an after-fees basis unless otherwise noted. They are geometric and time-weighted. Returns for periods longer than one year are annualized. x Universe percentiles are based upon an ordering system in which 1 is the best ranking and 100 is the worst ranking. x Due to rounding throughout the report, percentage totals displayed may not sum to 100%. Additionally, individual fund totals in dollar terms may not sum to the plan total. 13 Disclaimer Past performance is not necessarily indicative of future results. Unless otherwise noted, performance returns presented reflect the respective fund’s performance as indicated. Returns may be presented on a before-fees basis (gross) or after- fees basis (net). After-fee performance is net of each respective sub-advisor’s investment management fees and includes the reinvestment of dividends and interest as indicated on the notes page within this report or on the asset allocation and performance summary pages. Actual returns may be reduced by AHIC’s investment advisory fees or other trust payable expenses you may incur as a client. AHIC’s advisory fees are described in Form ADV Part 2A. Portfolio performance, characteristics and volatility also may differ from the benchmark(s) shown. The information contained herein is proprietary and provided for informational purposes only. It is not complete and does not contain certain material information about making investments in securities including important disclosures and risk factors. All securities transactions involve substantial risk of loss. Under no circumstances does the information in this report represent a recommendation to buy or sell stocks, limited partnership interests, or other investment instruments. The data contained in these reports is compiled from statements provided by custodian(s), record-keeper(s), and/or other third-party data provider(s). This document is not intended to provide, and shall not be relied upon for, accounting and legal or tax advice. AHIC has not conducted additional audits and cannot warrant its accuracy or completeness. We urge you to carefully review all custodial statements and notify AHIC with any issues or questions you may have with respect to investment performance or any other matter set forth herein. The mutual fund information found in this report is provided by Thomson Reuters Lipper and AHIC cannot warrant its accuracy or timeliness. Thomson Reuters Lipper Global Data Feed provides comprehensive coverage of mutual fund information directly to Investment Metrics, AHIC’s performance reporting vendor, via the PARis performance reporting platform. Thomson Reuters Lipper is the data provider chosen by Investment Metrics, and as such, AHIC has no direct relationship with Thomson Reuters Lipper. Refer to Hedge Fund Research, Inc. www.hedgefundresearch.com for information on HFR indices. FTSE International Limited (“FTSE”) © FTSE 2017. “FTSE®” and “FTSE4Good®” are trademarks of the London Stock Exchange Group companies and are used by FTSE International Limited under license. The FTSE indices are calculated by FTSE International Limited in conjunction with Indonesia Stock Exchange, Bursa Malaysia Berhad, The Philippine Stock Exchange, Inc., Singapore Exchange Securities Trading Limited and the Stock Exchange of Thailand (the "Exchanges"). All intellectual property rights in the FTSE/ASEAN Index vest in FTSE and the Exchanges. Neither FTSE nor its licensors accept any liability for any errors or omissions in the FTSE indices and / or FTSE ratings or underlying data. No further distribution of FTSE Data is permitted without FTSE’s express written consent. Aon Hewitt Investment Consulting, Inc. (“AHIC”) is a federally registered investment advisor with the U.S. Securities and Exchange Commission (“SEC”). AHIC is also registered with the Commodity Futures Trade Commission as a commodity pool operator and a commodity trading advisor, and is a member of the National Futures Association. The AHIC Form ADV Part 2A disclosure statement is available upon written request to: Aon Hewitt Investment Consulting, Inc. 200 East Randolph Street Suite 1500 Chicago, IL 60601 ATTN: AHIC Compliance Officer 14 2020 January April July October S M T W T F S S M T W T F S S M T W T F S S M T W T F S 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 5 6 7 8 9 10 11 5 6 7 8 9 10 11 5 6 7 8 9 10 11 4 5 6 7 8 9 10 12 13 14 15 16 17 18 12 13 14 15 16 17 18 12 13 14 15 16 17 18 11 12 13 14 15 16 17 19 20 21 22 23 24 25 19 20 21 22 23 24 25 19 20 21 22 23 24 25 18 19 20 21 22 23 24 26 27 28 29 30 31 26 27 28 29 30 26 27 28 29 30 31 25 26 27 28 29 30 31 February May August November S M T W T F S S M T W T F S S M T W T F S S M T W T F S 1 1 2 1 1 2 3 4 5 6 7 2 3 4 5 6 7 8 3 4 5 6 7 8 9 2 3 4 5 6 7 8 8 9 10 11 12 13 14 9 10 11 12 13 14 15 10 11 12 13 14 15 16 9 10 11 12 13 14 15 15 16 17 18 19 20 21 16 17 18 19 20 21 22 17 18 19 20 21 22 23 16 17 18 19 20 21 22 22 23 24 25 26 27 28 23 24 25 26 27 28 29 24 25 26 27 28 29 30 23 24 25 26 27 28 29 29 30 31 30 31 March June September December S M T W T F S S M T W T F S S M T W T F S S M T W T F S 1 2 3 4 5 6 7 1 2 3 4 5 6 1 2 3 4 5 1 2 3 4 5 8 9 10 11 12 13 14 7 1 9 10 11 12 13 6 7 8 9 10 11 12 6 7 8 9 10 11 12 15 16 17 18 19 20 21 14 15 16 17 18 19 20 13 14 15 16 17 18 19 13 14 15 16 17 18 19 22 23 24 25 26 27 28 21 22 23 24 25 26 27 20 21 22 23 24 25 26 20 21 22 23 24 25 26 29 30 31 28 29 30 27 28 29 30 27 28 29 30 31 Blue is Proposed IAC Meeting Yellow is Proposed Cabinet Meeting