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Michigan Public Pension Roundtable Presented by Blackrock Panelists

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Michigan Public Pension Roundtable Presented by Blackrock Panelists May 28, 2020 Michigan Public Pension Roundtable Presented by BlackRock Panelists Andrew Citron, Institutional Client Business Mike Pyle, Global Chief Investment Strategist Calvin Yu, Head of the Client Insight Unit Jonathan Cogan, Client Insight Unit Mark Everitt, Head of Investment Research & Strategy for BlackRock Alternative Investors Client May 2020 Insight Unit US Public Pensions Recent Market Volatility & Scenario Analysis Calvin Yu, Head of the Client Insight Unit Jonathan Cogan, Client Insight Unit ICBM0520U-1188518-1/15 Overview & Methodology We analyzed 69 US Public Pensions asset exposures to estimate the impact of recent market volatility on assets and funded status. We further assessed the stressed asset allocations using potential market scenarios to help determine the effects of rebalancing to original weights versus letting portfolios drift with markets. The analysis leverages the Aladdin® risk model to estimate the portfolio’s ex-ante risk factor decomposition and estimated PnL in stress scenarios. Model plan Analyze portfolio risk Estimate impact on Analyze rebalancing Assess portfolio allocations on the and stress impact funded status vs. market drifting impact under various Aladdin® platform economic scenarios 69 $2.1 $30.3 ~72 plans trillion+ billion percent included in our assets modeled and average market value average funded universe analyzed on of plan assets status of plans Aladdin® ranging from ranging from $1.2B to $214.9B 33% to 108% with a median of $15.6B with a median of 76% All peer data throughout this presentation is sourced from BlackRock and P&I using provided data and/or most recent filings available to BlackRock as of March 2020. ICBM0520U-1188518-2/15 FOR USE WITH INSTITUTIONAL INVESTORS ONLY – PROPRIETARY AND CONFIDENTIAL 4 Recent Market Movements US Public Pension Plan Allocations Asset Class Description Average Min Max Benchmark Cash Cash 2.2% 0.0% 22.9% US Cash US FI 13.0% 0.0% 27.4% BBG Barc US Aggregate Index Long Duration 0.9% 0.0% 10.1% BBG Barc Treasury 10+ Yr Index TIPS 1.6% 0.0% 9.2% BBG Barc US TIPS Index Global FI 1.5% 0.0% 22.1% BBG Barc Global Aggregate Index Fixed Income Securitized 0.3% 0.0% 4.0% BBG Barc Securitized Index 22.2% High Yield 2.6% 0.0% 15.6% BBG Barc US Corporate High Yield Index Bank Loans 0.7% 0.0% 5.8% S&P/LSTA Leveraged Loan Index EMD 1.3% 0.0% 10.1% 50% JPM Global EMBI Index / 50% JPM GBI-EM Global Div Index Multi-Strat FI 0.2% 0.0% 2.6% BBG Barc US Universal Index Convertibles 0.2% 0.0% 3.4% ICE BofAML US Convertible Excluding 144A Index US Large Cap Equity 14.2% 0.0% 46.1% Russell 1000 Index US Mid Cap Equity 0.9% 0.0% 10.7% Russell MidCap Index US Small/Mid Equity 0.5% 0.0% 6.4% Russell 2500 Index US Small Cap Equity 2.5% 0.0% 9.5% Russell 2000 Index Equity US All Cap Equity 4.0% 0.0% 34.5% Russell 3000 Index 44.6% Developed ex-US Equity 7.2% 0.0% 22.9% MSCI World Ex US International Equity 6.6% 0.0% 26.2% MSCI All Country World ex US EM Equity 3.6% 0.0% 11.0% MSCI Emerging Markets Index Frontier Equity 0.0% 0.0% 0.4% MSCI Frontier Markets Index Global Equity 5.1% 0.0% 36.0% MSCI All Country World Index Hedge Funds 6.3% 0.0% 35.7% BlackRock Proxy: Hedge funds (global fund weighted) Risk Parity 0.7% 0.0% 13.2% Equal-weighted: Global Equity, Long Duration, TIPS, EMD, HY PE 8.8% 0.0% 22.9% BlackRock Proxy: US Buyout PE Prv Credit 2.6% 0.0% 27.1% BlackRock Proxy: Direct Lending REITs 1.0% 0.0% 6.4% FTSE EPRA NAREIT US Index RE - Core 6.2% 0.0% 21.5% BlackRock Proxy: US Core RE Alternatives RE - Value-added 0.6% 0.0% 3.1% BlackRock Proxy: US Value-added RE 30.9% RE - Opp 0.8% 0.0% 5.8% BlackRock Proxy: US Opportunistic RE Commodities 1.4% 0.0% 16.0% S&P GSCI Commodity Index Timber 0.3% 0.0% 3.8% S&P Global Timber and Forestry Index Energy 0.4% 0.0% 2.9% S&P GSCI Energy Index MLPs 0.6% 0.0% 8.3% Alerian MLP Index Infrastructure 1.1% 0.0% 4.9% BlackRock Proxy: Infrastructure Equity Farmland 0.2% 0.0% 6.9% FTSE NAREIT Equity Diversified Asset class mapping and benchmarks are assigned by BlackRock. It is not possible to invest directly in an unmanaged index. ICBM0520U-1188518-4/15 FOR USE WITH INSTITUTIONAL INVESTORS ONLY – PROPRIETARY AND CONFIDENTIAL 6 Assessing the Recent Market Volatility Scenario Analysis Recent Volatility Year-to-Date (Apr’20) 2008 Recession Market Volatility 1 Standard Deviation Historical Scenario Historical Scenario Historical Scenario Ex-ante factor risk Recent market volatility resulting from a more Year-to-date performance Starting date for this scenario is the official rapid spread of Coronovirus than expected (Dec 31, 2019 – Apr 30, 2020) beginning of the latest recession in the US. (Feb 21 – Mar 19, 2020) The end date is the lowest point of S&P 500 in the recent decade (Dec 3, 2007 – Mar 09, 2009) 10% 0% -3.0% -7.1% -6.2% -4.6% -10% -3.7% -14.0% -4.7% -11.3% -24.3% -20% -11.9% -9.6% -30% -27.3% -11.3% -40% Risk & Stress PnL PnL (%) Stress Risk & -50% Rates Spreads Equity Alternative FX & Other Total -41.8% Impact on Funded Status: Recent Market Stress and Year-to-Date Pre-Stress Post-Stress - Mar’20 Post-Stress - Apr’20 Actuarial Assets ($b) $28.6 $20.8 $25.3 Actuarial Liabilities ($b) $39.8 $39.8 $39.8 Funded Status 71.7% 52.1% (-19.6%) 63.6% (-8.1%) Risk: 84% confidence interval, 231 constant weighted monthly observations, 1yr horizon, as of 11/29/19; see the “Risk Factors Glossary” for additional risk details and the “US Public Pension Plan Allocations” slide for details regarding the indexes used to represent each asset class. Historical scenarios simulate each plan’s current portfolio through historical time periods. Hypothetical scenarios simulate each plan’s current portfolio through hypothetical large market shocks and geopolitical stresses, with implied shocks. The performance shown is hypothetical, does not represent the performance of any existing portfolio, and does not reflect fees and expenses; if fees and expenses were included, the performance would be lower. It is not possible to invest directly in an unmanaged index. There is no guarantee that any portfolio will perform in this manner under similar scenarios going forward. Please refer to the “Stress Test Scenarios Methodology, Assumptions and Limitations” slide in the appendix for additional information. Change in funded status assumes liabilities remain static while actuarial assets are shocked by amount of stress PnL. ICBM0520U-1188518-5/15 FOR USE WITH INSTITUTIONAL INVESTORS ONLY – PROPRIETARY AND CONFIDENTIAL 7 Recent Market Volatility Loss dispersion among peers was significant; asset losses ranged from -20.3% to -39.6% while funded status impact ranged from -8.7% to -31.7% Market Loss vs. Change in Funded Status Market Loss vs. Allocation to Growth Assets -45.0% -45.0% -40.0% -40.0% Top-quartile losses -35.0% -35.0% Average Loss: -31.5% Average % Growth: 79.9% -30.0% -30.0% -25.0% -25.0% Change in Asset Value Value Asset Change (%) in Value Asset Change (%) in -20.0% -20.0% Bottom-quartile losses Average Loss: -24.1% Average % Growth: 73.4% -15.0% -15.0% 0.0% -10.0% -20.0% -30.0% -40.0% 50.0% 60.0% 70.0% 80.0% 90.0% 100.0% Change in Funded Status (%) Allocation to Growth Assets (%) Starting Funded Status Below 60% 60%-75% 75%-85% 85%+ Change in funded status assumes liabilities remain static while actuarial assets are shocked by amount of stress PnL; time period of recent market volatility is Feb 21 – Mar 19, 2020. Growth assets include all assets other than cash and fixed income. ICBM0520U-1188518-6/15 FOR USE WITH INSTITUTIONAL INVESTORS ONLY – PROPRIETARY AND CONFIDENTIAL 8 Contextualizing and Shaping the Recovery Historical Drawdowns & Recoveries Over the last 40+ years, the average drawdown of a hypothetical 60%/40% portfolio occurred over a period of ~8 months and recovered over the following ~8 months Historical Drawdowns (%) 0.0% -5.0% -10.0% -15.0% -20.0% -25.0% -30.0% -35.0% 60% S&P500 | 40% BBG US Agg Drawdown Information (Drawdowns greater than 7.5%) Max Drawdown Jan-77 Feb-80 Apr-81 Sep-87 Aug-90 Jul-98 Sep-00 Nov-07 May-11 Oct-18 Average Period Feb-78 Mar-80 Sep-81 Nov-87 Sep-90 Aug-98 Sep-02 Feb-09 Sep-11 Dec-18 Max Drawdown -13.02 -7.55 -8.03 -9.15 -17.42 -8.39 -8.53 -22.81 -32.53 -8.23 -7.56 Return, % Max Drawdown 7.8 14 2 6 3 2 2 25 16 5 3 Duration (Month) Recovery Mar-78 Apr-80 Oct-81 Dec-87 Oct-90 Sep-98 Oct-02 Mar-09 Oct-11 Jan-19 NA Period Jul-78 May-80 Nov-81 Jan-89 Jan-91 Oct-98 Oct-04 Dec-10 Jan-12 Mar-19 Recovery 100 100 100 100 100 100 100 100 100 100 100 Percent, % Recovery 8.3 5 2 2 14 4 2 25 22 4 3 Duration (Month) Past performance is not indicative of future results.
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