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March 19, 2020 State of Michigan Retirement System Quarterly Investment Review

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March 19, 2020 State of Michigan Retirement System Quarterly Investment Review STATE OF MICHIGAN INVESTMENT BOARD MEETING March 19, 2020 State of Michigan Retirement System Quarterly Investment Review Rachael Eubanks, State Treasurer Prepared by Bureau of Investments Michigan Department of Treasury STATE OF MICHIGAN INVESTMENT BOARD MEETING MARCH 19, 2020 Agenda 9:30 a.m. Call to Order and Opening Remarks 9:40 a.m. Approval of the 12/19/19 SMIB Meeting Minutes 9:45 a.m. Executive Summary & Performance for Periods Ending 12/31/19 10:00 a.m. Current Asset Allocation Review Markets Review and Outlook 10:15 a.m. Action Item: Removal of Oakmark Equity and Income Fund from 401(k)/457 DC Plans Investment Manager Lineup 10:25 a.m. Review of Investment Reports Defined Contribution International Equity Domestic Equity Fixed Income Private Equity – Receive and File Real Estate & Infrastructure – Receive and File Real & Opportunistic Return – Receive and File Absolute Return – Receive and File Basket Clause – Receive and File 11:00 a.m. Public Comment Closing Remarks ~ Adjournment 2020 Meeting Schedule Thursday, June 11, 2020 Thursday, September 10, 2020 Thursday, December 10, 2020 All meetings start at 9:30 a.m. www.michigan.gov/treasury State of Michigan Retirement System MINUTES State of Michigan Investment Board Meeting March 19, 2020 Robert L. Brackenbury Deputy C hief Investment Officer Bureau of Investments STATE OF MICHIGAN INVESTMENT BOARD December 19, 2019 Meeting Minutes Board Members Present: Chairman – Treasurer Rachael Eubanks Ms. Dina Richard Mr. Chris Kolb Mr. Reginald Sanders Mr. James Nicholson Members of the Public and Bureau of Investments Staff Present: Molly Jason Jamie Prevo Jack Behar Karl Borgquist Nick Whitman Jim Elkins Clay Davis Anthony Estell Kerrie VandenBosch Taylor Broekstra Todd Warstler Travis Haney Bradley Hartwell Semone James Mark Porrell Matt Hutson Patrick Moraniec Robert Brackenbury Lan Chen Ann Storberg Jennifer Yeung Dick Holcomb Jon Braeutigam Barb Becker Peter Woodford LeAnn Auer Anthony Estell Greg Parker Giles Feldpausch Pavel Stolarczyk Lori Barrett Annette Russell Max Kotary Betty Nicklesen Tim McEnery Marc Dietrich Janet Sudac Dave Klauka Mandy Hitsman Dan Quigley Opening Remarks: Rachael Eubanks called the meeting to order at 9:30 am. Approval of Minutes: Approval of the September 12, 2019 SMIB Meeting Minutes – Motion to approve: James Nicholson. Seconded: Chris Kolb. The vote was unanimous to approve. AGENDA Executive Summary and Performance Jon Braeutigam, Chief Investment Officer for the Bureau of Investments, reviewed the executive summary performance section discussing returns and markets. He explained that the Plans returns were among the least risky, as measured by standard deviation, but believes they are competitive and compelling. The goal is a 6.8% actuarial targeted rate of return so there is broad equity risk. The BOI strives for a very diversified portfolio which is what it has now. The return since 1979 is 9.4%, the 10-year return is 9.7%. Of course, the last 10 years have been a bull market for the US stock market and it’s not expected that this will be duplicated any time soon. Approximately $1 Billion in new commitments were approved recently. Staff is very busy working through legal documents in almost every division in the Bureau. There is a lot of physical review of partnership agreements along with compliance so that closings can 1 occur now and through the first of the year. He thanked staff for their hard work on locating and pursuing the very best and most appropriate investments for the Plans needs. Asset Allocation Review, Markets Review and Outlook Gregory Parker, Director of Investments - Public Markets reviewed asset allocation very briefly, explaining the graphical presentation chart on page 2 showing allocation changes over the past 12 months. He reminded us that almost $2 billion a year is paid out as benefits to the pensioners. Capital markets were covered very briefly as well. Mr. Parker mentioned that we are making 10-year highs on the stock market and are close to 10-year highs in the US. This leaves a backdrop causing the next year, five years, and the next ten years to be very, very challenging. It is difficult to find value in the markets. This is not to be considered as a warning, it is simply that since there has been a great bull market it will be more difficult to obtain this level of return going forward. Private Equity Review Peter Woodford, Senior Investment Manager discussed the strategies of the Private Equity Division stating that it invests across a broad range of partnerships, geographies and industries. He discussed performance stating it has been quite good, returning 15.4% on an annualized basis for the past 10 years. It also performed well over the past 3, 5, 7, and 10-year time periods, with the one-year return at 11.2%. Mr. Woodford explained that the division made new commitments in the amount of $315 million during the quarter and highlighted two of the largest new investments. He gave a market update relating to private equity and explained the divisions outlook and strategy going forward. Real Estate & Infrastructure Review Todd Warstler, Senior Investment Manager reviewed the division’s performance stating that performance remains strong relative to the benchmark. The division outperformed the one-year benchmark by 310 basis points. The primary drivers for this are: the portfolio is underweight in retail, several favorable sale executions have taken place, and appreciation has occurred across the entire portfolio. Performance of portfolio credit strategies and the performance of infrastructure portfolio have also contributed to this outperformance. Mr. Warstler discussed the current investment strategies used, and the current market environment of real estate and infrastructure. Real & Opportunistic Return Review Jennifer Yeung, Senior Investment Manager gave an overview of the portfolio, breaking it into three strategies. The largest percentage at 64% is comprised of real assets which includes investments in both tangible and intangible assets that are expected to provide inflation protection and diversification benefits to the overall pension system. Then 21% is credit funds which focuses on providing capital to the middle market direct lending space or providing financing in distressed or opportunistic situations. The remaining amount is comprised of opportunistic investments which is investments that offer an attractive risk-return profile and do not fit squarely into private market vehicles. Ms. Yeung discussed the division’s one, three and five-year performance which exceeded the benchmark by 300 to 500 basis points in each of the respective time periods. About one-third of the division’s return can be attributed to current income, specifically income 2 from credit investments, natural resource production-linked funds and royalties from intangible assets. The remainder of the return is driven largely by price appreciation, notably investments in the media and entertainment space, as well as the transportation space that are doing very well resulting in higher marks to valuations. Ms. Yeung explained the strategy for 2020 is to remain focused on finding differentiated strategies that are additive to the current portfolio mix. Stay disciplined and seek investments with attractive risk-adjusted returns with a preference for strategies that have visible cash flows and a high degree of capital protection. She believes it is important to stick to solid investment teams where there is strong alignment of interests. Absolute Return and Fixed Income Review Dan Quigley, Senior Investment Manager reviewed performance of Absolute Return stating that the portfolio returned 4.1% on a one-year basis, beating the HFRI index. The absolute return portfolio is a broad portfolio consisting of 69 funds across four strategies. The portfolio maintains seven relationships. Mr. Quigley explained key objectives going forward as well as themes and opportunities they will be focusing on. Mr. Quigley reviewed fixed income stating performance was strong on an absolute basis for all major fixed income indices on a year-to-date basis as both interest rate declines and spread compression have driven performance. The fixed income division portfolio underperformed slightly on a one-year basis but has outperformed peer group and benchmarks across all other time periods. There were many questions asked by the board members allowing much discussion to take place. Review of Investment Reports – Received and Filed Public Comment Treasurer Eubanks asked that any attendees wishing to address the Board come forward. No public comment. Adjournment Treasurer Eubanks adjourned the meeting at 11:07 am. Motion to adjourn by James Nicholson. Seconded: Reggie Sanders. The vote was unanimous to adjourn. Approved: Rachael Eubanks, Chairman 3 State of Michigan Retirement System EXECUTIVE SUMMARY State of Michigan Investment Board Meeting March 19, 2020 Gregory J. Parker, CFA Director of Investments – Public Markets Director of Asset Allocation Bureau of Investments EXECUTIVE SUMMARY December 2019 Performance Great peer comparison. MPSERS Plan (12/31/19) 1-Year 3-Years 5-Years 7-Years 10-Years Annualized Returns 15.4% 11.2% 8.7% 10.2% 10.0% Policy Returns 16.1% 11.1% 9.0% 10.1% 10.1% Peer Median Returns* 15.4% 9.4% 7.3% 8.3% 8.5% *State Street Universe greater than $10 billion. Over the past three, five, seven, and ten years, the returns are significantly higher than peer median returns. For the calendar year ending December 2019, returns matched peer returns. Compared to the State Street Universe of public pension plans greater than $10 billion, the returns are near the top decile of returns. Also, the plans’ returns were among the least risky, as measured by standard deviation. The ten-year return begins at the cyclical low of the global financial crisis and because risk assets were trading at depressed prices, the trailing 10-year returns are above average. Over a very long horizon, since 1979, the annualized rate of return on the plan assets has been approximately 9.4%.
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