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North Carolina Supplemental Retirement Plans Investment Performance March 31, 2014

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North Carolina Supplemental Retirement Plans Investment Performance March 31, 2014 North Carolina Supplemental Retirement Plans Investment Performance March 31, 2014 Services provided by Mercer Investment Consulting, Inc. Table of Contents Table of Contents 1. Capital Markets Commentary 2. Executive Summary 3. Total Plan 4. US Equity 5. International Equity 6. Global Equity 7. Inflation Sensitive 8. US Fixed Income 9. Stable Value 10. GoalMaker Portfolios 11. Appendix Capital Markets Commentary Performance Summary: Quarter in Review Market Performance Market Performance First Quarter 2014 1 Year DOMESTIC EQUITY DOMESTIC EQUITY Russell 3000 2.0 Russell 3000 22.6 S&P 500 1.8 S&P 500 21.9 Russell 1000 2.0 Russell 1000 22.4 Russell 1000 Growth 1.1 Russell 1000 Growth 23.2 Russell 1000 Value 3.0 Russell 1000 Value 21.6 Russell Midcap 3.5 Russell Midcap 23.5 Russell 2000 1.1 Russell 2000 24.9 Russell 2000 Growth 0.5 Russell 2000 Growth 27.2 Russell 2000 Value 1.8 Russell 2000 Value 22.7 INTERNATIONAL EQUITY INTERNATIONAL EQUITY MSCI ACWI 1.1 MSCI ACWI 16.6 MSCI ACWI Small Cap 2.9 MSCI ACWI Small Cap 20.7 MSCI AC World ex US 0.5 MSCI AC World ex US 12.3 MSCI EAFE 0.7 MSCI EAFE 17.6 MSCI EAFE Small Cap 3.4 MSCI EAFE Small Cap 23.3 MSCI EM -0.4 MSCI EM -1.4 FIXED INCOME FIXED INCOME Barclays Aggregate 1.8 Barclays Aggregate -0.1 Barclays T-Bill 1-3 months 0.0 Barclays T-Bill 1-3 months 0.1 Barclays Treasury 1.3 Barclays Treasury -1.3 Barclays Credit 2.9 Barclays Credit 1.0 Barclays High Yield 3.0 Barclays High Yield 7.5 Citi WGBI 2.7 Citi WGBI 1.4 JP GBI-EM Global Div. 1.9 JP GBI-EM Global Div. -7.1 ALTERNATIVES ALTERNATIVES NAREIT Equity REITs 8.5 NAREIT Equity REITs 3.3 NAREIT Global REITs 4.0 NAREIT Global REITs 2.2 HFRI FOF Composite 0.2 HFRI FOF Composite 5.7 DJ UBS Commodity 7.0 DJ UBS Commodity -2.1 S&P GSCI Commodity 2.9 S&P GSCI Commodity 1.1 -3 0 3 6 9 12 -12 -6 0 6 12 18 24 30 36 Returns (%) Returns (%) Source: Standard & Poor's, Russell, MSCI Barra, NAREIT, Bloomberg Source: Standard & Poor's, Russell, MSCI Barra, NAREIT, Bloomberg 1 Macro Environment: Economic Review Annual GDP Growth The outlook for the developed world economy remains positive and 8 the IMF projects advanced economies will expand 2.2% in 2014, an improvement from the 1.5% average from 2011 to 2013. 6 The Eurozone should benefit from a lower fiscal drag, reduced 4 imbalances, and an easing of financial conditions. Despite persistently low inflation and a strong euro, monetary policy in the Eurozone has 2 been far less accommodative than in other regions. The potential (%) remains for the ECB to take more aggressive action, and relative 0 monetary policy should become easier over the next several years as short-term interest rates in the US rise while rates in the Eurozone -2 remain near 0%. In Japan, GDP growth is expected to slow to 1.5% in 2014 and 1.4% in 2015 as an increase in consumption taxes -4 weighs on growth. Inflation is expected to temporarily rise to 2.8% this year, the highest level since 1991, but is expected to fall short of the 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 BOJ’s target in future years absent further declines in the yen. While monetary policy is expected to remain accommodative, the secular Source: Bureau of Economic Analysis growth outlook for Japan is dependent on additional structural reform. World Economic Growth (Projections as of March 2014) Growth in emerging market countries remains challenged, reflecting tighter financial conditions and structural issues. While currency 10 declines and improved developed world growth has the potential to lift 2014 (f) exports, the IMF projects that EM economies will expand just 4.9% 8 2015 (f) 7.4 7.3 this year. Several countries continue to suffer from gaping current account deficits and elevated inflation, suggesting that monetary 6 5.4 policy may need to tighten further, which is likely to further reduce 4.7 growth. However, the risk of a 1997-style panic appears low. Public and private debt levels are generally low and currency reserves (%) 4 3.0 2.7 exceed 2014 external financing requirements in most large EM 2.7 2.5 2.4 1.5 1.8 2.0 1.3 1.9 countries. One potential catalyst for further downside risk could be 2 1.3 1.4 1.0 0.9 China. While bad loans are likely to rise, China has the ability to 0.5 0.8 loosen monetary policy and recapitalize the banking system. 0 Additionally, China is not dependent on capital inflows and from a US UK longer-term perspective reducing debt growth should help rebalance Italy India Brazil Spain China Japan France the economy. The secular growth outlook for EM economies is more Germany positive if countries can implement productivity-enhancing reforms. Source: Bloomberg 2 Macro Environment: Currencies Performance of Foreign Currencies versus the US Dollar 5.7 On a trade-weighted basis, the US dollar appreciated 0.5% in the first New Zealand Dollar 3.6 4.0 quarter. The yen and euro advanced by 2.0% and 0.2% against the Brazilian Real -10.9 3.1 dollar, respectively, while emerging market and commodity sensitive Australian Dollar -11.6 3.0 currencies were mixed. Notably, the Chinese yuan depreciated by Indian Rupee -10.0 2.0 2.6% as China managed the currency’s exchange rate lower. Japanese Yen -8.7 0.9 Swiss Franc 7.3 0.6 The dollar is likely to trend upward against developed currencies over GB Pound 9.6 0.2 the next few years. The relative health of the US economy is a Euro 7.4 -0.2 positive for the buck and suggests the Fed will implement tighter Mexican Peso -5.7 -1.1 monetary policies than other central banks. QE3 is on track to end in Korean Won 4.4 -2.0 fall 2014 and the Fed will likely raise its policy rates ahead of others. Taiwan Dollar -2.1 -2.6 Finally, the dollar remains cheap against most currencies on relative Chinese Yuan -0.1 -3.9 purchasing power parity (PPP). A negative for the dollar is that the US Canadian Dollar -7.9 Quarter continues to run a current account deficit, although it is improving due -18 -12 -6 0 6 12 18 1 Year Returns (%) to falling energy imports. Source: Bloomberg The yen trades at a discount to the dollar on relative PPP; however, the BOJ is likely to remain aggressive in expanding its balance sheet Currency Valuation versus US Dollar (Based on Relative PPP) to fight deflation. While a short-term reversal is possible due to the 60 high number of speculative yen shorts, the currency is likely to Euro UK Pound continue its decline over the intermediate-term. Overvalued relative to the dollar Yen Swiss Franc 40 The euro has strengthened by 15% against the USD over the past 20 months and appears rich against the dollar on relative PPP, trading at 20 a premium of 16%. This makes it more difficult for the periphery to recover. The ECB may take more aggressive actions to support (%) growth and fight deflation, which could weaken the euro against the 0 dollar. EM currencies continued to decline in the first quarter. While further -20 currency losses are a short-term risk, especially for economies with Undervalued relative to the dollar current account deficits, we expect volatility to moderate because US -40 rate increases are likely to be more gradual. Over the long-term, we expect real exchange rates to appreciate due to higher economic 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 growth. Source: Bloomberg 3 Asset Class: US Equities – Style, Sector, Cap Performance Style and Capitalization Market Performance 2.0 Broad Market Russell 3000 22.6 1.8 Stocks rose modestly in the first quarter, benefiting from a stable S&P 500 21.9 Russell 1000 2.0 macro environment. The Russell 3000 Index increased 2.0% and is 22.4 up 22.6% over the last 12 months. US markets outperformed Russell 1000 Growth 1.1 23.2 international developed and emerging markets by 130 and 240 basis Russell 1000 Value 3.0 21.6 points, respectively, for the quarter. 3.5 Russell Midcap 23.5 2.0 Russell Mid Growth 24.2 Market Cap 5.2 Russell Mid Value 23.0 1.1 Large Caps: The S&P 500 Index rose 1.8% in the first quarter. Large Russell 2000 24.9 0.5 cap stocks lagged mid cap by 170 basis points, but outperformed Russell 2000 Growth 27.2 small cap stocks by 70 basis points. Russell 2000 Value 1.8 22.7 Mid Caps: The Russell Midcap Index advanced 3.5% in the first Quarter 0 6 12 18 24 30 1 Year Returns (%) quarter, outperforming the Russell 3000 index by 150 basis points. Source: Standard & Poor's, Russell, Bloomberg Small Caps: Small cap stocks underperformed large and mid cap stocks as the Russell 2000 Index rose 1.1% in the first quarter. Sector Performance Style 9.8 Value vs. Growth: Value stocks surpassed growth across all Utilities 10.8 capitalizations in the first quarter. Mid cap value was the best Health Care 5.9 29.9 performing style, gaining 5.2%.
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