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San Joaquin County EmployeesRetirement Association
A G E N D ABOARD MEETING
SAN JOAQUIN COUNTY EMPLOYEES RETIREMENT ASSOCIATIONBOARD OF RETIREMENT
FRIDAY, JANUARY 11, 2019AT 9:30 AM
Location: SJCERA Board Room6 S. El Dorado Street, Suite 400, Stockton, California
1.0 ROLL CALL2.0 PLEDGE OF ALLEGIANCE3.0 APPROVAL OF MINUTES
3.01 Approval of the minutes for the Board Meeting of December 14, 2018 43.02 Board to approve minutes
4.0 PUBLIC COMMENT4.01 The public is welcome to address the Board during this time on matters within the
Board’s jurisdiction. Members of the public are encouraged to complete a PublicComment form, which can be found near the entry to the Board Room. Publiccomment on items listed on the agenda may be heard at this time, or when theitem is called, at the discretion of the Chair.
Except as otherwise permitted by the Ralph M. Brown Act (California GovernmentCode Sections 54950 et seq.), no deliberation, discussion or action may be takenby the Board on items not listed on the agenda. Members of the Board may, butare not required to: (1) briefly respond to statements made or questions posed bypersons addressing the Board; (2) ask a brief question for clarification; or (3) referthe matter to staff for further information.
Public comment is expected to be civil and courteous and is limited to three (3)minutes.
5.0 CONSENT ITEMS5.01 Service Retirement (21) 85.02 General (1)
01 Proposed Revision to 2019 Board Meeting Calendar 11
5.03 Report of Closed Sessions01 Waterloo-Morada Rural Fire Protection District (WMRFPD) agreed to resolve a
matter of exposure to litigation which was discussed by the Board in closedsession on October 12, 2018. WMRFPD paid $192,965.33 to satisfy SJCERAinvoices for missing employer contributions for WMRFPD employees.
02 At the November 9, 2018 meeting, the Board directed staff to discontinue therebalancing portion of Parametric’s contract.
6.0 ASSET LIABILITY OVERVIEW6.01 Presentation by PCA on concepts and strategies for the 2019 asset liability study 14
6 South El Dorado Street, Suite 400 • Stockton, CA 95202(209) 468-2163 • [email protected] • www.sjcera.org
SJCERA Board Meeting • 1/11/2019 • Page 1
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6.02 Board to discuss and give direction to staff and consultant as necessary7.0 2019 INVESTMENT PROGRAM PLAN
7.01 Memo from PCA regarding proposed investment program activities and schedulefor 2019
69
7.02 Board to review and give direction to staff and consultant as necessary8.0 RETIREMENT-ELIGIBLE COMPENSATION 73
8.01 2018 Earnings Code Retirement-Eligible Ratification Report 758.02 Proposed Resolution 2019-01-01 titled “Compensation Earnable and Pensionable
Compensation for SJCERA Members” including Attachment II76
8.03 Board to ratify 2018 earnings codes and adopt resolution 2019-01-019.0 CONSULTANT REPORTS
9.01 Monthly Investment Performance Updates01 Manager Performance Flash Report - November 2018 with a verbal update on
December 2018 performance94
02 PCA Investment Market Risk Metrics - December 2018 97
03 Board to accept and file reports
9.02 PCA Manager Due Diligence Meetings and Reports01 PCA Due Diligence Memo on P/E Investments 115
02 Board to discuss and give direction to staff and consultant as necessary
10.0 EMPLOYER TERMINATION POLICY 12010.01 Board to discuss and give direction to staff as necessary
11.0 BOARD MEMBER CONTACT INFORMATION 15411.01 Board to discuss and give direction to staff as necessary
12.0 STAFF REPORTS12.01 Annual Trustee Education Report 15512.02 Pending Retiree Accounts Receivable - Fourth Quarter 2018 15612.03 Legislative Summary Report 15712.04 Trustee and Executive Staff Travel
01 Conferences and Events Schedule for 2019 160
02 Summary of Pending Trustee and Executive Staff Travel 161
03 Summary of Completed Trustee and Executive Staff Travel 162
12.05 Board to accept and file reports12.06 CEO Report 163
01 2018 Action Plan Report 167
02 Pension System Enhancement Project 177
12.07 CIO Report 17912.08 Report from Committee
SJCERA Board Meeting • 1/11/2019 • Page 2
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01 Committee Chair and staff will provide a brief summary of the outcome of the:
a Real Estate Committee Meeting - January 11, 2019
13.0 CORRESPONDENCE13.01 Letters Received13.02 Letters Sent13.03 Market Commentary/Newsletters/Articles
01 NCPERS The Monitor December 2018 180
02 Research Affiliates December 2018 187
03 Research Affiliates December 2018 199
14.0 COMMENTS14.01 Comments from the Board of Retirement
15.0 CLOSED SESSION15.01 PERSONNEL MATTERS
CALIFORNIA GOVERNMENT CODE SECTION 54957EMPLOYEE DISABILITY RETIREMENT APPLICATIONS (3)
15.02 PUBLIC EMPLOYEE PERFORMANCE EVALUATIONCALIFORNIA GOVERNMENT CODE SECTION 54957TITLE: RETIREMENT ADMINISTRATOR/CHIEF EXECUTIVE OFFICER
15.03 PURCHASE OR SALE OF PENSION FUND INVESTMENTSCALIFORNIA GOVERNMENT CODE SECTION 54956.81
15.04 CONFERENCE WITH LEGAL COUNSEL - EXISTING LITIGATIONCALIFORNIA GOVERNMENT CODE SECTION 94956.9(d)(1)01 Allum, et al. v. San Joaquin County Employees’ Retirement Association et al.
San Joaquin County Superior Court Case No. STK-CV-UBC-2017-1069616.0 CALENDAR
16.01 Board Meeting, February 8, 2019 at 9:30 AM17.0 ADJOURNMENT
SJCERA Board Meeting • 1/11/2019 • Page 3
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M I N U T E SBOARD MEETING
SAN JOAQUIN COUNTY EMPLOYEES RETIREMENT ASSOCIATIONBOARD OF RETIREMENT
FRIDAY, DECEMBER 14, 2018AT 9:30 AM
Location: SJCERA Board Room6 S. El Dorado Street, Suite 400, Stockton, California
San Joaquin County EmployeesRetirement Association
1.0 ROLL CALL1.01 MEMBERS PRESENT: J.C. Weydert, Jennifer Goodman, Michael Duffy, Katherine
Miller, Chanda Bassett, Adrian Van Houten, Margo Praus, Raymond McCray, andMichael Restuccia (out at 11:04 a.m.) presidingMEMBERS ABSENT: Phonxay KeokhamSTAFF PRESENT: Chief Executive Officer Johanna Shick, Assistant Chief ExecutiveOfficer Kathy Herman, Chief Investment Officer Nancy Calkins, Financial Officer LilyCherng, Management Analyst III Greg Frank, Department Information SystemsAnalyst II Lolo Garza, and Retirement Administrative Assistant Andrea BonillaOTHERS PRESENT: Deputy County Counsel Jason Morrish, David Sancewich andRyan Lobdell of PCA, and Gene Neely of Lathrop Manteca Fire District
2.0 PLEDGE OF ALLEGIANCE2.01 Led by Ray McCray
3.0 APPROVAL OF MINUTES3.01 Approval of the minutes for the Board Meeting of November 9, 2018
01 The Board voted unanimously (8-0) to approve the Minutes of the BoardMeeting of November 9, 2018. (Motion: Van Houten; Second: Weydert)
3.02 Approval of the minutes for the Administrative Committee Meeting of November 29,201801 The Board voted unanimously (8-0) to approve the Minutes of the
Administrative Committee Meeting of November 29, 2018. (Motion: Bassett;Second: Duffy)
4.0 CONSENT ITEMS4.01 Service Retirement (16)4.02 General (1)
01 Proposed 2019 Administrative Budgeta Proposed 2019 Budget Summary
b Proposed 2019 Administrative Budget Adjustment
c Proposed Resolution 2018-12-01 titled “Annual Administrative Budget for2019”
d Board to adopt proposed Resolution 2018-12-01
6 South El Dorado Street, Suite 400 • Stockton, CA 95202(209) 468-2163 • [email protected] • www.sjcera.org
SJCERA Board Meeting • 12/14/2018 • Page 1
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4.03 The Board voted unanimously (8-0) to approve the Consent Items and adoptResolution 2018-12-01. (Motion: Duffy; Second: Van Houten)
5.0 CONSULTANT REPORTS5.01 QUARTERLY REPORTS FROM INVESTMENT CONSULTANT FOR PERIOD
ENDED SEPTEMBER 30, 201801 PCA Quarterly Investment Performance Analysis
02 PCA Manager Certification Report
03 Manager Due Diligence Schedule
04 David Sancewich and Ryan Lobdell of Pension Consulting Alliance reviewed anddiscussed the reports in relation to the Board’s investment policies. The TotalPortfolio net return was 1.7% for the quarter and 5.9% for the one-year periodended September 30, 2018; performance relative to the policy benchmark trailedby 0.1% for the quarter and trailed by 0.2% for the year. Annualized net returns forthe total portfolio matched the policy benchmark over the 25-year period.
5.02 Monthly Investment Performance Updates01 Manager Performance Flash Report - October 2018 with a verbal update on
November 2018 performance02 PCA Investment Market Risk Metrics - November 2018
5.03 Board accepted and filed reports6.0 EMERGING MARKETS EDUCATION SESSION
6.01 Presentation by PCA on Emerging Markets6.02 The Board voted unanimously (8-0) to accept PCA’s recommendation to
conduct a Request for Information search for an active emerging marketsmanager. (Motion: Restuccia; Second: Miller)
7.0 CORRECTION OF ERRORS OR OMISSIONS POLICY7.01 Proposed Correction of Errors or Omissions Policy as recommended by
Administrative Committee7.02 Current Correction of Errors or Omissions Policy7.03 Proposed Resolution 2018-12-02 titled “Correction of Errors and Omissions Policy”7.04 The Board voted unanimously (8-0) to approve the Correction of Errors or
Omissions policy and adopt Resolution 2018-12-02. (Motion: Bassett; Second:Van Houten)
8.0 STAFF REPORTS8.01 Legislative Summary Report8.02 Trustee and Executive Staff Travel
01 Conferences and Events Schedule for 2019
a CALAPRS Advanced Principles of Pension Management
02 Summary of Pending Trustee and Executive Staff Travel
03 Summary of Completed Trustee and Executive Staff Travel
8.03 Board accepted and filed reports8.04 CEO Report
SJCERA Board Meeting • 12/14/2018 • Page 2
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01 Pension System Enhancement Project update
CEO Shick reported that December 15 is a significant deadline. There should bemore to report next month.
02 In addition to the written CEO report, CEO Shick reported that she sent a letter toCAO Nino regarding funding the replacement benefit plan and will keep the Boardapprised on progress toward resolution of this matter.
8.05 CIO Report8.06 Report from Committees
01 Committee Chairs and staff provided a brief summary of the outcome of the:
a Administrative Committee Meeting - November 29, 2018
b Real Estate Committee Meeting - December 14, 2018
Meeting postponed to January 11, 20199.0 CORRESPONDENCE
9.01 Letters Received01 November 6, 2018 San Joaquin County Mosquito and Vector Control District
9.02 Letters Sent01 November 30, 2018 Response to San Joaquin County Mosquito and Vector
Control District9.03 Reports9.04 Market Commentary/Newsletters/Articles
01 NCPERS The Monitor November 2018
10.0 COMMENTS10.01 Comments from the Board of Retirement
01 Trustee Miller suggested adding a public comment section to the agenda on allvoting items.
02 Trustee Weydert apologized to Chief Gene Neely and stated it is not the Board’sintent to be disrespectful regarding the treatment of public comments.
03 Chair Restuccia confirmed the Committee members for the Ad Hoc ExecutiveManagement Review Committee will remain the same with himself, Praus,Goodman and Weydert serving as the chairperson.
04 Trustee McCray stated SACRS is considering using marketing to encourage moretrustees to attend conferences. The Board indicated that location, schedule andthe balance between education and networking as reasons for non-attendance,not lack of awareness.
10.02 Comments from the Public
SJCERA Board Meeting • 12/14/2018 • Page 3
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01 Chief Gene Neely of Lathrop Manteca Fire District addressed the Board with thefollowing concerns: 1) There is no contact information for the Board of RetirementTrustees available to the public 2) He did not receive a return phone call fromChair Restuccia 3) He would like to explore the possibility of having a districtrepresentative appointed to the Board 4) He would like the Board to revisit theirdecision that was made on the Employer Termination Policy and expressed thatas a contributing employer, leaving the pension system is nearly impossible withthe way the policy is written 5) He suggested the Board incorporate the use ofpublic comment cards 6) He requests a more timely response from SJCERA staff.
11.0 CLOSED SESSION11.01 CONSIDERATION OF INVESTMENT TRANSACTIONS, PURCHASES, SALES;
GOVERNMENT CODE SECTION 54956.8101 The Vice Chair convened a Closed Session at 11:16 a.m. The Vice Chair
adjourned the Closed Session and reconvened the Open Session at 11:40 a.m.
Counsel noted there was nothing to report from closed session regarding thissubject.
12.0 CALENDAR12.01 Board Meeting, January 11, 2019 at 9:30 AM
01 Real Estate Committee Meeting January 11, 2019 at 8:00 a.m. was announcedverbally to the Board.
13.0 ADJOURNMENT13.01 There being no further business the meeting was adjourned at 11:40 a.m.
Respectfully Submitted:
______________________Michael Restuccia, Chair
Attest:
_______________________Raymond McCray, Secretary
SJCERA Board Meeting • 12/14/2018 • Page 4
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San Joaquin County Employees RetirementAssociationJanuary 2019
PUBLIC
5.01 Service Retirement ConsentCLEONA L CASH Clinical EducationCoordinator
Hosp Nursing EducationMember Type: GeneralYears of Service: 12y 08m 29dRetirement Date: 11/26/2018
01
VICKI M DAVIS Office SupervisorMental Health - Clerical
Member Type: GeneralYears of Service: 23y 08m 01dRetirement Date: 11/29/2018
02
RENEE M DELGADO Senior Collections ClerkOffice of Revenue - Recovery
Member Type: GeneralYears of Service: 36y 10m 22dRetirement Date: 12/10/2018
03
MATT D DUCHARME FirefighterLathrop Manteca Fire District
Member Type: SafetyYears of Service: 29y 05m 15dRetirement Date: 11/2/2018
04
DENNIS B DUFFY Info Systems Analyst VInformation Systems Div - ISF
Member Type: GeneralYears of Service: 16y 03m 25dRetirement Date: 11/26/2018
05
CECELIA C ERIKSEN-HISEL Deferred MemberN/A
Member Type: GeneralYears of Service: 19y 10m 22dRetirement Date: 12/7/2018Comments: Deferred from SJCERA since May 2017.
06
MICHELE C GEMIGNIANI Senior Legal TechnicianChild Support Svs
Member Type: GeneralYears of Service: 10y 01m 02dRetirement Date: 11/26/2018
07
BARBARA J LITTLE Child Support Officer IIChild Support Svs
Member Type: GeneralYears of Service: 23y 08m 19dRetirement Date: 11/17/2018
08
KATHLEEN LUANGRATH Employment Training Spec IIEmployment - Economic Developm
Member Type: GeneralYears of Service: 28y 04m 08dRetirement Date: 11/26/2018
09
1/4/2019 11:19:59 AM Page: 2
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San Joaquin County Employees RetirementAssociationJanuary 2019
PUBLIC
ROBERT A MCLACHLAN Crafts Worker IIIFacilities Management
Member Type: GeneralYears of Service: 12y 04m 29dRetirement Date: 11/26/2018
10
DAVE R MERTZ Deferred MemberN/A
Member Type: GeneralYears of Service: 25y 00m 26dRetirement Date: 11/16/2018Comments: Deferred from SJCERA since October 2017.
11
JEGAN L RAJA Deferred MemberN/A
Member Type: GeneralYears of Service: 12y 10m 04dRetirement Date: 11/2/2018Comments: Deferred from SJCERA since April 2005. Outgoing reciprocity and concurrent retirement withStanCERA.
12
DANNY P RAMIREZ Crafts Worker IIIFacilities Management
Member Type: GeneralYears of Service: 12y 02m 24dRetirement Date: 12/10/2018
13
LINDA I RETZLAFF Office Assistant SpecialistCorrectional Health Services
Member Type: GeneralYears of Service: 38y 00m 01dRetirement Date: 11/26/2018
14
AMY L RIGHTER Deferred MemberN/A
Member Type: GeneralYears of Service: 07y 00m 09dRetirement Date: 12/7/2018Comments: Deferred from SJCERA since October 2006.
15
MARIA Y SANCHEZ Eligibility Worker IIHSA - Eligibility Staff
Member Type: GeneralYears of Service: 07y 04m 09dRetirement Date: 12/1/2018Comments: Incoming reciprocity and concurrent retirement with MCERA.
16
LARA TAPIRO Deferred MemberN/A
Member Type: GeneralYears of Service: 08y 05m 06dRetirement Date: 11/29/2018Comments: Deferred from SJCERA since July 2016.
17
VERNETTA L TENENTE Accounting Technician IIPurchasing - Admin - Fiscal
Member Type: GeneralYears of Service: 12y 06m 13dRetirement Date: 11/26/2018
18
1/4/2019 11:19:59 AM Page: 3
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San Joaquin County Employees RetirementAssociationJanuary 2019
PUBLIC
RAMONA M THOMAS Substance Abuse Program MgrSubstance Abuse Services
Member Type: GeneralYears of Service: 33y 07m 16dRetirement Date: 11/26/2018
19
RICHARD E WILLIAMS Correctional OfficerSheriff-Custody-Regular Staff
Member Type: GeneralYears of Service: 01y 08m 07dRetirement Date: 6/25/2018
20
RICHARD E WILLIAMS Correctional OfficerSheriff-Custody-Regular Staff
Member Type: SafetyYears of Service: 22y 02m 07dRetirement Date: 6/25/2018
21
1/4/2019 11:19:59 AM Page: 4
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Board of Retirement Meeting San Joaquin County Employees’ Retirement Association
Agenda Item 5.02-01 January 11, 2019 SUBJECT: Proposed Revision to 2019 Board Meeting Calendar SUBMITTED FOR: _X_ CONSENT l___ ACTION ___ INFORMATION RECOMMENDATION Staff recommends that the Board approve the proposed revision to its 2019 Meeting Calendar. PURPOSE To update the calendar of scheduled meetings of the Board in order to align with the 2019 Critical Dates List for the annual audit and the Board of Supervisors 2019 meeting dates. DISCUSSION The Board adopted its 2019 meeting calendar on October 12, 2018. Since then, staff has received the Board of Supervisors 2019 meeting dates. After considering both the Board of Supervisors’ and the Board of Retirement’s meeting schedule, and the deadlines required for submitting SJCERA’s audited financial reports and CAFR, staff proposes rescheduling the June Board meeting from June 14 to June 7. Moving the meeting to June 7, offers the following advantages:
1. The Board of Retirement will be able to approve the audited financials before they are submitted to the Board of Supervisors.
2. The Board of Supervisors will be able to accept and file SJCERA’s audited financials at the June 11 meeting. This is the only Board of Supervisors meeting in June not dedicated to Budget Hearings.
3. SJCERA staff will be able to submit our approved, audited financial statements on time.
The proposed change to the 2019 calendar is reflected in the attached “mark-up” version using strike-out font for deletions and italic font for additions. A “clean” version of the 2019 calendar with the proposed changes is also attached for your information. ATTACHMENT 2019 SJCERA Board of Retirement Meeting Calendar – Proposed Revision (Mark-up) 2019 SJCERA Board of Retirement Meeting Calendar – Proposed Revision (Clean) ______________________ ______________________ JOHANNA SHICK ANDREA BONILLA Chief Executive Officer Retirement Administrative Assistant
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MONTH DATE MONTH DATE
JAN 11 Board Meeting JUL 12 Board MeetingEarnings Code Ratification Mid-Year Administrative Budget ReportFourth Quarter Operations Reports* Second Quarter Operations Reports*
11 Real Estate Committee Quarterly Meeting Election of Board Officers22 - 24 SACRS UC Berkeley
FEB 8 Board MeetingNotice of CPI/Set Retiree COLA AUG 21 Board Meeting
TBD Administrative Committee Meeting Adoption of Plan Contribution Rates22 Special Meeting; Inv Mgr Roundtable
26 - 29 CALAPRS Principles of Pension MgmtMAR 8 Board Meeting for Trustees, Pepperdine
Fourth Quarter Inv Reports8 Real Estate Committee Quarterly Meeting SEP 13 Board Meeting
TBD Audit Committee Meeting Second Quarter Inv Reports2 - 5 CALAPRS General Assembly, Monterey Consultants and Actuaries Evaluations
27 - 29 CALAPRS Advanced Principles of Pension 13 Real Estate Committee Quarterly Meeting Mgmt for Trustees, UCLA
APR 12 Board Meeting OCT 11 Board MeetingFirst Quarter Operations Reports* Adoption of Board Calendar for next year
Third Quarter Operations Reports*2020 Action Plan
MAY 17 Board Meeting7 - 10 SACRS Spring Conf, Lake Tahoe NOV 8 Board MeetingTBD Audit Committee Meeting Actuarial Experience Study
TBD Administrative Committee Meeting12 - 15 SACRS Fall Conference, Monterey
JUN 14 7 Board MeetingFirst Quarter Inv Reports DEC 13 Board MeetingAuditor's Annual Report / CAFR Third Quarter Inv Reports
14 7 Real Estate Comm Qtrly; RE Mgr Due Diligence Annual Administrative BudgetTBD Administrative Committee Meeting Semi-Annual Interest CreditingTBD RPESJC Picnic 13 Real Estate Committeee Quarterly Meeting
TBD RPESJC Holiday LunchTBD Board Holiday Event
* Disability App Status Report and Pending Retiree Accounts Receivable ReportNotes: May meeting is on third Friday due to the SACRS Spring Conference.
August meeting is on third Wednesday due to the Investment Roundtable.One meeting per month on all subjects; special Manager Due Diligence Meetings as needed. Proposed Revision January 11, 2019
2019 - SJCERA BOARD OF RETIREMENT MEETING CALENDAR Proposed Revision (Mark-up) Periodic Items / Other Events Periodic Items / Other Events
Unless otherwise noted on the agenda, Board Meetings convene at 9:30 a.m.
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MONTH DATE MONTH DATE
JAN 11 Board Meeting JUL 12 Board MeetingEarnings Code Ratification Mid-Year Administrative Budget ReportFourth Quarter Operations Reports* Second Quarter Operations Reports*
11 Real Estate Committee Quarterly Meeting Election of Board Officers22 - 24 SACRS UC Berkeley
FEB 8 Board MeetingNotice of CPI/Set Retiree COLA AUG 21 Board Meeting
TBD Administrative Committee Meeting Adoption of Plan Contribution Rates22 Special Meeting; Inv Mgr Roundtable
26 - 29 CALAPRS Principles of Pension MgmtMAR 8 Board Meeting for Trustees, Pepperdine
Fourth Quarter Inv Reports8 Real Estate Committee Quarterly Meeting SEP 13 Board Meeting
TBD Audit Committee Meeting Second Quarter Inv Reports2 - 5 CALAPRS General Assembly, Monterey Consultants and Actuaries Evaluations
27 - 29 CALAPRS Advanced Principles of Pension 13 Real Estate Committee Quarterly Meeting Mgmt for Trustees, UCLA
APR 12 Board Meeting OCT 11 Board MeetingFirst Quarter Operations Reports* Adoption of Board Calendar for next year
Third Quarter Operations Reports*2020 Action Plan
MAY 17 Board Meeting7 - 10 SACRS Spring Conf, Lake Tahoe NOV 8 Board MeetingTBD Audit Committee Meeting Actuarial Experience Study
TBD Administrative Committee Meeting12 - 15 SACRS Fall Conference, Monterey
JUN 7 Board MeetingFirst Quarter Inv Reports DEC 13 Board MeetingAuditor's Annual Report / CAFR Third Quarter Inv Reports
7 Real Estate Comm Qtrly; RE Mgr Due Diligence Annual Administrative BudgetTBD Administrative Committee Meeting Semi-Annual Interest CreditingTBD RPESJC Picnic 13 Real Estate Committeee Quarterly Meeting
TBD RPESJC Holiday LunchTBD Board Holiday Event
* Disability App Status Report and Pending Retiree Accounts Receivable ReportNotes: May meeting is on third Friday due to the SACRS Spring Conference.
August meeting is on third Wednesday due to the Investment Roundtable.One meeting per month on all subjects; special Manager Due Diligence Meetings as needed. Proposed Revision January 11, 2019
2019 - SJCERA BOARD OF RETIREMENT MEETING CALENDAR Proposed Revision (Clean) Periodic Items / Other Events Periodic Items / Other Events
Unless otherwise noted on the agenda, Board Meetings convene at 9:30 a.m.
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2019-01 Asset Liability Intro Presentation
January 2019
San Joaquin County Employees Retirement Association (SJCERA)
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San Joaquin County Employees Retirement Association (SJCERA)• 2019 Strategic Allocation Review
Table of Contents
Section Tab
Overview / Review 2015 AL Study 1
Proposed Allocation Concepts 2
Modeling Methodology 3
Next Steps 4
Appendix
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San Joaquin County Employees Retirement Association (SJCERA)• 2019 Strategic Allocation Review
Overview / Review 2015 AL Study
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San Joaquin County Employees Retirement Association (SJCERA)• 2019 Strategic Allocation Review
Strategic Allocation – Purpose
• What is Strategic Allocation? The percentage of plan assets that are allocated to high-level classes/buckets of
strategies Does not relate to managers/implementation
• Goal of Strategic Allocation: To review and possibly modify the strategic investment allocation policy:
Projected liabilities (projected future payments) Reflecting the tolerance for investment risk as defined by the Board of Trustees Incorporating the appropriate investment classes available to the plan
• Typically conducted every 2-to-5 years or after material fund changes Last review in 2015
• Strategic Allocation selection sets the foundation for the long-term management structure of a fund’s investment assets Strategic Allocation is the most critical driver of investment success
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San Joaquin County Employees Retirement Association (SJCERA)• 2019 Strategic Allocation Review
Strategic Allocation Review (Current Long-term Allocation)
• Approved long-term policy mix: Global Equity 30% Stable Fixed Income 10% Private Appreciation 12% Credit 14% Risk Parity 20% Crisis Risk Offset 10%
• Changes made in 2015: Implemented a Private Appreciation Class Implemented a Crisis Risk Offset Class Reduced Fixed Income and US Equity Exposure
Global Equity, 30%
Stable Fixed Income, 10%
Private Appreciation,
12%
Credit, 14%
Risk Parity, 14%
Crisis Risk Offset , 20%
Current Target Allocation
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San Joaquin County Employees Retirement Association (SJCERA)• 2019 Strategic Allocation Review
Proposed Allocation Concepts & Modeled Strategies
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San Joaquin County Employees Retirement Association (SJCERA)• 2019 Strategic Allocation Review
New Concepts
PCA would like to introduce one slightly new allocation concept:1. Adjust risk-based, functional allocation framework
Two high-level classes, each with three underlying bucketso Broad Growth
Aggressive Growth Traditional Growth Stabilized Growth
o Diversifying Strategies Inflation Protection Principal Protection Crisis Risk Offset
Allows the Board to have better clarity into the portfolio’s risk and return posture Full transparency beneath these high-level classes is always provided SJCERA has already partially adopted this framework
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San Joaquin County Employees Retirement Association (SJCERA)• 2019 Strategic Allocation Review
Risk-taking assets/strategies that produce high total returns relative to other classes
• Often utilize significant levels of financial/economic leverage
• Often linked closely to overall economic success/failure
• Long-term holding periods often result in significant growth in purchasing power/wealth
Growth
Key Concepts – Functional Framework
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San Joaquin County Employees Retirement Association (SJCERA)• 2019 Strategic Allocation Review
Diversification
• Low volatility (e.g., 2-6%)
• Known source of liquidity at all times
• Typically cash + 0-2% returns
• Not powerful/volatile enough to materially rebalance away from and into Public Equity
Two Forms of Diversification
• High volatility (e.g., 10-20%) / capital efficient
• Zero-to-negative conditional correlation to Public Equity
• Certain implementations work in inflationary crises and others work in deflationary crises
• Can be rebalanced away from and into Public Equity
OffsetAnchor
Key Concepts – Functional Framework
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San Joaquin County Employees Retirement Association (SJCERA)• 2019 Strategic Allocation Review
Reallocating Current StrategiesNew High-Level Class
New Mid-Level Component
Role Description
Broad Growth
Aggressive Growth Growth • Holds highest risk illiquid assets driven by economic growth • Private Equity
Traditional Growth Growth • Holds all of the same assets previously under Global Growth• US Equity and Non-US Equity
Stabilized Growth Growth• Holds lower risk illiquid assets• Lower volatility strategies that are still driven by economic growth • Private Credit and Core Real Estate
Diversifying Strategies
Inflation Protection Anchor • Designed to protect principal during periods of high inflation• TIPS: potential new class
Principal Protection Anchor• Designed to protect principal during most market environments and can
be used as a source of liquidity• Core Fixed Income: previously Interest Rate Class
Crisis Risk Offset Offset
• Designed to produce significant appreciation during an extended equity crisis• Alternative Risk Premia and Systematic Trend Following (current exposures are
reorganized from Absolute Return and Tactical Asset Allocation) • Long Duration: potential new class
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San Joaquin County Employees Retirement Association (SJCERA)• 2019 Strategic Allocation Review
Summary – New Concepts and Strategies
• Allocations to the high-level classes, mid-level components, and strategies are determined during the optimization process
• The Board will still utilize some measure of success (e.g., return) and some measure of risk (e.g., volatility) when selecting a portfolio
• Risk-oriented, Functional Framework is primarily for oversight
• Main goal of the framework is to increase understanding/transparency and focus on what matters: Risks are what drive investment returns Economic Growth Risk is the most dominant risk in portfolios We want to harvest Economic Growth Risk in a diversified manner When Economic Growth falters, we need strategies to help us survive during
those market environments
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San Joaquin County Employees Retirement Association (SJCERA)• 2019 Strategic Allocation Review
Modeling Methodology
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San Joaquin County Employees Retirement Association (SJCERA)• 2019 Strategic Allocation Review
Modeling Process
• PCA utilizes a proprietary, customizable simulation model
• Classes/time series maintain historical relationships and behavior but are tailored to expected risk/return specifications
• Portfolio statistics are based on thousands of multi-year simulations
• Process requires significant time and computing power but allows for custom modeling and performance statistics
• Differs from traditional mean-variance optimization Mean-Variance Optimization:
o Workhorse for asset allocation analysis since the 1950so Single-period modelo Assumes normal distributions and linear relationshipso Only examines risk under standard deviation lenso Doesn’t incorporate crisis situation (i.e., correlations moving to 1)o Fails to accurately reflect potential outliers
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San Joaquin County Employees Retirement Association (SJCERA)• 2019 Strategic Allocation Review
Modeling Process
2025, 70%
2035, 82%
64%
40.0%
50.0%
60.0%
70.0%
80.0%
90.0%
100.0%
2013 2016 2019 2022 2025 2028 2031 2034 2037 2040 2043 2046
AB 1469 Funding Trajectory Actual Trajectory Lower Threshold - Long Term
Progress Zone
Danger Zone
-4.0%
-3.5%
-3.0%
-2.5%
-2.0%
-1.5%
-1.0%
-0.5%
0.0%
$(20.00)
$(18.00)
$(16.00)
$(14.00)
$(12.00)
$(10.00)
$(8.00)
$(6.00)
$(4.00)
$(2.00)
$-
2015 2017 2019 2021 2023 2025 2027 2029 2031 2033 2035 2037 2039 2041 2043 2045
Net Contributions [LHS] Net Contributions as % of Actuarial Value of Assets (AVA) [RHS]
GrowthIncome
ProtectionCounter-Balance
Goals, Preferences &
Concerns
Stress the Role & Function of
Assets
Modeling: Simulation-
based Optimization
Key aspect of examining alternatives: probabilities of achieving/missing key client-defined thresholds
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San Joaquin County Employees Retirement Association (SJCERA)• 2019 Strategic Allocation Review
Next Steps
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San Joaquin County Employees Retirement Association (SJCERA)• 2019 Strategic Allocation Review
Conclusion and Next Steps
• Work with Cheiron’s actuarial assumptions to model future benefits (liabilities)
• Further define the underlying asset components
• Model different portfolios and their return distributions based on investment class assumptions and constraints
• Determine which portfolio best achieve your goals
Next Steps:
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San Joaquin County Employees Retirement Association (SJCERA)• 2019 Strategic Allocation Review
Appendix
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San Joaquin County Employees Retirement Association (SJCERA)• 2019 Strategic Allocation Review
Appendix – Strategic Classes & Their Roles: Domestic Equity
DEFINITION
• Ownership interest in publicly traded companies headquartered in U.S.
• Shares are SEC registered
SIZE OF MARKET
• $27.4 trillion total market capitalization as of 12/31/2017 - Russell 3000
STRATEGIC ROLE
• High long-term real returns• Hedge against active (pre-retirement) liabilities
SECTOR BREAKDOWN OF RUSSELL 3000(percentage of market cap as of 12/31/2017)
Technology19%
Health Care12%Consumer-
Oriented22%
Energy6%
Basic Industry13%
Financial Serv ices
16%
Utilities3% Real Estate4% Materials
3%
Telecom Serv ices
2%
Chart1
Technology
Health Care
Consumer-Oriented
Energy
Basic Industry
Financial Services
Utilities
Real Estate
Materials
Telecom Services
Russell 3000
18.82
12.5
21.49
5.7
13.1
16.37
2.99
4.11
2.72
1.87
Sheet1
TechnologyHealth CareConsumer-OrientedEnergyBasic IndustryAutos & TransportationFinancial ServicesUtilitiesReal EstateMaterialsTelecom Services
Russell 300018.8212.521.495.713.1016.372.994.112.721.87
12.6
816.8
20.6
99.67
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San Joaquin County Employees Retirement Association (SJCERA)• 2019 Strategic Allocation Review
Appendix – Strategic Classes & Their Roles: Domestic Equity
CHARACTERISTICS
• Relatively high returns (long-term)• Relatively high volatility (standard deviation of returns)• Relatively high liquidity• Diversification
IMPLEMENTATION
• Passively managed portfolios used to capture market returns• Actively managed portfolios expected to add value over passive funds• Size of aggregate portfolio may impact implementation choice(s)
OPERATIONS
• Securities held by Master-Custodial Bank• Electronic transfer of securities through DTC• Electronic trading systems, crossing networks, program trading available• Independent market prices readily available daily from exchanges for listed securities• Stocks traded over-the-counter can be daily-priced by market makers• Numerous small capitalization stocks require considerable effort to vote proxies
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San Joaquin County Employees Retirement Association (SJCERA)• 2019 Strategic Allocation Review
Appendix – Strategic Classes & Their Roles: Domestic Equity
COSTS
• Management fees for external managers• Transaction costs• Systems and custody costs• Staff salaries/benefits/administration• Consultant and legal costs
RISKS
• Absolute risk - possible magnitude of price decline• Liability hedging risk - risk that assets will not increase when liabilities increase• Regulatory risk - changes may adversely affect markets• Tax risk - changes may adversely affect markets• Liquidity risk - difficulty trading securities under adverse market conditions• Firm specific risk - unique risks associated with a specific firm• Tracking risk - magnitude of performance deterioration from a benchmark• Time horizon - horizon too short to weather cycles• Benchmark risk - benchmark not appropriate proxy• Market risks - price decline
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San Joaquin County Employees Retirement Association (SJCERA)• 2019 Strategic Allocation Review
Appendix – Strategic Classes & Their Roles: International Equity
DEFINITION
• Ownership interest in companies headquartered outside the U.S.• Publicly traded securities but subject to foreign registration
requirements
SIZE OF MARKET (as of 12/31/2017)
• The total market capitalization for the Morgan Stanley CapitalInternational ACWI ex-U.S. Index is now approximately $21.9trillion
• The total market capitalization for the Morgan Stanley EmergingMarkets Index is now approximately $5.4 trillion
STRATEGIC ROLE
• Increase overall portfolio diversification, less than fully correlatedwith other assets, improving risk-return tradeoff
• Increase investment opportunities• Increase total return
United Kingdom11%
Other Europe ex UK34%
EMU ex UK6%
Japan15%
Pacific ex Japan8%
Emerging Markets23%Canada
6%
Developed Markets: 77.8%
Emerging Markets: 22.2%
ACWI FREE EX-USA (as of 12/31/2017)
Chart1
United Kingdom
Other Europe xUK
EMU ex UK
Japan
Pacific ex Japan
Emerging Markets
Canada
Other Europe ex UK34%
EMU ex UK6%
Pacific ex Japan8%
2.6805
6.8872
2.2188
3.6185
1.8059
5.4297
1.4379
Sheet1
United KingdomOther Europe xUKEMU ex UKJapanPacific ex JapanEmerging MarketsCanada
2.68056.88722.21883.61851.80595.42971.4379
0.11130.28600.09210.15030.07500.22550.05971.0000
24.07853.44553.7472
16.768616.5856
0.20547332510.225930928
4209.94.41970.79452667490.774069072
1817.92.4161
uk2.0037
1350.2
other europe equalsEurope - EMU ex UK - UK
34627472.2
-22941168
11686304.2
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San Joaquin County Employees Retirement Association (SJCERA)• 2019 Strategic Allocation Review
Appendix – Strategic Classes & Their Roles: International Equity
CHARACTERISTICS
Developed Markets
• Relatively high real long-term returns• Relatively high liquidity• Relatively high volatility• Correlation with U.S. equities is about 0.60-0.80, depending on frequency of analysis• Currency adds to volatility but can be hedged, which mutes the diversification benefits
Emerging Markets
• Higher expected returns due to economic growth potential• Liquidity risk is significant• High volatility• FX markets not sufficiently developed to hedge currency risk• Limited access to markets• Market information less abundant than for developed markets• Correlation between emerging markets and EAFE index is surprisingly low
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San Joaquin County Employees Retirement Association (SJCERA)• 2019 Strategic Allocation Review
Appendix – Strategic Classes & Their Roles: International Equity
IMPLEMENTATION
• Externally managed active portfolios• Externally managed passive portfolios• External management is beneficial due to high level of staffing and expertise necessary to follow foreign stock and
currency market• Active management has at times produced better results outside U.S.
OPERATIONS
• DOT-style trading systems still in infancy• Electronic trading systems, crossing networks, available but do not provide any real volume at present• Liquidity varies widely in Non-U.S. equity markets• Settlement mechanisms continue to improve with a trend towards shorter settlement periods• Independent market prices not readily available in some markets• Tax reclamation
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San Joaquin County Employees Retirement Association (SJCERA)• 2019 Strategic Allocation Review
Appendix – Strategic Classes & Their Roles: International Equity
COSTS
• Management fees (average 50-75 basis points, whereas passive is much lower)
• Transaction costs (approximately 50 basis points) Broker commissions are becoming the least
significant component of execution costs Spread and Market impact higher than the U.S.
market Timing: cost of a delayed execution from time
decision is made to buy/sell Ticket costs higher: $25 to $100 versus $10 to $25
per transaction in the U.S. Transaction taxes
• Withholding taxes• Currency-overlay management fees (5 to 6 basis
points)• Custodial fees (approximately 3.3 basis points)
Maintaining sub-custodial networks in local markets
Operational issues dominated by local market regulations
Master custodian integrates information from local sub-custodians creating longer lead time and increased error rate in reporting
• Consultant fees• Staff salaries
RISKS
• Market risks - price decline• Structural risk from deflation• Currency risk• Counterparty risk• Liquidity risk• Political risk• Liability hedging risk• Liabilities denominated in U.S. dollars• Benchmark risk• Regulatory risk• Firm specific risk• Investors should explicitly consider
currency risk management in their international equity investment policies
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San Joaquin County Employees Retirement Association (SJCERA)• 2019 Strategic Allocation Review
Appendix – Strategic Classes & Their Roles: Domestic Fixed Income
DEFINITION
• Loans in U.S. dollars of companies, governmental entitiesor agencies, banks, and insurance companies with finitelives domiciled in the U.S. or issued in the U.S.
SIZE OF MARKET
• $24.4 trillion total market capitalization as of 12/31/2017–Bloomberg Barclays Capital Universal
STRATEGIC ROLE
• Diversification within a multi-asset class, total returnportfolio
• Hedge against a long duration accrued liability• Current income
SECTOR BREAKDOWN OF Blmbg BC UNIVERSAL(percentage of market cap as of 12/31/2017)
Treasuries31%
Agencies3%
Mortgages23%CMBS
2%
ABS0%
Other15%
Corp. Inv . Grade21%
Corp. High Yield5%
Chart1
TreasuriesTreasuries
AgenciesAgencies
MortgagesMortgages
CMBSCMBS
ABSABS
OtherOther
Corp. Inv. GradeCorp. Inv. Grade
Corp. High YieldCorp. High Yield
2017
7463617
0.306127884
662570
0.0271759861
5670314
0.2325737275
377126
0.0154682086
104933
0.0043039343
3571125
0.1464733439
5192094
0.2129590452
1338937
0.0549178703
Sheet1
2017
Treasuries7,463,617.000.30612788430
Agencies662,570.000.02717598611.9
Mortgages5,670,314.000.232573727523.8
CMBS377,126.000.01546820861.6
ABS104,933.000.00430393430.4
Other3,571,125.000.146473343910
Corp. Inv. Grade5,192,094.000.212959045226
Corp. High Yield1,338,937.000.05491787035.8
24,380,716.00199.5
24,380,716.00
- 0
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San Joaquin County Employees Retirement Association (SJCERA)• 2019 Strategic Allocation Review
Appendix – Strategic Classes & Their Roles: Domestic Fixed IncomeCHARACTERISTICS
• Medium volatility asset class• Relatively high liquidity• Broadly diversified by market sector, quality, and maturity
IMPLEMENTATION
• Variety of implementation options: Core only Core-satellite approach Sector specialties Liability orientation
OPERATIONS
• Securities held by Master-Custodial Bank• Large part of market (including all government securities) are Fed Wireable• Most of the market prices (U.S. Treasury and pass-through certificates) are readily available• Bonds with less publicly available information (corporates and CMOs) can be priced by securities brokers
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San Joaquin County Employees Retirement Association (SJCERA)• 2019 Strategic Allocation Review
Appendix – Strategic Classes & Their Roles: Domestic Fixed IncomeCOSTS
• Management fees• Transaction cost• System and custody cost• Staff salaries/administration
RISKS
• Duration risk - price volatility from a change in overall interest rates• Convexity risk - negative convexity is the risk of price declines being greater than the price increase due to interest
rates moving equally up versus down• Default or credit risk - the uncertainty surrounding the borrower’s ability to repay its obligations• Structure risk - risk that arises when the options implicit in bonds (like call ability and sinking funds) or the rules that
govern cash flow differ from expectations• Sector risk - risk of holding sectors that are in different proportions than the benchmark• Liquidity risk - cost of trading in a security which is reflected in the bid-ask spread or the cost of selling due to cash
flow needs• Reinvestment risk - the uncertainty surrounding future yield opportunities to invest funds which come available due
to calls, maturities, or coupon payments• Benchmark risk - risk of the benchmark being inappropriate• Yield curve risk - price changes induced by changes in the slope of the yield curve
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San Joaquin County Employees Retirement Association (SJCERA)• 2019 Strategic Allocation Review
Appendix – Strategic Classes & Their Roles: Inflation Linked Bonds
U.S. Inv. Grade41%
Euro Gov t21%
UK Govt31%
Japan Govt3%
Sweden Govt1%
Canada Govt2%
Australia Gov t1%
DEFINITION
• A relatively liquid, default risk-free bond whose principallevel and/or interest payments are adjusted to accountfor inflation
SIZE OF MARKET
• $2.9 trillion total market capitalization as of 12/31/2017 –Bloomberg Barclays World Govt. Inflation-Linked AllMaturities
• 5.4% of total global bond market
STRATEGIC ROLE
• Lower correlation to other major asset classes• Hedge against unexpected inflation• Provides “floor” against deflation• Preservation of principal and purchasing power in real
terms• De minimis credit risk
BREAKDOWN OF INFLATION-LINKED MULTIVERSE(percentage of market cap as of 12/31/2017)
Chart1
U.S. Inv. Grade
Euro Govt
UK Govt
Japan Govt
Sweden Govt
Canada Govt
Australia Govt
40.4
21
31.05
2.5
1.04
2.1
1.2
Sheet1
U.S. Inv. GradeEuro GovtUK GovtJapan GovtSweden GovtCanada GovtAustralia Govt
Market Value40.42131.052.51.042.11.2
99.2999.29
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San Joaquin County Employees Retirement Association (SJCERA)• 2019 Strategic Allocation Review
Appendix – Strategic Classes & Their Roles: Inflation Linked BondsCHARACTERISTICS
• Value tied to movements (up/down) in consumer prices• Typically issued with fixed coupon rates and maturity dates• Changing principal value and/or coupon payments to keep pace with inflation• Lower correlation to equity markets than conventional treasury bonds• Lower volatility than conventional treasury bonds
IMPLEMENTATION
• Direct purchase of securities through primary auction or secondary markets Allows investor to lock in a known real rate of return and final maturity date
• Passive and actively managed funds and ETFs Provides advantage of owning portfolio of securities across a range of maturities and geographies
OPERATIONS
• U.S. Treasury auctions 10-year TIPS on quarterly basis with expanded auction schedule for semi-annual 5- and 20-year issuances
• Buying/selling in secondary markets operate in same way as other fixed income markets• Only difference in cash flow streams between inflation-adjusted and nominal bonds is maturity value as inflation-
protected bonds are adjusted for inflation between issue and maturity dates
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San Joaquin County Employees Retirement Association (SJCERA)• 2019 Strategic Allocation Review
Appendix – Strategic Classes & Their Roles: Inflation Linked BondsCOSTS
• Management fees• Transaction cost• System and custody cost• Staff salaries/administration
RISKS
• In general, inflation-protected bonds carry the same general risks as other Fixed Income instruments with the exception of inflation risk. However, there are still ways for inflation-protected securities to be susceptible to inflation-related risk:
Inflation protection may be insufficient if official inflation measures fail to track actual inflation Deflation could lead to market sell-off causing sharp declines in market prices of inflation-protected securities Preemptive moves against inflation by central banks can cause major market value changes
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San Joaquin County Employees Retirement Association (SJCERA)• 2019 Strategic Allocation Review
Appendix – Strategic Classes & Their Roles: Alternative Return (Hedge Funds)DEFINITION
• Hedge funds are not an asset class Hedge funds are a type or style of asset management that is generally skill-based (ALPHA) Hedge fund management is not homogeneous (not many common factors)
• Hedge funds are commonly considered alternative investments because they: Have higher management fees and performance related fees Are illiquid Are privately structured and limited to “sophisticated” investors
• Hedge funds may contain significant financial leverage and contain other risk factors including: Financial leverage (use of margin accounts and short-term loans) Instrument leverage (use of derivatives that magnify returns)
• Short sales• Lack of transparency• Less regulatory oversight
• Span a broad array of strategies, producing a range of risk/volatility and returns from high to low • Exhibit return behaviors that may be independent from other asset classes
STRATEGIC ROLE
• Low correlation to other major asset classes• Potential for attractive risk-adjusted returns• Claim ability to add value throughout market cycles
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San Joaquin County Employees Retirement Association (SJCERA)• 2019 Strategic Allocation Review
Appendix – Strategic Classes & Their Roles: Alternative Return (Hedge Funds)
0
500
1000
1500
2000
2500
3000
3500
1990 1993 1996 1999 2002 2005 2008 2011 2014 2017
$ Bi
llions
CAPITAL ALLOCATED TO HEDGE FUNDS (as of 12/31/2017)
• Hedge funds have exhibited significant growth Estimates vary significantly Projected to be more than 10,000 managers Estimated to be over $3 trillion in capital, before leverage Pace of commitments to hedge funds continues to grow but stabilizing
Chart1
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
East
$ Billions
38.9
58.4
95.7
167.8
167.4
185.8
256.7
367.6
374.8
456.4
487.6
536.1
622.3
817
972
1105
1464
1868
1407
1600
1917
2008
2252
2628
2845
2969
2969
3210
Sheet1
1990199119921993199419951996199719981999200020012002200320042005200620072008200920102011201220132014201520162017
East38.958.495.7167.8167.4185.8256.7367.6374.8456.4487.6536.1622.38179721105146418681407160019172008225226282845296929693210
West
North
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San Joaquin County Employees Retirement Association (SJCERA)• 2019 Strategic Allocation Review
Appendix – Strategic Classes & Their Roles: Alternative Return (Hedge Funds)CHARACTERISTICS AND ATTRIBUTES
• Hedge funds span many investment styles• Manager styles can be organized by market exposure
Hedge Fund Styles
Relative Value Event-Driven Opportunistic
Convertible arbitrage
Market ExposureLow High
Fixed income arbitrage
Equity market neutral
Risk arbitrage
Distressed securities
Macro
Short sellers
Long region industry or style
Emerging markets
Long/short equity
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San Joaquin County Employees Retirement Association (SJCERA)• 2019 Strategic Allocation Review
Appendix – Strategic Classes & Their Roles: Alternative Return (Hedge Funds)CHARACTERISTICS AND ATTRIBUTES
Strategies Definition Relative Value Convertible Arbitrage Invests in the convertible securities of a company. A typical investment is to be long the convertible bond and short the
common stock of the same company. Positions are designed to generate profits from the fixed income security as well as the short sale of the stock, while protecting the principal from market moves.
Fixed Income Arbitrage Fixed income arbitrage managers seek to exploit pricing anomalies within and across global fixed income markets and their derivatives, using leverage to enhance returns. In most cases, fixed income arbitrageurs take offsetting long and short positions in similar fixed income securities that are mathematically, fundamentally or historically interrelated. The relationship can be temporarily distorted by market events, investor preferences, exogenous shocks to supply or demand, or structural features of the fixed income market.
Equity Market Neutral Equity market-neutral is designed to produce consistent returns with very low volatility and correlation in a variety of market environments. The investment strategy is designed to exploit equity market inefficiencies and usually involves being simultaneously long and short matched equity portfolios of the same size within a country. Market neutral portfolios are designed to be either beta or currency-neutral or both. Equity market-neutral is best defined as either statistical arbitrage or equity long/short with zero exposure to the market.
Event Driven Risk Arbitrage Risk arbitrage (also known as merger arbitrage) specialists invest simultaneously in long and short positions in both companies
involved in a merger or acquisition. In stock swap mergers, risk arbitrageurs are typically long the stock of the company being acquired and short the stock of the acquiring company. In the case of a cash tender offer, the risk arbitrageur is seeking to capture the difference between the tender price and the price at which the target company’s stock is trading.
Distressed Securities Distressed securities funds invest in the debt or equity of companies experiencing financial or operational difficulties or trade claims of companies that are in financial distress, typically in bankruptcy. These securities generally trade at substantial discounts to par value. Hedge fund managers can invest in a range of instruments from secured debt to common stock. The strategy exploits the fact that many investors are unable to hold below investment grade securities.
Opportunistic Macro Macro hedge funds pursue a base strategy such as equity long/short or futures trend following to which large scale and highly
leveraged directional bets in other markets are added a few times each year. They move from opportunity to opportunity, from trend to trend, from strategy to strategy.
Short Sellers The short selling discipline has an equity as well as fixed income component. Short sellers seek to profit from a decline in the value of stocks. In addition, the short seller earns interest on the cash proceeds from the short sale of stock.
Long Region, Industry, or Style
Traditional equity fund structured like a hedge fund; ie, uses leverage and permits managers to collect an incentive fee. Focus of the fund could be a specific geographic region (i.e., Japan), industry (i.e., technology) or style (i.e., growth).
Emerging Markets Emerging market hedge funds focus on equity or fixed income investing in emerging markets as opposed to developed markets. This style is usually more volatile not only because emerging markets are more volatile than developed markets, but because most emerging markets allow for only limited short selling and do not offer a viable futures contract to control risk. The lack of opportunities to control risk suggests that hedge funds in emerging markets have a strong long bias.
Long/Short Equity Long/short strategies combine both long as well as short equity positions. The short positions have three purposes, which can vary over time or by manager. First, the short positions are intended to generate alpha. This is one of the main differences when compared with traditional long-only managers. Stock selection skill can result in doubling the alpha. A long/short equity manager can add value by buying winners as well as selling losers. Second, the short positions can serve the purpose of hedging market risk. Third, the manager earns interest on the short as he collects the short rebate.
Strategies
Definition
Relative Value
Convertible Arbitrage
Invests in the convertible securities of a company. A typical investment is to be long the convertible bond and short the common stock of the same company. Positions are designed to generate profits from the fixed income security as well as the short sale of the stock, while protecting the principal from market moves.
Fixed Income Arbitrage
Fixed income arbitrage managers seek to exploit pricing anomalies within and across global fixed income markets and their derivatives, using leverage to enhance returns. In most cases, fixed income arbitrageurs take offsetting long and short positions in similar fixed income securities that are mathematically, fundamentally or historically interrelated. The relationship can be temporarily distorted by market events, investor preferences, exogenous shocks to supply or demand, or structural features of the fixed income market.
Equity Market Neutral
Equity market-neutral is designed to produce consistent returns with very low volatility and correlation in a variety of market environments. The investment strategy is designed to exploit equity market inefficiencies and usually involves being simultaneously long and short matched equity portfolios of the same size within a country. Market neutral portfolios are designed to be either beta or currency-neutral or both. Equity market-neutral is best defined as either statistical arbitrage or equity long/short with zero exposure to the market.
Event Driven
Risk Arbitrage
Risk arbitrage (also known as merger arbitrage) specialists invest simultaneously in long and short positions in both companies involved in a merger or acquisition. In stock swap mergers, risk arbitrageurs are typically long the stock of the company being acquired and short the stock of the acquiring company. In the case of a cash tender offer, the risk arbitrageur is seeking to capture the difference between the tender price and the price at which the target company’s stock is trading.
Distressed Securities
Distressed securities funds invest in the debt or equity of companies experiencing financial or operational difficulties or trade claims of companies that are in financial distress, typically in bankruptcy. These securities generally trade at substantial discounts to par value. Hedge fund managers can invest in a range of instruments from secured debt to common stock. The strategy exploits the fact that many investors are unable to hold below investment grade securities.
Opportunistic
Macro
Macro hedge funds pursue a base strategy such as equity long/short or futures trend following to which large scale and highly leveraged directional bets in other markets are added a few times each year. They move from opportunity to opportunity, from trend to trend, from strategy to strategy.
Short Sellers
The short selling discipline has an equity as well as fixed income component. Short sellers seek to profit from a decline in the value of stocks. In addition, the short seller earns interest on the cash proceeds from the short sale of stock.
Long Region, Industry,
or Style
Traditional equity fund structured like a hedge fund; ie, uses leverage and permits managers to collect an incentive fee. Focus of the fund could be a specific geographic region (i.e., Japan), industry (i.e., technology) or style (i.e., growth).
Emerging Markets
Emerging market hedge funds focus on equity or fixed income investing in emerging markets as opposed to developed markets. This style is usually more volatile not only because emerging markets are more volatile than developed markets, but because most emerging markets allow for only limited short selling and do not offer a viable futures contract to control risk. The lack of opportunities to control risk suggests that hedge funds in emerging markets have a strong long bias.
Long/Short Equity
Long/short strategies combine both long as well as short equity positions. The short positions have three purposes, which can vary over time or by manager. First, the short positions are intended to generate alpha. This is one of the main differences when compared with traditional long-only managers. Stock selection skill can result in doubling the alpha. A long/short equity manager can add value by buying winners as well as selling losers. Second, the short positions can serve the purpose of hedging market risk. Third, the manager earns interest on the short as he collects the short rebate.
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San Joaquin County Employees Retirement Association (SJCERA)• 2019 Strategic Allocation Review
Relative Value26%
Event Driven26%
Opportunistic48%
Appendix – Strategic Classes & Their Roles: Alternative Return (Hedge Funds)
CHARACTERISTICS AND ATTRIBUTES
BREAKOUT OF HEDGE FUND INDUSTRY by Major Strategy Type (by AUM)
(as of 12/31/2017)
• Market dominated by Opportunistic (Long/short and Macro) Long/short strategies combine both long as well as short equity
positions. The short positions have three purposes:• Generate alpha• Hedge market risk• Earn interest on the short as the manager collects the short
rebate Macro strategies employ a base strategy and move from
opportunity to opportunity, from trend to trend, and from sub-strategy to sub-strategy, depending on the global economic environment
• A key distinction between hedge funds and “traditional” managers is their ability to hold “short” positions and the goal of generating an absolute rate of return
• Range of performance targets Absolute return targets (i.e., 10%-20% per year) Relative return targets (i.e., T-Bills + 4% over a market cycle)
• Higher costs than traditional asset management Commonly 2% management fee with a 20% performance fee Fees are, in most instances, not negotiated; commingled pools
utilized• Lower liquidity than traditional asset management, commonly
Quarterly redemptions with restrictions One-year “lock-up” More liquid than other alternative investments (private equity,
real estate)
Chart1
Relative ValueRelative ValueRelative ValueRelative ValueRelative Value
Event DrivenEvent DrivenEvent DrivenEvent DrivenEvent Driven
OpportunisticOpportunisticOpportunisticOpportunisticOpportunistic
East
West
26.2
831.6
0.261682243
25.9
1538.4
0.2590654206
47.9
0.4792523364
Sheet1
Relative ValueEvent DrivenOpportunistic
East26.225.947.9
West
North
840831.61538.43,210
0.2620.25910.479
100
100
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San Joaquin County Employees Retirement Association (SJCERA)• 2019 Strategic Allocation Review
Appendix – Strategic Classes & Their Roles: Alternative Return (Hedge Funds)
IMPLEMENTATION
Three General Approaches
• Include as a segment of an existing asset class Commonly a segment of the alternative investment asset class
• Adds consistency and some liquidity to otherwise privately-held strategies Also could replace equities, fixed income, cash, etc., depending upon targeted risk and return objectives
• Treat as a new asset class Allocation level typically relies on optimization techniques Key role is largely as diversifier versus other asset classes Strategies with higher return objectives have higher exposure to underlying asset classes (i.e., more “directional”)
• An alpha “overlay” to existing asset classes Must be material to have impact within overall asset class portfolio Utilizes significant amount of highly liquid derivatives to obtain market exposure Assumption of “zero beta” to underlying asset class returns
Investment Vehicle Options
• Individual Hedge Funds - typically, partnerships in which you select a specific strategy for each fund - macro, risk arbitrage, equity market neutral, etc.
• Multi-Strategy Funds - fund that invests in multiple hedge fund strategies of a single firm• Fund of Hedge Funds - fund that invests across multiple strategies by investing in multiple independent hedge funds
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San Joaquin County Employees Retirement Association (SJCERA)• 2019 Strategic Allocation Review
Appendix – Strategic Classes & Their Roles: Alternative Return (Hedge Funds)OPERATIONS
• Custody - for fund of funds - ownership of underlying funds held by Fund of Hedge Fund Managers. Assets of individual hedge funds typically held in offshore bank
• Pricing - market prices available to underlying managers daily from exchanges for listed securities. For privately held securities, investments carried at cost until significant event
• Reporting Lack of disclosure
• Not regulated by the SEC• Hedge funds disclose only limited amounts of investment data
Monthly performance estimates Consultant monitoring and investment performance reports available quarterly and annually Manager monitoring, investment performance, and financial reports available quarterly and annually Audited financial reports available annually
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San Joaquin County Employees Retirement Association (SJCERA)• 2019 Strategic Allocation Review
Appendix – Strategic Classes & Their Roles: Alternative Return (Hedge Funds)COSTS
• Manager fees and profit sharing• Master custody costs• Staff salaries/benefits/administration• Consultant fees
RISKS
• There are several risks unique to hedge funds: Disclosure risk Partnership mortality risk (average life of partnership - 3 years) Financial leverage risk (mitigated to some degree by ERISA) Return dispersion risk
• Other risks: Event risk
• Correlations tend to increase during global shocksManager selection risk Complexity risks (of process, of transactions, of securities) Personnel risks (hedge funds are usually run by smaller firms) Asset growth (too large an asset base threatens nimbleness) Liquidity risk Fraud risk Custody of assets - assets held in someone else’s name, rather than in custodial bank
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San Joaquin County Employees Retirement Association (SJCERA)• 2019 Strategic Allocation Review
Appendix – Strategic Classes & Their Roles: Private EquityDEFINITION
• Equity or equity-linked securities in operating companies that are not publicly traded on a stock exchange • Types of investment strategies:
Buyout – acquisition of a company that investor believes can be made more valuable Growth capital – investment in mature companies looking for capital to expand, restructure, enter new markets Venture capital – investment in typically less mature companies for launch, early development, or expansion Private Credit – oftentimes subordinated debt/preferred equity used to reduce amount of equity capital required to
finance leveraged buyouts Distressed – equity securities of financially distressed companies Special Situations – transactions that fall outside of typical private equity strategies and that typically have an element of
heightened complexity due to any number of possible factors Secondaries – investment in existing private equity assets
• Types of structures: Direct investment – direct purchase of equity securities of a private company Co-investments – investments in equity securities of a private company alongside the manager of a direct fund Direct fund – pool of capital formed to make direct investments Fund of funds – pool of capital formed to make investments in direct funds
STRATEGIC ROLE
• Enhance total portfolio return – expected long-term premium of 3-5% over a broad public equity index• Improve funded status with returns in excess of actuarial interest rate• Reduce total portfolio risk through diversification and negotiation of terms and conditions
Lower covariance of returns with other asset classes
CHARACTERISTICS
• Illiquid, long-term time horizon (7-12 year closed-end partnerships) • Quality of the managers selected is the key determinant of success • High volatility of returns compensated by higher expected returns• Encompasses three stages: fundraising, portfolio construction, and investment exit
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San Joaquin County Employees Retirement Association (SJCERA)• 2019 Strategic Allocation Review
Appendix – Strategic Classes & Their Roles: Private Equity
$0
$50
$100
$150
$200
$250
$300
$350
$400
2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
Billi
ons
Year
Commitments to U.S. Private Equity Partnerships
Buyouts Venture Private Debt Other Private Equity Fund of funds
Source: Private Equity Analyst through December 2017
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San Joaquin County Employees Retirement Association (SJCERA)• 2019 Strategic Allocation Review
Appendix – Strategic Classes & Their Roles: Private EquityIMPLEMENTATION AND ADOPTION• Investment policy development• Portfolio construction (partnership selection/due diligence)• Negotiation of terms and conditions• Monitoring and administration
OPERATIONS• Custody
Securities held by limited partnerships, not by custodian banks• Cash flow management
Capital called from investors (new investments, fees) Capital distributed to investors (realized investments, dividends, interest)
• Fair value pricing – FASB ASC Topic 820 mark-to-market hierarchy Level 1 – quoted prices found in public markets (NYSE, NASDAQ, etc.) Level 2 – inputs other than prices that are observable for the asset (matrix pricing, yield curves, indices) Level 3 – unobservable inputs that reflect fund manager’s assumptions
• Performance reporting General partner financial reports available quarterly and annually (audited) Custodian reconciliation and reporting available quarterly and annually Consultant investment performance monitoring and reviews available quarterly or semi-annually and
annually • Exit/Liquidity options
Initial public offering (IPO) Sale to another entity (i.e., strategic and financial buyers) Dividend Recapitalizations
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San Joaquin County Employees Retirement Association (SJCERA)• 2019 Strategic Allocation Review
Appendix – Strategic Classes & Their Roles: Private EquityCOSTS• General partner fees and profit sharing• Consultant fees• Master custody costs• Staff salaries/benefits/administration
RISKS
• Headline risk – general partner behavior attributed to limited partner (for investors)• Liquidity risk – absence of liquidity and appropriate exits could significantly increase time horizon• Firm specific risk – unique risks associated with a specific firm• Leverage risk – historical excess use of leverage and current inability to secure adequate financing may
adversely affect profits• Manager selection risk – selecting managers that fail to deliver top performance results• Diversification risk – inability to properly diversify the portfolio by vintage year, industry groups, geography• Tax risk – changes may adversely affect markets• Regulatory risk – changes may adversely affect markets• Strategy risk – continuing applicability of investment strategy in context of macroeconomic and industry
factors• Market risks – price decline
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San Joaquin County Employees Retirement Association (SJCERA)• 2019 Strategic Allocation Review
Appendix – Strategic Classes & Their Roles: Private CreditDEFINITIONPrivate credit is a broad opportunity set that includesorigination-based strategies where issuers provide illiquidfinancing to borrowers who do not have to access to ordo not care to access the broadly syndicated creditmarkets or other financing sources. Other strategies arefocused on non-performing and other opportunisticstrategies where there is value through loanmodifications and other operationally-focused activities.
RETURN PROFILE• Income-oriented. The lending or origination-
focused strategies offer a consistent yield withlimited upside potential. Depending on collateraland risk profile, returns typically range from 7% to12% (net).
• Opportunistic. The opportunistic strategies targethigher returns (typically mid-teens net) with capitalappreciation rather than income as the primarydriver of returns.
STRATEGIC ROLEMore institutions are adopting a policy allocation toprivate credit in recognition of its stable cash flow, strongdownside protection and diversification benefits. Privatecredit can serve as an attractive alternative to traditionalfixed income, as private equity substitute or as part of anopportunistic allocation.
Private Credit Assets Under Management (2007-2017)
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San Joaquin County Employees Retirement Association (SJCERA)• 2019 Strategic Allocation Review
Appendix – Strategic Classes & Their Roles: Private Credit
Mid Market Direct Lending/BDCsMarketplace FundingNon-agency residential mortgagesCommercial real estate debtSpecialty lending (equipment leasing, aviation)Consumer finance (student loans, installment loans, credit card receivables)
Yield-Oriented
Non Performing LoansBridge LendingRescue FinanceSpecial SituationsMezzanineCLO Equity/Risk RetentionDistressed (liquidations, restructuring)
Opportunistic Distressed
The asset class covers a wide range of collateral types including corporate, consumer, real estate, andasset-based
Private Credit Universe
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San Joaquin County Employees Retirement Association (SJCERA)• 2019 Strategic Allocation Review
Appendix – Strategic Classes & Their Roles: Private CreditCOSTS• Management fee (typically 1.25%)• Incentive fee (typically 15-20%; paid on realized gains)• Hurdle rate (depends on strategy; often 7-8% for direct lending)• Fees typically paid on invested rather than committed capital
STRUCTURE• Closed-end, drawdown capital structure• Typically 2 year investment period; 5 to 7 year final • Income typically distributed during the investment period for yield-oriented strategies• Modest J-curve relative to private equity
FUNDRAISING1• 2017 was a record year for private credit fundraising with $107 billion raised across 136 funds. Since 2010
nearly $600 billion in capital has been raised• Direct lending was main driver of asset class growth in 2017 with 61 funds raising nearly $55 billion. The 10
largest funds accounted for approximately 56% of capital raised
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San Joaquin County Employees Retirement Association (SJCERA)• 2019 Strategic Allocation Review
Appendix – Strategic Classes & Their Roles: Real Estate
DEFINITION
• A right or interest in land, improvements, or real property whose fundamental value derives from the cash flows generated by leases
SIZE OF MARKET
•An estimated $10.4 trillion in the total institutionalowned real estate universe as of November 2017 –LaSalle Investment Management
Source: LaSalle Investment Management, “Investment Strategy Annual 2018”
REAL ESTATE INVESTABLE UNIVERSE
STRATEGIC ROLE OF CORE REAL ESTATE
• Reduces risk of composite multi-asset portfolios through diversification• Relatively low correlations to domestic equity, international equity, and fixed income markets• Can serve as a possible inflation hedge during periods of high inflation • Provides an attractive return relative to fixed income asset class in periods of low to moderate inflation• Provides current income• Potential for high returns in niche opportunities
Total Income-Producing Real
Estate: $57 trillion
Institutional Owned – Public
& Private: $10.4 trillion
Public Real Estate:
$4.6 trillion
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San Joaquin County Employees Retirement Association (SJCERA)• 2019 Strategic Allocation Review
Appendix – Strategic Classes & Their Roles: Real EstateCHARACTERISTICS
• Risk – standard deviation of private core real estate returns falls between publicly-traded debt and other publicly-traded equities. Since privately held real estate investments are generally evaluated quarterly or annually, somesmoothing of returns may be observed compared to publicly traded investments which are evaluated daily
• Returns – core returns are expected to fall between equities and fixed income• Illiquidity - transactions require a significantly longer period to execute than other asset classes• Inefficient Market - information affecting private real estate asset valuation and market trading is not rapidly,
accurately, or efficiently reflected or interpreted in its pricing
DISTRIBUTION OF INSTITUTIONAL REAL ESTATE(estimates by region*)
*Estimates for major markets as of November 2017**May not sum to 100% due to roundingSource: LaSalle Investment Management, “Investment Strategy Annual 2018”
Americas33%
Asia Pacific33%
Europe30%
Rest of the World4%
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San Joaquin County Employees Retirement Association (SJCERA)• 2019 Strategic Allocation Review
Appendix – Strategic Classes & Their Roles: Real EstateIMPLEMENTATION• Market Pricing Inefficiencies - translates into acquisition delays due to extensive, up-front due diligence
requirements to justify pricing• High Transaction Costs and Delays - on both a dollar and timing basis due to the private market nature and
the inherent legal deal structure complexities• Units of Trade Size Concern - asset “lumpiness” can result from the inability to acquire private real estate
assets at specific quantities• Personnel Commitment - sizable up-front overhead requirements, either in-house and/or outside, in order to
understand and react to the local real estate market dynamics of each asset at acquisitions• Investments typically made through commingled funds and/or partnerships that require other kinds of
portfolio construction and management expertise
OPERATIONS
• High Management Intensity - unlike securities, each individual asset must be intensely managed in order to maximize its return potential
• Personnel Commitment - sizable ongoing overhead requirements, either in-house and/or outside, in order to understand and react to the local real estate market dynamics of each asset to enhance its value during its holding period
• Control Requirements - sizable financial, accounting, legal, and documentation controls must be committed internally and/or externally due to the active and private nature of the asset class
• Illiquidity - extensive lag time in executing sales strategies• Valuation - slow, difficult, and historical data biased
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San Joaquin County Employees Retirement Association (SJCERA)• 2019 Strategic Allocation Review
Appendix – Strategic Classes & Their Roles: Real EstateCOSTS*• Asset management fees • Incentive fees• Acquisition/disposition fees• Other transactional/ongoing costs (real estate consultants; legal; mechanical, electrical, and structural engineering;
environmental engineering; seismic engineering; appraisal & performance measurement costs)• Staffing costs• Property management and leasing fees
RISKS• Property type risks - negative changes in demand/supply conditions by property type• Location risks - local market condition relative to the adverse changes surrounding a property, or in discovery of hazardous
underlying conditions, such as toxic waste• Tenant credit risks - failure by a tenant to pay what is contractually owed• Physical/functional obsolescence - negative influences on buildings due to technological changes, outdated layout and
design features, and physical depreciation• Interest rate risk - higher rates can negatively impact both sales strategies and leveraged properties at refinancing• Reinvestment risk - in a declining rental rate market, cash flow received may not be reinvested at the same level• Business cycle risk - as economies slow down, there may be less demand for space• Inflationary risk - rent levels may not always keep up with rising operating expense levels• Illiquidity - inability to effectively liquidate a property into cash• Natural disaster risk - weather, floods, earthquakes• Regulatory concerns are critical, especially in emerging markets• Capital and managerial intensive• Partner risk• Key person risk• Currency and tax risks• Legal and title risks• Transaction structure risk - governance and controls
*Those investors that must pay for most of these services at market prices on the outside may be at a disadvantage over investors that have some of these capabilities in house.
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San Joaquin County Employees Retirement Association (SJCERA)• 2019 Strategic Allocation Review
Appendix – Strategic Classes & Their Roles: Real Estate Investment Trust
SECTOR BREAKDOWN OF FTSE NAREIT Equity REITS Index
(As of 12/29/2017)DEFINITION•A REIT, or Real Estate Investment Trust, is a
company that owns or finances income-producing real estate
•Modeled after mutual funds. REITs typicallypay out all of their taxable income asdividends to shareholders
SIZE OF MARKET•$850 million total market capitalization as of
December 2017 – FTSE NAREIT All REITs
STRATEGIC ROLE•Current income and appreciation•Access management teams and types of
properties not easily sourced in private realestate funds
*May not sum to 100% due to roundingSource: FTSE, Duff & Phelps Investment Management
Apartments12.9%
Data Centers8.2%
Diversified6.9%
Free Standing Retail4.1%
Health Care11.4%
Industrial8.5%Lodging/Resorts
6.3%
Manufactured Housing
1.7%
Office 11.8%
Regional Malls9.8%
Self Storage6.1%
Shopping Centers6.6%
Single Famliy Homes1.5%
Specialty 4.4%
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San Joaquin County Employees Retirement Association (SJCERA)• 2019 Strategic Allocation Review
Appendix – Strategic Classes & Their Roles: Real Estate Investment TrustCHARACTERISTICS
• Higher volatility investment vehicle that private real estate; similar to small- and mid-cap equities • Shows high levels of correlation with equity markets in the short to medium term • Relatively high liquidity•Not a replacement for private real estate
OPERATIONS
• Securities held by Master-Custodial Bank• Most of the market prices are readily available and traded on major stock exchanges
COSTS
• Management fees• Transaction cost• System and custody cost• Staff salaries/administration
RISKS
•Liquidity risk - cost of trading in a security which is reflected in the bid-ask spread or the cost of selling due to cash flow needs
•Interest rate risk - rising interest rates could add to capital costs•Regulation risks - a challenging regulatory environment from lending to building codes could negatively affect REITs•Macroeconomic risks - REITS are highly susceptible to economic conditions
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San Joaquin County Employees Retirement Association (SJCERA)• 2019 Strategic Allocation Review
Source: Asset Management: A Systematic Approach to Factor Investing, Andrew Ang, PhD
Growth of $1
• With infrequent trading, estimates of risk (volatility, correlation, beta, etc.) are too low whenusing reported returns (i.e., quarterly appraisal/marked returns).
• Example asset:
Appendix – Strategic Classes & Their Roles: Private Markets
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San Joaquin County Employees Retirement Association (SJCERA)• 2019 Strategic Allocation Review
-40%
-20%
0%
20%
40%
60%
80%
Private Equity - Reported Quarterly Returns vs. Unsmoothed
Unsmoothed Reported Cambridge PE Index
• When “unsmoothed”, Private Markets data is more representative of economic reality
• Example: Cambridge Private Equity Indexo Reported volatility ≈ 13% | Unsmoothed volatility ≈ 22%
Note: Unsmoothed via a simplistic AR(1) time series process for illustration only
Unsmoothing increases volatility (both upside and downside)
Appendix – Strategic Classes & Their Roles: Private Markets
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San Joaquin County Employees Retirement Association (SJCERA)• 2019 Strategic Allocation Review
• Component relies upon default-free long-duration assets to capture “flight to quality”during deflationary economic crises
Appendix – Long Duration
Period Event S&P 500 Total Return
Index (%)
Long Treasury Duration Index
(%)
Difference
Q4 2008 Bear Market in U.S. Equities led by Financials -21.9 17.9 39.8
Q3 2002 WorldCom Scandal -17.3 12.1 29.4
Q3 2001 Terrorist Attacks on World Trade Center and Pentagon -14.7 6.7 21.4
Q3 2011 European Sovereign Debt Crisis -13.9 23.9 37.8
Q2 2002 Continuing Aftermath of Technology Bubble Bursting -13.4 6.1 19.5
Q1 2001 Bear Market in U.S. Equities led by Technology -11.9 1.4 13.3
Q2 2010 European Sovereign Debt Crisis, “Flash Crash” -11.4 11.8 23.2
Q1 2009 Credit Crisis Continues -11.0 -5.3 5.7
Q1 2008 Beginning of Bear Market in U.S. Equities -9.4 3.8 13.2
Q3 2008 Bear Market in U.S. Equities led by Financials -8.4 2.6 11.0
Long Duration Performance During the 10 Worst Quarters of Equity PerformanceJanuary 2000 – December 2015
• Viewed as “first responder” durin