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Office of the Treasurer of The Regents

University of California

UCRP and GEPQ t l I t t Ri k R t Quarterly Investment Risk Report

Quarter ending March 2013

Committee on Investments/ Committee on Investments/ Investment Advisory Group

May 2013

Contents

UCRP GEP• Asset allocation history 5 17

– What are the fund’s asset exposures?• Asset allocation current position and risk contributions 6 18

– How do they compare to policy targets?• Capital markets expectations for return 7 19

– What is the probability the fund will achieveWhat is the probability the fund will achieveits required return?

– Is the amount of risk required acceptable?• Historical Funded Status 8 NA• Forecast Funded Status 9 NA• Forecast Funded Status 9 NA

– What is the probability the fund will be ableto meet future obligations(with and without additional contributions)?

• Historical standard deviation of total returns vs benchmark 10 20• Historical standard deviation of total returns vs. benchmark 10 20• Historical standard deviation of active return 11 21

– What is fund’s realized volatility?– How does it compare with the policy benchmark and risk budgets?

UCRP and GEP Quarterly Investment Risk ReportMarch Quarter 2013 | May 2013| 2



Contents continued

UCRP GEP• Systematic vs. residual risk contribution 12 22• Asset allocation vs. selection risk contribution 12 22

– What are the sources of volatility?What are the sources of volatility?– What factors drive performance?

Is the fund adequately diversified?• Sharpe ratio (total risk) 13 23• Information ratio (active risk) 14 24( )

– Are risk exposures being rewarded?– Historical risk adjusted returns

• Performance Attribution 15 25– What are the sources of active return?

• Asset allocation versus security selection– Which asset classes contributed or detracted from return?




Risk Metrics for UCRPRisk Metrics for UCRP




Asset Allocation

70%4 0%UCRP ASSET ALLOCATION (%)

• Total Risk is largely related to the allocation between equity and bonds• At quarter-end the portfolio’s equity exposure was modestly above policy weight

50%

60%

70%

0.0%

2.0%

4.0%

s)rs)

30%

40%

‐4.0%

‐2.0%

l Exposures (lines

ve Exposure (bar

0%

10%

20%

‐10.0%

‐8.0%

‐6.0%

Total

Activ

0%10.0%

Mar‐08

Sep‐08

Mar‐09

Sep‐09

Mar‐10

Sep‐10

Mar‐11

Sep‐11

Mar‐12

Sep‐12

Mar‐13

Public Eq. Over/ (Under) [left] Public Equity [right]

[ h ] [ h ]




U.S. Equity [right] Non‐U.S. Equity [right]

Asset Allocation and RiskNote: Exposures and Risk charts below are shown using April 1 2013 target asset weightsNote: Exposures and Risk charts below are shown using April 1, 2013 target asset weights.Systematic risk is estimated using long term forecasts [from Mercer Investment Consulting, July 2012], not recent realized volatility.

(Lower Left) Asset weights are measured relative to Current Policy. The fund is underweight in Core Bonds and TIPS by 0.8% and 1.5% respectively. The fund is slightly overweight to US Equity, y p y g y g q yEmerging Markets Equity, High Yield, Cross Asset Class, Real Estate, and Cash.

(Lower Right) The fund’s forecast total systematic risk (blue bars) is 13.9% annualized standard deviation. It is heavily weighted to Public Equity (73% of total). Alternatives contributed 24%. Forecast active systematic risk is 32bp. The policy benchmark risk decomposition (red bars) is roughly identical to the actual fund as of quarter endroughly identical to the actual fund as of quarter end.

1

1.5

2 UCRP Asset Exposures vs. Policy as of Mar 13

35

40

UCRP Forecast Contrib. to Systematic Risk at Mar 31, 2013 (%)

UCRP Current Policy

UCRP Actual

‐1

‐0.5

0

0.5

1

Percent

10

15

20

25

30

Percen

t

‐2

‐1.5

US Equity

Int'l D

ev. Eq

Emg Mkt Eq

obal/ Opp Eq

Core Bonds

High Yield

mg Mkt Debt

TIPS

Private Eq

Abs Ret

CAC

Opp Equity

Real Assets

RE ‐Private

RE ‐Public

Cash

Active vs. Current Policy

0

5US Eq

Non

US Eq

Emg Mkt Eq

lobal/Opp

Eq

US Agg FI

HY Deb

t

EM Deb

t

US TIPS

Private Eq

Abs Ret

CAC

RE ‐Private

RE ‐Pu

blic




Glo Em G

Expected Risk and ReturnForecast risk and return (using Mercer’s July 2012 capital markets assumptions) lies near the Forecast risk and return (using Mercer s July 2012 capital markets assumptions) lies near the constrained efficient frontier; long-term forecast return of the current policy allocation of 7.7%* is close to the actuarially required return of 7.5%.

*Asset Class returns 2012 Capital Market Assumptions Asset Class returns and efficient frontiers are shown in the chart as arithmetic (i.e.,

) t d 12

14

16

urn

Risk and Expected Return with Constrained Efficient Frontier

average) expected returns.

The projected compound annual 6

8

10

Expected Retu

preturn over multi-year horizon is 7.7% for the Current Policy weights.

‐

2

4

E

Forecast volatility of the current policy is 13.7%.

‐ 5 10 15 20 25 30 35 Risk (Standard Deviation)

US Eq Non US Eq Emg Mkt Eq US Agg FIHY Debt EM Debt ‐ $ EM Debt ‐ Local US TIPSCash Private Equity Timber CommoditiesUCRP Long‐Term UCRPCurrent Policy Effic Frontier




UCRP Long Term UCRP Current Policy Effic. Frontier

Historical Funded StatusThe Pension Fund’s liabilities have been growing The Pension Fund s liabilities have been growing steadily (upper left) with University employment, while the assets have grown (and fallen) with the equity markets. The ratio of actives to retirees has fallen from 3x to 2x (lower left).20

40

60 UCRP ASSETS, LIABILITIES, and SURPLUS ($B)

The Funded Ratio (= the ratio of assets to liabilities), is an overall metric of the financial health of a pension plan. This ratio has fluctuated considerably over the past (lower right), and has

(20)

‐

199

3

199

4

199

5

199

6

199

7

199

8

199

9

200

0

200

1

200

2

200

3

200

4

200

5

200

6

200

7

200

8

200

9

201

0

201

1

201

2

( h d) b l ( )( g )

fallen below 100% with the bear market of 2007-09, and has not yet recovered.

200%

UCRP FUNDED RATIOS

5 140

d

Pension Membership (LHS) and Active/Retiree Ratio (RHS)

Assets (Smoothed) Liabilities (AAL)

Assets (Market) Surplus/Deficit (Smoothed)

100%

125%

150%

175%

1

2

3

4

40

60

80

100

120

o: Active / Re

tired

ers (Touu

sand

s)

50%

75%19

9319

9419

9519

9619

9719

9819

9920

0020

0120

0220

0320

0420

0520

0620

0720

0820

0920

1020

1120

12

F d d R i ( h d) F d d R i (M k )

‐

1

‐

20

1993

1995

1997

1999

2001

2003

2005

2007

2009

2011

Ratio

Mem

be

Active Members Retired Members

i i / i d




Funded Ratio (smoothed) Funded Ratio (Market)Ratio: Active/Retired

Forecast Funded StatusContributions were reinstated in 2010 after a pension Contributions were reinstated in 2010 after a pension “holiday” that began in 1990. Annual benefit payments have grown in line with and recently exceeded Normal Cost over the last decade (upper left).

The bottom charts show projected funded ratio with 1.50

2.00

2.50

UCRP Cash Flows (Contributions, Benefit Payments) vs. Normal Cost ($ Billion)

p jplanned contributions. On the left is a static forecast assuming a constant 7.5% investment return beginning FY 2013. On the right is a simulation of a variable rate of return. It indicates that the probability of reaching full funding (ratio = 1.0) by 2016 is below 20%. [These

j ti d i l ti ti t l d l d

‐

0.50

1.00

1988

1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

2010

2012

projections and simulations are estimates only, developed by the Treasurer’s Office, not Segal Co, the Regents actuary.]

1 1 1 1 1 1 2 2 2 2 2 2 2

Total Outflows (ex‐Labs) Total Inflows Normal Cost

110%

UC Pension Projections (Treasurer's Office) with Planned Contributions

90%100%

lue

Simulated Funded Ratio ‐ 2016

80%

90%

100%

110%

nded

Ratio

30%40%50%60%70%80%90%

xceeding Given Va

60%

70%

80%

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

Fu

0%10%20%30%

40%

50%

60%

70%

80%

90%

100%

110%

120%

Probability of E x

Future Funded Ratio




Funded Ratio (Smoothed) Funded Ratio (Market Val) 2016 ‐Market 2016 ‐ Smoothed

Risk Measures: Total

Total risk trend is quite similar to the benchmark; recently Plan volatility has been slightly less than the Budget, but well within allowed ranges. Total volatility has resumed a historically normal range higher than the mid 2000’s but 25

30

35

Deviation

UCRP Total Risk, Total Risk Budget, and Ranges

normal range, higher than the mid 2000 s but lower than the 2008-09 crash.

Total Risk budget equals Benchmark risk plus the Active risk budget. The ranges are +/-20% around the budget.

5

10

15

20

ercent Stand

ard D

% g‐

Mar‐08

Sep‐08

Mar‐09

Sep‐09

Mar‐10

Sep‐10

Mar‐11

Sep‐11

Mar‐12

Sep‐12

Mar‐13

P

Pension Total Risk Total Risk Budget

Lower Range: ‐ 20% Upper Range: + 20% 12

14

16

viation

UCRP Total Risk, Total Risk Budget, and Ranges

Total Risk is measured by standard deviation of monthly total returns; each point or bar shows a 12 month measurement period.

A t d d d i ti f 12% th t hl 2

4

6

8

10

nt Stand

ard Dev

A standard deviation of 12% means that roughly 2/3 of the time, the realized return will be within ±12% points from the average return.

At the end of the quarter total risk was 5.99% for UCRP and 5 74% for the benchmark

‐

2

Mar‐12

Apr‐12

May‐12

Jun‐12

Jul‐1

2

Aug

‐12

Sep‐12

Oct‐12

Nov

‐12

Dec

‐12

Jan‐13

Feb‐13

Mar‐13Perce

Pension Total Risk Total Risk Budget

Lower Range: ‐ 20% Upper Range: + 20%




UCRP and 5.74% for the benchmark. Lower Range: 20% Upper Range: + 20%

The spike in Active Risk in Q1 09 resulted from the

Risk Measures: ActiveThe spike in Active Risk in Q1 09 resulted from the underweight in equity as the market fell and then rallied, plus higher equity volatility. Active risk has currently resumed its low level of the mid 2000’s (about 0.5% annualized standard deviation). Although well diversified active risk is still well below 3

3.54

4.55

eviation

UCRP Active Risk, Active Risk Budget, and Ranges

Although well diversified, active risk is still well below long term expectations for active return.

The Active risk budget is 3% annualized Tracking Error (adjusted for market volatility), with ranges of +/- 1% point around Budget0

0.51

1.52

2.53

ent Stan

dard De

of +/ 1% point around Budget.0

Mar‐08

Sep‐08

Mar‐09

Sep‐09

Mar‐10

Sep‐10

Mar‐11

Sep‐11

Mar‐12

Sep‐12

Mar‐13

Perce

Pension Tracking Error Tracking Error Budget

Lower Range: ‐ 33% Upper Range: + 33% 3.5

4

4.5

eviation

UCRP Active Risk, Active Risk Budget, and Ranges

Active risk is measured by standard deviation of monthly active returns; each point or bar shows a 12 month measurement period.

g pp g

1

1.5

2

2.5

3

cent Stand

ard De

A standard deviation of 3% means that roughly 2/3 of the time, the realized active return will be within ± 3% points from the average active return.

Active risk at the end of the quarter was 0 44%

0

0.5

Mar‐12

Apr‐12

May‐12

Jun‐12

Jul‐1

2

Aug

‐12

Sep‐12

Oct‐12

Nov

‐12

Dec

‐12

Jan‐13

Feb‐13

Mar‐13

Perc

Pension Tracking Error Tracking Error Budget




Active risk at the end of the quarter was 0.44%. Lower Range: ‐ 33% Upper Range: + 33%

Risk Attribution(Upper Left) Virtually all (99.9%) of Total Risk is attributed to systematic (market) factors (red bars).

(Lower Right) Normally, the majority of Active Risk96%97%98%99%100%

UCRP ‐ Components of Total Risk

( g ) jis attributed to security/manager selection. When asset allocation transitions are implemented, allocation risk increases. During the market turmoil, the equity over/underweight dominated all other decisions, but for the past 11 quarters security 91%

92%93%94%95%96%

selection risk is resuming its normal contribution. 90%

Mar‐08

Sep‐08

Mar‐09

Sep‐09

Mar‐10

Sep‐10

Mar‐11

Sep‐11

Mar‐12

Sep‐12

Mar‐13

Systematic Risk % Residual Risk %

90%

110%UCRP ‐ Components of Active Risk

Note: Scale represents 0-100% but for greater clarity between systematic and residual

Risk is measured here by variance (standard deviation squared) of monthly returns; each bar shows a 12 month measurement period. 30%

50%

70%

Note: Scale represents 0 100% but for greater clarity between systematic and residual risk horizontal and vertical axes cross at 90%.

Systematic Risk is associated with policy benchmark exposures; residual risk is associated with non benchmark decisions (security selection or asset allocation tilts).

‐10%

10%Mar‐08

Sep‐08

Mar‐09

Sep‐09

Mar‐10

Sep‐10

Mar‐11

Sep‐11

Mar‐12

Sep‐12

Mar‐13

Resid Risk Contrib Alloc Risk Contrib




Resid Risk Contrib Alloc Risk Contrib

Risk Adjusted Return: Total

Sharpe Ratio (risk adjusted total return) trend has been quite similar to the benchmark for the past 5 years. The 12 month return on risky

2

3

4

nit V

olatility

UCRP and Benchmark Sharpe Ratio

p y yassets has been generally positive since 2009 but with considerable volatility.

‐2

‐1

0

1

ess R

eturn pe

r un

‐3

Mar‐08

Sep‐08

Mar‐09

Sep‐09

Mar‐10

Sep‐10

Mar‐11

Sep‐11

Mar‐12

Sep‐12

Mar‐13Ex

c

Pension Benchmark 2

2.5

olatility

UCRP and Benchmark Sharpe Ratio

Sharpe ratio is “excess” return (total return less risk-free rate) divided by total risk; each point or bar shows a 12 month measurement period.

0

0.5

1

1.5

Return per unit V

o

Over long periods, most asset classes show an average Sharpe ratio of 0.25.

At the end of the quarter the UCRP Sharpe Ratio was 1 7 vs 1 6 for the benchmark

‐0.5

0

Mar‐12

Apr‐12

May‐12

Jun‐12

Jul‐1

2

Aug

‐12

Sep‐12

Oct‐12

Nov

‐12

Dec

‐12

Jan‐13

Feb‐13

Mar‐13Excess R

Pension Benchmark




Ratio was 1.7 vs. 1.6 for the benchmark. Pension Benchmark

Risk Adjusted Return: Active

Information ratio (risk adjusted active return) is the result of both asset weighting decisions and active performance. It is higher when the returns are positive and more consistent (less volatile) The Info ratio has been positive for the 70%

80%

90%

100%

1.0

2.0

3.0

el

Pension Information Ratio and Significance Level

volatile). The Info. ratio has been positive for the past 12 quarters; from the graph below, active returns for the past 15 quarters have been small but positive.

20%

30%

40%

50%

60%

(1.0)

‐

1.0

gnificance Leve

Info Ratio

0%

10%

20%

(3.0)

(2.0)

Mar‐08

Sep‐08

Mar‐09

Sep‐09

Mar‐10

Sep‐10

Mar‐11

Sep‐11

Mar‐12

Sep‐12

Mar‐13

Sig

0.5

1

1.5

nt

UCRP Active Return & Active Risk Budget [Monthly]

Information ratio is active return (total return less benchmark) divided by active risk; each point shows a 12 month measurement period.

Last 12 Mo Signif. Level Last 12 Mo Info Ratio

‐1

‐0.5

0

Percen

The Significance level is the probability that results are due to skill, with 50% being a neutral measure (e.g., “0% sure,” “100% sure,” “50/50”).

The UCRP Information Ratio was 2 0 at quarter-end

‐1.5

Mar‐08

Sep‐08

Mar‐09

Sep‐09

Mar‐10

Sep‐10

Mar‐11

Sep‐11

Mar‐12

Sep‐12

Mar‐13

UCRP Active Return ‐ Risk Budget + Risk Budget





The UCRP Information Ratio was 2.0 at quarter end.

Active Return for the Quarter was +0 44% (Fund return of +4 59%

Performance Attribution

Active Return for the Quarter was +0.44% (Fund return of +4.59% vs. policy benchmark of +4.15%).

[BELOW] Asset allocation decisions in US Equity, Core Fixed Income and TIPS (blue bars) contributed to active return(15bp).

US EquityNon‐US EquityEmg Mkt Equity

Global/Opp EquityCore Fixed Income

High Yield Debt

Avg. Active Weight (%)

Security selection decisions (red bars) added 29bp (primarily Non-US and EM Equity, Core Fixed Income, Absolute Return Strategies, Real Assets and Real Estate).

UCRP Attribution for 3 mo. ending Mar‐31‐13 (%)

Emg Mkt DebtTIPS

Private EquityAbs Ret

CACReal AssetsRE ‐ PrivateRE Public

US Equity

Avg. Active Return (%)

US EquityNon‐US Equity

Emg Mkt EquityGlobal/Opp EquityCore Fixed Income

High Yield Debt

g ( )

‐2 ‐1 0 1

RE ‐ PublicCash


Global/Opp EquityCore Fixed Income

High Yield DebtEmg Mkt Debt

TIPS

Emg Mkt DebtTIPS

Private EquityAbs Ret

CACReal AssetsRE ‐ PrivateRE P bliPrivate Equity

Abs RetCAC

Real AssetsRE ‐ PrivateRE ‐ Public

Cash

‐0.1 0 0.1 0.2 0.3 0.4 0.5

RE ‐ PublicCash

TOTAL

Alloc. Select. TOTAL




‐2 ‐1 0 1 2

Risk Metrics for GEPRisk Metrics for GEP




Asset Allocation

GEP ASSET ALLOCATION (%)

• Total Risk is largely related to the allocation between equity and bonds• At quarter-end the portfolio’s equity exposure was modestly above policy weight

35%

40%

45%

50%

0%

2%

4%

es)

ars)

20%

25%

30%

‐4%

‐2%

xposures (lin

ive Expo

sure (b

a

0%

5%

10%

15%

‐10%

‐8%

‐6%

Total EActi

0%10%

Mar‐08

Sep‐08

Mar‐09

Sep‐09

Mar‐10

Sep‐10

Mar‐11

Sep‐11

Mar‐12

Sep‐12

Mar‐13

Public Eq. Over/ (Under) [left] Public Equity [right]

U S Equity [right] Non‐U S Equity [right]




U.S. Equity [right] Non U.S. Equity [right]

Asset Allocation and RiskNote: Exposures and Risk charts below are shown using January 1, 2013 target asset weights. p g y , g gSystematic risk is estimated using long term forecasts [from Mercer Investment Consulting, July 2012], not recent realized volatility.

(Lower Left) Asset weights are measured relative to Current Policy. The fund is underweight in Core Fixed Income EM Debt and TIPS by 0 9% 0 5% and 1 7% respectively The fund is overweight in US Fixed Income, EM Debt, and TIPS by 0.9%, 0.5%, and 1.7% respectively. The fund is overweight in US and EM Equity, Cross Asset Class, and Real Estate.

(Lower Right) The fund’s forecast total systematic risk (dark blue bars) is 14.42% annualized standard deviation. It is still heavily weighted to Public Equity (57% of the total). Forecast active systematic riski 42b Th li b h k i k d iti (li ht bl b ) i i il t th t l f d f is 42bp. The policy benchmark risk decomposition (light blue bars) is similar to the actual fund as of quarter end.

1

1.5GEP Asset Exposures vs. Policy as of Mar 13

20

25

GEP Forecast Contrib. to Systematic Risk at Mar 31, 2013 (%)

GEP Current Policy GEP Actual

‐1

‐0.5

0

0.5

Percen

t

5

10

15

20

Percen

t

‐2

‐1.5

US Equity

Int'l Dev. Eq

Emg Mkt Eq

Global Eq

Core Bon

ds

High Yield

mg Mkt Deb

t

TIPS

Private Eq

Abs Ret

CAC

Opp

Equ

ity

Real Assets

RE ‐Private

RE ‐Pu

blic

Cash

Active vs. Current Policy

‐

5

US Eq

Non

US Eq

Emg Mkt Eq

Global/Opp

Eq

US Agg FI

HY Deb

t

EM Deb

t ‐$

US TIPS

Private Eq

Abs Ret

CAC

RE ‐Private




Em

Expected Risk and Return

Forecast risk and return (using Mercer’s July 2012 capital markets assumptions) lies near the constrained efficient frontier; forecast return of the current policy mix of 8.2%* is close to the nominal return needed to maintain a constant real payout per student (estimated at 8.5%).

* Asset Class returns 2012 Capital Market Assumptionsand Efficient frontiers are shown in the chart as arithmetic (average) 12

14

16

rn

Risk and Expected Return with Constrained Efficient Frontier

(average) expected returns.

The projected compound annual

t lti 6

8

10

xpected Retur

return over multi year horizon is 8.2%for the Current Policy weights.

‐

2

4

5 10 15 20 25 30 35

Ex

Forecast volatility of the current policy is 14.1%.

‐ 5 10 15 20 25 30 35 Risk (Standard Deviation)

US Eq Non US Eq Emg Mkt Eq US Agg FIHY Debt EM Debt ‐ $ EM Debt ‐ Local US TIPSCash Private Equity Timber CommoditiesGEP Long‐Term GEPCurrent Policy Effic. Frontier




GEP Long Term GEP Current Policy Effic. Frontier

Risk Measures: Total

Total risk trend has been quite similar to the benchmark; GEP volatility is quite close to its Budget. Total volatility has resumed a historically normal range, higher than the mid 2000’s but lower than the 2008 09 crash15

20

25

30

Deviation

GEP Total Risk, Total Risk Budget, and Ranges

lower than the 2008-09 crash.

Total Risk budget equals Benchmark risk plus the Active risk budget. The ranges are +/- 20% around the budget.

‐

5

10

15

‐08

‐08

‐09

‐09

‐10

‐10

‐11

‐11

‐12

‐12

‐13

ercent Stand

ard

Total risk is measured by standard deviation of

g

Mar‐

Sep‐

Mar‐

Sep‐

Mar‐

Sep‐

Mar‐

Sep‐

Mar‐

Sep‐

Mar‐

Pe

Endowment Total Risk Total Risk Budget


12

14

ation

GEP Total Risk, Total Risk Budget, and Ranges

Total risk is measured by standard deviation of monthly total returns; each point or bar shows a 12 month measurement period.

A standard deviation of 12% means that roughly 2

4

6

8

10

t Stand

ard Devia

2/3 of the time, the realized return will be within ±12% points from the average return.

At the end of the quarter total risk was 5.73% for GEP and 5 99% for the benchmark

‐

Mar‐12

Apr‐12

May‐12

Jun‐12

Jul‐1

2

Aug

‐12

Sep‐12

Oct‐12

Nov

‐12

Dec

‐12

Jan‐13

Feb‐13

Mar‐13

Percen

t

Endowment Total Risk Total Risk Budget

Lower Range: 20% Upper Range: + 20%




GEP and 5.99% for the benchmark. Lower Range: ‐ 20% Upper Range: + 20%

The spike in Active Risk in 2008-09 resulted from

Risk Measures: Activei i k i i k d d

The spike in Active Risk in 2008 09 resulted from the underweight in equity as the market fell and then rallied, plus higher equity volatility.

Active risk has resumed its low level of the mid 2000’s (about 1 0%) Although well diversified

3

4

5

Deviation

GEP Active Risk, Active Risk Budget, and Ranges

2000’s (about 1.0%) Although well diversified, active risk is still well below long term expectations for active return

The Active risk budget is 3.0% annualized Tracking Error (adj for market volatility) with

0

1

2

8 8 9 9 0 0 1 1 2 2 3ent Stan

dard D

Tracking Error (adj. for market volatility), with ranges of +/- 1 pct. point around BudgetM

ar‐0

Sep‐0

Mar‐0

Sep‐0

Mar‐1

Sep‐1

Mar‐1

Sep‐1

Mar‐1

Sep‐1

Mar‐1

Perc

Endow. Tracking Error Tracking Error Budget

Lower Range: ‐ 33% Upper Range: + 33% 5

tion

GEP Active Risk, Active Risk Budget, and Ranges

Active risk is measured by standard deviation of monthly active returns; each point or bar shows a 12 month measurement period.

A standard deviation of 3% means that roughly 1

2

3

4

Stan

dard Deviat

A standard deviation of 3% means that roughly 2/3 of the time, the realized active return will be within ± 3% points from the average active return.

0

Mar‐12

Apr‐12

May‐12

Jun‐12

Jul‐1

2

Aug

‐12

Sep‐12

Oct‐12

Nov

‐12

Dec

‐12

Jan‐13

Feb‐13

Mar‐13

Percen

t

Endow. Tracking Error Tracking Error Budget




Active risk at the end of the quarter was 0.90%. Lower Range: ‐ 33% Upper Range: + 33%

Risk Attribution

(Upper Left) Virtually all (99.1%) of Total Risk is attributed to systematic (market) factors (red bars).

(Lower Right) Normally the majority of Active Risk97%

98%

99%

100%

GEP ‐ Components of Total Risk

(Lower Right) Normally, the majority of Active Riskis attributed to security/manager selection. When asset allocation transitions are implemented, allocation risk tends to dominate. In late 2009, the equity overweight dominated all other active d i i F th t 11 t it

92%

93%

94%

95%

96%

decisions. For the past 11 quarters, security selection risk has resumed its normal contribution level.

90%

91%

Mar‐08

Sep‐08

Mar‐09

Sep‐09

Mar‐10

Sep‐10

Mar‐11

Sep‐11

Mar‐12

Sep‐12

Mar‐13

Systematic Risk % Residual Risk %100%110%

GEP ‐ Components of Active Risk

Risk is measured here by variance (standard deviation squared) of monthly returns; each bar shows a 12 month measurement period.

Systematic Risk % Residual Risk %

20%30%40%50%60%70%80%90%

Note: Scale represents 0-100% but for greater clarity between systematic and residual risk horizontal and vertical axes cross at 90%.

bar shows a 12 month measurement period.

Systematic risk is associated with policy benchmark exposures; residual risk is associated with non benchmark decisions ( it l ti t ll ti tilt )

‐10%0%

10%20%

Mar‐08

Sep‐08

Mar‐09

Sep‐09

Mar‐10

Sep‐10

Mar‐11

Sep‐11

Mar‐12

Sep‐12

Mar‐13

R id Ri k C t ib All Ri k C t ib




(security selection or asset allocation tilts). Resid Risk Contrib Alloc Risk Contrib

Risk Adjusted Return: Total

Sharpe Ratio (risk adjusted total return) trend has been quite similar to the benchmark for the past 5 years; in the past year it has been 1

2

3

4

nit V

olatility

GEP and Benchmark Sharpe Ratio

the past 5 years; in the past year it has been slightly higher. The 12 month return on risky assets had been generally positive since 2009 but with considerable volatility.

‐3

‐2

‐1

0

08 08 09 09 10 10 11 11 12 12 13cess Return pe

r u

Sharpe ratio is “excess” return (total return l i k f t ) di id d b t t l i k h

Mar‐

Sep‐

Mar‐

Sep‐

Mar‐

Sep‐

Mar‐

Sep‐

Mar‐

Sep‐

Mar‐

Exc

Endowment Benchmark

2.5tility GEP and Benchmark Sharpe Ratio

less risk-free rate) divided by total risk; each point or bar shows a 12 month measurement period.

Over long periods, most asset classes show 0

0.5

1

1.5

2

urn pe

r unit V

olat

g pan average Sharpe ratio of 0.25.

At the end of the quarter the GEP Sharpe Ratio was 1.7 vs. 1.6 for the benchmark.

‐1

‐0.5

Mar‐12

Apr‐12

May‐12

Jun‐12

Jul‐1

2

Aug

‐12

Sep‐12

Oct‐12

Nov

‐12

Dec

‐12

Jan‐13

Feb‐13

Mar‐13

Excess Retu

Endowment Benchmark




Endowment Benchmark

I f ti ti ( i k dj t d ti t )

Risk Adjusted Return: ActiveInformation ratio (risk adjusted active return) is the result of both asset weighting decisions and active equity and bond performance.

It is higher when the returns are more 60%70%80%90%100%

1.0

2.0

3.0

vel

GEP Information Ratio and Significance Level

gconsistent (less volatile). The information ratio has been positive for the past 12 quarters; active return has been small but on average, positive in the past 15 quarters.

10%20%30%40%50%60%

(2.0)

(1.0)

‐

ignifican

ce Lev

Info Ratio

0%(3.0)

Mar‐08

Sep‐08

Mar‐09

Sep‐09

Mar‐10

Sep‐10

Mar‐11

Sep‐11

Mar‐12

Sep‐12

Mar‐13

S

Last 12 Mo Signif. Level Last 12 Mo Info Ratio

0 5

1

1.5GEP Active Return & Active Risk Budget [Monthly]

Information ratio is active return (total return less benchmark) divided by active risk; each point shows a 12 month measurement period.

‐1.5

‐1

‐0.5

0

0.5

Percent

The Significance level is the probability that results are due to skill, with 50% being a neutral measure (e.g., “0% sure,” “100% sure,” “50/50”).

The GEP Information Ratio was 1 7 at quarter-end

‐2

Mar‐08

Sep‐08

Mar‐09

Sep‐09

Mar‐10

Sep‐10

Mar‐11

Sep‐11

Mar‐12

Sep‐12

Mar‐13

GEP Active Return ‐ Risk Budget + Risk Budget





The GEP Information Ratio was 1.7 at quarter end. g pp g

Active Return for the Quarter was +0 82% (Fund return of

Performance Attribution

Active Return for the Quarter was +0.82% (Fund return of +4.58% vs. policy benchmark of +3.76%).

[BELOW] Asset allocation decisions (blue bars) from Core Fixed Income and TIPS contributed 8bp. Security selection decisions


Core BondsHY DebtEM Debt

Avg. Active Weight (%)

(red bars) added 74bp (primarily Emerging Markets Equity, Absolute Return Strategies and Opportunistic Equity).

TIPSPrivate Equity

Abs Ret CAC

Opp EquityReal AssetsRE ‐ PrivateRE ‐ Public

CashGEP Attribution for 3 mo. ending Mar‐31‐13 (%)

‐2 ‐1 0 1 2

Cash

US EquityAvg. Active Return (%)



g ( )



TIPSPrivate Equity

AbsRet

TIPSPrivate Equity

Abs Ret CAC

Opp EquityReal AssetsRE ‐ Private

‐2 ‐1 0 1 2 3

Abs Ret CAC

Opp EquityReal AssetsRE ‐ PrivateRE ‐ Public

Cash ‐0.1 0 0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.8 0.9

RE PrivateRE ‐ Public

CashTOTAL

Alloc. Select. TOTAL




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