Presentation Transcript

1. Board Member Orientation Investments Section May 20, 2013

2. ROLES AND RESPONSIBILITIES

   As detailed in MPERS’ investment policy. See Appendix for additional information.
3. Overview of Roles and Responsibilities Board of Trustees Investment Committee Custodian Bank (Northern Trust) Investment Consultants MPERS’ Executive Staff General Investment (NEPC) Executive Director Report Performance to: Private Equity Investment (Grove Street) Chief Investment Officer Investment Managers Hedge Funds Investment (Albourne) Traditional Non-traditional Hired by:
4. Board of Trustees General oversight of the portfolio Review and approval of investment policies and procedures Establishes broad asset allocation policies and return objectives Based on recommendations and analysis from staff and consultants
5. Investment Committee While the Board of Trustees is responsible for the general oversight of the investment portfolio, the investment committee is charged with the responsibility of providing more in-depth analysis on a wide range of investment related issues. The investment committee reviews and/or provides the Board with recommendations on topics such as: The organization’s tolerance for risk Asset allocation strategies Total fund performance Compliance with investment policy
6. Executive Director Administers operations Agrees in writing to all manager hires and terminations Monitors performance of investment portfolio Ensures funds are invested in accordance with Board approved investment policies Ensures internal controls are developed to safeguard assets
7. Chief Investment Officer Administers all facets of the investment portfolio Continually evaluates and refines the program Works with consultants to make recommendations to the Board Hiring and termination of fund managers (with approval from Executive Director and the appropriate Consultant) Day-to-day management & re-balancing of investment portfolio Oversee due diligence existing asset managers Acts as a liaison between MPERS and the investment community Employment agreement with Board of Trustees (salary plus performance incentives)
8. Custodian Bank: The Northern Trust Company The official “book of record” for the investment program Hired by the Board of Trustees Safekeeping of assets; collects and disburses principal and income Provides performance reporting and accounting statements Processes and maintains the securities lending program
9. General Investment Consultant: New England Pension Consultants Hired by and reports to the Board of Trustees Consultant to Board and “check and balance” to System staff. Educates and provides investment perspective on portfolio goals and structures Develops and implements investment policies and asset allocation strategies in conjunction with CIO Agrees in writing to traditional manager hires and terminations Domestic Equity, International Equity, Core Fixed Income, and Real Estate
10. Specialty Investment Consultants Fiduciary responsibility Provide specialized knowledge and expertise Assist staff in developing a greater level of expertise and understanding of their respective strategy or asset class Develop and implement investment policies and asset allocation strategies in conjunction with CIO Evaluate investment performance
11. Hedge Funds: Albourne Partners Agrees in writing to hedge fund manager hires and terminations MPERS’ maintains ultimate decision making authority (discretion) of managers selected. Provides extensive due diligence research of hedge funds to MPERS’s staff Provides guidance on allocations
12. Private Equity: Grove Street Advisors Full discretion on hires within fund of funds umbrella, subject to provisions of investment management agreement Assist with due diligence on hiring & termination decisions made outside the fund of funds umbrella
13. Investment Managers Manage assets according to provisions of Investment Management Agreement Typically broken down by strategy or asset class (e.g., stocks, bonds, real assets, real estate, hedge funds, private equity) Subject to hiring and firing decisions by staff and consultant(s) Decisions reported to board within 72 hours Quarterly communications with MPERS including performance results and any significant organizational changes

14. HOW CASH FLOWS THROUGH MPERS

    From employer contribution to investment to disbursement.
15. Tracking the Flow of Funds through MPERS Employer Contributions ($13 million / month) Cash Flows Investment Income ($5 million / month) Central Bank Received / Collected by Custodian Bank (Northern Trust) Benefit Payments ($18 million / month) Invested According to Investment Policy Established by the Board of Trustees Implemented by Executive Staff and Consultants Distributed among Existing and/or New Investment Managers New Hires made by CIO, with consent from Executive Director and Consultants Investments are monitored, and funds collected from investment income and/or re-balancing of manager allocations

16. Goals and Assumptions

    Objectives for MPERS’ Investment Portfolio
17. Objectives, Constraints and Preferences High Level Discussion on Founding Principles of Investment Portfolio (C + I) = (B + E) (Contributions + Investment Income) = (Benefits + Expenses) Key Points: Right side of equation is essentially fixed (benefits are set in statute) If the right side is fixed, for employee contributions to come down, investment income must go up To increase investment income, you must take risk. Balancing this relationship and establishing a risk tolerance level is arguably the most critical decision in constructing an investment portfolio. So how / where do you start the risk management process? Investment Policy and Diversification
18. Investment Policy & Diversification MPERS’ Most Important Risk Management Tools The Board of Trustees, through the investment policy, defines the desired outcome of the investment program. In defining the goals and objectives of the program, the investment policy includes provisions that: Define the assumed rate of return for the portfolio (currently 8.25%). Establish a diversified asset allocation that is expected to both meet the assumed rate of return while minimizing the impact of the fund’s volatility to contribution rates. Define the approved asset classes and investment strategies. Establish a range of allocations from which the CIO can operate. Establish procedures for hiring and terminating investment managers. Establish on-going due diligence requirements for existing managers.
19. THE ROLE OF EACH ASSET CLASS WITHIN A DIVERSIFIED INVESTMENT PORTFOLIO Key Points: Historically, equities have produced the best long-term returns, but also carry the highest risk Government Bonds offer the best diversification to equities, but offer little in terms of expected return. Alternatives are used primarily to enhance returns, but can also serve as risk reducers How much you allocate each respective category depends on your risk & return objectives QUESTION: If equities offer the best long-term returns, and we are a long term investor, why not put 100% of the fund in equities?
20. ANSWER: TOO MUCH SHORT-TERM RISK There have been several 10-15 year periods where equity returns have been negative or flat The need to preserve capital leads to the use of multiple asset classes to reduce risk (a.k.a., “don’t put all your eggs in one basket”)
21. EQUITY vs. BOND RISK IN THE INVESTMENT PORTFOLIO Problem: Equity Risk Dominates the Typical Investment Portfolio Equities have roughly 3 times the risk of traditional fixed income securities In the typical 60/40 stock/bond portfolio, over 90% of the overall risk comes from the equity allocation To equally balance the risk of stocks and bonds, you have to invest 28% in stocks and 72% in stocks This portfolio only generates a 4% expected return.

22. How does MPERS diversify the Investment Portfolio?

    By adopting an Asset Allocation that spreads risk across multiple asset classes and strategies
23. Target Asset Allocation Private Equity 15% Fixed Income 25% Real Estate 10% Real Assets 5% Hedge Funds 15% Global Equities 30% The target asset allocation is set by the Board of Trustees as a result of the Asset / Liability Studyin 2010 and recommendations from investment staff and general consultant. An A/L study occurs approximately every 5 years, and was last completed June 30, 2010.

24. Performance Measurement and Due Diligence

25. DUE DILIGENCE & PERFORMANCE MEASUREMENT Due Diligence Investment policy mandates a MINIMUM of one meeting per year with each external investment manager (occurs much more frequently in practice) Meetings can be in the form of: Manager Visits Annual Meetings Conference Calls Performance Measurement Performance is calculated by Northern Trust, and verified by New England Pension Consultants (NEPC) Quarterly performance reporting provided by NEPC