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Investment Update Judy Freyer Senior Vice President, Treasurer and Chief Investment Officer.
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Transcript of Investment Update Judy Freyer Senior Vice President, Treasurer and Chief Investment Officer.
Investment Update
Judy Freyer
Senior Vice President, Treasurer and Chief Investment Officer
Video
It’s a Small, Small World
3
• Plans, Programs, and the Board of Pensions Balanced Investment Portfolio
• 2014 Markets and Investment Performance
• Our Changing and Ever Smaller World
• The Unknowable Future
Part 1 – Plans and Programs
4
• Independent plans/programs
• Diverse funding sources
• Distinct portfolios
• Separate accounting
2015 Dues-Based Programs
Medical Plan23%
Pension Plan11%
Death & Disability 1%
Short-Term Investments
Medical Benefits Paid for
Members
Pension, Death & Disability Benefits Paid to Members
Short-Term Investments
Board of Pensions Balanced
InvestmentPortfolio
Employing Organization35% Dues
5
2015 Dues-Based Programs
Medical Plan23%
Pension Plan11%
Death & Disability 1%
Short-Term Investments
Medical Benefits Paid for
Members
Pension, Death & Disability Benefits Paid
to Members
Short-Term Investments
Board of Pensions Balanced Investment
Portfolio
Employing Organization35% Dues
2014:
Revenue $ 180 Million
Expenses$ 181Million
6
2015 Dues-Based Programs
7
Medical Plan23.5%
Pension Plan11%
Death & Disability 1%
Short-Term Investments
Medical Benefits Paid for Members
Pension, Death & Disability Benefits Paid to Members
Short-Term Investments
Board of Pensions Balanced
InvestmentPortfolio
Employing Organization35% Dues
2014:
Dues $ 75 Million
Benefits Paid$ 344 Million
U.S. Stocks
InternationalStocks
Fixed Income
Alternatives
Pension
Death & Disability
Assistance Programs
Endowment
Restricted Gifts/Other Programs
Board of PensionsBalanced Investment
Portfolio
Investment Structure
8
A Portfolio that Reflects the Values of the Presbyterian Church (U.S.A.)
9
• Two voting members on Mission Responsibility Through Investment (MRTI)
• Divestment program of the PC(USA)
• Shareholder resolutions
• Proactive proxy voting
Part 2 - Global Markets and Investment Performance in 2014
10
• Overview of Global Markets in 2014
• 2014 Investment Performance – The Board of Pensions Balanced Investment Portfolio
2014 We Ain’t Down Yet!The Unsinkable Molly Brown
U.S. Dominates Global Markets
USA
11
Dec-13 Jan-14 Mar-14 Apr-14 May-14 Jun-14 Jul-14 Aug-14 Sep-14 Oct-14 Nov-14 Dec-1480
85
90
95
100
105
110
115
120
125
US Stocks Int'l Stocks Emg Mkt Stocks Treasury Bonds High Yield BondsCommodities
24%
13%
-1%2%
-5%
-17%
2%
2014 Global Market Performance
Long U.S. Treasury bonds outperform;other asset classes perform similarly to each other
U.S. assets outperform the rest of the world, as relative strength in the U.S. economy attracts global investors
Commodities perform very poorly in the second half of 2014; oil leads the decline amidst a supply glut
Source: Bloomberg
12
Dec-13 Jan-14 Mar-14 Apr-14 May-14 Jun-14 Jul-14 Aug-14 Sep-14 Oct-14 Nov-14 Dec-1450
60
70
80
90
100
110
120
Energy Industrial Metals Agriculture Livestock Precious Metals
14%
Copper and iron ore weaken on excess supply
Gold and silver re-bound after a terrible
2013
Demand outstrips supply as herd size is at a sixty-year low
Corn and wheat tumble with strong harvests
Oil prices collapse
Supply (U.S. shale) exceeds slow-ing global demand/growth
OPEC chooses not to cut supply
-4%-7%
-11%
-44%
2014 Commodity Group Performance
13
Mar-83 Mar-86 Mar-89 Mar-92 Mar-95 Mar-98 Mar-01 Mar-04 Mar-07 Mar-10 Mar-130
20
40
60
80
100
120
140
160
Pri
ce
pe
r b
arr
el,
US
D
70% fall in 7 months
10/85$30
9/90$40
$1111/98
6/08$140
$421/09
6/14$105
$5312/14
50% fall in 6 months
Source: Bloomberg, first month futures contract. Data reflects month end prices.
Oil PricePrice per barrel, West Texas Intermediate
14
Dec Jan Mar Apr May Jun Jul Aug Sep Oct Nov Dec96
98
100
102
104
106
108
110
112
114
116
Vs. Other Developed Market Currencies Vs. Emerging Market Currencies
Ch
an
ge
in V
alu
e o
f U
.S. D
olla
r
YTD
The Value of the U.S. Dollar in 2014
+13%+12%
Source: Bloomberg
15
I’m Lovin’ It – You Can Never Start Too Young
16
Le Big Mac - The Real Deal in a Global Economy
17
Ukraine
India
South Africa
Egypt
Poland
Venezuela
China
Czech Republic
Pakistan
Japan
Argentina
Colombia
Mexico
Portugal
UAE
South Korea
Costa Rica
Australia
Israel
New Zealand
Canada
Sweden
Denmark
Switzerland
-100 -80 -60 -40 -20 0 20 40 60 80
The Economist Big Mac Index
Source: Bloomberg
Overvalued vs. U.S. Dollar
Undervalued vs. U.S. Dollar
18
10 Year Sovereign Bond Yields
Source: Bloomberg
Dec-90 Dec-93 Dec-96 Dec-99 Dec-02 Dec-05 Dec-08 Dec-11 Dec-140
1
2
3
4
5
6
7
8
9
10
11
12
U.S. U.K. Germany Japan Australia Canada
Inte
res
t R
ate
(%
)
0.3%
Japan6. 5%12/90
U.S.8.1%12/90
U.K.10.8%12/90
0.5%
1.8%1.8%2.2%
2.7%
19
Ownership of U.S. Treasury SecuritiesSeptember 30, 2014
Source: J.P. Morgan, U.S. Treasury. Excludes intragovernmental debt such as securities held by Social Security Trust Fund.
Foreign official
32%
Federal Reserve
19%Foreign private
15%
Mutual funds9%
State/local govt 7%
Finan-cial insti-tutions
7%
Households 6%
Pensions 4%
Other1% Total Debt Held by Public:
$12.756 trillion
20
U.S. Inflation Composition and 2014 year over year percent change
Source: Bureau of Labor Statistics. Data as of December 2014.
Item Weight 2014 Pct. Change
Transportation 16.4% (6.2)%
Apparel 3.4 (2.0)
Recreation 5.8 0.0
Education/Communication 7.0 0.4
Other 3.4 1.6
Housing 41.5 2.5
Medical Care 7.6 3.0
Food/Beverages 14.9 3.3
Total 100% 0.8%
21
Jan-58 Jan-63 Jan-68 Jan-73 Jan-78 Jan-83 Jan-88 Jan-93 Jan-98 Jan-03 Jan-08 Jan-13-4
-2
0
2
4
6
8
10
12
14
16
CPI (All Items) Core CPI (excludes Food and Energy)
Co
ns
um
er
Pri
ce
Ind
ex
U.S. Inflation Year over year percent change
Source: Bureau of Labor Statistics
1.6%0.8%
Inflation rose throughout the 1970s as oil prices and wages both soared
The Federal Reserve’s efforts to curtail inflation led to a multidecade disinflationary trend
Inflation has been low and stable; commodity volatility has not impacted core CPI
12/7412.3%
3/8014.8%
7/085.6%
7/09-2.1%
22
12/31/14 12/31/13 Change
U.S. Equity 37.9% 37.3% 0.6%
Int’l Equity 19.9 21.3 (1.4)
Fixed Income 29.4 29.5 (0.1)
Alternatives
Private LPs 8.0 7.3 0.7
Liquid Alts 4.8 4.6 0.2
Total 100.0% 100.0%
$ millions $8,640 $8,478 $162
Balanced Investment Portfolio Asset Allocation
23
12/31/14L-T Strategic Asset Allocation
Ranges
U.S. Equity 37.9% 30-50%Int’l Equity 19.9 10-25Fixed Income 29.4 25-45Alternatives 12.8 1-20 Private LPs 8.0%
Liquid Alts 4.8
Total 100.0%$ millions $8,640
24
Balanced Investment Portfolio Asset Allocation
Returns of Market Indices andBoard of Pensions Balanced Investment Portfolio
December 31, 2014
-4.9
4.9
5.6
6.0
1.8
-2.2
12.6
-10 -5 0 5 10 15
MSCI EAFE
MSCI EM
CG High Yield Cash Pay
Russell 2000
BOARD OF PENSIONS
Barclays Govt/Credit
Russell 3000
% Return
Source: MSCI (net) 25
Board of Pensions Balanced Investment PortfolioHistorical Asset Allocation
19871988
19891990
19911992
19931994
19951996
19971998
19992000
20012002
20032004
20052006
20072008
20092010
20112012
20132014
0
10
20
30
40
50
60
70
80
90
100
U.S. Equity International Equity Fixed Income Alternatives
High14%
44% US Stocks
Low 6%Intl Stocks
High48% Fixed
3% Alts
Low 0%13%Alts
29%Fixed
High21%
38% US Stocks
High51%
20% Intl Stocks
Low 28%
Low 36%
26
Annualized Rate of Return (%)
1Year
3Years
5Years
10Years
15Years
20Years
Total Fund 5.6 12.1 10.0 6.8 5.7 8.6
Asset Mix Policy Benchmark
7.4 12.3 10.1 6.8 5.3 8.2
Excess Return (1.8) (0.2) (0.1) 0.0 0.4 0.4
Board of Pensions Balanced Investment PortfolioDecember 31, 2014
27
Dec-90 Dec-93 Dec-96 Dec-99 Dec-02 Dec-05 Dec-08 Dec-11 Dec-142
3
4
5
6
7
8
9
-0.2
0
0.2
0.4
0.6
0.8
1
Balanced Investment Portfolio (left) Benchmark Performance (left)
Bill
ion
s o
f d
olla
rs
Cu
mu
lati
ve R
elat
ive
Per
form
ance
, bill
ion
s
Since 1990, active management of the Balanced Investment Portfolio has pro-vided an additional $840 million in as-sets, most of which is attributable to the last ten years.
The Value of Long-Term Outperformance
Benchmark Performance represents Asset Mix Policy Benchmark, adjusted for Balanced Investment Portfolio cash flows. Columns represent cumulative dollar impact of relative performance, shown on right hand scale.
28
Jan-90 Jan-93 Jan-96 Jan-99 Jan-02 Jan-05 Jan-08 Jan-11 Jan-142
3
4
5
6
7
8
9
-50
0
50
100
150
200
250
300
350
Balanced Investment Portfolio (left)
Bill
ion
s o
f d
olla
rs (
mar
ket
valu
e)
Mill
ion
s o
f d
olla
rs (
ben
efit
s p
aid
)
Since 1988, $4.5 billion has been withdrawn from the Balanced In-vestment Portfolio to pay benefits.
$132 million
$1.42 billion
Balanced Investment PortfolioMarket Value and Benefits Paid in Excess of Dues
Gray bars represent benefits paid annually in excess of dues received and are shown in millions of dollars against the right scale. Timing of cash payments in December 2011, 2012 and 2013 overstates 2011 payments and understates 2013 payments. Excluding timing differences, cash payments were approximately equal 2011-2013.
29
Part 3: It’s a Small, Small WorldOur Changing and Ever Smaller World
30
• Butterfly Wings in 2015 and Our Interconnected Global Markets
• Global Demographics and Statistics
31
The Butterfly Effect
“The flapping of a butterfly’s wings might create a minuscule disturbance that, in the chaotic motion of the atmosphere…change the large scale atmospheric motion.”
Edward Lorenz,
Meteorologist
Chaos Theory, 1963
32
Demographics - Why It Matters
D- Drinking water, discount rates, debts, deficits
E- Economic growth, emerging markets, social equality
M- Mortality, longevity risk, mega-cities
O- Organizational structure and behaviors, outsourcing
G- Geopolitical risks, genomics, global labor force
R- Retirement, real estate, resource allocation
A- Asset prices, asset allocation
P- Pensions, pharmaceuticals
H- Health, housing
I- Inflation, information technology, infrastructure
C- Climate, countries, commodities, communications
S- Societal structures, investment sectors
0
1
2
3
4
5
6
7
8
9
10
World Asia Africa Europe
Latin America North America Oceania
Source: Wikipedia, Presbyterian Historical Society, spiritrestoration.org
Glo
bal p
opul
atio
n (b
illio
ns)
Global Population Growth through a Presbyterian Historical Lens
70000 BC – 500 BC 1 AD 1000 1750 - 1900 1950 - 2010
Noah born
c3000 BC
Great Pyramids
c2500 BC
Moses born
c1250 BC
Rome
c750 BC
Birth ofChrist
John Calvin born
1509 Fund forPious Uses
1717
First GAPhila, PA
1789
North-South split1861
UPCUSA forms
1958Book of Confessions
1967
Reunion
PCUSA 1983
33
The World’s Most Populated Countries - 2014
Source: Population Reference Bureau
China India U.S. Indonesia Brazil Pakistan Nigeria Bangladesh
Russia Japan Rest of World
0
1
2
3
4
5
6
7
8
9
10
Bill
ion
s o
f P
eo
ple
In 2014, the ten largest countries accounted for approximately 60% of the world’s 7.2 billion people.
34
The World’s Most Populated Countries –2050 Projection
Source: Population Reference Bureau
India China Nigeria U.S. Indonesia Pakistan Brazil Bangladesh
Congo Ethiopia Rest of World
0
1
2
3
4
5
6
7
8
9
10
Bill
ion
s o
f P
eo
ple
In 2050, it is expected that the ten largest countries will account for approximately 55%
of the world’s 9.7 billion people.
Congo and Ethiopia are expected to replace Russia and Japan in the Top 10.
35
36
0
1
2
3
4
5
6
7
8
9
10
2000 2005 2010 2015 2020 2025 2030 2035 2040 2045 2050
Asia Africa Europe Latin America North America Oceania
Glo
bal
pop
ulat
ion
(b
illio
ns)
Global Population by Region
Source: United Nations. 2008 estimates
Demographic SnapshotDeveloped Markets
Source: JP Morgan
Developed
GDP per Capita Population
% under Age of 20
Investment% of GDP
U.S. $53,101 316 mm 26% 20%
Canada 51,990 35 22 24
Germany 44,999 81 18 17
France 43,000 64 24 19
U.K. 39,567 64 24 14
Japan 38,491 127 18 21
Italy 34,715 60 19 17
37
Demographic SnapshotEmerging Markets
Source: JP Morgan
Emerging
GDP per Capita Population
% under Age of 20
Investment% of GDP
Korea $24,329 50 mm 22% 26%
Russia 14,819 143 21 24
Brazil 11,311 198 33 18
Mexico 10,630 118 38 22
China 6,747 1,361 20 48
India 1,505 1,243 38 35
38
Demographic SnapshotDeveloped Markets vs. Emerging Markets
Source: JP Morgan
GDP per Capita Population
% under Age of 20
Investment% of GDP
Developed Average $46,184 747 mm 23% 19%
Emerging Average 5,745 3,113 29 37
Includes countries shown on previous two slides
39
Perceived Retirement Shortfall by Country
Sources: JP Morgan, HSBC
Average U.K. U.S. France Canada AUS Sin-gapor
e
Brazil China India Mexico UAE0
5
10
15
20
25
108
14
911 11
9
1210 10
9 9
810
7
108
10
8
11
10
58
6
Savings expected to last (years) Expected savings shortfall (years)
40
Hourly Compensation Costs in Manufacturing
Sources: Goldman Sachs, ISI. Data through 2012; China and U.S. estimated through 2014.
Bel
gium
Sw
eden
Ger
man
y
Fra
nce
Net
herla
nds
Irel
and
U.S
.
Can
ada
Japa
n
Ital
y
U.K
.
Spa
in
Sin
gapo
re
Sou
th K
orea
Gre
ece
Bra
zil
Tai
wan
Pol
and
Mex
ico
Chi
na
Phi
lippi
nes
0
5
10
15
20
25
30
35
40
45
50
5552
50
46
40 4038 37 37
3534
31
27
24
2119
119
86
42
Ho
url
y W
ag
es
(U
.S. D
olla
rs)
41
42
Trends Too Important to Ignore
• U.S. Energy Independence
• A Revolution in Communication
Source: U.S. Energy Information Administration
43
Production of OilMillions of barrels per day
Source: JP Morgan, EIA. 2014 and 2015 are estimates.
Production 2013 2014 2015Growth
since 2013
U.S. 12.3 13.9 14.9 20.7%
OPEC 36.0 36.0 35.9 -0.3
Other 41.8 42.1 41.9 0.4
Global 90.2 92.0 92.8 2.9%
44
Consumption of OilMillions of barrels per day
Source: JP Morgan, EIA. 2014 and 2015 are estimates.
Consumption 2013 2014 2015Growth
since 2013
Japan 4.5 4.4 4.2 -6.4%
Europe 13.6 13.5 13.4 -1.9
U.S. 19.0 19.0 19.1 0.7
China 10.6 11.0 11.3 6.9
Other 42.8 43.6 44.3 3.6
Global 90.5 91.4 92.3 2.0%
45
Oil Imports as a Percent of GDPVarious developed and emerging countries
Sources: JP Morgan, EIA, IMF
Canada U.K. U.S. Italy France Germany Japan Russia Brazil China South Africa
India-6
-4
-2
0
2
4
6
-3.6
0.91.6
2.2 2.4 2.4
3.6
-13.6
0.700000000000001
2.4
4.85.3
Russian net oil exports are 13.6% of GDPNet exporters
Net importers
46
Don’t Hang Up
A Revolution in Communication
47
Global Smartphone Shipments
Sources: The Economist, IDC
2011 2012 2013 2014 20180
0.5
1
1.5
2
</= $99 $100-$199 $200-$299 $300-$399 $400-$499 >/=$500
estimate forecast
48
Showering
XXX
Car
Exercise
Movies
Coffee
Books
Alcohol
Chocolate
Newspapers
Fast Foods
0 10 20 30 40 50 60 70 80
9
17
22
44
47
49
52
58
68
70
77%
Mobile Internet Addiction
Sources: The Economist, BCG. Survey conducted in September 2014.
Query: What would Europeans be willing to give up for a week Before giving up their mobile internet access?
49
50
Investment Outlook
Where Are We Today
and Where Are We Headed
51
Optimism
Excitement
Euphoria
Thrill Anxiety
Denial
Fear
Desperation
Panic
Capitulation
Despondency
DepressionHope
Optimism
Relief
Point of maximum financial risk
Point of maximum financial opportunity
The Investing Cycle
US Eq Lg Cap US Eq S/mid Cap Int’l Developed Emerging Mkts Fixed Income
1995 37.6 33.5 11.2 -5.2 19.3
1996 23.0 17.2 6.1 6.0 2.9
1997 33.4 25.7 1.8 -11.6 9.8
1998 28.6 8.6 20.0 -25.3 9.5
1999 21.0 35.5 27.0 66.4 -2.1
2000 -9.1 -15.8 -14.2 -30.6 11.9
2001 -11.9 -9.3 -21.4 -2.4 8.5
2002 -22.1 -17.8 -15.9 -6.0 11.0
2003 28.7 43.9 38.6 56.3 4.7
2004 10.9 18.1 20.3 26.0 4.2
2005 4.9 10.0 13.5 34.5 2.4
2006 15.8 15.3 26.3 32.6 3.8
2007 5.5 5.4 11.2 39.8 7.2
2008 -37.0 -39.0 -43.4 -53.2 5.7
2009 26.5 37.4 31.8 79.0 4.5
2010 15.1 28.6 7.8 19.2 6.6
2011 2.1 -3.8 -12.1 -18.2 8.7
2012 16.0 17.9 17.3 18.2 4.8
2013 32.4 38.1 22.8 -2.6 -2.4
2014 13.7 7.6 -4.9 -2.2 6.0
Data: S&P 500, DJ U.S. Completion TSM, MSCI EAFE, MSCI EM, Barclays Capital Government/Credit52
53
Global Themes in 2015
• U.S. stocks fairly valued with selective opportunities in active management
• International hedged stocks could outperform U.S. stocks
• Currency management will continue to be important
• Commodity prices will remain volatile• Interest rates will diverge in U.S. and global
markets due to timing of quantitative easing
54
It’s a Small, Small World 1939 - A Great Church Now Maintains a Great Pension ProgramThe Annual Report of the Board of Pensions of the Presbyterian Church in the United States of America 1939
2015 - Secure Benefits in Uncertain Times