Public Equity Portfolio Overview - North CarolinaAgenda . 2 Equity Markets Overview Portfolio...
Transcript of Public Equity Portfolio Overview - North CarolinaAgenda . 2 Equity Markets Overview Portfolio...
Public Equity Portfolio Overview May 29, 2013
Agenda
2
Equity Markets Overview
Portfolio Profile
Portfolio Structure
Activities/Accomplishments
Global Equity Initiatives
Hedged Equity Portfolio
General Market Performance Review
3 Sources: Russell, MSCI, Bloomberg
2.0%
8.6%
11.3%
11.0%
11.6%
14.0%
14.6%
-1.6%
3.6%
5.1%
6.9%
8.2%
10.6%
11.1%
-4.0% -2.0% 0.0% 2.0% 4.0% 6.0% 8.0% 10.0% 12.0% 14.0% 16.0%
MSCI EM
MSCI ACWI Ex-USA IMI
MSCI EAFE
MSCI ACWI IMI
MSCI FRONTIER
S & P 500
RUSSELL 3000
1Q2013 1 Year
US Equity Market Performance Review
4
14.0%
13.2%
14.5%
10.1%
18.8%
17.3%
21.5%
12.8%
16.3%
14.5%
18.1%
11.0%
14.6%
10.6%
10.1%
11.0%
9.5%
12.3%
13.0%
14.2%
11.5%
12.4%
13.2%
11.6%
6.9%
11.1%
0.0% 5.0% 10.0% 15.0% 20.0% 25.0%
S&P 500
Russell Top 200
Russell 1000
Russell 1000 Growth
Russell 1000 Value
Russell Mid Cap
Russell Mid Cap Value
Russell Mid Cap Growth
Russell 2000
Russell 2000 Growth
Russell 2000 Value
MSCI ACWI IMI
Russell 3000
1Q2013 1 Year
-3.8% 25.3%
20.8%
19.6%
10.2%
11.1%
16.7%
19.1%
20.3%
4.3%
15.9%
11.9%
15.2%
10.5%
5.6%
12.5%
12.1%
11.8%
-5.0% 0.0% 5.0% 10.0% 15.0% 20.0% 25.0% 30.0%
Technology
Healthcare
Consr. Disc.
Consr. Staples
Energy
Materials
Producer Durables
Financials
Utilities
Source: Russell 3000 global sectors
• US stocks shrugged off European debtworries and posted the best returnsregionally for the quarter and 1 year.
• Markets reached new highs.• Strong housing related rebound in retail
sales, quantitative easing, and improvedemployment were contributors to marketperformance.
• Large cap stocks lagged small and mid capstocks.
• Value stocks outperformed growth stocks.• Defensive sectors such as health care,
consumer staples, and utilitiesoutperformed the broader market.
• Technology sector generated the weakestreturns in part due to Apple’s weaknessand large benchmark weight.
International Equities Performance Review
5
11.3% 13.3%
10.6% 13.7%
8.4% 10.4%
11.0% 8.6%
2.0% 9.2%
10.6% 8.5%
9.8% 3.4%
11.6%
5.1% 8.4%
6.5% 9.7%
3.2% 6.5% 6.9%
3.6% -1.6%
4.2% 2.7%
11.6% 2.5%
0.9% 8.2%
-5.0% 0.0% 5.0% 10.0% 15.0% 20.0%
MSCI EAFE
MSCI EAFE SC
MSCI ACWI
MSCI ACWI SC
MSCI ACWI Ex-USA
MSCI Ex-USA SC
MSCI ACWI IMI
MSCI ACWI Ex-USA IMI
MSCI EM
MSCI EM SC
MSCI Europe
MSCI Japan
MSCI UK
MSCI Canada
MSCI Frontier
1Q2013 Year
-7.4%
-6.1%
-1.7%
5.3%
4.6%
17.2% 8.1%
11.4%
18.9%
25.6%
-6.7%
-1.9%
-0.2%
2.7%
4.1%
4.5%
5.3%
6.5%
8.9%
11.9%
-20.0% -10.0% 0.0% 10.0% 20.0% 30.0%
Materials
Energy
Utilities
Telecom. Serv.
Info. Tech
Financials
Industrials
Cons. Discr
Consr. Staples
Healthcare
Source: MSCI ACWI Ex-USA IMI GICS Sector
• Mixed returns amongst internationalmarkets.
• Cyprus banking crisis and pooreconomic data suppressed returns inthe European regions.
• Emerging markets equities were theweakest due to slower growth ratesin some regions, concerns ofincreased regulation in China,pressures of inflation in Brazil, andlower commodities prices.
• Japanese stocks’ strong performancewas driven by Bank of Japan policiesto hit 2% inflation rate.
• International small cap stocksoutperformed internationaldeveloped large cap stocks.
• Health care, financials, and consumerstaples performed strongly duringthe year. Energy, utilities, andmaterials sectors were the laggards.
Equity Markets Valuation Review
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16.1
44.0
14.6 18.2
25.0
0.0 5.0
10.0 15.0 20.0 25.0 30.0 35.0 40.0 45.0 50.0
Russell 1000 Russell 2000 DAX FTSE 100 Nikkei 225
PE Ratio (Current vs. 10 Yr History)
Lower Quartile Median Upper Quartile Current
2.1 1.8
3.3 3.7
1.6
0.00 0.50 1.00 1.50 2.00 2.50 3.00 3.50 4.00 4.50
Russell 1000 Russell 2000 DAX FTSE 100 Nikkei 225
Dividend Yield (Current vs. 10 Yr History)
Lower Quartile Median Upper Quartile Current
105.0 101.6
175.4
134.0
79.1
0.0
50.0
100.0
150.0
200.0
250.0
300.0
350.0
400.0
450.0
500.0
Russell 1000 Russell 2000 DAX FTSE 100 Nikkei 225
Debt / Equity (Current vs. 10 Yr History)
Lower Quartile Median Upper Quartile Current
9.7 11.7
7.3 8.0
9.7
0.0
2.0
4.0
6.0
8.0
10.0
12.0
14.0
16.0
18.0
Russell 1000 Russell 2000 DAX FTSE 100 Nikkei 225
EV / EBITDA (Current vs. 10 Yr History)
Lower Quartile Median Upper Quartile Current
Total Equity Profile – March 31, 2013
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Portfolio Characteristics
Portfolio MSCI ACWI IMI
Price/Earnings 17.3 17.2
Dividend Yield (%) 2.41 2.56
Price/Book 1.88 1.87
Debt/Equity 0.82 0.86
Market Cap ($ Weighted Median) 27,937 30,157
Return on Equity – 1 Year 15.4 15.7
Source: BNY Mellon Note: Regional allocation, sector allocation and portfolio characteristics are calculated on Equity ex-cash. Sector Allocation is based on Russell Global Sectors.
7.1%
18.4%
11.5%
8.8%
3.7%
8.7% 6.9%
17.8%
11.5%
8.7%
3.1%
8.3%
0.0%
5.0%
10.0%
15.0%
20.0%
Qtr Fiscal YTD 1 Yr 3 Yrs. 5 Yrs. 10 Yrs. Portfolio Benchmark
10.6%
9.6%
12.7%
9.1%
9.8%
7.9%
11.0%
22.2%
7.1%
11.9% 10.6%
14.3%
7.9%
9.5%
6.5%
12.1%
20.4%
6.8%
0.0% 5.0% 10.0% 15.0% 20.0% 25.0%
Technology
Health Care
Cons. Disc.
Cons. Staples
Energy
Materials
Producer Durables
Financials
Utilities
Portfolio MSCI ACWI IMI
Performance Sector Allocation
50.1%
16.2% 12.2% 10.1% 7.6%
3.8%
47.8%
15.0% 13.2%
12.1% 7.9% 4.0%
0.0%
10.0%
20.0%
30.0%
40.0%
50.0%
60.0%
U.S. Europe Ex-UK
Asian /Pacific Basin
Emerging Mkts
UK Canada
Regional Allocation
Portfolio MSCI ACWI IMI
U.S. Equity Portfolio Profile – March 31, 2013
Portfolio Characteristics
Portfolio Russell
3000 Index
Price/Earnings 18.1 18.0
Dividend Yield (%) 1.82 2.00
Price/Book 2.29 2.33
Debt/Equity 1.12 1.20
Market Cap ($ Weighted Median)
34,254 40,378
Return on Equity – 1 Year 16.2 17.1 Source: BNY Mellon. Note: Market Capitalization, sector allocation and portfolio characteristics are calculated on Equity Ex-Cash. Sector Allocation is based on Russell Global Sectors.
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11.1%
18.7%
13.7% 12.8%
6.7%
9.4%
11.1%
18.3%
14.6% 13.0%
6.3%
9.2%
0.0%
5.0%
10.0%
15.0%
20.0%
Qtr Fiscal YTD 1 Yr 3 Yrs. 5 Yrs. 10 Yrs. Portfolio Russell 3000 Index
14.9%
12.1%
14.2%
8.4%
9.9%
4.4%
11.5% 18.5%
6.0%
16.1%
12.9%
14.5%
7.5%
10.3%
3.6%
12.7%
17.4%
5.1%
0.0% 5.0% 10.0% 15.0% 20.0%
Technology
Health Care
Cons. Disc.
Cons. Staples
Energy
Materials
Producer Durables
Financials
Utilities
Portfolio Russell 3000 Index
Performance Sector Allocation
36.8%
23.6% 17.9%
13.2%
8.4%
39.3%
26.0%
17.7%
9.9% 7.1%
0.0%
10.0%
20.0%
30.0%
40.0%
Large Cap. Medium/Large Cap.
Medium Cap. Medium/Small Cap.
Small Cap.
Market Capitalization Allocation
Portfolio Russell 3000 Index
Non-U.S. Equity Profile – March 31, 2013
Portfolio Characteristics
Portfolio MSCI ACWI Ex-US IMI
Price/Earnings 16.80 16.50
Dividend Yield (%) 2.92 3.06
Price/Book 1.62 1.58
Debt/Equity 0.53 0.54
Market Cap ($ Weighted Median)
22,952 24,065
Return on Equity –1 Year 14.7 17.1 9
Performance
Source: BNY Mellon. Note: Sector allocation and portfolio characteristics are calculated on Equity Ex-Cash. Sector Allocation is based on Russell Global Sectors.
3.6%
18.4%
8.9%
4.2%
-0.5%
10.5%
3.6%
17.8%
8.6%
4.2%
-1.1%
9.6%
-5.0%
0.0%
5.0%
10.0%
15.0%
20.0%
Qtr Fiscal YTD 1 Yr 3 Yrs. 5 Yrs. 10 Yrs.
Portfolio Benchmark
6.3%
7.4%
11.2%
9.7%
9.5%
11.1%
10.9%
25.8%
8.1%
7.8%
7.7%
13.5%
8.5%
9.4%
9.8%
11.8%
23.0%
8.6%
0.0% 5.0% 10.0% 15.0% 20.0% 25.0% 30.0%
Technology
Health Care
Cons. Disc.
Cons. Staples
Energy
Materials
Producer Durables
Financials
Utilities
Portfolio MSCI ACWI ex- US
Sector Allocation
27.8% 24.6%
20.7%
13.8%
7.5% 5.6%
28.8% 25.3% 23.1%
15.1%
7.7%
0% 0.0%
5.0%
10.0%
15.0%
20.0%
25.0%
30.0%
35.0%
Europe Ex-UK
Asian /Pacific Basin
Emerging Mkts
UK Canada U.S.
Regional Allocation
Portfolio MSCI ACWI Ex-US IMI
Portfolio Structure
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56.9 43.1
Total Equity (%)
Active
Passive
45.2 54.8
Domestic
62.5 37.5
Intl
100
Global
Active-Passive Allocation
Level I 97.3%
Level II 2.7%
Liquidity of Assets
# of Managers in Segments
Note: Calculations do not include cash, rebalancing & hedged strategy
• 25 managers/46 strategies• 5 Historically Under-utilized Businesses
(“HUB”)• 3 NC based firms
Domestic Equity
Foreign Equity
Global Equity
Passive 3 1 0
Active
Long 10 7 2
Long FoF's 1 (10) 1 (8) 0
Long-Short 1 (2) 0 0
Portfolio Risk Profile
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REDACTED: CONTAINS CONFIDENTIAL INFORMATION PROVIDED BY A VENDOR
Portfolio Active Risk Evolution
12
Domestic Equity
International Equity
Source: BlackRock
13
Funded Emerging Manager Program Leading Edge (Russell 1000 strategy) - $150 million FIS Group (MSCI ACWI ex-U.S. strategy) - $150 million
Rebalanced portfolio $1.0 billion increase in international exposure $1.8 billion benefits, Emerging Manager and passive funding Included terminating an international portfolio
SAS implementation Finalized equity reports and performed user acceptance testing
Continue to renegotiate fees with managers
Searches: emerging markets, global and international
Updated portfolio structure review with BlackRock
Hedged equity discussions with fund of funds providers
Review of FY2013 Activities
Global Equity – FY2014 Work Plan and Initiatives
14
Consolidate passive mandates Leverage economies of scale Mitigate operational risk and transition costs Simplification
Emphasize high conviction managers Address potential over-diversification Simplification Evaluate Non-US, Global and Emerging Markets short lists currently under
review
Evaluate differentiated active strategies Activists Low volatility Hedged equity
Historical Hedged Equity Risk/Return Profile REDACTED: CONTAINS CONFIDENTIAL INFORMATION PROVIDED BY A VENDOR
16
Strategic Hedged Equity Beta Target REDACTED: CONTAINS CONFIDENTIAL INFORMATION PROVIDED BY A VENDOR
1
Historical Hedged Equity Risk REDACTED: CONTAINS CONFIDENTIAL INFORMATION PROVIDED BY A VENDOR
1
Historical Hedged Equity Returns REDACTED: CONTAINS CONFIDENTIAL INFORMATION PROVIDED BY A VENDOR
19
Additional Hedged Equity Goals
Maximize transparency
Minimize absolute and relative correlations
Evaluate monetizing longer investment horizon with lower fees
Focus on creative fee structures that maximize alignment of interests
Preference for managed account or fund of one structure
Hedge Fund Investment Structures
20
Fund of Funds Commingled Fund of One
Managed Account Infrastructure
Investment Considerations
Maximum manager universe
Minimum tracking error ?
Ability to exclude illiquid or undesired exposure ?
Maximum fee/term flexibility ? ?
Additional fees +45-100bps None +20-40bps +20-35bps
Risk Considerations
Treasurer controls assets
Reduces hedge fund operational risk ?
Not affected by actions of other LPs ?
Full transparency ? ? ?
Minimum investor operational burden ?
Maximum loss is invested capital
Note: Additional fees are estimates based on discussions.
Yes
? Uncertain
No
Forms of “Strategic Partnership”
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Customized Fund of Funds
Hybrid (Class A and Class B)
Hybrid (Joint Investment Committee) Advisory
Fiduciary liability Partner Partner (A)/NCRS (B) NCRS NCRS
Discretionary portfolio Yes Yes (A), No (B) No No
Housed in legal entity Yes Yes Yes No
NCRS invests directly No No (A), Yes (B) Yes Yes
Benefit from partner’s scale Yes Yes Yes No
Source investments Partner Partner (A)/Both (B) Both Both
Portfolio management Partner Partner (A)/Both (B) Both NCRS
Manage liquidations Partner Partner Partner NCRS
Investment/ODD monitoring
Operational support
Legal support
Portfolio and risk analytics
Reporting
NCRS operational burden Low Low Low High
NCRS legal burden Low Low Low High
Portability Low Low High High
Cost High Medium Medium Medium
Provided by Strategic Partner
Note: Information is indicative and to be confirmed during strategic partner evaluation.
“Strategic Partner” Considerations
22
Strengths Potentially increased odds of selecting top quartile managers and avoiding underperforming
managers Extension of staff resources Access to best practices in portfolio construction, manager selection, ongoing monitoring and
operational due diligence Access to industry leading portfolio and risk analytics Experienced fiduciary Access to pre-negotiated fee discounts and advantageous terms for both discretionary and direct
portfolios Strategic partner portfolio could be complementary to direct portfolio (e.g. emerging, esoteric)Issues to Consider Double layer of fees Overlap in capabilities with Albourne Overlap between managers in discretionary and direct portfolios Importance of travel budget in achieving knowledge transfer Variability in expected vs. realized knowledge transfer Uncertain alignment of interests in customized vehicle Incremental burden of managing relationship on staff
Hedge Fund and Fund of Funds Fee Ratios
23
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
0.00% 2.00% 4.00% 6.00% 8.00% 10.00% 12.00% 14.00%
Underlying fee ratio
FoF fee ratio (% of net underlying return)
Total fee ratio (% of gross return)
Gross Return
Fee
Rat
io
Note: Assumes 1.5% management fee, 20% performance fee, and 0.75% fund of funds fee.
•Below 6% gross return, underlying fees absorb over 40% of returns and double layer fees absorb over half of returns.
Hedged Equity Discussion Topics
24
Portfolio goals: Beta, risk, return, transparency, liquidity, etc.
Pace of implementation: Managing equity market risk versus cost of implementation
Implementation
Direct driven by staff and consultant
Strategic Partner versus Traditional Fund of Funds
Mix of larger/mature hedge funds versus emerging/smaller/niche managers
Preference for managed accounts and funds of one versus commingled