Water and Power Employees’ Retirement Plan€¦ · Most hedge fund strategies generated positive...

Water and Power Employees’ Retirement Plan

Real Return Analysis

Period Ended: June 30, 2015

rvkuhns.com

Capital Markets Review Real return managers again provided a wide range of performance outcomes as market expectations for short-term inflation decreased while longer-term expectations increased as measured by a steepening of the TIPS breakeven curve. The market’s 10-year view for future inflation was modestly higher at 1.9% as of the quarter’s end compared to 1.8% last quarter, while the one-year view decreased from 1.5% to 0.7%. Measured inflation was again disparate as Core CPI decreased to 1.7% from 1.8%. The more-volatile Headline CPI increased from -0.10% to -0.04%. CPI measures reflect year-over-year changes as of May since data is released with a one month lag. Inflation sensitive assets also diverged widely for the quarter, including various subsets of the commodities complex.

Even with low short-term inflation expectations, disparate measures of inflation, a difficult quarter for equities and rising real yields, most diversified inflation strategies outperformed a moderate duration TIPS allocation. Managers with larger energy and agricultural commodities exposures saw a key reversal of their underperformance from earlier in the year. Managers with larger U.S. REIT equity allocations underperformed with the partial exception of managers focused on the full capital structure within REITs, which participated in less of the downside. Managers with larger TIPS exposures, especially those in longer duration securities, underperformed the broader group.

Most hedge fund strategies generated positive returns in the second quarter, adding to gains realized in Q1. Long/Short equity funds in particular are having a strong 2015. Top tier managers have added alpha on both their long and short positions as they were able to capture the majority of equity market upside during the months of April and May, and protected capital well toward the end of June as markets sold off. The environment for Event Driven strategies remains favorable as well, aided in part by heavy involvement from the Activist investor community. Corporate management teams are increasingly looking to maximize shareholder wealth through M&A activity, share buybacks, and spinoffs. Event Driven and Merger Arbitrage strategies were up on the quarter as a result. Fixed Income oriented hedge funds also generated gains during the second quarter, as most managers were well positioned for a reversal in developed market interest rate trends. By contrast, Global Macro managers, and Systematic Trend Followers in particular, were positioned incorrectly for the interest rate moves. Macro strategies were the strongest performing strategy in 2014 and into Q1-2015, as managers were able to ride trends in developed market rates, the U.S. Dollar, and energy. However, April and May brought sharp reversals in a number of these trends; consequently many Macro funds were hit with heavy losses during the second quarter.

Executive Summary

Real Return Composite As of June 30, 2015, the Real Return Composite held $534 million in assets, or 5.3% of Plan assets. This compares to the target allocation of 6.0%. Asset allocation by strategy is shown on page 4.

The Real Return Composite underperformed the Consumer Price Index + 3% by 260 basis points during the second quarter, in large part due to the relative underperformance of Commodities and Global Inflation-Linked Securities (GILS) versus their respective benchmarks. GILS, which account for 52% of the total Real Return Composite, was the only asset class within the composite with negative returns for the quarter, thus serving as a drag on the composite’s performance. Conversely, hedge funds positively contributed to the relative and absolute performance of the composite.

HEDGE FUNDS The Hedge Funds Composite outperformed its benchmark by 99 basis points during the quarter and 334 basis points over the one-year time period. Both GAM Divergent and Morgan Stanley Convergent continue to strengthen the total Real Return Composite performance with positive relative and absolute performance since inception.

COMMODITIES Commodities posted a positive quarterly return for the first time since the second quarter of 2014, but still had a negative relative performance, returning 1.16% versus 4.66% for the benchmark. Despite poor absolute performance over the one-year period, Invesco has still produced positive relative performance, outperforming the Bloomberg Commodity Index by 420 basis points.

TIMBERLAND The Timberland Composite slightly underperformed the NCREIF Timberland Index, returning 1.66% and 1.75% for the quarter, respectively. Molpus IV has not had any capital called to date and Hancock Timberland was funded in early 2014 making it too early to judge the long-term performance of this fund.

GLOBAL INFLATION-LINKED The Global Inflation-Linked Composite was the only composite with negative absolute performance during this quarter, returning -2.95% versus -2.51% for the Barclays World Government Inflation Linked Index (Hedged). Over the longer time periods, GILS have positively contributed to the Real Return Composite on an absolute basis, although the GILS manager has trailed its benchmark by 52 basis points since inception.

Comparative Performance

Portfolio Allocation

QTD FYTD1

Year3

Years5

Years7

Years2014 2013 2012

SinceIncep.

InceptionDate

Real Return Composite -0.85 -0.54 -0.54 0.32 2.75 1.41 1.94 -5.11 5.62 2.45 02/01/2007

CPI + 3% (Blended) 1.75 3.33 3.33 3.85 3.55 3.56 3.70 3.98 3.11 4.16

Difference -2.60 -3.87 -3.87 -3.53 -0.80 -2.15 -1.76 -9.09 2.51 -1.71

GAM Divergent (CF) (Lagged-1 Mo) 1.41 8.30 8.30 N/A N/A N/A 4.82 N/A N/A 5.18 12/01/2013

BofA ML 3 Mo US T-Bill Index + 3% (1 Mo Lag) 0.74 3.03 3.03 3.07 3.09 3.25 3.05 3.08 3.10 3.04

Difference 0.67 5.27 5.27 N/A N/A N/A 1.77 N/A N/A 2.14

MS Convergent (CF) (Lagged-1 Mo) 2.07 4.28 4.28 N/A N/A N/A N/A N/A N/A 3.22 03/01/2014


Difference 1.33 1.25 1.25 N/A N/A N/A N/A N/A N/A 0.19

Invesco Commodity (CF) 1.16 -19.51 -19.51 N/A N/A N/A -15.82 N/A N/A -11.63 08/01/2013

Bbrg Cmdty Index (TR) 4.66 -23.71 -23.71 -8.76 -3.91 -10.91 -17.01 -9.52 -1.06 -10.15

Difference -3.50 4.20 4.20 N/A N/A N/A 1.19 N/A N/A -1.48

Hancock Timberland (CF) (Lagged-1 Mo) 1.66 -0.24 -0.24 N/A N/A N/A N/A N/A N/A -0.19 04/01/2014

NCREIF Timberland Index (Lagged-1 Mo) 1.75 10.64 10.64 9.81 6.20 4.33 10.40 9.68 2.25 9.83

Difference -0.09 -10.88 -10.88 N/A N/A N/A N/A N/A N/A -10.02

Molpus IV (CF) (Lagged-1 Mo) N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A 09/01/2014


Difference N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A

WAMCO (SA) -2.95 3.25 3.25 1.93 3.73 N/A 8.60 -5.81 5.27 3.91 04/01/2010

Barclays Wrld Gov't Infl Lnkd Index (Hedged) -2.51 3.34 3.34 1.88 4.24 4.28 9.04 -5.51 5.60 4.43

Difference -0.44 -0.09 -0.09 0.05 -0.51 N/A -0.44 -0.30 -0.33 -0.52

June 30, 2015 : $534,247,040

Water and Power Employees' Retirement PlanReal Return Portfolio Summary

As of June 30, 2015

Performance shown is net of fees. Performance is annualized for periods greater than one year. Inceptions dates shown represent the first full month following initial funding. Fiscal year ends June 30th. Allocations shown may not sum up to 100% exactly due to rounding.

Quarterly Returns

Relative Performance vs. CPI + 3% (Blended)

Growth of $100

Water and Power Employees' Retirement PlanReal Return Portfolio Summary

As of June 30, 2015

Performance shown is net of fees.

12-Month Rolling Beta vs. S&P 500 Index (Cap Wtd)

Risk/Return - 1 Year

Re

turn

(%

)Water and Power Employees' Retirement PlanReal Return Portfolio Summary

As of June 30, 2015



Quarterly Returns

Relative Performance vs. BofA ML 3 Mo US T-Bill Index + 3% (1 Mo Lag)

QTD FYTD1

Year3

Years5

Years7

Years2014 2013 2012

SinceIncep.

InceptionDate

Hedge Funds Composite 1.73 6.37 6.37 6.39 5.00 2.86 3.03 9.15 6.83 3.70 03/01/2007


Difference 0.99 3.34 3.34 3.32 1.91 -0.39 -0.02 6.07 3.73 -0.19

GAM Divergent (CF) (Lagged-1 Mo) 1.41 8.30 8.30 N/A N/A N/A 4.82 N/A N/A 5.18 12/01/2013


Difference 0.67 5.27 5.27 N/A N/A N/A 1.77 N/A N/A 2.14

MS Convergent (CF) (Lagged-1 Mo) 2.07 4.28 4.28 N/A N/A N/A N/A N/A N/A 3.22 03/01/2014


Difference 1.33 1.25 1.25 N/A N/A N/A N/A N/A N/A 0.19

Water and Power Employees' Retirement PlanHedge Funds Portfolio Summary

As of June 30, 2015

Performance shown is net of fees and is annualized for periods greater than one year. Inception dates shown represent the first full month following initial funding. Fiscal year ends June 30th.

Growth of $100

12-Month Rolling Beta vs. S&P 500 Index (Cap Wtd)


As of June 30, 2015


Hedge Funds Composite

GAM Divergent (CF)

MS Convergent (CF)


As of June 30, 2015

Allocations shown may not sum up to 100% due to rounding.

Water and Power Employees' Retirement Plan As of June 30, 2015

Macro - Discretionary Allocation (%) Managed Futures - Trend Allocation (%)Alphadyne Global Rates II 9.6 Winton Futures 7.9MaxQ Enhanced 8.4 Subtotal 7.9Tudor DM 7.9Karya 6.7 Managed Futures - Short-Term/Active Allocation (%)Autonomy Global 6.1 Laurion Global Markets 8.4LindenGrove 5.6 Edgestream Nias 5.3Fortress 5.6 Jefferies Systematic 5.0Field Street 5.1 Crabel Multi-Product 4.2Guard Macro 4.3 Subtotal 22.8Salt Rock Enhanced 3.7Subtotal 63.0 Cash and Other 0.4

Macro - Systematic Allocation (%)QMS Diversified Global Macro 3.3Two Sigma AR Macro Enhanced 2.6Subtotal 5.9

GAM Underlying Manager Allocations

Strategy Allocation New Terms/Trans

Macro-Discretionary 0 0

Macro-Systematic 1 0

Managed Futures-Trend 0 0

Managed Futures-Short Term/Active 0 0

YTD Turnover 1 0

Turnover

Water and Power Employees' Retirement Plan As of June 30, 2015

Equity L/S Opportunistic Allocation (%) Event Driven Credit Allocation (%)

Anchor Bolt Offshore Fund, Ltd. 5.5 GCA Credit Opportunities Offshore Fund, Ltd. 4.0

Quentec Fund, Ltd. 4.9 Beach Point Total Return Offshore Fund II Ltd. 2.1

Cobalt Offshore Fund Limited 4.0 Taconic Opportunity Offshore Fund, Ltd. 1.9

Chilton European International (BVI) Ltd. 2.7 Subtotal 8.0

Doonbeg Fund, Ltd. 1.9

TPG-Axon Partners (Offshore), Ltd. 1.5 Merger/Risk Arbitrage Allocation (%)

Subtotal 20.5 Magnetar Global Event Driven Fund Ltd 3.6

Paulson International Ltd. 3.0

Event Driven Equity Allocation (%) Subtotal 6.6

LionEye Offshore Fund Ltd. 4.6

Ionic Event Driven Fund Ltd. 3.9 Mortgage Arbitrage Allocation (%)

Sachem Head Offshore Ltd. 2.9 SPM Core Offshore Fund, Ltd. 5.6

Litespeed Offshore Fund, Ltd. 2.6 East Lodge Capital Credit opportunities Fund, Ltd. 1.5

Subtotal 14.0 Subtotal 7.1

Equity L/S High Hedge Allocation (%) Multi Strategy Allocation (%)

Millennium International, Ltd. 4.1 KLS Diversified Fund Ltd. 5.1

Citadel Global Equities Fund Ltd. 2.8 HBK Multi-Strategy Offshore Fund Ltd. 5.0

Atlas Enhanced Fund, Ltd. 2.0 Manikay Offshore Fund, Ltd. 2.0

Subtotal 8.9 Double Black Diamond Ltd. 1.9

Subtotal 14.0

Distressed Allocation (%)

York Credit Opportunities Unit Trust 3.8 Relative Value Credit Allocation (%)

Subtotal 3.8 Symphony Long-Short Credit (Offshore) Fund Ltd. 5.1

Tricadia Credit Strategies, Ltd. 2.0

Statistical Arbitrage Allocation (%) Subtotal 7.1

HBK Quantitative Strategies Offshore Fund L.P. 6.0

Subtotal 6.0

Turnover

Morgan Stanley Underlying Manager Allocations

Strategy Allocation New Terms/Trans

Distressed 0 0

Equity L/S High Hedge 0 0

Equity L/S Opportunistic 0 2

Event Driven Credit 0 0

Event Driven Equity 1 0

Merger/Risk Arbitrage 0 0

Mortgage Arbitrage 0 0

Multi Strategy 0 0

Relative Value Credit 0 0

Statistical Arbitrage 0 0

YTD Turnover 1 2


Quarterly Returns

Strategy Allocation

QTD FYTD1

Year3

Years5

Years7

Years2014 2013 2012

SinceIncep.

InceptionDate

Commodities Composite 1.16 -19.51 -19.51 N/A N/A N/A -15.86 N/A N/A -11.65 08/01/2013



Invesco Commodity (CF) 1.16 -19.51 -19.51 N/A N/A N/A -15.82 N/A N/A -11.63 08/01/2013



Water and Power Employees' Retirement PlanCommodities Portfolio Summary

As of June 30, 2015

Performance shown is net of fees and is annualized for periods greater than one year. Inception dates shown represent the first full month following initial funding. Fiscal year ends June 30th. Allocations shown may not sum up to 100% exactly due to rounding.


Portfolio Allocation by Manager

QTD FYTD1

Year3

Years5

Years7

Years2014 2013 2012

SinceIncep.

InceptionDate

Timberland Composite 1.66 -0.24 -0.24 N/A N/A N/A N/A N/A N/A -0.19 04/01/2014



Hancock Timberland (CF) (Lagged-1 Mo) 1.66 -0.24 -0.24 N/A N/A N/A N/A N/A N/A -0.19 04/01/2014



Molpus IV (CF) (Lagged-1 Mo) N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A 09/01/2014


Difference N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A

June 30, 2015 : $2,424,273

Water and Power Employees' Retirement PlanTimberland Portfolio Summary

As of June 30, 2015

Performance shown is net of fees and is annualized for periods greater than one year. Inception dates shown represent the first month following initial funding. Fiscal year ends June 30th. Allocations shown may not sum up to 100% exactly due to rounding.


Sector Allocation

Country Allocation

QTD FYTD1

Year3

Years5

Years7

Years2014 2013 2012

SinceIncep.

InceptionDate

GILS Composite -2.95 3.25 3.25 1.93 3.73 N/A 8.60 -5.81 5.27 3.91 04/01/2010


Difference -0.44 -0.09 -0.09 0.05 -0.51 N/A -0.44 -0.30 -0.33 -0.52

WAMCO (SA) -2.95 3.25 3.25 1.93 3.73 N/A 8.60 -5.81 5.27 3.91 04/01/2010


Difference -0.44 -0.09 -0.09 0.05 -0.51 N/A -0.44 -0.30 -0.33 -0.52

Water and Power Employees' Retirement PlanGILS Portfolio Summary

As of June 30, 2015

Performance shown is net of fees and is annualized for periods greater than one year. Inception dates shown represent the first month following initial funding. Fiscal year ends June 30th. Allocations shown may not add up to 100% exactly due to rounding.

Quarterly Returns

Relative Performance vs. Barclays Wrld Gov't Infl Lnkd Index (Hedged)

Growth of $100

Water and Power Employees' Retirement PlanGILS Portfolio Summary

As of June 30, 2015


Water and Power Employees' Retirement PlanHedge Funds Characteristics and Terms

StrategyRelative Value

Convertible Arbitrage

Fixed Income/Credit

Arbitrage

Equity Market Neutral

Event Driven

Risk/Merger Arbitrage

Distressed Securities

Opportunistic

Global Macro

Short Selling

Emerging Markets

Long/Short Equity

Definition

Seeks to profit from pricing anomalies between a company’s convertible securities and its equity. A manager buys the convertible instrument (often a bond) and sells short the common stock.

Exploits pricing inefficiencies between fixed income securities with similar characteristics, such as corporate vs. Treasury yield spreads. Offsetting long and short positions typically neutralize exposure to interest rate risk, isolating the pricing discrepancy.

Exploits relative pricing inefficiencies between equity securities while neutralizing market exposure. Typically the net (total long and short) portfolio exposure is balanced so that there is no directional bias to equity sectors or styles.

Generally long-biased equity or debt positions that seek to capitalize on the undervaluation of companies in developing countries, which tend to have higher inflation and volatile growth.

Core holding of long equities hedged to varying degrees with short positions in stocks or derivatives.

Invests in the shares of companies involved in mergers, acquisitions, and LBOs. A common merger arbitrage strategy is to buy the equity of the “target” and sell short the equity of the “acquirer,” making a profit if the deal outcome (and timing) is in line with the manager’s positioning.

Managers pursuing this strategy invest in bank debt, corporate debt, trade claims, common stock, and warrants of companies either in bankruptcy or having financial or operational issues. The goal is to anticipate how corporate events (such as bankruptcies, reorganizations, distressed sales, and restructurings to reverse negative trends) will impact the underlying securities.

Employs a “top down” approach to invest across a wide range of global asset classes based on forecasted changes in global economies, political fortunes, or global supply and demand for resources.

Taking short positions in stocks in anticipation of a price decline, based on a view that the stock is overvalued, company earnings will disappoint, or there is a market selloff approaching.

Disclaimer of Warranties and Limitation of Liability - This document was prepared by RVK, Inc. (RVK) and may include information and data from some or all of the following sources: client staff; custodian banks; investment managers; specialty investment consultants; actuaries; plan administrators/record-keepers; index providers; as well as other third-party sources as directed by the client or as we believe necessary or appropriate. RVK has taken reasonable care to ensure the accuracy of the information or data, but makes no warranties and disclaims responsibility for the accuracy or completeness of information or data provided or methodologies employed by any external source. This document is provided for the client’s internal use only and does not constitute a recommendation by RVK or an offer of, or a solicitation for, any particular security and it is not intended to convey any guarantees as to the future performance of the investment products, asset classes, or capital markets.

Water and Power Employees’ Retirement Plan€¦ · Most hedge fund strategies generated positive...

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