CalPERS Trust Level ReviewPeriod Ending June 30, 2017
Ted Eliopoulos, Chief Investment OfficerWylie Tollette, Chief Operating Investment Officer
Eric Baggesen, Managing Investment DirectorJohn Rothfield, Investment Director
Investment CommitteeAugust 2017
CalPERS Trust Level Review
Review Outline
I. Economic and Market Overview
II. Investment Reviewi. Performanceii. Risk
CalPERS Trust Level Review
I. Economics and Market Overview
CalPERS Trust Level Review
Economic trends since last reviewPositive Same Trend Negative
-
-
-
-
-
-
-
Confidence surge sustains -
-
-
-
US economic growth -
-
-
-
-
-
-
Soft personal income reduces 'cushion'Consumer and business confidence indicators remains very strong.
The less volatile 'final demand' measure remains steady in the low to mid 2s.
Revised US GDP data shows less income growth and savings than previously thought.
Improved relative position of low income earners US labor market Weak corporate investmentShowing up somewhat in wages and confidence data. Could boost housing and spending in aggregate.
Jobs growth 180K per month this year vs 187K per month in '16. Fed's "LMCI" remains sl ightly positive.
In low growth world with scarce labor, borrowing deployed to buybacks rather than investment.
Housing Leverage in the US economy Consumer creditStrength across starts, sales and sentiment. Comfortable valuations vs last cycle and vs abroad.
There have been some compositional changes but leverage as a multiple of GDP remains steady
Auto, student loan and credit card debt has risen strongly as GDP multiple.
Mining drag dissipates US external balance Auto sectorSignificant rebound in dril l ing and extraction could add about 0.3% to US GDP this year.
US current account deficit remains at around 2.5%/GDP
Production appears to have topped out. Also,a lot of leased cars coming into used market.
Benign US Inflation Weak tax revenuesLikely to remain (well) below the 2% target this year, affording flexibil ity to the Fed.
Due in part to low wages plus shifting income out of 2016 … has compromised federal and S&L budgets.
Stable China QE taper/ trimSolid growth and slower capital outflows have reduced tail risk pressure from this source.
Not necessarily a negative unless it reflects fatigue. However it can be correlated with equity prices.
Less nationalist outcomes in Europe Eight years and countingRecent elections partly reversed shift to nationalism seen in the 1st Brexit vote and US election.
US business cycle is into its ninth year, so investors start looking for 'late-cycle' signs
CalPERS Trust Level Review
Economic growth has another steady year
-2
0
2
4
6
8
10
Tota
l GDP
Cons
umer
Equi
pmen
t
R&D,
soft
war
e
Stru
ctur
es
Hous
ing
Gove
rnm
ent
Fina
l Dem
and
Inve
ntor
ies
Fore
ign
trad
e
US Economic Growth During This Expansion
Years 0-7
Year 8
% yoy
Business
-8
-6
-4
-2
0
2
4
6
M-06 M-08 M-10 M-12 M-14 M-16
US Final Demand
6mo saar
YoY
%
CalPERS Trust Level Review
Rising wealth has raised confidence but not spending
0
20
40
60
80
100
120
140
160
-4
-2
0
2
4
6
8
Mar-76 Mar-86 Mar-96 Mar-06 Mar-16
Real Consumer Spending vs Confidence
real consumer spending, lhs
consumer confidence, rhs
yoy%
4.5
5.0
5.5
6.0
6.5
7.0
0
20
40
60
80
100
120
140
Mar-03 Mar-07 Mar-11 Mar-15
Wealth Recovery = Sentiment Surge
consumerconfidence, lhs
Household networth/income, rhs
Why the gap? Slower real income growth and balance sheet restoration.
CalPERS Trust Level Review
Business capex hasn’t yet reflected intentions
-50
-40
-30
-20
-10
0
10
20
30
40
50
-25
0
25
50
Mar-98 Mar-01 Mar-04 Mar-07 Mar-10 Mar-13 Mar-16
Phill Fed Intended Capex vs Actual Capex
Philly Fed intended capex,LHS
Equipment Investment inReal GDP, saar, RHS -0.7%
-0.5%
-0.3%
-0.1%
0.2%
0.4%
0.6%
-140%
-100%
-60%
-20%
20%
60%
100%
140%
Mar-01 Mar-04 Mar-07 Mar-10 Mar-13 Mar-16
US Real Capex - Mining Investment
GDP impact %, RHS Rig Count YoY
$bn saar Mining is an exception, as prices rebound
Intentions have surged
CalPERS Trust Level Review
Gradual improvement continues in US labor market
-60
-40
-20
0
20
J-88 J-92 J-96 J-00 J-04 J-08 J-12 J-16
Fed Labor Market Conditions
grey areas recessions
Household Net Worth and Growth of Domestic Nonfinancial Debt
YearHousehold net worth1
Growth of domestic nonfinancial debt2
Total Households BusinessesFederal
governmentState and
local gov'ts
2007 66,505 8.1 7.1 12.4 4.7 6.2
2008 56,205 5.8 0.1 5.9 21.4 1.3
2009 57,969 3.6 0.4 -4.0 20.4 4.5
2010 62,026 4.4 -0.5 -0.7 18.5 2.4
2011 63,280 3.5 -0.4 2.7 10.8 -1.4
2012 69,118 5.0 2.0 4.6 10.1 -0.2
2013 78,818 3.8 1.8 4.6 6.7 -1.8
2014 84,014 4.3 3.0 6.1 5.4 -1.2
2015 87,022 4.5 2.9 6.9 5.0 0.3
2016 92,489 4.6 3.6 5.5 5.6 0.9
2015: Q1 85,824 2.8 2.2 7.5 -0.3 1.6
Q2 86,387 4.4 3.9 8.1 2.7 0.5
Q3 85,143 2.7 1.4 5.6 2.1 0.3
Q4 87,022 7.9 4.0 5.7 15.4 -1.2
2016: Q1 87,576 5.3 2.4 9.3 5.6 0.7
Q2 88,274 4.3 4.4 3.8 5.0 2.2
Q3 90,558 5.7 3.5 6.3 8.2 0.7
Q4 92,489 2.8 3.9 2.2 2.9 0.1
2017: Q1 94,835 1.4 3.2 6.2 -3.3 -35
CalPERS Investment Office
CalPERS Trust Level Review
Steady leverage is a plus … if sustained
120%
140%
160%
180%
200%
220%
240%
260%
81 85 89 93 97 01 05 09 13 17
All Nonfinancial Debt to GDP
grey areas recessions
7 1/2 yrs
10 yrs
6 yrs
7 1/2 yrs
-2500
-2000
-1500
-1000
-500
0
500
1000
1500
Mar-00 Mar-02 Mar-04 Mar-06 Mar-08 Mar-10 Mar-12 Mar-14 Mar-16
US net lending by sector- by quarter at an annualized rate
Government
Household
NF Corp
$bn LENDER
BORROWER
CalPERS Trust Level Review
Many business cycle indicators still have runway
CalPERS Trust Level Review
DOWNSIDE (25%) CENTRAL (50%) UPSIDE (25%)
"Late cycle ri sks" "Chal lenging Returns" "Headwinds Recede"
Waning centra l bank support undermines asset markets .
US GDP growth remains in the low 2s ', constra ined by secular factors
Sudden pick up in legis lative progress by the GoP, unlocking spending
Late cycle US s timulus increases s tagflation ri sk.
Labor force, household formation and deregulation modestly feed productivi ty and growth.
Productivi ty at least temporari ly improves from current 1%.
US pivots toward protectionis t measures .
Gradual rol l out of GoP pol icies but on a smal ler sca le.
Recent s igns of bottoming in emerging markets morph into a vi rtuous cycle
Fed (and Bank of Japan) decis ions become more pol i ti ci zed.
Inflation tepid in spi te of late cycle labor market.
Clearer European pol i tica l picture supports upward growth momentum
Unpredictable US responses to global geopol i tica l events .
Gradual removal of s timulus in the US, China, Europe and Japan
Scenarios for Market Returns
CalPERS Trust Level Review
II. Investment Review
CalPERS Trust Level Review
Executive Summary• Public Employees’ Retirement Fund (PERF) returned 11.2% for the fiscal year bringing
Total Fund performance to 8.8%, 4.4%, and 6.6% over the 5, 10, and 20 year time periods• Global Equity was the strongest contributor, with 19.6% FY return contributing
approximately 9% to the plan total return• PERF underperformed the benchmark by 15 bps for the fiscal year
• Private Equity explains -43 bps of plan excess return. The Program returned 13.9% for the year relative to a benchmark return of 20.3%
• Fixed Income contributed +23 bps. The program returned 0.3% relative to a benchmark return of -0.9%
• Affiliate Investment Programs returns were in line with their respective asset allocations, largely positive for both the fiscal year and over longer time periods
• Current Barra volatility estimate for PERF is 8.3%, 2.1% lower than prior• 75% of the decline is due to low recent market volatility feeding into model forecasts• 25% of the decline is due to asset mix changes
• Current active tracking error of 0.5%, within policy of 1.5%
CalPERS Trust Level Review
Performance SummaryAs of June 30, 2017
Trust Assets Managed
Ending Market Value (MM)
Net Return
Excess BPS
Net Return
Excess BPS
Net Return
Excess BPS
Net Return
Excess BPS
PUBLIC EMPLOYEES' RETIREMENT FUND 323,660 11.2% (15) 4.6% (22) 8.8% 23 4.4% (123)
JUDGES' RETIREMENT FUND 44 0.7% 25 0.4% 16 0.3% 8 0.7% 16
JUDGES' RETIREMENT SYSTEM II FUND 1,341 9.6% 62 3.6% 25 8.2% 30 5.1% 6
LEGISLATORS' RETIREMENT SYSTEM FUND 117 4.4% 58 2.8% 28 5.4% 42 5.3% 25
CERBT STRATEGY 1 5,655 10.6% 71 3.7% 48 8.1% 41 4.6% 38
CERBT STRATEGY 2 880 7.2% 71 3.2% 42 6.7% 40 - -
CERBT STRATEGY 3 261 4.1% 64 2.7% 42 5.2% 46 - -
CALPERS HEALTH CARE BOND FUND 445 -0.3% 4 2.7% 24 2.8% 55 4.7% 23
LONG-TERM CARE FUND 4,376 1.6% 4 2.0% 19 3.9% 27 3.6% 13
1-YR 3-YR 5-YR 10-YR
CalPERS Trust Level Review
Note: Actuarial Rate of Return FY 2007-12 was 7.75%. FY 2013-17 rate is 7.5%.
PERF 10 Year Cumulative Returns
CalPERS Trust Level Review
PERF Short-Term vs. Long-Term Performance
*Inflation has an inception date of October 2007, therefore 10-year returns and excess BPS are unavailable
N/A
1.3%
-0.9%
6.5%
9.3%
4.3%
4.4%
-2.7%
0.8%
7.4%
0.3%
13.9%
19.6%
11.2%
-5% 0% 5% 10% 15% 20% 25%
INFLATION*
LIQUIDITY
REAL ASSETS
INCOME
PRIVATE EQUITY
PUBLIC EQUITY
PERF
1-Year Total Returns 10-Year Total Returns
CalPERS Trust Level Review
PERF Rolling 5-Year Excess Returns
-7%
-6%
-5%
-4%
-3%
-2%
-1%
0%
1%
2%
FY 2008 FY 2009 FY 2010 FY 2011 FY 2012 FY 2013 FY 2014 FY 2015 FY 2016 FY 2017
PERF 1-YEAR EXCESS RETURN PERF ROLLING 5 YR EXCESS RETURN
CalPERS Trust Level Review
PERF 1-Year and 5-Year Excess Returns
68
(22)
(19)
96
(221)
26
23
(83)
29
43
115
(640)
(18)
(15)
-700 -600 -500 -400 -300 -200 -100 0 100 200
INFLATION
LIQUIDITY
REAL ASSETS
INCOME
PRIVATE EQUITY
PUBLIC EQUITY
PERF
1-Year Excess BPS 5-Year Excess BPS• Private Equity one year
excess of -640 bps– Excess returns are
volatile over shorter periods due to valuation-based pricing relative to a public market benchmark
• Income one year excess of +115 bps
– Driven in part by strong excess returns in credit and mortgage portfolios
• Inflation program one year excess of -83 bps
– Driven mostly by an underweight to commodities in Q1 during a period of rising prices
CalPERS Trust Level Review
Excess Returns Attribution
• Consistent positive contribution from public programs
• Neutral impact from allocation management
• Private Equity was biggest negative contributor
• The need to use public assets to proxy underweights vs. targets in privates detracted over 3 & 5 year periods
• Over 5-year period Other/Residual added +18 bps
+/-
+
-
-
Total Fund Attribution As of : June 30, 2017 (Annualized)
Average Weight in
Plan
5 Year 1 Year 3 Year 5 Year 1 Year 3 Year 5 Year
Total Excess Return (bps) (15) (22) 23
Public Program Contributions 12 22 34 PUBLIC EQUITY 52% (18) 5 26 (7) 2 13 INCOME 18% 115 70 96 23 13 17 INFLATION 5% (83) 70 68 (5) 3 3 OTHER 1 2 2
Private Program Contributions (39) (30) (25) PRIVATE EQUITY 10% (640) (180) (221) (43) (16) (21) REAL ASSETS 10% 43 (130) (19) 4 (15) (5)
Allocation Management2 4 (1) 6
Public Proxy Performance 3 10 (10) (10)
Other/Residual 4 (1) (2) 18
1 Contribution figures are calculated on monthly basis and aggregated over the respective period. 2 Contribution from MAC and ARS Programs are inlcuded in Allocation Impact.3 Impact of not obtaining full desired interim policy exposure to private asset classes and proxying these with public assets.
Includes the impact of lagged reporting of private asset benchmarks relative to current month reporting of public proxies.4 Includes impact of 2009-2013 benchmark currency hedge calculation and compounding residual.
Program Excess Return (bps)
Contribution to Plan Excess (bps) 1
Key Observations
CalPERS Trust Level Review
PERF Risk Highlights (as of 05/31/2017)
One Year Volatility Estimates• Current forecast volatility of 8.3% vs. 10.4% in prior year
– 0.5% risk reduction from asset allocation changes– Recent low-volatility market conditions explain remainder of reduction in forecast– Implies 24% chance of negative returns in a given year
• Growth assets, especially public equities, remain the primary drivers of total volatility • Forecast active tracking error of 0.5% is within guidelines of 1.5%
Fundamental• Well diversified across individual issuers/companies• Geographically weighted to US • Adequate liquidity coverage and modest leverage level• Counterparty risk remains modest
CalPERS Trust Level Review
One Year Outcomes Implied by Risk Model
* Estimated starting Funding Ratio of 68%, 1 yr growth in liabilities and cash flow projections provided by CalPERS Actuarial Office. Forecast volatility of 8.3% from Barra as of 05/31/2017. PERF’s NAV as of Jun 30, 2017 = $323.5B.
Probability
Gain/Loss $B
Estimated Funding Ratio*
Return -1.7%
-6
64%
14.8%
+48
75%
20.1%
+65
78%
6.5%
+21
70%
-7.1%
-23
61%
1-in-20 year minimum gain
Expected return using June 2017 Capital Market Assumptions with current interim asset allocation
(arithmetic returns)
1-in-20 year minimum loss
34% 34%
5% 5%
11%11%
Model Forecast Volatility: 8.3%
CalPERS Trust Level Review
Barra Model Used for Risk Reporting
Barra Model Used as Input to ALM Process Wilshire*
Historical period for model estimation ~1 Year ~8 Years long (20+ yrs)
Forecast Volatility 8.3% 10.6% 11.6%
Risk Forecasts Vary with Time Period
• Risk models use historical data to build forecasts• For shorter periods, more recent data is emphasized• Current market environment is unusually calm, leading to lower short-term forecast
All numbers are as of May 31, 2017, except otherwise noted*From Performance Review Dec 31, 2016 for Actual Allocation
CalPERS Trust Level Review
Markets Have Been Unusually Calm
Source: Global Financial Data
0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
50%19
5419
5619
5819
6019
6219
6419
6619
6819
7019
7219
7419
7619
7819
8019
8219
8419
8619
8819
9019
9219
9419
9619
9820
0020
0220
0420
0620
0820
1020
1220
1420
16
S&P 500 12 m trailing volatility
8.2% as of Jun 30, 2017
Percent of T ime
Average subsequent 12m return
Volatility < 8.2% 6% 2.6%
Volatility > 8.2% 94% 12.4%
CalPERS Trust Level Review
0
5
10
15
20
25
30
35
40
45
50
-35% -30% -25% -20% -15% -10% -5% 0% 5% 10% 15% 20% 25% 30% 35% 40% 45% 50% 55%
Freq
uenc
y
Annual Net Returns
Normal Curve w/samereturn and vol as actual
Historical Returns Are Not Normally DistributedPERF’s Rolling Annual Returns: Jun 89-May 17
Historical Volatility: 8.7%
Average Historical Rolling Return: 8.9%
CalPERS Trust Level Review
Drawdown Risk
Scenario Simulated Impact on Current Portfolio
PERF Actual Historical
Experience1989-2017
Simulated Return Gain/Loss Estimated
Funding Ratio*Historical PERF
Return
Subprime and Credit Crisis(Oct 07 – Mar 09)
-37% -$119B 41% -32.6%
Tech Crash and Recession(Jan 00-Mar 03)
-16% -$51B 55% -17.5%
*Starting Funding Ratio of 68%, growth in liabilities, and cash flow projection assumptions as per CalPERS Actuarial Office. PERF’s NAV as of Jun 30, 2017 = $323.5B;
CalPERS Trust Level Review
Board Investment Committee
CIO
Trust Level Portfolio
Mgmt
Sustainable Investments
COIO
Inv. Compliance & Operational
Risk
Investment Risk & Performance
Investment Servicing, Mgr.
Engagement3. Implement portfolios
2. Propose risk & return “opportunity set” 4. Integrate
sustainability considerations throughout the investment process
5. Independent “transparency factory”:
* Performance & risk measurement & reporting
* Analytics to ensure risks are intended, understood, and compensated
* Monitoring of key investment risks
1. Risk appetite and asset allocation
Asset Classes
Investment Risk Responsibilities in Context
CalPERS Trust Level Review
Appendix
Household Net Worth and Growth of Domestic Nonfinancial Debt
YearHousehold net worth1
Growth of domestic nonfinancial debt2
Total Households BusinessesFederal
governmentState and
local gov'ts
2007 66,505 8.1 7.1 12.4 4.7 6.2
2008 56,205 5.8 0.1 5.9 21.4 1.3
2009 57,969 3.6 0.4 -4.0 20.4 4.5
2010 62,026 4.4 -0.5 -0.7 18.5 2.4
2011 63,280 3.5 -0.4 2.7 10.8 -1.4
2012 69,118 5.0 2.0 4.6 10.1 -0.2
2013 78,818 3.8 1.8 4.6 6.7 -1.8
2014 84,014 4.3 3.0 6.1 5.4 -1.2
2015 87,022 4.5 2.9 6.9 5.0 0.3
2016 92,489 4.6 3.6 5.5 5.6 0.9
2015: Q1 85,824 2.8 2.2 7.5 -0.3 1.6
Q2 86,387 4.4 3.9 8.1 2.7 0.5
Q3 85,143 2.7 1.4 5.6 2.1 0.3
Q4 87,022 7.9 4.0 5.7 15.4 -1.2
2016: Q1 87,576 5.3 2.4 9.3 5.6 0.7
Q2 88,274 4.3 4.4 3.8 5.0 2.2
Q3 90,558 5.7 3.5 6.3 8.2 0.7
Q4 92,489 2.8 3.9 2.2 2.9 0.1
2017: Q1 94,835 1.4 3.2 6.2 -3.3 -35
CalPERS Investment Office
CalPERS Trust Level Review
120%
140%
160%
180%
200%
220%
240%
260%
81 85 89 93 97 01 05 09 13 17
All Nonfinancial Debt to GDP
grey areas recessions
7 1/2 yrs
10 yrs
6 yrs
7 1/2 yrs
-2500
-2000
-1500
-1000
-500
0
500
1000
1500
Mar-00 Mar-02 Mar-04 Mar-06 Mar-08 Mar-10 Mar-12 Mar-14 Mar-16
US net lending by sector- by quarter at an annualized rate
Government
Household
NF Corp
$bn LENDER
BORROWER
Steady leverage and household savings is a plus
CalPERS Trust Level Review
Household debt is higher for consumer credit but stagnant for outstanding mortgages
50%
80%
110%
140%
M-70 M-75 M-80 M-85 M-90 M-95 M-00 M-05 M-10 M-15
Household debt to income ratio
135.0% (4Q07)
105.7% (1Q17)
pre'01 trendline
16%
19%
22%
25%
28%
80%
90%
100%
110%
120%
130%
140%
M-90 M-93 M-96 M-99 M-02 M-05 M-08 M-11 M-14 M-17
Household debt to income ratio
Mortgages, lhs consumer credit, rhs
consumer credit includes auto, student and credit cards
CalPERS Trust Level Review
Household net asset valuations are high relative to history but lower than many peer group countries
4.0
4.5
5.0
5.5
6.0
6.5
7.0
Sep-81 Sep-89 Sep-97 Sep-05 Sep-13
Household Net Worth As Multiple of Disp. Income
6.11x (1Q00)
6.49(1Q07)
6.62(1Q17)
4.0
4.5
5.0
5.5
6.0
6.5
7.0
7.5
8.0
8.5
9.0
M-00 M-02 M-04 M-06 M-08 M-10 M-12 M-14 M-16
Household Net Worth/Disposable Income
Canada US Australia New Zealand
multiple ...
CalPERS Trust Level Review
Economic growth has another steady year
-2
0
2
4
6
8
10
Tota
l GDP
Cons
umer
Equi
pmen
t
R&D,
soft
war
e
Stru
ctur
es
Hous
ing
Gove
rnm
ent
Fina
l Dem
and
Inve
ntor
ies
Fore
ign
trad
e
US Economic Growth During This Expansion
Years 0-7
Year 8
% yoy
Business
-8
-6
-4
-2
0
2
4
6
M-06 M-08 M-10 M-12 M-14 M-16
US Final Demand
6mo saar
YoY
%
CalPERS Trust Level Review
Rising wealth has raised confidence but not spending
0
20
40
60
80
100
120
140
160
-4
-2
0
2
4
6
8
Mar-76 Mar-86 Mar-96 Mar-06 Mar-16
Real Consumer Spending vs Confidence
real consumer spending, lhs
consumer confidence, rhs
yoy%
4.5
5.0
5.5
6.0
6.5
7.0
0
20
40
60
80
100
120
140
Mar-03 Mar-07 Mar-11 Mar-15
Wealth Recovery = Sentiment Surge
consumerconfidence, lhs
Household networth/income, rhs
Why the gap? Slower real income growth and balance sheet restoration.
CalPERS Trust Level Review
Recent revision down in income growth
-4
-2
0
2
4
6
8
10
M-91 M-94 M-97 M-00 M-03 M-06 M-09 M-12 M-15
US Personal Disposable Income
Per Capita
% yoy
-6
-4
-2
0
2
4
6
8
M-91 M-94 M-97 M-00 M-03 M-06 M-09 M-12 M-15
US Personal Disposable Income After Inflation
Per Capita
% yoy
CalPERS Trust Level Review
Accompanying downward revision to savings ratio
0
2
4
6
8
10
12
M-91 M-94 M-97 M-00 M-03 M-06 M-09 M-12 M-15
US Personal Savings Ratio
Revised Old
% yoy
4.5
5.0
5.5
6.0
6.5
7.0
0
1
2
3
4
5
6
7
8
9
10
Mar-03 Mar-07 Mar-11 Mar-15
Wealth Recovery = More Spending Out of Savings
hh savings ratio, lhs
hh net worth/income, rhs
CalPERS Trust Level Review
Business capex hasn’t yet reflected intentions
-50
-40
-30
-20
-10
0
10
20
30
40
50
-25
0
25
50
Mar-98 Mar-01 Mar-04 Mar-07 Mar-10 Mar-13 Mar-16
Phill Fed Intended Capex vs Actual Capex
Philly Fed intended capex,LHS
Equipment Investment inReal GDP, saar, RHS -0.7%
-0.5%
-0.3%
-0.1%
0.2%
0.4%
0.6%
-140%
-100%
-60%
-20%
20%
60%
100%
140%
Mar-01 Mar-04 Mar-07 Mar-10 Mar-13 Mar-16
US Real Capex - Mining Investment
GDP impact %, RHS Rig Count YoY
$bn saar Mining is an exception, as prices rebound
Intentions have surged
CalPERS Trust Level Review
1000
1100
1200
1300
1400
1500
1600
1700
1800
1900
M-10 M-11 M-12 M-13 M-14 M-15 M-16 M-17
Nonfinancial Corporate Capex and Internal Funds
US internal funds
Capex, rhs
$bn
Capex constrained by softer internal fund generation, and by deploying borrowing to buybacks
-400
-200
0
200
400
600
800
Mar-91 Mar-96 Mar-01 Mar-06 Mar-11 Mar-16
Corporates: Borrowing and Buybacks
net corporate borrowing
net equity buybacks
$bn 4qtr avg
borrow to invest
borrow to buyback
borrow to buyback
CalPERS Trust Level Review
Housing: lower square footage and shortage of workers
-2.00
-1.50
-1.00
-0.50
0.00
0.50
1.00
1.50
2000
2100
2200
2300
2400
2500
2600
Mar-01 Mar-04 Mar-07 Mar-10 Mar-13 Mar-16
House Sq Ft Size vs Housing Contribution to GDP
GDP contribution, rhs
Median Sq Ft, lhs
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
Jan-04 Jan-06 Jan-08 Jan-10 Jan-12 Jan-14 Jan-16
Construction Job Vacancies
per person employed
CalPERS Trust Level Review
Housing still has upside but closer to inflection point
1
2
3
4
5
6
7
0
10
20
30
40
50
60
70
80
90
Jan-04 Jan-06 Jan-08 Jan-10 Jan-12 Jan-14 Jan-16 Jan-18
US NAHB Housing Confidence vs Consumer Plans to Buy
NAHB FutureSales, lhsPlans to Buy,lead 1yr rhs
Source: NAR1.5
2.5
3.5
4.5
5.5
6.5
7.5
90
110
130
150
170
190
210
230
250
Jan-92 Jan-96 Jan-00 Jan-04 Jan-08 Jan-12 Jan-16
US Housing Affordability and Plans to Buy
Affordability, lhs
plan to buy,lagged 3 years
Source: NAR
CalPERS Trust Level Review
Incentive to build still there, slight jump in owned rate
32
34
36
38
40
42
44
46
48
50
60
63
66
69
72
75
78
M-94 M-97 M-00 M-03 M-06 M-09 M-12 M-15
US Occupied Housing Units
Owned (LHS)
Rented (RHS)
millions millions
2400
2800
3200
3600
4000
4400
4800
800
1200
1600
2000
2400
M-89 M-94 M-99 M-04 M-09 M-14
US Vacant Houses On Market
For sale (LHS
For Rent (RHS)
CalPERS Trust Level Review
Home ownership drop most evident for young cohorts
47
48
49
50
51
52
53
54
77
78
79
80
81
82
83
84
85
Mar-94 Mar-98 Mar-02 Mar-06 Mar-10 Mar-14
Home Ownership Rate By Income
Above medianincome, LHSBelow medianincome, RHS
-12
-10
-8
-6
-4
-2
0
2
U35 35-44 45-54 55-64 65+
Change in US Home Ownership Rates by Age Cohort
Since'94
Since '05
CalPERS Trust Level Review
Caveats: multis and west coast getting ‘rich’
0
5
10
15
20
25
30
35
40
45
35
46
57
68
79
90
Mar-92 Mar-96 Mar-00 Mar-04 Mar-08 Mar-12 Mar-16
NAHB Housing Opportunity Index ** Share of homes sold that were affordable to median income family
National
San Francisco(RH axis)
-2
-1
0
1
2
3
4
5
40
45
50
55
60
65
70
Mar-06 Mar-08 Mar-10 Mar-12 Mar-14 Mar-16 Mar-18
US Apartment Absorption Rate
% of unfurnished apartmentsrented within three months
US CPI rents inflation (lagged 6 qtrs)
CalPERS Trust Level Review
Gradual improvement continues in US labor market
-60
-40
-20
0
20
J-88 J-92 J-96 J-00 J-04 J-08 J-12 J-16
Fed Labor Market Conditions
grey areas recessions
CalPERS Trust Level Review
Firms increasingly can’t find workers
0
50
100
150
200
250
300
350
47
49
51
53
55
57
59
61
J-12 J-12 J-13 J-13 J-14 J-14 J-15 J-15 J-16 J-16 J-17
US Service Sector Jobs vs NAPM non manufacturing - employment
Non Mfg PMI employment index, lhs
payrolls: private service sector jobs, rhs
index # monthly change
0
5
10
15
20
25
30
35
40
-10
0
10
20
30
40
Jan-99 Jan-02 Jan-05 Jan-08 Jan-11 Jan-14 Jan-17
US Small Business Survey
Comp increases paid, LHS
Hard To Fill, RHS
CalPERS Trust Level Review
Getting higher labor force participation in the key 25-34 year old group seems key
52
54
56
58
60
62
64
66
68
30
32
34
36
38
40
42
Jan-00 Jan-02 Jan-04 Jan-06 Jan-08 Jan-10 Jan-12 Jan-14 Jan-16
Labor Force Particpation Rates
55+ (LHS)
16-24s (RHS)
%
80
81
82
83
84
85
86
Jan-00 Jan-02 Jan-04 Jan-06 Jan-08 Jan-10 Jan-12 Jan-14 Jan-16
Labor Force Particpation Rates
25-3425-54
%
Steady for young and old cohorts
Trending lower for middle cohorts
Employed Unemployed Not in LF
Table 8: Prevalence of Pain and Pain Medication, By Labor Force Status
All Prime Age MenAverage Pain Rating (0-6)
Time Spent with Pain > 0Took Pain Medication Yesterday
N
0.7629.6%20.2%7,277
0.8126.3%18.9%468
1.9751.6%43.5%
683
Disabled Prime Age MenAverage Pain Rating (0-6) 1.49 1,25 2.81
Time Spent with Pain > 0 52.3% 42.1% 70.9%Took Pain Medication Yesterday 32.4% 12.4% 57.7%
N 191 25 276Notes: Sample is ATUS Well-being module respondents, prime age (25-54) men, pooling years 2010, 2012,and 2013. Weighted using the final well being activity weights. N is number of respondents.
Source: Where Have All the Workers Gone?Alan B. Krueger, Princeton University and NBER, October 2016
CalPERS Trust Level Review
Weak participation for men in this cohort might be related to trends in disability and chronic pain
Source: Where Have All the Workers Gone?Alan B. Krueger, Princeton University and NBER, October 2016
69
71
73
75
77
79
87
88
89
90
91
92
93
94
95
96
Jan-00 Jan-03 Jan-06 Jan-09 Jan-12 Jan-15
Labor Force Participation Rates - 25-34 year olds
men, lhs women, rhs
CalPERS Trust Level Review
Relative wage growth for lower income earners has improved … but not sentiment
40%
41%
42%
43%
44%
45%
Mar-07 Mar-09 Mar-11 Mar-13 Mar-15 Mar-17
US Usual Weekly Wages - 1st quartile/3rd quartile
10
40
70
100
130
160
190
0
20
40
60
80
100
120
140
J-00 J-02 J-04 J-06 J-08 J-10 J-12 J-14 J-16
US Conference Board Confidence Survey
Income under $15K pa Over $50K, rhs
CalPERS Trust Level Review
Deteriorating debt and deficit position will limit the US’ capacity to effect fiscal stimulus
-5.5%
-5.0%
-4.5%
-4.0%
-3.5%
-3.0%
-2.5%
-2.0%
15A 16 17 18 19 20 21 22 23 24 25 26 27
Latest CBO Projections on Federal Deficit (%/GDP)
CBO-Aug'16
CBO-Jan'17
CBO-Jun'17
Fiscal year 70%
75%
80%
85%
90%
95%
15A 16 17 18 19 20 21 22 23 24 25 26 27
Latest CBO Projections on Federal Debt
CBO-Aug'15
CBO-Aug'16
CBO-Jan'17
CBO-Jun'17
Fiscal year
%/GDP
CalPERS Trust Level Review
Central banks here and abroad are hinting at pivots toward less accommodative policy
2.10
2.15
2.20
2.25
2.30
2.35
2.40
5/31 6/5 6/10 6/15 6/20 6/25 6/30 7/5 7/10 7/15
US 10yr Yield
FOMC
ECB
Draghi @ SintraBoJ
Kuroda (regional)
BoCYellen
Riksbank
NorgesRBNZ
Poloz
PolozWilkins
RBA minutesBoJ
-4
-2
0
2
4
6
J-07 J-08 J-09 J-10 J-11 J-12 J-13 J-14 J-15 J-16 J-17 J-18 J-19
Wu Xia 'Shadow' Fed Funds Target
peak of QE3
taper
rate hikes
reinvestment taper and more rate hikes
CalPERS Trust Level Review
2017 likely to be peak of global QE Flows to foreign markets from Japan QE has stalled
-1.0
-0.5
0.0
0.5
1.0
1.5
2.0
2.5
-1500
-1000
-500
0
500
1000
1500
2000
2500
09 10 11 12 13 14 15 16 17 18 19
G4 QE in $B, Assuming Tapers
BoE ECBBoJ FedTotal US term premium, rhs
-30
-20
-10
0
10
20
30
06 07 08 09 10 11 12 13 14 15 16 17-td
Japan Portfolio Flows - Long Term Debt
annualizedY trn
NET OUTFLOWS FROM JAPAN
NET INFLOWS TO JAPAN
CalPERS Trust Level Review
Benign inflation outlook keeps the Fed cautious
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
Jan-06 Jan-08 Jan-10 Jan-12 Jan-14 Jan-16
US Underlying Inflation Measures
Core CPI
Core PCE
Clev Fed Median CPI
ATL Fed Core Sticky CPI
-3
-2
-1
0
1
2
3
4
5
6
Mar-05 Mar-07 Mar-09 Mar-11 Mar-13 Mar-15 Mar-17
US CPI Inflation
Actual JR Model
projected
Jun'17= 1.6%
US inflation could stay in mid-1s all this yearUS inflation has fallen even after idiosyncratic factors
CalPERS Trust Level Review
IMF Update projects continued mild upward momentumIMF commentsThe pickup in global growth anticipated in the April Outlook remains on track.The unchanged global growth projections mask somewhat different contributions at the country level.While risks around the global growth forecast appear broadly balanced in the near term, they remain skewed to the downside over the medium term.Projected global growth rates for 2017–18 remain below pre-crisis averages.Many advanced economies face excess capacity as well as headwinds to potential growth from aging populations, weak investment, and slowly advancing productivity.Financial stability risks need close monitoring in many emerging economies.
2015 2016 2017 2018 2017 2018World Output 3.4 3.2 3.5 3.6 0.0 0.0Advanced Economies 2.1 1.7 2.0 1.9 0.0 –0.1United States 2.6 1.6 2.1 2.1 –0.2 –0.4Euro Area 2.0 1.8 1.9 1.7 0.2 0.1Germany 1.5 1.8 1.8 1.6 0.2 0.1France 1.1 1.2 1.5 1.7 0.1 0.1Ita ly 0.8 0.9 1.3 1.0 0.5 0.2Spain 3.2 3.2 3.1 2.4 0.5 0.3Japan 1.1 1.0 1.3 0.6 0.1 0.0United Kingdom 2.2 1.8 1.7 1.5 –0.3 0.0Canada 0.9 1.5 2.5 1.9 0.6 –0.1Other Advanced 2.0 2.2 2.3 2.4 0.0 0.0Emerging Market 4.3 4.3 4.6 4.8 0.1 0.0Russ ia –2.8 –0.2 1.4 1.4 0.0 0.0China 6.9 6.7 6.7 6.4 0.1 0.2India 8.0 7.1 7.2 7.7 0.0 0.0ASEAN-5 4.9 4.9 5.1 5.2 0.1 0.0EMEA 4.7 3.0 3.5 3.2 0.5 –0.1Brazi l –3.8 –3.6 0.3 1.3 0.1 –0.4Mexico 2.6 2.3 1.9 2.0 0.2 0.0
World Trade Volume 2.6 2.3 4.0 3.9 0.2 0.0Consumer PricesAdvanced Economies 0.3 0.8 1.9 1.8 –0.1 –0.1Emerging Market 4.7 4.3 4.5 4.6 –0.2 0.2
IMF - Overview of the World Economic Outlook Projections - July 2017
Estimates Projections Di ff vs Apri l
CalPERS Trust Level Review
Some risk that Japan changes from its QQE policy
But government is less popular and the central bank balance sheet is getting very large
-1.0
-0.8
-0.6
-0.4
-0.2
0.0
0.2
0.4
0.6
0.8
1.0
95
99
103
107
Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17
Japan Cycle Indicators
Economic Activity, lhs
Core inflation, rhs0%
20%
40%
60%
80%
100%
J-08 J-09 J-10 J-11 J-12 J-13 J-14 J-15 J-16
Size of Central Bank Balance Sheets
US Fed
Bank of Japan
European Central Bank
Bank of England
as %/GDPas %/GDP
So far, stronger activity hasn’t result in higher inflation
CalPERS Trust Level Review
China’s stabilization ahead of 19th Party Congress has helped risk markets this year
-150
-100
-50
0
50
100
Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17
China Capital Flow Tracker - IIF
0
2
4
6
8
10
12
14
16
1500
2000
2500
3000
3500
4000
4500
5000
5500
Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17
China Industrial Indicators
Rebar steel price Li Keqiang Index, rhs
Controls and better economy have - for now -stemmed capital outflow
CalPERS Trust Level Review
US policy paralysis and stalled improvement in US ‘twin deficits” have hurt US dollar
-15%
-12%
-9%
-6%
-3%
0%
75
85
95
105
115
Mar-92 Mar-96 Mar-00 Mar-04 Mar-08 Mar-12 Mar-16
US Dollar vs US Twin Balances
US Dollar (broad, real), LHS
Twin Deficits, lead 2 years, RHS
92
94
96
98
100
102
104
1.65
1.85
2.05
2.25
2.45
2.65
N-16 D-16 J-17 F-17 M-17 A-17 M-17 J-17 J-17
Bonds and USD Since GOP Sweep
US 10yr bond yield
US dollar index
Twin Deficits = budget and external
CalPERS Trust Level Review
PERF Asset Liability Management Assumptions
*Expected risk and return is based on the 2013 ALM Workshop and uses the short-term (1-10year) expected return from capital market assumptions; actual risk and return figures are 5 year figures
PERFEQ
PE
FIRA
IA
PERF
EQPE
FI
RA
IA
-5%
0%
5%
10%
15%
20%
-5% 0% 5% 10% 15% 20% 25% 30%
Retu
rn %
Risk %
Expected Risk and Return vs. 5-Year Realized Risk and Return
Expected
Actual
More Risk
Mor
e Re
turn
CalPERS Trust Level Review
PERF Contribution to Return
Public equity was largest contributor as a function of its weight in the plan + very strong returns (9.2%)
Asset ClassAverage Weight (%)
1-Year Return (%)
Year Ended Contribution to Return (%)
GROWTH 56.8 18.8 10.4PUBLIC EQUITY 48.4 19.6 9.2PRIVATE EQUITY 8.3 13.9 1.1
INCOME 18.9 0.3 0.1
REAL ASSETS 10.9 7.4 0.8REAL ESTATE 9.2 7.6 0.7FORESTLAND 0.6 1.0 0.0INFRASTRUCTURE 1.0 9.9 0.1
LIQUIDITY 4.4 0.8 0.0INFLATION 8.1 -2.7 -0.2TRUST LEVEL 1.0 0.1TOTAL FUND 100 11.2 11.2
ASSET CLASS
AS OF: June 30,2017 Current
Allocation(%)
Interim
Strategic
Target (%)*
GROWTH 56.3% 54%
PUBLIC EQUITY 48.3% 46%
PRIVATE EQUITY 8.0% 8%
INCOME 19.4% 20%
REAL ASSETS 11.2% 13%
REAL ESTATE 9.4% 11%
FORESTLAND 0.6% 1%
INFRASTRUCTURE 1.2% 1%
LIQUIDITY 4.8% 4%
INFLATION 7.8% 9%
TRUST LEVEL 0.5% -
ARS 0.1% -
MULTI-ASSET CLASS (MAC) 0.4% -
OVERLAY+TRANS+PLAN 0.0% -
TOTAL FUND 100.0% 100.0%
CalPERS Trust Level Review
PERF Asset Allocation
*Interim strategic targets were adopted by the Board and effective October 1, 2016.
CalPERS Trust Level Review
Public Equity, 47.9%
Private Equity, 8.1%
Income, 18.5%
Real Assets, 11.2%
Liquidity, 4.7%
Inflation, 7.9%
Plan Level , 1.7%
Portfolio Allocation
Public Equity, 69.1%Private Equity,
12.7%
Income, 1.9%
Real Assets, 11.7%
Liquidity, 0.0%Inflation, 4.1% Plan Level, 0.5%
Forecast Contribution to Volatility
Growth Assets Dominate VolatilityAs of May 31, 2017
CalPERS Trust Level Review
Historical Equity Market Drawdowns
Source: Robert Shiller, Bloomberg, J.P. Morgan Asset Management, BarraOne
-90%
-80%
-70%
-60%
-50%
-40%
-30%
-20%
-10%
0%
1927 1932 1937 1942 1947 1952 1957 1962 1967 1972 1977 1982 1987 1992 1997 2002 2007 2012 2017
S&P composite declines from all-time highs
Crash of 1929/ Depression
1937 Fed Tightening
Post-WWII Crash
Flash Crash of 1962
Tech Crash of 1970Stagflation/ Oil Embargo
Volcker Tightening
1987 Crash/ Program Trading
Tech Bubble Collapse
Global Financial Crisis
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