Architects of Financial Prosperity

Investment Management Consultants

Underlying Causes of Pension Deficits

Investment Risk

April 19, 2023

Investment Risk

April 19, 2023 22

DISCLAIMER

This presentation is directed only to the client for whom it is intended. The underlying data has been obtained from sources considered to be reliable but its accuracy and completeness cannot be assured. This presentation is for informational purposes only and is not intended to be an offer, solicitation, or recommendation with respect to the purchase or sale of any security or a recommendation of the services supplied by any money management organization. Annual, cumulative, and annualized total returns are calculated assuming reinvestment of dividends and income plus capital appreciation. Past performance results are not necessarily indicative of future performance.

Investment Risk

April 19, 2023 3

The many faces of “Risk”:

Actuarial Assumptions Impact on Liabilities Running out of money Variability of Return Negative Returns Underperformance Style Characteristics Quality of Names in Portfolio

Investment Risk

What is it?– It’s not just volatility...– It’s the absence of fiduciary education around

duty of care and duty of loyalty when it comes to investments.

Not understanding the shape and “math” of the liabilities

– Duration– Liquidity– Actuarial assumptions

April 19, 2023 4

Investment Risk

April 19, 2023 5Inversiones para Fiduciarios 5

Pension PlanExpected Benefit Payments

(Based on Target Liability Assumptions with Normal Cost)

0

500,000

1,000,000

1,500,000

2,000,000

2,500,000

3,000,000

3,500,000

4,000,000

4,500,000

5,000,000

2008

2011

2014

2017

2020

2023

2026

2029

2032

2035

2038

2041

2044

2047

2050

2053

2056

2059

2062

2065

2068

2071

2074

2077

2080

2083

2086

2089

2092

2095

2098

2101

2104

2107

Years

Am

ou

nt

Investment RiskInvestment Risk

April 19, 2023 6

Curves of Convergence(000)

0,000

10,000

20,000

30,000

40,000

50,000

60,000

70,000

80,000

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

Market Value 8.5% 6.8% 5.0%

Assets

Future Spending

The “End” Game: “A fund’s liabilities should dictate the shape of its assets...

Investment Risk

Investment Risk

Leads to…Not setting appropriate asset allocation policyNot rebalancingNot optimizing yieldNot watching costsRunning out of money altogether

April 19, 2023 7

Investment Risk

Investment Risk reflected in the Pension Arena– Didn’t move along the asset allocation continuum

April 19, 2023 8

(5.0) 0.0 5.0 10.0 15.0 20.0 25.0 30.0 35.0 40.0

3.0

4.0

5.0

6.0

7.0

8.0

9.0

10.0

11.0

12.0

13.0

Asset Class Risk/Reward

Projected Risk

Pro

ject

ed R

etur

n

US Large Cap

US Sm/Mid Cap

Non-US Dev Mkts Non-US Emer Mkts

US Fixed

US TIPS

US High Yield

Non-US Fixed

Real Estate

Private Equity

Hedge FoF

Cash Equivs

Commodities/ Natl Res

Investment RiskInvestment Risk

April 19, 2023 9

Rat

e of

Ret

urn

Time

Variability Tolerance Range

8%

Investment Risk

April 19, 2023 10

Desired Investment Growth

Investment A

Investment B

Time

Return

Investment RiskInvestment Risk

April 19, 2023 11

5

6

7

8

9

10

11

12

13

14

15

2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18

1 Year 3 Years 5 Years 10 Years

Provides portfolio diversificationCan enhance returns and/or lower risk

Investment Risk

Not enough diversification– US-Centric

Equities Fixed Income

– Alternative investments as alpha generators, rather than as diversifiers

April 19, 2023 12

Investment RiskInvestment Risk

April 19, 2023 13

Asset ClassReturns SD Return SD Return SD Return SD

EquitiesUS Large 8% 19% 8.85% 16.40% 8.88% 21% 7.60% 18%

US Small/Mid 10% 29% 9.85% 22.70% 7.92% 23%Non-US Dev 8.75% 22% 9.2 20.10% 9.29% 24.68 7.58% 20%

Non-US Emerging 9.8 32.90% 7.99% 27.75%Fixed Income

US 5% 4.30% 5.25% 4.50% 5.28% 4.65% 3.25% 4.25%TIPS na na 4.90% 6% 2.98% 5.60%

US High Yield na na 7% 11.50% 5.35% 12.50%Non-US na na 5.15% 9.60% 2.84% 9.50%

AlternativesPrivate Equity 12% 34% 12% 34% 8.78% 30.60%Real Estate 7.25% 17.50% 7.60% 16.50% 6.41% 16.95%Natural Resources 9% 18% 5.50% 15% 3.23% 17.90%Hedge Funds 6.50% 9.70% 6.90% 10% 5.53% 10%

2013Return Expectations Over Time: The Pursuit of 8%2004 2007 2009

Investment RiskInvestment Risk

April 19, 2023 14

2004 2007 2009 2013 2013Equities

US 50% 44% 50% 43% 27%Non-US 10% 7% 15% 39% 25%

Fixed IncomeUS 40% 1% 25% 0% 24%

Non-US 0% 8%Alternatives 0% 48% 10% 18% 16%

Total 100% 100% 100% 100% 100%

Expected Returns 7.5% - 8.5% 8.2 7.8 8.2 6.7%

Expected Volatility 11.5% - 15.5% 12.4 14.3 20.6 12.1%

Return Expectations Over Time: The Pursuit of 8%