CalPERS Trust Level Review · 2017-08-07 · Real Consumer Spending vs Confidence. real consumer...

Item 5a, Attachment 1, of 59

CalPERS Trust Level Review

Period Ending June 30, 2017

Ted Eliopoulos, Chief Investment Officer Wylie Tollette, Chief Operating Investment Officer

Eric Baggesen, Managing Investment Director John Rothfield, Investment Director

Investment Committee August 2017

Item 5a, Attachment 1, of 59 CalPERS Trust Level Review

Review Outline

I. Economic and Market Overview

II. Investment Review i. Performance ii. Risk


I. Economics and Market Overview


Economic trends since last review Positive 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


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

%


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.


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


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


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


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


Many business cycle indicators still have runway


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


II. Investment 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 toa 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 the prior period estimate• 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%


Performance Summary As 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


Note: Actuarial Rate of Return FY 2007-12 was 7.75%. FY 2013-17 rate is 7.5%.

PERF 10 Year Cumulative Returns


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


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


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


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


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


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%


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


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%


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 Distributed PERF’s Rolling Annual Returns: Jun 89-May 17

Historical Volatility: 8.7%

Average Historical Rolling Return: 8.9%


Drawdown Risk

Scenario Simulated Impact on Current Portfolio

PERF Actual Historical

Experience 1989-2017

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;


Board Investment Committee

CIO

Trust Level Portfolio

Mgmt

Sustainable Investments

COIO

Inv. Compliance & Operational

Risk

Investment Risk & Performance

Investment Servicing, Mgr.

Engagement 3. 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


Appendix


120%

140%

160%

180%

200%

220%

240%

260%

81 85 89 93 97 01 05 09 13 17

All Nonfinancial Debt to GDP


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


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


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 ...


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

%


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


Wealth Recovery = Sentiment Surge

consumerconfidence, lhs

Household networth/income, rhs

Why the gap? Slower real income growth and balance sheet restoration.


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


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


Wealth Recovery = More Spending Out of Savings

hh savings ratio, lhs

hh net worth/income, rhs


Business capex hasn’t yet reflected intentions

-50

-40

-30

-20

-10

0

10

20

30

40

50

-25

0

25

50


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%


US Real Capex - Mining Investment

GDP impact %, RHS Rig Count YoY

$bn saar Mining is an exception, as prices rebound

Intentions have surged


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


Corporates: Borrowing and Buybacks

net corporate borrowing

net equity buybacks

$bn 4qtr avg

borrow to invest

borrow to buyback

borrow to buyback


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


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


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


US Housing Affordability and Plans to Buy

Affordability, lhs

plan to buy,lagged 3 years

Source: NAR


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)


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


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


Caveats: multis and west coast getting ‘rich’

0

5

10

15

20

25

30

35

40

45

35

46

57

68

79

90


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


US Apartment Absorption Rate

% of unfurnished apartmentsrented within three months

US CPI rents inflation (lagged 6 qtrs)


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



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


US Small Business Survey

Comp increases paid, LHS

Hard To Fill, RHS


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


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


Relative wage growth for lower income earners has improved … but not sentiment

40%

41%

42%

43%

44%

45%


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


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


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


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


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


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


US CPI Inflation

Actual JR Model

projected

Jun'17= 1.6%

US inflation could stay in mid-1s all this year US inflation has fallen even after idiosyncratic factors


IMF Update projects continued mild upward momentum IMF comments The 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


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


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


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


China Industrial Indicators

Rebar steel price Li Keqiang Index, rhs

Controls and better economy have - for now - stemmed capital outflow


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


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


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

PERF EQ

PE

FI RA

IA

PERF

EQ PE

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


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


PERF Asset Allocation

*Interim strategic targets were adopted by the Board and effective October 1, 2016.


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 Volatility As of May 31, 2017


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 1970 Stagflation/ Oil Embargo

Volcker Tightening

1987 Crash/ Program Trading

Tech Bubble Collapse

Global Financial Crisis

CalPERS Trust Level Review · 2017-08-07 · Real Consumer Spending vs Confidence. real consumer...

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