Total-Return Investment Pool (TRIP) Asset Allocation...
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Total-Return Investment Pool (TRIP) Asset Allocation & Investment Policy Review and Recommendations May 27, 2015 Office of the Chief Investment Officer ATTACHMENT 2
Transcript of Total-Return Investment Pool (TRIP) Asset Allocation...
Total-Return Investment Pool (TRIP) Asset Allocation & Investment Policy Review and Recommendations May 27, 2015 Office of the Chief Investment Officer
ATTACHMENT 2
For Discussion at Committee on Investments: Working Capital
Rethinking Liquidity Management
Asset Allocation and Investment Policy Recommendations
To be Approved by Board of Regents July 23, 2015
Contents
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3
Working Capital
48% 52%
Short-Term Investment Pool: $8.3B
Total-Return Investment Pool: $7.6B
We have two investment portfolios that serve the university’s ongoing operational needs. Working with the investments, operations and finance teams across the campuses and with the Office of the President, we help shape our capital and liquidity strategy to meet the objectives that make the university work.
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The Working Capital Short-Term Investment Pool was established by the UC Board of Regents in 1976. This is a highly liquid cash pool, available to all university groups for funding day-to-day operations. The pool allows participants to maximize income on their short-term cash balances. By investing in this larger pool and its broad range of maturities, we can take advantage of the economies of scale granted by our institutional size. We make investments appropriately to control liquidity, interest rate, credit and maturity risk. The Working Capital Short-Term Investment Pool is supplemented by our Working Capital Total-Return Investment Pool, which was set up in 2008. This allows all campuses, as well as the Office of the President, to maximize the return on their long-term capital, subject to acceptable risk.
Capital, Working
Short-Term Investment Pool
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Allocation Shifts Fixed Income & Cash
March 31, 2015 June 30, 2009 June 30, 2004
$8.3B $6.6B $6.7B
Short-Term Investment Pool (STIP) Investment Highlights
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Assets Under Management March 31, 2014 $8.1 billionMarket Gains
$29 millionValue Added
$87 millionNet Cash Flow
$100 millionAssets Under Management March 31, 2015 $8.3 billion
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Value Added
Policy Benchmark
Net Returns
Short-Term Investment Pool (STIP) Performance as of March 31, 2015
STIP Policy Benchmark is weighted composite of Two Year US Treasury Note and 30 Days US Treasury Bills. Weights will be actual average weights of bond and cash equivalent components of the pool. Rebalanced monthly.
0.1 0.3 0.4 0.3 0.3
1.7
3.1
0.20.8
1.0 1.51.8
1.4
1.1
0
2
4
Q3 FiscalYear 2014-15
(3 Months)
Fiscal Year toDate 2014-15
(9 Months)
1 Year 3 Year 5 Year 10 Year 20 Year
%
1.4% 1.8% 2.1%0.3% 1.1% 3.1% 4.2%
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Total-Return Investment Pool (TRIP) Allocation Shifts
Equity allocation has doubled while Fixed Income cut in half. In August 2013, introduced liquid alternatives.
EquityFixed Income & CashAlternatives
March 31, 2015 June 30, 2009 August 31, 2008
13%
37%
50% $7.6B
78%
22%
$1.5B
75%
25%
$1.5B
Total-Return Investment Pool (TRIP) Investment Highlights
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Assets Under Management March 31, 2014 $7.1 billionMarket Gains
$0.5 billionValue Added
$0.2 billionNet Cash Flow
($0.2 billion)Assets Under Management March 31, 2015 $7.6 billion
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Value Added
Policy Benchmark
Net Returns
Total-Return Investment Pool (TRIP) Performance as of March 31, 2015
TRIP Aggregate Policy Benchmark is a weighted composite of 15% Russell 3000 Tobacco Free Index+7.5% MSCI World Ex-US (Net) Tobacco Free+ 7.5% MSCI Emerging Market (Net) + 10% MSCI ACWI (Net) + 17.0% Barclays US Credit + 2.5% Barclays US Credit + 5% Merrill Lynch High Yield Cash Pay Index + 5% JP Morgan Emerging Markets Bond Index Global Diversified + 10% Equally Weighted HFRX Absolute Return Index and HFRX Market Directional Index +10% FTSE EPRA NAREIT Global Index + 10.5% Aggregate TRIP Portfolio. As of March 31, 2015.
2.6 2.3
6.68.3 8.2 7.9
0.1 0.7
1.0
0.5 0.4 0.4
0
5
10
15
Q3 Fiscal Year2014-15
(3 Months)
Fiscal Year to Date2014-15
(9 Months)
1 Year 3 Year 5 Year Since InceptionAugust 2008
%
7.6% 8.8% 8.6%2.7% 3.0% 8.3%
Review long-term asset allocation Optimize portfolios for the different plan objectives Manage costs in a low-return environment Active management will play an increasing role in seeking returns Our competitive advantages are size, scale and patience
Opportunities for 2014/2015
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Rethinking Liquidity Management
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Rethinking Liquidity Management
Develop holistic view of STIP and TRIP Hold STIP at constant levels based on campus financial controls Blend STIP and TRIP to maximize returns and balance liquidity needs
Based on system-wide cash flows Non-Campus financial control funds in STIP (e.g. bond proceeds, foundation
assets, UCRP funds) will not be included as part of the operational liquidity levels UCOP will guarantee operational liquidity for campus access
Office of the Chief Investment Officer will propose a revised asset allocation within
TRIP to the Committee on Investments Combination of assets in STIP and TRIP will help meet liquidity requirements for
rating agencies (operational and self-liquidity) Income from STIP and TRIP will be part of operational budgets going forward
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$1 Billion $2 Billion
$3 Billion $4 Billion $5 Billion
$8 Billion
$8 Billion $8 Billion $8 Billion
$7 Billion $8 Billion
$7 Billion
$8 Billion
0
2
4
6
8
10
12
14
2009 2010 2011 2012 2013 2014 2015
$ B
illio
ns
Growth in STIP* and TRIP ($ Billions)
TRIP STIP
Growing Working Capital
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Maintain Minimum Short-Term Financial Controls at a $3 Billion Threshold
$2.5 Billion Short-Term Ratings and Self-Liquidity Requirements
* STIP amounts include Financial Control and the other portion of STIP comprised of: Gifts, Endowment Funds, Plant internal Loans and Other Loans, “OP/Bond Proceeds” amount includes Bond Proceeds, Commercial Paper Proceeds), MOP, and 3rd Parties includes amounts held for Agencies, Foundations, and OPEB
$3 $3 $8 $2
$0 $2 $4 $6 $8 $10 $12 $14
Pro-Forma
$ Billions
System-Wide (Hypothetical Reallocation)
Campus Financial Control STIP Other STIP TRIP Reallocation
Managing our Assets System-Wide
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15% Absolute Return 20% Public Equities 65% Fixed Income $2.5 Billion in Treasuries and Agencies
$5 $3 $8
$0 $2 $4 $6 $8 $10 $12 $14
As of March 31, 2015
$ Billions
Working Capital (STIP and TRIP)
August 2008: • TRIP formed with an
initial investment of about $1.5 Billion
April 2011: • The University
moved $1.1 Billion from STIP to fund UCRP
August 2012 - 2013: • STIP to TRIP Ratio (System-wide): moved an additional $2 Billion
from STIP to TRIP. Maximum ceiling of 40% STIP and 60% TRIP • TRIP Asset Allocation: increased public equities and alternatives,
decreased fixed income • TRIP Pay-out Structure: revised to pay campuses income earned (or
reinvested if they choose) and 4.75% of NAV (less income earned) on a 60 month moving basis, to avoid volatility
August 2014 • Transferred $700
Million from STIP to fund UCRP
September 2014: • OCIO offered campuses a TRIP
Window of Liquidity to take extraordinary gains from TRIP
• Campuses took the opportunity to harvest $105 Million
April 2015: Move towards a holistic policy, control system-wide Conversion of Funds Two campuses have converted $225 Million to set-up a FFE
By March 2012: • Reached a 70%STIP and
30% TRIP ratio
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Since TRIP’s inception, more than $4.5 billion has been moved from STIP to TRIP, and $1.8 billion from STIP to UCRP
Timeline of Key STIP and TRIP Movements
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May 2015: Recommend new asset allocation
STIP and TRIP Annual Fiscal Year Returns
-1.6%
14.0%
11.3%
6.7%
8.3%
14.6%
3.7% 2.7% 2.6% 2.4% 2.1% 1.6%
-4%
0%
4%
8%
12%
16%
20%
Jun-09 Jun-10 Jun-11 Jun-12 Jun-13 Jun-14
TRIP
STIP
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Various Pools Available to Stakeholders’ with Different Objectives, Purpose, Risk, and Liquidity Requirements
STIP TRIP GEP
Purpose
Pooled investment vehicle for UC entities cash balances.
Supplements budgets, supports MOP and medical centers, and
meets ratings requirements
Pooled investment vehicle for UC entities longer-term cash
balances
Pooled investment vehicle, which will generate
a stable and continuously growing income stream for designated endowments
Objective Maximize return consistent with safety of Principal, liquidity and
cash flow requirements
Generate rate of return consistent with liquidity, cash
flow, and risk budget
Preserve purchasing power of future stream of endowment
Investment Mandate Income Total-Return Total-Return
Risk Exposures Interest Rates, Credit, Reinvestment
Interest Rates, Credit, Reinvestment, Equity,
Country, Sector, Currency
Interest Rates, Credit, Reinvestment, Equity, Country,
Sector, Currency
Liquidity Daily, cash flow and modeling
should support management of portfolio
Quarterly withdrawals and 3-year lock-up Withdrawals subject to liquidity
Payout Income plus realized gains/losses paid monthly Annual Payout Annual Payout
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TRIP – Historical Policy Asset Allocation
25 35
45.5 50 50
35
12
30 20.5
15
75 65
42.5
20 29.5
50
0
10
20
30
40
50
60
70
80
90
100
Aug-08 Jan-11 Aug-13 Aug 2013 LongTerm
May-15 Proposed July,2015
%
Total Fixed Income Total Liquid Alternatives Total Equity
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Understanding our Stakeholders’ Objectives Asset allocation should reflect stakeholder objectives, liabilities, cash management practices, liquidity, time horizon, and risk tolerances.
STIP is the primary vehicle for day to day operating needs Funds should be sufficient to cover “extraordinary” liquidity needs and be comparable to other universities’ days of cash-on-hand metrics Investments should be sufficient and liquid enough to cover daily operating needs (such as payroll, debt service, expenses, coverage ratios, etc.)
Maintain an amount of daily operating needs to meet requirements; benchmark relative to peers; stress test for extreme events
STIP should hold enough rating agency-defined investments to meet coverage requirements for self-liquidity. Change in absolute value of STIP impacts long-term ratings. TRIP is the vehicle for operating needs over the coming 3-5 years Objective of earning a 2-3% return above STIP Asset allocation optimized to minimize drawdown over 5 year period There are trade-offs to any investment portfolio, and a higher return/income is correlated with a higher risk profile. In addition, higher return portfolios do not always result in higher annual income.
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Asset Allocation and Investment Policy Recommendations
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Asset Allocation Considerations to Meet Stakeholders’ Objectives Proposed changes will result in greater accountability in portfolio construction of underlying asset class policy portfolios. Shift from specific benchmarks and discrete weightings to broad benchmarks and greater discretion. Objective of TRIP is to generate returns between those earned in GEP and STIP over an intermediate time horizon with a moderate risk profile and adequate liquidity
1. Reduce Equity Allocation
2. Remove Global REITS
3. Remove Cross Asset Class
4. Increase Fixed Income Allocation
5. Increase Absolute Return Allocation
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Assumptions and Constraints
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Source: Mercer and Office of Chief Investment Officer
Asset Class 3-Year 5-Year 10-Year Long Term
Equilibrium Return
Standard Deviation Constraints / Notes
Global Equity 7.1% 7.1% 7.1% 7.6% 19.5%
Liquid Real Estate 6.2% 6.2% 6.2% 6.2% 21.3%
US Short Government/Credit Fixed Income 1.8% 2.3% 3.0% 3.9% 3.4% STIP Assumption
US Broad - Aggregate Fixed Income 1.8% 2.3% 3.0% 4.2% 5.3% Fixed Income allocation 80% Broad
10% US High Yield Fixed Income 10% Emerging Markets Fixed Income
US High Yield Fixed Income 1.9% 2.5% 4.8% 6.4% 9.7% Emerging Markets Fixed Income - Hard Currency ($ Denominated) 1.1% 1.9% 4.7% 6.1% 10.6%
Absolute Return 4.2% 4.7% 5.4% 6.0% 7.1% 75% Global Macro and
25% Moderate Maximum 20% Allocation
Return Drivers
CPI 1.9% 2.0% 2.0% 2.0%
GDP 2.9% 2.8% 2.8% 2.7%
90 Day Real Yield -0.6% -0.4% -0.2% -0.1%
30 Year Treasury Yield 3.3% 3.3% 3.4% 3.4%
High Yield Spread to Treasury Curve 4.7% 4.9% 5.1% 5.2%
Reduce Equity Allocation
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Benchmark
Current Policy Current Benchmark MSCI ACWI IMI Index
Asset Class % TRIP Portfolio % TRIP Equity Portfolio
Equity Weighted Policy Benchmark % Exposure
U.S. 15.0% 37.5% 50.5% 52.0%
Non-U.S. 7.5% 18.75% 28.2% 37.6%
Emerging Market 7.5% 18.75% 21.3% 10.3%
Opportunistic 10.0% 25.0%
Opportunistic Regional Breakdown U.S. Exposure 5.2% Non-U.S. Exposure 3.8% Emerging Market Exposure 1.0%
Total 40.0% 100.0% 100.0% 100.0%
Rationale for Change in Equity Policy Benchmark
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Current allocation mix between US, Non-US Developed, and Emerging Markets is making a sizeable bet on Non-US Developed and Emerging Markets Emerging Markets target allocation is more than twice the MSCI ACWI IMI index weight and Non-US Developed Allocation is 10% less than the global benchmark weight
US , 50%
Non-US , 28%
EM , 21%
Current Equity Policy
US , 52% Non-US , 38%
EM , 10%
MSCI ACWI IMI
Benchmark Performance Comparison
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-60.0
-50.0
-40.0
-30.0
-20.0
-10.0
0.0
10.0
20.0
30.0
40.0
50.0
60.0
70.0
Jan-02 Jan-04 Jan-06 Jan-08 Jan-10 Jan-12 Jan-14
%
Rolling 12-Month Return
Equity Policy Benchmark MSCI - AC World IMI Index ($Net)
Remove Global REITS
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Remove Public Real Estate (REITS) as a category (allocation of 10%): current target is twice as much as the equity index exposure to Real Estate which represents less than 5% REITS presents downside risk, given elevated valuations, slowing economic growth, and likely Fed rate hike
Rationale for Change in Cross Asset Class Strategy
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Remove Cross Asset Class as a category Upon strategic review and exposure analysis determined the cross asset class strategy should be restructured First phase was to reduce the amount of redundant beta exposures and return capital to provide both liquidity to the entity and to fund better opportunities. Remaining portfolio was tilted to alternatives. Restructuring taken place with liquidity raised from duplicative investment exposures. Value added positions will be reallocated to more appropriate portfolios Greater detail on Cross Asset Class provided in the Appendix (in $mm) NAV 6/30/14 NAV 9/30/14 NAV 12/31/14 NAV 3/31/15 NAV 4/30/15 NAV 5/11/15
NAV 6/30/2015 Estimated
Satellite Strategies Pool 546 555 273 224 1.5 1.5 0 Core Strategic Partners Pool 1,728 1,729 896 444 45 45 0
Total CAC NAV 2,274 2,284 1,169 668 47 47 0
of which: UCRP 1,352 1,359 694 409 26 26 0 GEP 224 225 114 69 4 4 0 TRIP 698 700 361 190 17 17 0
Increase Fixed Income Allocation
Current Policy
Asset Class % TRIP Portfolio % Fixed Income Portfolio
Core 19.5% 66.2%
Government 17.0% 57.6%
Credit 2.5% 8.6%
Collateral 0.0% 0.0%
High Yield 5.0% 16.9%
Credit 5.0% 16.9%
Emerging Market Debt 5.0% 16.9%
Government 5.0% 16.9%
Total 29.5% 100.0%
of Total TRIP
Portfolio
Category Current Policy Implied Weights BC US Aggregate
Sectors % Fixed Income Portfolio % Exposure
Government 74.6% 46.0%
Credit 25.4% 23.0%
Collateralized (Securitized) 0.0% 31.0%
Total 100.0% 100.0%
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Rationale for Change in Fixed Income Policy Benchmark Propose moving Fixed Income to Barclays Capital US Aggregate Index as the benchmark, which is comprised of Government, Credit, and Collateralized securities Allocation to Emerging Market Debt and High Yield represents opportunistic bets in fixed income markets and removing from benchmark will provide the ability to better assess the impact of our decision to over or underweight these exposures given market conditions
-20.00
-10.00
0.00
10.00
20.00
30.00
40.00
Dec-94 Dec-96 Dec-98 Dec-00 Dec-02 Dec-04 Dec-06 Dec-08 Dec-10 Dec-12 Dec-14
Rolling 12-Month Return
Weighted FI BC Aggregate
30
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An absolute return program should provide consistent, superior risk-adjusted returns throughout market cycles.
Combine disciplined manager selection with robust portfolio construction.
The role of an absolute return program is to provide diversification benefits to a broader portfolio, which includes traditional asset classes such as equities and bonds.
Mine for less crowded strategies where there is high potential for alpha.
A good program should also be a source of investment idea generation and market intelligence.
Idea generation is only valuable if it is communicated and executable
Role of Absolute Return
Increase Absolute Return
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Absolute Return is constructed to diversify the public equity and fixed income allocations. Focused on a smaller set of strategies with low beta to the traditional equity and fixed income strategies. Over a full market cycle, expect the TRIP Absolute Return strategy to deliver consistent absolute returns.
-40.0
-30.0
-20.0
-10.0
0.0
10.0
20.0
30.0
40.0
Jan-02 Jan-04 Jan-06 Jan-08 Jan-10 Jan-12 Jan-14
%
Custom - AR BM - HFRX 50/50-40.0
-30.0
-20.0
-10.0
0.0
10.0
20.0
30.0
40.0
Jan-02 Jan-04 Jan-06 Jan-08 Jan-10 Jan-12 Jan-14
%
HFRX - Absolute Return IndexHFRX - Market Directional IndexCustom - Libor+3
Recommended TRIP Asset Allocation
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Options
STIP TRIP Current
TRIP Long-Term Policy
GEP
Option 1 Min Max
Draw Down
Option 2 Recommended
Option 3
Recommended Range
Equity 0.0% 50.0% 50.0% 44.5% 37.0% 35.0% 40.0% +/- 5%
Fixed Income 100.0% 29.5% 20.0% 14.1% 43.0% 50.0% 40.0% +/- 5%
Cross Asset Class 0.0% 10.5% 20.0% 0.0% 0.0% 0.0% 0.0% --
Absolute Return 0.0% 10.0% 10.0% 23.5% 20.0% 15.0% 20.0% +/- 10%
Risk and Return Statistics Expected 3-Year Return 1.6% 5.4% 6.0% 6.2% 4.8% 4.6% 5.0% Expected 5-Year Return 2.1% 5.6% 6.2% 6.4% 5.3% 5.2% 5.6% Long-Term Equilibrium Return 2.8% 6.1% 6.8% 6.8% 5.8% 5.6% 6.0%
Standard Deviation (Risk) 2.7% 12.1% 14.2% 13.0% 8.3% 8.3% 9.1%
Expected Worst 3-Year Return 0.8% -7.2% -9.2% -10.0% -4.2% -4.3% -4.3%
2008 Historical Drawdown 4.3% -20.7% -32.8% -27.3% -16.7% -16.7% -17.8%
Return/Risk (3-Year 0.59 0.44 0.42 0.42 0.58 0.55 0.51
Options for TRIP Asset Allocation
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STIP
TRIP Current
TRIP Long-Term Policy
GEP
Option 1 MinMaxDD
Option 2 Recommended
Option 3
0.0%
2.0%
4.0%
6.0%
8.0%
0.0% 4.0% 8.0% 12.0% 16.0%
Expe
cted
3-Y
ear R
etur
n
Risk (Standard Deviation)
Optimize Allocation Between Different Portfolios: STIP, TRIP, and GEP
STIP Current TRIP Proposed TRIP GEP
Key Portfolio Characteristics
Expected Return 1.6% 5.4% 4.6% 6.2%
Expected Risk 2.7% 12.1% 8.3% 13.0%
Risk Tolerance Low High Medium High
Time Horizon Short (Less than 3 years) Long (7+ years) Intermediate (3-5 years) Long (10+ years)
Liquidity High Low Medium Low
Composition of Pools
Equity 0% 50% 35% 38.5%
Fixed Income 100% 30% 50% 12.5%
Liquid Alternatives 0% 20% 15% 28.5%
Illiquid Alternatives 0% 0% 0% 20.5%
Total 100% 100% 100% 100%
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Recommended Asset Allocation Changes
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Optimization focused on drawdown over 5 year time horizon across broad asset classes (public equity, fixed income, and absolute return) Developed assumption with Consultant given current and expected environment Excluded illiquid assets Recommended changes are shown in the following table Reduce Equity, Increase Fixed Income and Absolute Return, and remove Cross Asset Class exposure Amendments to investment policy, benchmarks and guidelines
TRIP Current TRIP Long-Term Policy
Recommended
Required Change in
Policy Ranges
Equity 50.0% 50.0% 35.0% -15.0% +/- 5% Fixed Income 29.5% 20.0% 50.0% +30.0% +/- 5% Cross Asset Class 10.5% 20.0% 0.0% -20.0% -- Absolute Return 10.0% 10.0% 15.0% +5.0% +/- 10%
Risk and Return Statistics Expected 3-Year Return 5.4% 6.0% 4.6% Standard Deviation (Risk) 12.1% 14.2% 8.3%
Recommendations
The following actions are recommended to the Committee:
1. Approve the proposed asset allocation changes of:
a. Reduce Equity Allocation by -15%
b. Increase Fixed Income Allocation by +30%
c. Remove Cross Asset Class -20%
d. Increase Absolute Return by +5%
2. Approve benchmark revisions
a) Public Equity = MSCI ACWI Investable Market Index Tobacco Free
b) Fixed Income = Barclays Capital US Aggregate Index
3. Approve investment policy changes
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Recommended Investment Policy Changes
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Asset Category Current Target Current Benchmark New
Target New Benchmark
U.S. Equity 15.0% Russell 3000 Index (Tobacco Free)
Non-U.S. Developed Equity 7.5 MSCI World ex U.S. Index (Net) (Tobacco Free)
Emerging Market Equity 7.5 MSCI Emerging Market Index (Net)
Opportunistic Equity 10.0 MSCI All Country World Index (Net)
Global REITS 10.0 FTSE / EPRA / NAREIT Global REIT Index
Total Equity 50.0% 35.0% MSCI All Country IMI World Index (Net) (Tobacco Free)
U.S. Core Gov’t. 2.5 Barclays U.S. Aggregate Government Index
U.S. Core Credit 7.5 Barclays U.S. Aggregate Credit Index
High Yield Debt 5.0 BofA / Merrill Lynch HY Cash Pay BB/B rated Index
Emerging Market Debt 5.0 JP Morgan Emerging Markets Bond Index Global Diversified
Total Fixed Income 20.0% 50.0% Barclays U.S. Aggregate
Absolute Return 10.0 HFRX Absolute Return Index (50%) + HFRX Market Directional Index (50%)
Cross Asset Class 20.0 Aggregate TRIP Policy Benchmark
Total Liquid Alternatives 30.0% 15.0% HFRX Absolute Return Index
(50%) + HFRX Market Directional Index (50%)
Liquidity -
TOTAL 100.0% Weighted Average of Underlying Benchmarks 100.0% Weighted Average of Underlying Benchmarks
