Oklahoma State Pension Commission public fund universe analysis report

              Oklahoma State
Pension Commission
Public Fund Analysis
August 24, 2011
Allan Martin, Partner
Don Stracke, CFA, Senior Consultant
Tony Ferrara, Senior Analyst
2
Greenwich Associates Universe
• A survey of 209 public funds over $250 million was done as of
December 31, 2010 to compare asset allocations of various public
funds.
• The breakdown of the participants by asset size are below:
3
Asset Allocation vs. Greenwich Associates Universe
• Asset allocations are compared with the 209 Public Fund defined benefit plans surveyed in
the 2010 Greenwich Associates universe (weighted averages in US dollars).
• The OK Teachers, PERS, Judges, and Wildlife plans have less exposure to alternatives in
comparison to like size Public Funds surveyed.
4
Asset Allocation Differences vs. Greenwich Associates Universe
Funded Ratios
5
Source: 2010 Greenwich Associates Survey
• All Plans rank well in terms
of funded ratio, except for
OK Teachers and Firefighters
which are in the lower
quartile of their respective
ranges.
• Investment returns have
improved but we have yet to
see an effect on funded
ratios as actuarial losses
from 2008 and early 2009
are still being smoothed out.
6
Investment Assumption
• The average investment assumption for responding funds is 7.7 percent. Approximately 23
percent of responding funds have reduced this assumption in the past two years, and an
additional 15 percent plan to do so in two years.
• Investment return assumptions:
• 8.0% for OK Teachers plan, 7.5% for all other plans.
Source: 2011 NCPERS Public Fund Study
7
• A survey of 72 public funds was done as of December 31, 2010 asking
about various topical issues facing public funds.
• The demographics of the participants are below:
RV Kuhns Public Fund Survey (SACRS)
8
Survey Results
What, if any, changes has the Plan made to its securities lending program in the last 2 years?
# of Funds
3 Increase the program
19 Decrease the program
1 Terminate the program
37 No changes
Total 60
2) Board Delegation
a) Does the Board delegate any investment decisions to Staff?
Yes No Total
37 20 57
65% 35% 100%
b) If so, which of the following decisions have been delegated?
# of Responses
4 Strategic Asset Allocation
19 Tactical Movements
37 Rebalancing
11 Manager Selection
9 Manager Termination
10 Security Selection in a Passive Internal Portfolio
10 Security Selection in an Active Internal Portfolio
3) Asset Liability
How often does your defined benefit plan conduct Asset Liability Studies?
# of Funds
6 Every year
18 Every 1-3 years
27 Every 3-5 years
3 Every 5+ years
Total 54
1) Securities Lending
# of Funds
% of Funds
Source: Public Fund Universe Analysis - SACRS.
9
4) Current Management
Yes No Total
23 35 58
40% 60% 100%
b) If yes, which of the following parties are engaged in the active management of currency?
# of Responses
3 Internal Staff
17 External Asset Manager (stocks, bonds or otherw ise)
5 External Standalone Currency Manager
Some funds marked more than one box.
# of Responses
12 0-25%
4 26-50%
3 51-75%
3 76-100%
# of Responses
11 0-25%
1 26-50%
1 51-75%
2 76-100%
5) Emerging Markets
a) Has the Plan increased its allocation of assets to emerging markets in the last 2 years?
Yes No Total
29 28 57
51% 49% 100%
b) Does the Plan intend to increase its allocation of assets to emerging markets in the next 2 years?
Yes No Total
23 28 51
45% 55% 100%
a) Does the Plan (or its managers) actively manage currency (including w ithin international stock or
bond mandates, standalone currency managers, or otherwise)?
c) If applicable, what percentage of the Plan's international equity allocation w ould you consider the
currency positions to be actively managed?
d) If applicable, w hat percentage of the Plan's international bond allocation w ould you consider the
currency positions to be actively managed?
# of Funds
% of Funds
# of Funds
% of Funds
# of Funds
% of Funds
Survey Results
Source: Public Fund Universe Analysis - SACRS.
10
Legislative Updates
• The proposals from each state range from drastic overhauls, such as switching
from defined benefit to defined contribution plans, to more incremental changes
such as increasing employee contribution rates, raising the retirement age and
changing benefit calculations.
• In addition, many of the states that fell short on contributions to their retirement
systems will need to show discipline in paying their annual bill as their budgets
continue to recover.
• Some recent legislative changes to benefits that have been made by the State of
Oklahoma in 2011:
– The normal retirement criteria for teachers and state employees was raised. Also,
requires provision of a funding source to fund future COLAs. The required COLA funding
provision is estimated to reduce OK PERS and Teachers unfunded by liabilities by 30%.
• Legislation that has been introduced in Oklahoma includes a proposal to replace
the Oklahoma Teachers Retirement System defined benefit plan with a defined
contribution plan and to replace it with a system that offers new employees a
choice between a defined contribution plan and a combined plan with defined
benefit and defined contribution components, known as “The New Education
Employees' Hybrid Retirement System.
Source: House Media Office, “Lawmakers to Consider Major Pension Reforms,” February 16, 2011
11
Sector Index 2008 2009 2010 Jan Feb Mar QTR 1 Apr May Jun QTR 2 July August 2011
Emerging FI BC Emerging ($US) -14.8% 34.2% 12.8% -0.3% 0.5% 1.4% 1.6% 1.4% 1.3% 0.7% 3.4% 2.0% 0.4% 7.4%
Muni Bonds BC Muni (unadj) -2.5% 12.9% 2.4% -0.7% 1.6% -0.3% 0.5% 1.8% 1.7% 0.4% 3.9% 1.0% 1.5% 7.0%
Global FI Citigroup WGBI 10.9% 2.6% 5.2% -0.0% 0.4% 0.3% 0.7% 3.2% -0.1% 0.2% 3.3% 2.3% -0.3% 6.1%
Core FI BC Aggregate 5.2% 5.9% 6.5% 0.1% 0.3% 0.1% 0.4% 1.3% 1.3% -0.3% 2.3% 1.6% 0.7% 5.1%
High Yield BC HY -26.2% 58.2% 15.1% 2.2% 1.3% 0.3% 3.9% 1.6% 0.5% -1.0% 1.1% 1.2% -1.9% 4.2%
REITS Wilshire REIT -39.2% 28.6% 28.6% 3.5% 4.6% -1.4% 6.7% 5.8% 1.6% -3.4% 3.9% 1.8% -12.4% -1.2%
Balanced Diversified* -26.9% 24.8% 14.4% 1.3% 2.5% 0.2% 3.9% 2.9% -0.6% -1.3% 1.0% -0.6% -5.5% -1.4%
LC Growth R1000 Growth -38.4% 37.2% 16.7% 2.5% 3.3% 0.1% 6.0% 3.4% -1.1% -1.4% 0.8% -1.0% -7.4% -2.1%
S&P 500 S&P 500 -37.0% 26.5% 15.1% 2.4% 3.4% 0.0% 5.9% 3.0% -1.1% -1.7% 0.1% -2.0% -7.2% -3.6%
Commodities DJ UBS Commodity -35.7% 18.9% 16.8% 1.0% 1.3% 2.1% 4.4% 3.5% -5.1% -5.0% -6.7% 3.0% -4.1% -3.8%
Large Cap Russell 1000 -37.6% 28.4% 16.1% 2.4% 3.5% 0.3% 6.2% 3.0% -1.1% -1.8% 0.1% -2.2% -7.6% -3.9%
LC Value R1000 Value -36.8% 19.7% 15.5% 2.3% 3.7% 0.4% 6.5% 2.7% -1.1% -2.1% -0.5% -3.3% -7.7% -5.6%
Intl. Dev. EAFE (net) -43.4% 31.8% 7.8% 2.4% 3.3% -2.2% 3.4% 6.0% -3.0% -1.3% 1.6% -1.6% -9.8% -6.8%
SMid Cap R2500 -36.8% 34.4% 26.7% 1.3% 4.9% 2.3% 8.7% 2.9% -1.2% -2.2% -0.6% -3.8% -10.4% -6.9%
SC Growth R2000 Growth -38.5% 34.5% 29.1% -0.6% 5.9% 3.8% 9.2% 3.6% -2.0% -2.1% -0.6% -3.9% -10.9% -7.0%
Intl. Emerging EM (net) -53.3% 78.5% 18.9% -2.7% -0.9% 5.9% 2.1% 3.1% -2.6% -1.5% -1.1% -0.4% -8.4% -8.1%
Small Cap Russell 2000 -33.8% 27.2% 26.9% -0.3% 5.5% 2.6% 7.9% 2.6% -1.9% -2.3% -1.6% -3.6% -10.3% -8.2%
SC Value R2000 Value -28.9% 20.6% 24.5% 0.1% 5.1% 1.4% 6.6% 1.6% -1.8% -2.5% -2.7% -3.3% -9.8% -9.5%
* 35% LC, 10% SC, 12% Intl, 3% Emerging, 25% FI, 5% HY, 5% Global FI, 5% REITS
PERFORMANCE THROUGH 8/5/2011
8/5/2011
Market Update: As of August 5, 2011
Sources: Lehman Live, Bloomberg, Wilshire
12
Market Environment – Yield Curve
12/31/2010
7/29/2011
8/5/2011
6/30/2011
0.00
0.50
1.00
1.50
2.00
2.50
3.00
3.50
4.00
4.50
6 mo 1 yr 2 yr 3 yr 5 yr 7 yr 10 yr 15 yr 20 yr
US Treasury Yield Curves
8/5/2011
13 8/5/2011
S&P 500 – 2010-Current (midday, August 8th)
950
1000
1050
1100
1150
1200
1250
1300
1350
1400
-15%
Current sell-off similar to
2010 market decline driven by
European peripheral country
Debt crisis, and before
announcement of QE2
-16%
• Securitized/sub-prime credit
crisis
• Major bank failure (Lehman)
served as catalyst
• Major liquidity squeeze
– Over-leveraged financials/hedge
funds
– Short-term lending frozen (TED
spread peaked at 467 bps)
– Flight to quality = Treasuries
• S&P 500 P-E (trailing) = 17.2
– VIX peaked at 80
• Optimism priced in across
markets leading into crisis
• Response to crisis – QE1
followed by QE2
• Developed sovereign credit
concerns
• Sovereign debt concerns (incl. US
downgrade) and economic growth
declines catalyze sell-off
• Less leverage across system
today
– Flight to quality = Treasuries and gold
– Reasonable liquidity and tighter money
market standards
– TED spread stable at 26 bps
• S&P 500 P-E (trailing) = 14.7
– VIX at 40 and climbing
• Optimism priced into corporate
earnings
– But growth and inflation expectations
are tepid
• Response to deteriorating
economic fundamentals/sell-off -
QE3 – QEn?
Evolving Crises: 2008 vs. Current Landscape
2008 2011
14 8/5/2011