Eastern Michigan University
Board of Regents
Quarter ending December 31, 2014
Investment Performance Analysis
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Table of Contents
Page
Transition Review
4
Performance Review
6
Context for Capital Market Assumptions
22
NEPC 2015 Observations & Actions
27
Asset Allocation Review
32
Observations & Actions – Detail
38
Appendix
43
2
NEPC UPDATES
Fourth Quarter 2014
Highlights of Fourth Quarter Happenings at NEPC
NEPC Research
Recent/Upcoming Events
Recent White Papers Posted
x Improving Asset Allocation with Factor
Analysis (November 2014) - Mark
Cintolo, CAIA, Research Consultant
2015 Market Outlook Webinar—January 22, 2015 at 3:00
PM EST
x NEPC’s 20th Annual Client Conference—May 19-20, 2015
in Boston at the Boston Convention & Exhibition Center
(BCEC)
x
x
x
Improving Governance Under an OCIO
Structure (October 2014) - Steven
Charlton, CFA, Director of Consulting
Services
NEPC Gives Back
A team of NEPC employees participated in Movember once
again this year. Movember is a global men’s health charity
requiring each ‘Mo Bro’ to sport a well-groomed mustache
during the entire month of November to raise funds and
awareness for men’s prostate cancer, testicular cancer, and
mental health. The team raised about $20,000 this year and
ranked #49 nationally! Additionally, NEPC employees
participated in Lee National Denim Day once again this year
and raised $1,745. Lee National Denim Day is a fundraiser that
takes place in October and was created by Lee Jeans to
support the American Cancer Society’s breast cancer
programs.
NEPC 2014 Defined Contribution Plan
& Fee Survey: What Plan Sponsors Are
Doing Now (October 2014) - Ross
Bremen, CFA, Partner; Dan Beaton,
Senior Analyst
Professional Staff Updates
x
New Partner: Sean Ruhmann, Partner, Director of Real Assets
Research
x
New Principals: Jeffrey Mitchell, CFA, CAIA, Principal, Senior
Consultant; Terri Sacramone, SPHR, Principal, Senior Human
Resources Manager; and Michael Sullivan, Principal, Senior
Consultant
x
We are also please to announch that Daniel Hennessy has joined
NEPC as a Senior Consultant located in our Redwood City, CA
office. Daniel will be focusing on Ta-Hartley and Public Funds in
the West.
NEPC Client Recognitions
Several of NEPC’s clients were recognized by CIO Magazine
recently. First, the October 2014 issue of CIO Magazine
ranked the Power 100 CIOs, which included Tim Barre, CIO
of Texas Tech University System (#59), and Don Pierce, CIO of
San Bernardino County Employees’ Retirement Association
(#61). Next, several NEPC clients were nominated for the CIO
2014 Industry Innovation Awards. Additionally, NEPC’s client
SBCERA was nominated for an Investor Intelligence Award in
‘Portfolio Design’.
3
Transition Review
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Performance Review
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Composite Performance
- The portfolio returned 0.2% for the 4th Quarter. The
portfolio lagged the Allocation Index by 40 basis
points.
Fourth Quarter Transition
- Performance of prior managers and partial month
performance of newly funded managers is reflected at
the composite level.
Recommendations / Recent Decisions
- The newly approved Asset Allocation and manager
lineup was implemented during the 4th Quarter.
- The Long Term Investment Pool transition is
complete.
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Investment Options
Artisan Partners Limited
Partnership
Artisan Global Opportunities
Manager Changes/
Announcements
(Recent Quarter)
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NEPC Due Diligence
Committee Recommendations
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Commentary
NEPC Status
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Context for Capital Market Assumptions
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%XWLPSRUWDQWWRUHFDOOWKHUDQJHRIRXWFRPHVWKDWKDYHEHHQLQSOD\DORQJWKHZD\
•
•
6WLOOLQWKHPLGVWRIGUDZGRZQVIUR]HQFUHGLWPDUNHWVXQSUHFHGHQWHGPRQHWDU\SROLF\
4XDQWLWDWLYH(DVLQJ(XUR]RQHVWDELOLW\HWF
Low yields and core fundamentals suggest muted returns looking forward
24
.H\7KHPHVIRU
• Balance potential for short term strength with an acknowledgement of
lofty recent returns relative to global growth
– 5HDOORFDWHULVNDVDSSURSULDWHZKLOHPDLQWDLQLQJGRZQVLGHSURWHFWLRQDVDFRXQWHUZHLJKW
• US equity and credit similarly valued vs. history; near-term favors stocks
– &UHGLW
VOLPLWHGXSVLGHIURPSRWHQWLDO,*VSUHDGFRPSUHVVLRQRYHUDOOUHGXFWLRQLQOLTXLGLW\
DQGSUROLIHUDWLRQRI(7)VFRQWULEXWHWRDV\PPHWU\
– 5HDOHVWDWHDQGGLUHFWOHQGLQJWKRXJKOHVVOLTXLGFDQEHDVXEVWLWXWHIRUKLJK\LHOG
– 0DQDJHSULYDWHFRPPLWPHQWVDQGPDLQWDLQOLTXLGLW\WRH[SORLWGRZQWXUQV
• Non-US equity markets have not experienced the same rally as US
– 9DOXDWLRQVDQGPRQHWDU\HDVLQJVXSSRUWRYHUZHLJKWGRZQVLGHULVNVSRLQWWRFDXWLRQ
•
0XWHGUHWXUQH[SHFWDWLRQVDUHVHQVLWLYHWRELQDU\SROLF\GHFLVLRQVXSVLGHDQGGRZQVLGH
– (PHUJLQJJURZWKH[SHFWDWLRQVKDYHFRPSUHVVHG
•
•
&RPPRGLW\GULYHQFRXQWULHVIDFHSUHVVXUHVEXW86VWUHQJWKVXSSRUWVH[SRUWHUV
)XQGDPHQWDOVWUHQJWKYVGHYHORSHGOLNHO\WRZLQLQWKHORQJUXQ
– %HJOREDOO\GLYHUVLILHGKHGJHGHYHORSHGFXUUHQF\ULVNVDQGGRQ
WIOHH(0
• We are one year closer to rate hikes by the Federal Reserve
– &XUYHKDVVKLIWHGLQDQWLFLSDWLRQPDNLQJERWKFDVKVKRUWGXUDWLRQDQGORQJERQGVUHODWLYHO\
PRUHDWWUDFWLYHWKDQFRUHGXUDWLRQ
– /RQJUDWHVOLNHO\UDQJHERXQGGXHWRG\QDPLFVRIVXSSO\VKULQNLQJGHILFLWVDQGGHPDQG
LQFUHDVLQJ/',KHGJHUVJOREDOLQYHVWRUVDJLQJSRSXODWLRQRIVDYHUV
– %DUEHOORIORQJWUHDVXULHVDQGFDVKFDQRIIHUVLPLODUFRUHERQGGXUDWLRQYRODWLOLW\\LHOGDQG
DKLJKHUVHQVLWLYLW\WRUHFHVVLRQSURWHFWLRQFRXQWHUZHLJKW
25
,PSRUWDQFHRI5HDO<LHOGVRQ*OREDO0DUNHW5HWXUQV&DXWLRQWRRXU2SWLPLVP
•
Many investors surprised by
market impact of Bernanke’s
taper comments in Spring 2013
–
–
–
–
7KH3ULPDU\GULYHUZDVDFKDQJHLQ
XQGHUO\LQJJOREDOUHDO\LHOGV
0DUNHWGLVFRXQWUDWHVLQFUHDVHG
GULYLQJGRZQSUHVHQWYDOXHV
$QGWKHVXUSULVHFKDQJHLQ
H[SHFWDWLRQVRIWLJKWHUSROLF\
VSRRNHGVHQWLPHQW
86PDUNHWVWUHQJWKPD\QRWSHUVLVW
ZLWKDUHSHDWRFFXUUHQFH
Source: Bloomberg as of 11/30
•
Real yields in 2014 reversed
the normalization trend of 2013
and are a key component of
lower 5-7 year expected
returns in 2015
–
–
86JDYHXSIDUOHVVWKDQRWKHU
GHYHORSHGPDUNHWV
*UDYLW\RIORZLQWHUHVWUDWHVLQ
*HUPDQ\DQG-DSDQPD\GUDZ86
UDWHVORZHU
Source: Bloomberg as of 11/30
26
1(3&2EVHUYDWLRQVDQG$FWLRQV
27
1(3&&DSLWDO0DUNHW2EVHUYDWLRQV
• Protracted bull market, slow growth, and low interest rates persist
– &DXWLRXVRSWLPLVPIRU86HFRQRP\EXWOHQJWKDQGVWUHQJWKRIUDOO\ZDUUDQWVLQTXLU\
– 1HJDWLYHUHDOLQWHUHVWUDWHVKDYHVXSSRUWHGHOHYDWHGYDOXDWLRQVDQGORZYRODWLOLW\
– ,QYHVWRUFRPSODFHQF\FRXSOHGZLWKORZHUOLTXLGLW\PD\OHDYHPDUNHWPRUHYXOQHUDEOH
• Global monetary policies and capital markets continue to diverge
– 7KH86VXFFHVVIXOO\QDYLJDWHGWKHHQGRITXDQWLWDWLYHHDVLQJLQZKLOH(XURSH
SRQGHUHGDQG-DSDQSXUVXHGIXUWKHUDJJUHVVLYHPRQHWDU\SROLF\
– 5HJLRQDOHTXLW\PDUNHWYDOXDWLRQGLYHUJHQFHJUHZDV863(UDWLRVH[SDQGHG
• The US economy shows strength relative to other developed markets
– ,PSURYLQJODERUPDUNHWVLQFUHDVLQJFRQILGHQFHDQGH[SHFWHGULVHLQLQWHUHVWUDWHVDUH
VXSSRUWLYHRIDVWURQJHUGROODUZKLFKKDVEHHQDKHDGZLQGIRUIRUHLJQH[SRVXUHV
– 0HDQLQJIXOVWUXFWXUDOUHIRUPDQGFRQWLQXHGDJJUHVVLYHPRQHWDU\SROLF\DUHUHTXLUHGLQ
(XURSH-DSDQWRSURSHODVVHWVKLJKHU
• Fed rate hikes are on the horizon but markets expect a slow pace
– +LJK86JURZWKPD\VSXUDFFHOHUDWHGKLNHGHFRXSOLQJUDWHVIURPPDUNHWH[SHFWDWLRQV
– )HGWLJKWHQLQJLVDILUVWVWHSLQDPXOWL\HDUSROLF\QRUPDOL]DWLRQSURFHVV
• Emerging Market fatigue tangible; low valuations cannot be ignored
– 6KRUW DQGPHGLXPWHUPFKDOOHQJHVFDPRXIODJHORQJWHUPHFRQRPLFJURZWKSURVSHFWV
– 3OXPPHWLQJHQHUJ\SULFHVKDYHSRWHQWLDOWRFUHDWHFKDOOHQJHVIRUFHUWDLQHFRQRPLHV
28
1(3&*HQHUDO$FWLRQVIRU&OLHQWV
• Confirm alignment of portfolio positioning with long-term objectives
– 5HFRJQL]HLQYHVWPHQWSURJUDP¶VWROHUDQFHWRZLWKVWDQGVKRUWWHUPYRODWLOLW\
– 6RPHWUDGLWLRQDODSSURDFKHVVXFKDVFRUHERQGVVXERSWLPDOLQFXUUHQWHQYLURQPHQW
• Balance desire for increased return with recognition of downside risks
– %DUEHOOSRUWIROLRULVNZLWKGHIHQVLYHDOORFDWLRQVWRZLWKVWDQGUDQJHRIRXWFRPHV
– 6KLIWMXGLFLRXVO\DFURVVDQGZLWKLQDVVHWFODVVHV
•
•
6WUHWFKHGOLTXLGFUHGLWPDUNHWVPDNHHTXLWLHVUHODWLYHO\PRUHDWWUDFWLYH
5HFRJQL]HSRWHQWLDOIRUQRQ86GHYHORSHGPDUNHWVWRUHDFWWR4(SURJUDPVERWKFRQWLQXHG
%DQNRI-DSDQDQGSRWHQWLDO(XURSHDQ&HQWUDO%DQN
• Evaluate impact of expected US dollar strength on non-US allocations
– &RQVLGHUVWUDWHJLFGHYHORSHGPDUNHWFXUUHQF\KHGJLQJSURJUDPWRPLWLJDWHULVN
– 6FUXWLQL]HDOORFDWLRQWRDQGLPSOHPHQWDWLRQZLWKLQHPHUJLQJPDUNHWV
•
•
$WWUDFWLYHIXQGDPHQWDOVDQGVHFXODUWUHQGVZDUUDQWPDUNHWZHLJKWDWDPLQLPXP
&KDOOHQJLQJFRXQWU\VSHFLILFFRQGLWLRQVVXSSRUWSXUVXLWRIEROGDFWLYHPDQDJHPHQW
• Remain committed to high conviction active manager exposures
– 3DVVLYHWUHQGVDQGPDUNHWFRPSODFHQF\PD\LJQLWHGRUPDQWDOSKDRSSRUWXQLWLHV
– 8VHQRQWUDGLWLRQDOVWUDWHJLHVZLWKUHGXFHGFRQVWUDLQWVDFURVVPDUNHWVWRFDSLWDOL]H
•
*OREDOHTXLW\WDFWLFDOFUHGLWVWUDWHJLHV*$$OLTXLGDOWHUQDWLYHEHWDJOREDOPDFUR
• Seek niche private strategies to mitigate challenge of high valuations
– (QHUJ\(XURSHDQ5HDO(VWDWHVHFWRUIRFXVHGJURZWKHTXLW\$VLDIRFXVHGPDQDJHUV
DQGVHOHFWGLUHFWOHQGLQJPDUNHWVDOOSURYLGHFRPSHOOLQJRSSRUWXQLWLHV
29
1(3&$FWLRQVIRU(QGRZPHQW)RXQGDWLRQ&OLHQWV
• Strike the appropriate balance between offense and defense
– 1LFKHDUHDVOLNHHQHUJ\(XURSHDQUHDOHVWDWHVHFWRUIRFXVHGJURZWKHTXLW\$VLDIRFXVHG
PDQDJHUVDQGVHOHFWGLUHFWOHQGLQJPDUNHWVDOOSURYLGHFRPSHOOLQJRSSRUWXQLWLHV
– 2QWKHPDUJLQFRQVLGHUUHGXFLQJOLTXLGFUHGLWIRURWKHUUHWXUQVHHNLQJDVVHWV
– 3ULYDWHHTXLW\DQGGHEWLQYHVWPHQWVDOORZIRUWDFWLFDOGHSOR\PHQWRIFDSLWDO
• Review inflation hedging allocations in light of recent market action
– 6RPHDUHDVKDYHOLNHO\VROGRIIPRUHWKDQLVZDUUDQWHG
– 3ULYDWHUHDOHVWDWHDQGUHDODVVHWLQYHVWPHQWVRIIHUDWWUDFWLYHRSSRUWXQLWLHV
• Fixed income allocation should remain low and focused on high quality,
liquid exposures
– %DUEHOOSRUWIROLRULVNZLWKGHIHQVLYHDOORFDWLRQVWRZLWKVWDQGUDQJHRIRXWFRPHV
– 5LVNSDULW\DQGXQFRQVWUDLQHGVWUDWHJLHVFDQDOVRVDWLVI\WKHKLJKTXDOLW\DOORFDWLRQ
• Focus on global macro ideas within hedge fund portfolio
– 'LYHUJLQJFHQWUDOEDQNSROLFLHVSUHVHQWRSSRUWXQLW\IRURXWVL]HGUHWXUQV
– %URDGOLTXLGRSSRUWXQLW\VHW
• Remain committed to high conviction active manager exposures,
especially in emerging markets
– 3DVVLYHWUHQGVDQGPDUNHWFRPSODFHQF\PD\LJQLWHGRUPDQWDOSKDRSSRUWXQLWLHV
• Weigh the pros and cons of currency hedging in select areas
– &DQPLWLJDWHULVNEXWPD\EHDORZHUSULRULW\LWHPIRUVRPHSURJUDPVEDVHGRQHDVHRI
LPSOHPHQWDWLRQ
30
'HYHORSPHQWRI$VVHW&ODVV$VVXPSWLRQV
• Combination of historical data and forward-looking analysis
– ([SHFWHGUHWXUQVEDVHGRQFXUUHQWPDUNHWSULFLQJDQGIRUZDUGORRNLQJHVWLPDWHV
– 9RODWLOLW\EDVHGRQKLVWRU\ZKLOHUHFRJQL]LQJFXUUHQWXQFHUWDLQW\
– &RUUHODWLRQVEDVHGRQDPL[RIKLVWRU\DQGFXUUHQWWUHQGV
• Historical data is used to frame current market environment as well
as to compare to similar historical periods
– +LVWRULFDOLQGH[UHWXUQVYRODWLOLW\FRUUHODWLRQVYDOXDWLRQVDQG\LHOGV
• Forward-looking analysis is based on current market pricing and a
“building blocks” approach
– 5HWXUQHTXDOV\LHOGFKDQJHVLQSULFHYDOXDWLRQGHIDXOWVHWF
– 8VHRINH\HFRQRPLFREVHUYDWLRQVLQIODWLRQUHDOJURZWKGLYLGHQGVHWF
– 6WUXFWXUDOWKHPHVVXSSO\DQGGHPDQGLPEDODQFHVFDSLWDOIORZVHWF
• Assumptions prepared by NEPC’s Asset Allocation Committee
– $VVHW$OORFDWLRQWHDPSOXVPHPEHUVRIYDULRXVFRQVXOWLQJSUDFWLFHJURXSVPHHW
WKURXJKRXW4WRGHYHORSWKHPHVDQGDVVXPSWLRQV
– 3XEOLFPDUNHWVKHGJHIXQGVDQGSULYDWHPDUNHWVWHDPVSURYLGHPDUNHWLQVLJKWV
• Assumptions and Actions reviewed and approved by Partners
Research Committee
31
Asset Allocation Review & 2015 Asset
Class Assumptions
32
(DVWHUQ0LFKLJDQ8QLYHUVLW\$VVHW$OORFDWLRQ5HYLHZ
5 – 7 Year Outlook
2015
Long Term
Change
Assumptio
Target
from 2014
n
'RPHVWLF$OO&DS (TXLW\
,QWHUQDWLRQDO(TXLWLHV
(PHUJLQJ ,QWHUQDWLRQDO
(TXLWLHV
*OREDO (TXLW\
Total Equity
35%
&RUH %RQGV
(PHUJLQJ0DUNHW'HEW
*OREDO0XOWL6HFWRU)L[HG
,QFRPH
$EVROXWH5HWXUQ)L[HG
,QFRPH
Total Fixed Income
25%
5HDO$VVHWV/LTXLG
+HGJH)XQGV
Total Alternatives
20%
6WDQGDUG/LIH*$56
$45*53(/
Total GAA / Risk Parity
Expected Return
(compound)
20%
Expected Risk (volatility)
Sharpe Ratio
2014 Expected Return
(compound)
2014 Expected Risk
(volatility)
2014 Sharpe Ratio
•
After exceptional capital market
returns over the past three years,
most future expectations are more
muted
–
–
•
With real yields in 2014 reversing
the normalization trend of 2013,
fixed income return expectations are
lower
–
•
6.2%
11.9%
0.38
6.1%
11.3%
0.41
33
$OORI1(3&¶V\HDUHTXLW\
DVVXPSWLRQVDUHORZHUDVFRPSDUHGWR
7KHH[SHFWHGUHWXUQIRUKHGJHIXQGVLV
H[SHFWHGWRLQFUHDVHE\EDVLVSRLQWV
/RZLQWHUHVWUDWHVLQ-DSDQDQG*HUPDQ\
PD\GUDZ86UDWHVORZ
Even with the 2015 revisions, the
portfolio still is attractive from a
risk/return perspective
(DVWHUQ0LFKLJDQ8QLYHUVLW\5LVN%XGJHWLQJ
&RPPRG
$EV5HW),
*EO0XOWL6HFWRU),
+)
+) &UHGLW
+) 0DFUR
+)
(PHUJ
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O
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+<
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34
WR<HDU5HWXUQ)RUHFDVWV
Geometric Expected Return
Asset Class
&DVK
7UHDVXULHV
,*&RUS&UHGLW
0%6
Core Bonds*
7,36
+LJK<LHOG%RQGV
%DQN/RDQV
*OREDO%RQGV8QKHGJHG
*OREDO%RQGV+HGJHG
(0'([WHUQDO
(0'/RFDO&XUUHQF\
/DUJH&DS(TXLWLHV
6PDOO0LG&DS(TXLWLHV
,QW
O(TXLWLHV8QKHGJHG
,QW
O(TXLWLHV+HGJHG
(PHUJLQJ,QW
O(TXLWLHV
3ULYDWH(TXLW\
3ULYDWH'HEW
3ULYDWH 5HDO$VVHWV
5HDO(VWDWH
&RPPRGLWLHV
+HGJH)XQGV
2014
2.53%
2015
2.30%
2015-2014
-0.23%
&RUH%RQGVDVVXPSWLRQEDVHGRQPDUNHWZHLJKWHGEOHQGRIFRPSRQHQWVRI$JJUHJDWH,QGH[7UHDVXULHV,*&RUS&UHGLWDQG0%6
35
2015 Volatility Forecasts
Volatility
Asset Class
Cash
Treasuries
IG Corp Credit
MBS
Core Bonds*
TIPS
High-Yield Bonds
Bank Loans
Global Bonds (Unhedged)
Global Bonds (Hedged)
EMD External
EMD Local Currency
Large Cap Equities
Small/Mid Cap Equities
Int'l Equities (Unhedged)
Int'l Equities (Hedged)
Emerging Int'l Equities
Private Equity
Private Debt
Private Real Assets
Real Estate
Commodities
Hedge Funds
2014
1.00%
6.00%
7.50%
7.00%
6.32%
7.50%
13.00%
8.00%
8.50%
5.00%
12.00%
15.00%
17.50%
21.00%
20.50%
18.50%
26.00%
27.00%
19.00%
23.00%
17.00%
18.00%
9.00%
2015
1.00%
5.50%
7.50%
7.00%
6.03%
7.50%
13.00%
8.00%
9.00%
5.00%
12.00%
15.00%
17.50%
21.00%
21.00%
17.50%
26.00%
27.00%
17.00%
23.00%
15.00%
18.00%
9.00%
2015-2014
-0.50%
-0.29%
0.50%
0.50%
-1.00%
-2.00%
-2.00%
* Core Bonds assumption based on market weighted blend of components of Aggregate Index (Treasuries, IG Corp Credit, and MBS).
36
5HODWLYH$VVHW&ODVV$WWUDFWLYHQHVV
37
Observations and Actions – Detail
38
<HDU5HWXUQV&RPPHQVXUDWHZLWK*URZWK1HDU7HUP6WUHQJWK&DQ3HUVLVW
•
Global growth forecasts low
but approaching pre-crisis
levels with less reliance on
China
–
–
–
•
$EVROXWHILJXUHVSURMHFWHGWR
LPSURYHIRUWKH86DQG:RUOG
(XURSHMRLQV-DSDQDVDGUDJRQ
JOREDOJURZWK
&KLQDH[SHFWDWLRQVFRPSUHVVEXW
UHPDLQTXLWHKLJK
Source: Bloomberg as of 11/30
S&P rally unlikely to persist for
another 5-7 years
–
–
–
/RZIRUORQJHULQWHUHVWUDWHVPD\
SURYLGHQHDUWHUPVXSSRUWIRU
KLJKHUYDOXDWLRQV
7HSLGJURZWKOHYHOVFKDOOHQJHDELOLW\
WRH[WHQGRXWVL]HGUHWXUQVRYHUWKLV
KRUL]RQDVVWLPXOXVZDQHV
:KLOHSHUFHLYHGWDLOHQGVRIEXOO
PDUNHWVFDQEHIDOVHVLJQVWKH
FXUUHQWOHQJWKDQGPDJQLWXGHLV
RQO\RXWSDFHGE\µµDQGµ
µ
Bubble Size = P-E at peak
Source: Bloomberg and Shiller Data as of 9/30
39
3ROLF\DQG0DUNHW'LYHUJHQFHV&RQWLQXHWR'HYHORS
•
Central bank stimulus has been
a key driver of market returns
–
–
–
3RVWFULVLVPRQHWDU\SROLF\ZDVILUVW
KLJKO\VWLPXODWLYHZDQHGLQ
WKHQUHVXPHGXQHYHQO\
*UHDWHUVWLPXOXVOHGWRVWURQJlocal
PDUNHWUHWXUQV
&RQWLQXHGVWLPXOXVLQ-DSDQDQG
(XURSHVKRXOGEHLQFRUSRUDWHGLQWR
RXWORRNEXWKHGJLQJGHYHORSHG
PDUNHWFXUUHQF\H[SRVXUHLV
SUXGHQW
Source: Bloomberg as of 11/30
•
Policy responses have been key
driver of capital market results
–
–
'LVWLQFWHFRQRPLFHQYLURQPHQWV
DFURVVFRXQWULHVOHDGVWR
GLIIHUHQWLDWLRQLQPDUNHWUHWXUQV
(YROYLQJPRQHWDU\SROLFLHVFRQWLQXH
WRGLYHUJHDQGOLNHO\OHDGWRPRUH
LQGHSHQGHQWFDSLWDOPDUNHW
RXWFRPHVDPRQJFRXQWULHV
Source: Bloomberg as of 11/30 - Local indices consist of Australia, Europe, UK,
Emerging Markets, Japan, New Zealand, US, and Canada
40
)HG5DWH+LNHV([SHFWHGLQ7LPLQJDQG3DFH$UH8QFHUWDLQ
•
Fed governors (blue dots)
project higher rates over the
next few years
–
–
0DUNHWH[SHFWDWLRQVJUHHQGRWV
DUHOHVVDPELWLRXVZLWKUHDOLW\OLNHO\
LQEHWZHHQ
8SVLGHVXUSULVHWRSDFHRUOHYHORI
LQWHUHVWUDWHVVXSSRUWLYHRIKLJKHU
86'QHJDWLYHIRU86ULVNDVVHWV
/RQJ7HUP
•
Source: Bloomberg and Federal Open Market Committee as of 11/30
Low real rates suppressed by
central banks, squeeze
expectations for future returns
–
–
–
–
8.(XURSH-DSDQDOOZLWK
QHJDWLYH\HDUUHDO\LHOGV
86ERQGVORRNUHODWLYHO\DWWUDFWLYH
LQWKLVFRQWH[W
5HDOUDWHVPRYLQJORZHUWRZDUG
SHHUVLVEXOOLVKIRUULVNDVVHWV
/RQJWHUPQRUPDOL]HGPRQHWDU\
SROLF\FRXOGUHYHUVHWKHWUHQG
Source: Bloomberg as of 11/30
41
6WUXFWXUDO/RQJ7HUP3RVLWLYHVRI(PHUJLQJ0DUNHWV5HPDLQ6R'R,GLRV\QFUDWLF5LVNV
•
Emerging markets have higher
growth and lower debt levels
vs. developed markets
–
–
•
•
1HDUWHUPULVNVDUHSUHVHQWDVERWK
&KLQDDQGFRPPRGLW\F\FOHVORZV
6WURQJGROODUZLOOKXUWVRPH
FXUUHQFLHVEXWZLOODOVRDLG
H[SRUWHUVKHOSLQJ(0JURZWK
Local currency debt offers a
compelling yield but paired
with heightened volatility
Source: IMF as of 10/31
Both exogenous and internal
factors can drive major shifts
across countries
–
–
'URSLQHQHUJ\SULFHVLQLVD
UHFHQWVWUXFWXUDOVKLIWWKDWZLOOKDYH
DPDMRULPSDFWRQFHUWDLQFRXQWULHV
9HQH]XHOD1LJHULD5XVVLDDQG
VHYHUDOIURQWLHUFRXQWULHV
Source: Bloomberg as of 11/30
42
Appendix
43
,QIRUPDWLRQ'LVFODLPHU
• Past performance is no guarantee of future results.
• The goal of this report is to provide a basis for substantiating asset
allocation recommendations. The opinions presented herein
represent the good faith views of NEPC as of the date of this report
and are subject to change at any time.
• Information on market indices was provided by sources external to
NEPC. While NEPC has exercised reasonable professional care in
preparing this report, we cannot guarantee the accuracy of all source
information contained within.
• All investments carry some level of risk. Diversification and other
asset allocation techniques do not ensure profit or protect against
losses.
• This report is provided as a management aid for the client’s internal
use only. This report may contain confidential or proprietary
information and may not be copied or redistributed to any party not
legally entitled to receive it.
44
$OWHUQDWLYH,QYHVWPHQW'LVFORVXUHV
It is important that investors understand the following characteristics of nontraditional investment strategies including hedge funds and private equity:
1. Performance can be volatile and investors could lose all or a substantial
portion of their investment
2. Leverage and other speculative practices may increase the risk of loss
3. Past performance may be revised due to the revaluation of investments
4. These investments can be illiquid, and investors may be subject to lock-ups
or lengthy redemption terms
5. A secondary market may not be available for all funds, and any sales that
occur may take place at a discount to value
6. These funds are not subject to the same regulatory requirements as
registered investment vehicles
7. Managers may not be required to provide periodic pricing or valuation
information to investors
8. These funds may have complex tax structures and delays in distributing
important tax information
9. These funds often charge high fees
10.Investment agreements often give the manager authority to trade in
securities, markets or currencies that are not within the manager’s realm of
expertise or contemplated investment strategy
45