Investment Update - FOIALTS.com · 2017. 9. 30. · September 30, 2017 3 Table of Contents CIO Update 4 Risk Management 10 Private Equity 16 Real Estate 20 Natural Resources 23 Domestic

Investment UpdateAs of September 30, 2017

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September 30, 2017 3

Table of Contents

CIO Update 4Risk Management 10Private Equity 16Real Estate 20Natural Resources 23Domestic Equity 25International Equity 31Fixed Income (High Yield) 36Fixed Income (Broad) 39Fixed Income (US Treasury & Agency) 43Fixed Income (TIPS) 44Fixed Income (Mortgage Backed Securities) 45Fixed Income (Investment Grade Credit) 46STIP 47State Fund 50Trust Funds Investment Pool 53Appendix 57


CIO Update – Pension Plans Performance

Name 1 Year 3 Year 5 Year 10 Year 20 Year

Public Employees 12.10 7.39 9.41 5.42 6.37Teachers 12.06 7.39 9.41 5.42 6.38Firefighters 12.10 7.39 9.41 5.41 6.30Police 12.09 7.39 9.41 5.39 6.28Sheriffs 12.11 7.39 9.40 5.42 6.34Game Wardens 12.11 7.39 9.40 5.41 6.32Highway Patrol 12.08 7.39 9.41 5.42 6.32Judges 12.12 7.40 9.41 5.43 6.33Vol. Firefighters 12.09 7.36 9.40 5.40 6.60

Retirement Plans Performance

• Dollar Value Added – The total dollar return of the portfolio including income and capital gains.

• Net Cash Need - The total dollar amount distributed from portfolio assets to meet the deficit of contributions minus distributions.

• A red bar indicates an aggregate net outflow by all plans even though some plans may have experienced net inflows.• Though aggregates are shown, each plan is independent and not able to rely on other plans to meet their respective

liabilities.

5September 30, 2017

10,269 11,258

249 1,238

02,0004,0006,0008,000

10,00012,00014,000

9/30/2016 Dollar ValueAdded

Net Cash Need 9/30/2017

Mil

lio

ns

Asset Changes1 Year

Decrease Increase

8,071 11,258

1,124 4,311

02,0004,0006,0008,000

10,00012,00014,000



Mil

lio

ns

Asset Changes5 Year

Decrease Increase

8,318 11,258

1,901 4,841

02,0004,0006,0008,000

10,00012,00014,000



Mil

lio

ns

Asset Changes10 Year

Decrease Increase


CIO Update – Size of Pension Plans and Change during Previous Year

% of Total 09/30/2017 09/30/2016 ChangePublic Employees 49.7% 5,598,839,166 5,122,035,900 476,803,266 Teachers 36.1% 4,059,502,076 3,722,327,030 337,175,047 Firefighters 3.6% 404,795,840 357,443,978 47,351,861 Police 3.5% 392,896,543 348,848,852 44,047,691 Sheriffs 3.0% 340,836,661 305,533,736 35,302,925 Game Wardens 1.6% 181,796,296 158,832,164 22,964,132 Highway Patrol 1.3% 143,580,309 130,526,115 13,054,195 Judges 0.9% 99,111,838 89,542,509 9,569,329 Vol. Firefighters 0.3% 36,736,685 33,890,699 2,845,986 Total 100.0% 11,258,095,413 10,268,980,981 989,114,432


CIO Update – Pension Plans Allocations by Pool

2.0%1.9%1.8%1.8%2.0%1.9%1.9%2.7%1.9%

0% 20% 40% 60% 80% 100%

Vol. FirefightersJudges

Highway PatrolGame Wardens

SheriffsPolice

FirefightersTeachers

Public Employees

Plan by Pool

STIP CAPP

$11,258,095,413


CIO Update – Asset Class Benchmark Returns

1 YR 5 YR 10 YR 15 YR 20 YRMSCI ACWI ex USA

IMI 19.61%

MSCI US IMI14.26%

MSCI USA SMALL CAP

8.63%

MSCI USA SMALL CAP

12.29%

MSCI US REIT8.87%

MSCI USA SMALL CAP

19.12%

MSCI USA SMALL CAP

14.17%

BARC US HY7.92%

MSCI US REIT10.74%

MSCI US IMI7.37%

MSCI US IMI18.63%

MSCI ACWI ex USA IMI

10.90%

MSCI US IMI7.72%

MSCI US IMI10.57%

BARC US HY6.91%

Private Equity Cash Equivalents

MSCI AC World Commodity

12.24%

MSCI US REIT9.58%

MSCI US REIT5.79%

BARC US HY9.39%

PERS6.37%

Domestic EquityUS

Treasury/Agency

PERS12.10%

PERS9.41%

PERS5.42%


8.05%

BARC US Corp Inv Grd

5.47%

International Equity

Broad Fixed Income

BARC US HY8.87%

BARC US HY6.37%


5.01%

PERS7.97%

BARC US Agg5.12%

High Yield Mortgage-Backed


1.84%


2.86%

BARC US Agg4.27%


7.26%

BARC US MBS4.98%

Real Estate Natural Resources

LIBOR 1 MONTH0.96%

BARC US Agg2.06%

BARC US MBS4.13%


4.90%

BARC TSY4.21%

Investment Grade Credit

TIPS

MSCI US REIT0.54%

BARC US MBS1.96%

BARC US TIPS3.27%

BARC US Agg4.23%

LIBOR 1 MONTH2.34%

BARC US MBS0.30%

BARC TSY1.00%

BARC TSY3.15%

BARC US MBS4.14%

BARC US Agg0.07%


0.65%


2.85%

BARC US TIPS3.80%

BARC US TIPS-0.14%

LIBOR 1 MONTH0.38%

LIBOR 1 MONTH0.67%

BARC TSY3.10%

BARC TSY-0.73%

BARC US TIPS0.08%


-0.89%

LIBOR 1 MONTH1.50%

Legend


CIO Update – CAPP Asset Class Allocation

Asset Class Market Value % of Total Board Approved RangeDomestic Equity 3,881,420,416 35.2%International Equity 1,939,539,296 17.6%Private Equity 1,147,335,809 10.4%Natural Resources 234,629,271 2.1%Real Estate 862,309,161 7.8%TIPS 382,387,666 3.5%Broad Fixed Income 249,032,000 2.3%US Treasury & Agency 875,010,951 7.9%Investment Grade Credit 462,940,855 4.2%Mortgage-Backed 486,699,548 4.4%High Yield 218,839,314 2.0%Cash 272,966,817 2.5%Total 11,013,111,105 100.0%

Total Fixed income 2,674,910,335 24.3%

9% - 15%12% - 18%24% - 38%

2% - 6%5% - 14%1% - 3%0% - 4%4% - 12%

15% Minimum

1% - 6%1% - 5%2% - 8%

0% - 6%

Risk Management Overview

• Monitor Liquidity, Manager, Sector and Country risk exposures

• Continuous compliance checks to ensure portfolios are within policy guidelines

• Actively participate in asset allocation discussions with an overall risk perspective

• Performance Attribution by Asset Class

10September 30, 2017





CAPP Exposures



CAPP Regional Exposures



CAPP Sector Exposures

SectorDomestic

EquityInternational

EquityPrivate Equity

Natural Resources

Real Estate

Fixed Income

Cash Equivalents Grand Total

US TREASURY / AGENCY 16.3 16.3 FINANCIALS 5.1 3.6 1.0 0.0 2.4 12.2 INFORMATION TECHNOLOGY 7.6 2.3 1.7 0.5 12.1 REAL ESTATE 1.1 0.6 0.1 7.4 0.9 10.0 INDUSTRIALS 4.2 2.4 2.6 0.0 0.4 9.6 CONSUMER DISCRETIONARY 4.4 2.1 1.6 1.1 9.2 HEALTH CARE 4.5 1.2 1.3 0.4 7.4 CASH EQUIVALENT 1.3 0.6 0.1 0.0 0.5 0.4 2.5 5.3 CONSUMER STAPLES 2.2 1.5 0.6 0.6 4.9 ENERGY 1.9 1.0 0.4 1.0 0.5 4.8 MATERIALS 1.6 1.2 0.7 1.0 0.2 4.6 TELECOMMUNICATION SERVICES 0.5 0.6 0.2 0.4 1.7 UTILITIES 0.9 0.4 0.1 0.1 0.2 1.6 OTHER 0.1 0.0 0.0 0.1 Grand Total 35.2 17.6 10.4 2.1 7.8 24.3 2.5 100.0



Relevant Benchmark: CAPP Custom Benchmark

Private Equity Overview

Environment• Private equity firms invested $163.4B across 959 PE deals in the US during

3Q17, bringing year-to-date totals to $401.7B in deal value across 2,820 transactions. Despite the prolonged elevation in fundraising, deal volume through the first three quarters is down 11% compared to the first three quarters of 2016

• M&A activity in North America and Europe has totaled $1.4T across 13,972 deals through 3Q17,declines of 19% and 23% from the same period last year

• Average purchase price multiples across all US leverage buyout deals in 3Q17 increased to 11.2x from an average of 10.0x for the full year 2016

• US VC-backed companies saw $19B in total funding, invested across 1,207 deals. Deals were even with last quarter, but down 6% over the same quarter last year



Environment (con’t)• Deal activity increased 3% in 3Q17, as $42B was invested across 2,645 deals

to VC-backed companies globally. This represents a 4% decrease in total funding vs. 2Q17 but remains 47% greater than 1Q17

• US IPO issuance for 3Q17 saw 35 companies raise $6.3B, a decline of 42% and 51% respectively from volumes and values seen in the prior quarter

• Fundraising activity has slowed compared to the previous quarter, with 75 fewer funds reaching a final close and $42B less in aggregate capital raised by these vehicles

• Record amounts of private equity dry powder stand at approximately $954B as of September 2017, almost $100B higher than the start of the year


Private Equity Performance

Relevant Benchmark: Private Equity – PAC Custom Blend


14.8%

12.0%

8.2%

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

16.0%

1 Year 5 Year 10 Year

Private EquityTotal Returns

-4.2%

-6.1%

-2.8%

-12.0%

-10.0%

-8.0%

-6.0%

-4.0%

-2.0%

0.0%


Private EquityRelative Return to Benchmark

Performance• 10-Year – 8.17% Net Internal Rate of Return as of 6/30/17• 10-Year – 8.2% Net Time-Weighted Return as of 9/30/17• Inception to Date – 12.6% Net Internal Rate of Return as of 6/30/17• Inception to Date – 12.2% Net Time-Weighted Return as of 9/30/17


Characteristics• Total Market Value of $1.1B as of 6/30/17• North American-centric at 67%, 33% non-US • Direct/primary fund exposure focus, approx. 72% vs. Fund-of-Funds at

approximately 28%• Buyout focused • Increasing allocation to direct lending strategies• Positive net cash flow of $31.3M for quarter ending 9/30/17


Real Estate Overview

Environment• Private commercial real estate market fundamentals in the US continue to be stable,

with near-record occupancies and positive net operating income growth trends • Aside from a few exceptions, supply growth has normalized and the risk of

overbuilding that hurt many previous real estate cycles appears minimal• Investment momentum continues to shift from primary into secondary markets, and

from central business districts (CBDs) into inner suburban submarkets• Pricing remains stable and reflects the firm fundamentals • Debt capital remains available and attractive for high quality properties• Lenders are tightening standards around their construction and development loans

demanding higher loan-to-value and debt service coverage ratios• 2017 global transaction volumes expected to top $1.4T, approximately in line with the

$1.37T volumes seen in 2016• The US continues to see the lion’s share of foreign capital inflow, while yields are at

cyclical lows, on a relative basis capital continues to access the sector as growth continues

• Dry powder continues to remain at record levels standing at $244B as of September 2017, $20B was raised in 3Q17, a 41% decrease from 2Q17


PerformanceReal Estate

Relevant Benchmark: MSCI US REIT


9.6%10.9%

3.2%

-4.0%

-2.0%

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%


Real EstateTotal Returns

3.1%

0.3%

-1.0%-2.0%

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%


Real EstateRelative Return to Benchmark

Performance• 10-Year – 3.2% Net Time-Weighted Return as of 9/30/17• 10-Year – 6.13% Net Internal Rate of Return as of 6/30/17• Inception to Date – 3.43% Net Time-Weighted Return as of 9/30/17• Inception to Date – 6.2% Net Internal Rate of Return as of 6/30/17• Montana Office Portfolio – 6.4% Net Internal Rate of Return as of 6/30/17

Real Estate Overview

Characteristics• Total Gross Market Value of $1.3B as of 6/30/17• Total Net Asset Value of $760M as of 6/30/17• North American-centric, broadly diversified, approximately 3% non-US• Broadly diversified across property types• Increased focus on property type specific operators• Negative net cash flow of $2.8M for quarter ending 9/30/17• Total Leverage – 45.77% as of 6/30/17

o Core – 17.55%o Non-Core – 58.60%


Natural Resources Overview

Environment• The price of oil remains range bound as markets continue to seek a catalyst

for price growth• With OPEC members continuing to produce at historic levels, Nigerian and

Libyan supply coming online and the ramp up in US shale production, global oil continues to be oversupplied

• There continues to be pockets of distress in the energy industry • Chinese demand for softwood logs and lumber continues to grow• Global softwood lumber and log prices have trended up in 2017 continuing

their momentum from 2016• US housing has largely returned to normal after 10 years, starts came in at

1.2M as of August 2017 on a seasonally adjusted annual rate

Performance• Inception to Date Energy Portfolio – 6.33% Net IRR as of 6/30/17• Inception to Date Timber Portfolio – 4.67% Net IRR as of 6/30/17• Inception to Date Natural Resources (Energy/Timber combined) – 4.7% Net

TWR as of 9/30/17


Natural Resources Overview

Characteristics• Total Market Value of Energy Portfolio - $109.2M as of 6/30/17• Total Market Value of Timberland Portfolio of $116.7M, Net Asset Value

of $104.6M as of 6/30/17• Both the energy and timber portfolios are North American-centric, but

broadly diversified regionally• Energy broadly diversified across the energy value chain, timber broadly

diversified across species and age class• Energy experienced negative net cash flow of $18.1M for quarter

ending 9/30/17 • Timber experienced positive net cash flow of $1.4M for quarter ending

9/30/17 • Timber Portfolio Total Leverage – 5.48% as of 6/30/17


Domestic Equity Overview


Environment

• US equities extended the current rally through September, tacking on mid single digit returns during the quarter.

• The US stock market has become quite confident that tax cuts and fiscal stimulus are on the horizon. Corporate earnings continue to strengthen amid improving economic growth, adding to investor confidence.

• As of the end of September, the S&P 500 Index was valued at 18x the estimated next 12 month earnings.

• Small capitalization stocks performed the best for the quarter, showing strong upside since the middle of August when the push for tax reform by the Trump Administration gathered steam.



MBOI Performance• The domestic equities asset class slightly outperformed its benchmark

during the past quarter.• Cash drag was minimal as cash at the asset class level was consistently <1%.• Size allocation added to performance for the period while manager

selection detracted slightly.• The performances of the actively managed portfolios collectively continues

to improve.• The asset class slightly lagged its benchmark for the 1 year and 5 year

periods.

Domestic Equity Performance

Relevant Benchmark: Domestic Equity – PAC Custom Blend


-0.19% -0.20% -0.36%

-5.00%

-3.00%

-1.00%

1.00%

3.00%

5.00%


Domestic EquityRelative Return to Benchmark

Domestic Equity – Active Managers Performance


-10.0%

-5.0%

0.0%

5.0%

10.0%

Allia

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Artis

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1 YearRelative Return to Benchmark

-10.0%

-5.0%

0.0%

5.0%

10.0%

Allia

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erns

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Artis

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DFA

Smal

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Iridi

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-10.0%

-5.0%

0.0%

5.0%

10.0%

Allia

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Artis

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DFA

Smal

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Iridi

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T. R

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-10.0%

-5.0%

0.0%

5.0%

10.0%

Allia

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Artis

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Iridi

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Domestic Equity – Active Managers Performance


-5.0%-3.0%-1.0%1.0%3.0%5.0%

Artis

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DFA

Smal

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T. R

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10 YearRelative Return to

Benchmark

-5.0%-3.0%-1.0%1.0%3.0%5.0%

Allia

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Characteristics and Activity• As usual there is a significant passive weight within the large cap allocation.• Cash level is <1% at the asset class level.• The overweight in mid cap stocks and small cap stocks relative to the

benchmark continues.• The domestic equities asset class benchmark was changed to the MSCI USA

IMI on May 1 and subsequently assets were moved from the S&P Index funds at BlackRock to the MSCI Index funds at BlackRock.

• The weighting of the small capitalization active portfolios was increased by $210 million during the quarter. Proceeds came from a reduction in the small capitalization passive portfolio.

• The Analytic Investors 130/30 portfolio was terminated during the quarter. Proceeds of $179 million were removed for the domestic equity asset class and moved to cash at the pension fund level.

International Equity Overview


Environment

• International equities extended their rally through September. Returns for the quarter were slightly higher than returns for US equities, mostly due to currency effects.

• An improving corporate earnings picture drove international equity markets in the quarter. The US dollar continued its slide, easing about 2% during the quarter, and adding to international returns for US investors.

• The advance in international stocks during the past 12 months has been broad based, but the outperformance versus US stocks has been largely driven by a generally weaker US dollar. Currency returns account for about half of the total returns for international equities.

• Similar to the US equity market, international small cap stocks posted higher returns in the quarter when compared to the large cap stocks.



Environment (con’t)

• Emerging market equities posted the highest returns; over 8% for the quarter.

• As of the end of the fiscal year, the MSCI ACWI ex US IMI Index was valued at 16x the estimated next 12 month earnings while the MSCI Emerging Markets Index was valued at 13x next 12 month earnings.

MBOI Performance• The international equities asset class slightly underperformed its

benchmark during the quarter.• Cash drag was minimal as cash at the asset class level was consistently <1%

for the quarter. Cap size allocation and an overweight to emerging markets added to performance for the period.

• The performance of the actively managed portfolios collectively continues to improve.

• The asset class has outperformed its benchmark for the calendar year to date, one year, and five year periods.

International Equity Performance

Relevant Benchmark: International Equity – PAC Custom Blend


0.29%

0.42%

-0.85%

-5.00%

-3.00%

-1.00%

1.00%

3.00%

5.00%


International EquityRelative Return to Benchmark

International Equity – Active Managers Performance


-8.0%-6.0%-4.0%-2.0%0.0%2.0%4.0%6.0%8.0%

10.0%

Acad

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0.0%1.0%2.0%3.0%4.0%5.0%

Acad

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DFA

Intl

SC


0.0%1.0%2.0%3.0%4.0%5.0%

Acad

ian

DFA

Intl

SC


-15.0%-10.0%

-5.0%0.0%5.0%

10.0%

Acad

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Amer

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Intl

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Fran

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Characteristics and Activity

• A heavy passive weight within the large cap allocation continues.

• Cash level is <1% at the asset class level.

• The international equities asset class continues to favor small capitalization stocks with an overweight in those stocks relative to the benchmark.

• This asset class also continues to carry an overweight in emerging markets stocks which has been in place since December 2016.

• There were no significant changes to positions in this asset class during the quarter.

High Yield Overview


Environment

• High yield spreads continued to grind tighter within the US bond market in the quarter and finished the period near their tightest levels in the past 20 years.

• More of the same, as US fixed income investors continued to reach for yield in this low rate environment and international investors continued to be buyers of US corporate debt which still offers the highest yields globally.

• As has been the norm during the past year, high yield bonds posted the highest fixed income returns; 1.8% for the quarter.

• The fixed income markets continue to exhibit characteristics of the later stages of the credit cycle with investors taking on more credit risk in order to garner better yields despite somewhat higher debt leverage and somewhat lower interest coverage by the issuing companies.

High Yield Overview


MBOI Performance

• Following the restructuring of the fixed income sub asset classes on April 1, the high yield fixed income asset class consists of the high yield external managers, Neuberger Berman and Post Advisory.

• For the quarter, both managers lagged their respective benchmarks, mostly due to the defensive positioning of their portfolios relative to a strong, risk-taking market.

• Overall the high yield asset class underperformed by -30 basis points for the quarter.

High Yield Overview


Characteristics and Activity• By design, the high yield asset class at MBOI carries a significant

weighting in downside protecting portfolios. • Duration of the high yield asset class is near the benchmark duration

(Bloomberg Barclays US High Yield 2% Issuer Cap Index) and the sector exposure is well diversified.

• Following a lengthy due diligence process, staff is in final negotiations with two investment firms whose high yield portfolios would be added to this asset class. If hired, this would make four portfolios within the high yield fixed income asset class.

• Assuming a successful contracting process, it is anticipated that these two new portfolios would be initially funded with $50 million per portfolio within the next couple of months.

Fixed Income – Broad Fixed Income Overview


Environment

• Treasury yields were little changed during the quarter and credit spreads continued to grind tighter.

• US fixed income investors continued to reach for yield in this low rate environment and international investors continued to be buyers of US corporate debt.

• The Federal Reserve is likely to raise interest rates by a quarter point in December. The financial markets seem to be well prepared for the move.

• The fixed income markets continue to exhibit characteristics of the later stages of the credit cycle with investors taking on more credit risk in order to garner better yields, despite somewhat higher debt leverage and somewhat lower interest coverage by the issuing companies.



MBOI Performance

• Following the restructuring of the fixed income sub asset classes, the broad fixed income asset class performance since April 1 includes only the external fixed income manager, Reams.

• For the quarter the broad fixed income asset class slightly underperformed the Bloomberg Barclays US Aggregate Index as returns among fixed income sectors saw minimal differentiation.

Broad Fixed Income Performance

Relevant Benchmark: Broad Fixed Income – PAC Custom Blend


-0.6%

2.5%

5.0%

-1.0%

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%


Broad Fixed IncomeTotal Returns

-0.6%

0.4%0.7%

-2.0%

-1.5%

-1.0%

-0.5%

0.0%

0.5%

1.0%

1.5%

2.0%


Broad Fixed IncomeRelative Return to Benchmark



Characteristics and Activity• This asset class continues to be positioned defensively with a large

overweight position in US Treasury debt and a heavy cash position. It is also underweight corporate credit and mortgage credit.

• Duration remains less than the benchmark, although has moved up to be slightly less than the benchmark.

• There were no additional investments or cash flows during the quarter.

US Treasury & Agency Overview

Environment• The U.S. Treasury curve shifted up approximately 75 bps across the curve

over the last year. The curve was relatively unchanged in 3Q17. • Agency and Agency CMBS spreads tightened slightly over the last year

and were a little below their 5-year average. • The Federal Reserve has raised interest rates three times over the last

year. • Market currently expects the Federal Reserve to raise interest rates 25

bps in December.• The Federal Reserve announced the gradual reduction of its balance

sheet starting in October 2017.

Characteristics• Duration was neutral relative to the benchmark at quarter end. • US Agency CMBS are slightly above and US Agency securities are slightly

below the middle of the range relative to guidelines.• The portfolio is within all defined guidelines.


TIPS Overview

Environment• The 10-year breakeven inflation level was up 24 bps over the last year

ending at 1.85%. This is slightly below the 5-year average of 1.94%. • Headline CPI (Consumer Price Index) was up 0.7% while PCE (Personal

Consumption Expenditure) was down 0.6% year over year. CPI ended the quarter at 2.2% while PCE was 1.3%.

• Oil was up $3.43/barrel over the last year ending the quarter at $51.67/barrel. The CRB Index, a broad measure of commodity prices, was down 1.7% over the last year.

• Average hourly earnings were up 2.9% over the last year.

Characteristics• No significant deviation from the benchmark characteristics.• The portfolio is within all defined guidelines.


Mortgage-Backed Securities Overview

Environment• Mortgage spreads widened 8 basis points over the last year. Spreads are

slightly below their 5-year average. • 30-year mortgage lending rates were 3.80% at quarter end, up 46 bps in

the last year. • The mortgage purchase index is up 4.9% over the last year. This index

tracks the volume of mortgage loan applications that have been submitted to lenders.

• National home prices were 5.9% higher over the last year and have been supported by continued employment gains, homeownership creeping up from the lows and limited housing supply.

Characteristics• Duration was slightly below the benchmark at quarter end. • The portfolio was toward the top of the range in ABS and Non-Agency

CMBS relative to guidelines.• The portfolio is within all defined guidelines.


Investment Grade Credit Overview

Environment• Corporate spreads tightened 37 basis points over the last year. Corporate

spreads are approaching the 5-year low of 97 basis points. • New issue remained strong over the last year at approximately $1.38 trillion

which was slightly below the prior 12 months. • Market volatility has been muted over the last year and was near historic

lows at quarter end.• Investment Grade market volume averaged $16.4B/day vs. the 5-year

average of $14.1B/day.

Characteristics• Duration was neutral to the benchmark at quarter end. Slight overweight

to the 5-10 year portion of the curve and underweight the front end of the curve.

• Overweight Financials, underweight Industrials and Utilities at quarter end. • Credit quality of the portfolio was slightly higher than the index at quarter

end.• The portfolio is within all defined guidelines.


STIP Overview

Environment• The one month Libor yield increased .70% over the last 12 months. • The increase was primarily driven by the Federal Reserve raising

interest rates three times for a total of .75%. • The pick up in yield, between 1 month and 3 month Libor, declined

.19% over the last 12 months.• The Libor benchmark will be phased out by the end of 2021.

Performance• The total return on STIP slightly outperformed the benchmark. The

STIP yield lagged the increases in Libor yield.


STIP Performance

Relevant Benchmark: 1 Month LIBOR


0.97%

0.39%

0.74%

0.0%

0.2%

0.4%

0.6%

0.8%

1.0%

1.2%


Short Term Investment PoolTotal Returns

0.01% 0.01%0.07%

-0.5%

-0.3%

-0.1%

0.1%

0.3%

0.5%


Short Term Investment PoolRelative Return to Benchmark

STIP Overview

Characteristics• Treasuries, Agencies and Government money market funds made up

25% of the Pool on 9/30/17 compared to 23% for the prior year. • Local Government participants’ percentage increased slightly to 33% on

9/30/17 from 29% the prior year.• The STIP assets were $3,035 million on 9/30/17 up $248 million over

the last 12 months.• The STIP reserve increased $10.5 million to $26.2 million on 9/30/17.

The increase came from about $7.1 million in recoveries and earnings and $3.4 million in funds reserved.


State Fund Overview

Environment• The consensus forecast is for GDP growth of 2.4% in 2018 which is a

modest increase over the last year. • The U.S. Treasury curve shifted up approximately 75 bps across the curve

over the last year. The curve was relatively unchanged in 3Q17. • Inflation as measured by CPI has been increasing and ended the quarter at

2.2%. However, core inflation has been drifting lower and ended the quarter at 1.3%, well below the Federal Reserve’s long term target of 2%.

• Spreads on risk assets have fallen significantly over the course of the year as market participants continued to seek yield in a low volatility environment.

• $40M dividend payment pending in 4Q17..

Performance• Solid performance over every time frame vs. the benchmark.


State Fund Performance

Relevant Benchmark: Montana State Fund Custom Benchmark


0.5%

0.8% 0.8%

0.0%

0.1%

0.2%

0.3%

0.4%

0.5%

0.6%

0.7%

0.8%

0.9%


State FundRelative Return to Benchmark

State Fund Overview

Characteristics• Added $15M to the ACWI ex. US Index Fund and subtracted $15M from

the S&P 500 index fund during 1Q17. No additional changes since 1Q17.

• Continued the process of diversifying core real estate exposure in 3Q17.

• Duration was slightly below the benchmark at quarter end. • Maintained our overweight to spread product but continued to

improve credit quality at the margin.• The portfolio is within all defined guidelines.


Trust Funds Investment Pool Overview

Environment• The consensus forecast is for GDP growth of 2.4% in 2018 which is a

modest increase over the last year. • The U.S. Treasury curve shifted up approximately 75 bps across the

curve over the last year. The curve was relatively unchanged in 3Q17. • Inflation as measured by CPI has been increasing and ended the quarter

at 2.2%. However, core inflation has been drifting lower and ended the quarter at 1.3%, well below the Federal Reserve’s long term target of 2%.

• Spreads on risk assets have fallen significantly over the course of the year as market participants continued to seek yield in a low volatility environment.

Performance• Solid performance over every time frame vs. the benchmark.


Trust Funds Investment Pool Performance

Relevant Benchmark: Bloomberg Barclays US Aggregate Bond


1.1%

1.3%

1.2%

0.0%

0.2%

0.4%

0.6%

0.8%

1.0%

1.2%

1.4%


TFIPRelative Return to Benchmark

Trust Funds Investment Pool - Fixed Income Performance

Relevant Benchmark: Bloomberg Barclays US Aggregate Bond


0.3%

2.7%

5.0%

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%


Trust Funds Bond PortfolioTotal Returns

0.3%

0.7% 0.7%

-2.0%

-1.5%

-1.0%

-0.5%

0.0%

0.5%

1.0%

1.5%

2.0%


Trust Funds Bond PortfolioRelative Return to Benchmark

Trust Funds Investment Pool Overview

Characteristics• Total additions to TFIP were $10M during the quarter.• There was no change to the high yield allocation during the last year. • Continued the process of diversifying core real estate exposure in 3Q17.• Duration was slightly below the benchmark at quarter end driven

primarily by the Agency MBS sector. • Maintained our overweight to spread product but continued to improve

credit quality at the margin. • The portfolio is within all defined guidelines.


APPENDIX


Retirement Plans Characteristics


2.0%

100.0%

82.5%

24.4%

100.0%

100.0%

100.0%

98.0%

17.5%

75.6%

-20% 0% 20% 40% 60% 80% 100%

Domestic Equity


Private Equity

Real Estate

STIP

Fixed Income

Pensions

Internal / External

Internal External

4.8%

4.9%

56.4%

60.6%

30.7%

100.0%

100.0%

95.2%

95.1%

43.6%

39.4%

69.3%

0% 20% 40% 60% 80% 100%

Fixed Income

STIP

Private Equity

Real Estate

Domestic Equity


Pensions

Passive / Active

Passive Active


CIO Update – CAPP Asset Class Allocation Changes

-25.0% -20.0% -15.0% -10.0% -5.0% 0.0% 5.0% 10.0%

CashHigh Yield

Mortgage-BackedInvestment Grade Credit

US Treasury & AgencyBroad Fixed Income

TIPSReal Estate

Natural ResourcesPrivate Equity

International EquityDomestic Equity

Change in Allocation1 Year

Domestic Equity Policy


0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

CASH

Voya Investment ManagementAlliance Bernstein US Small Cap Growth

BlackRock MSCI USA Small CapDFA US Small Cap

Vaughan Nelson Small CapTOTAL SMALL CAP

ETF - S&P 400 (IJH)ETF - S&P 500 (SPY)

Iridian Mid CapArtisan Mid Cap Value

TimesSquare Mid Cap GrowthJP Morgan Partial L/S

T Rowe Price Large CapBlackRock MSCI USA

TOTAL LARGE/MID CAP

Domestic Equity by Manager

Domestic Equity Performance


International Equity Policy


0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

CASH

DFA Emerging Markets Small CapAmerican Century Inv Management

BlackRock ACWI EX US Small CapTempleton Investment Counsel

DFA International Small CompanyTOTAL SMALL CAP

BlackRock MSCI Emerging Mkt FreeETF - MSCI EAFE (EFA)

ETF - MSCI Emerging Markets (EEM)Baillie Gifford

AcadianInvesco

Lazard Asset ManagementBlackRock ACWI EX US Super Fund A

TOTAL LARGE/MID CAP

International Equity by Manager

International Equity Performance


Broad Fixed Income Characteristics


0% 10% 20% 30% 40% 50% 60%

Cash

ABS

Agency/Govt Related

CMBS

MBS

Treasuries

Corporate

Broad Fixed IncomeSector Weights

Broad Fixed Income Bloomberg Barclays US Aggregate Bond

0% 10% 20% 30% 40% 50% 60% 70% 80% 90%

BB & Below

BBB

A

AA

AAA

Broad Fixed IncomeCredit Quality - Moody's

Broad Fixed Income Bloomberg Barclays US Aggregate Bond

High Yield Characteristics


0% 5% 10% 15% 20% 25%

TransportationIndustrial- Oth

CashBanking

REITsInsurance

UtilityBasic IndustryCapital Goods

Brokerage & FinTechnology

EnergyConsumer Cyclic

Consumer Non CyCommunications

High YieldSector Weights

High Yield Bloomberg Barclays US High Yield - 2% Issuer Cap

0% 5% 10% 15% 20% 25% 30% 35% 40% 45%

Below CCC

CCC

B

BB

BBB

A

AA

AAA

High YieldCredit Quality - Moody's

High Yield Bloomberg Barclays US High Yield - 2% Issuer Cap

US Treasury & Agency Characteristics


0% 20% 40% 60% 80% 100% 120%

Cash

Agency/Govt Related

CMBS

Treasuries

US Treasury & AgencySector Weights

US Treasury & Agency Bloomberg Barclays US Intermediate Treasury

100.00%100.00%

0% 20% 40% 60% 80% 100% 120%

BB & Below

BBB

A

AA

AAA

US Treasury & AgencyCredit Quality - Moody's

US Treasury & Agency Bloomberg Barclays US Intermediate Treasury

Investment Grade Credit Characteristics


0% 5% 10% 15% 20% 25% 30% 35%

Other IndustriaBasic Industry

CashTransportation

TreasuriesCapital Goods

Brokerage and FUtilityREITs

TechnologyConsumer Non Cy

InsuranceCommunicationsConsumer Cyclic

EnergyBanking

Investment Grade CreditSector Weights

Investment Grade Credit Bloomberg Barclays US Intermediate Corporate

0% 10% 20% 30% 40% 50% 60%

BB, Below& NR

BBB

A

AA

AAA

Investment Grade CreditCredit Quality - Moody's

Investment Grade Credit Bloomberg Barclays US Intermediate Corporate

Mortgage-Backed Securities Characteristics


`

0% 20% 40% 60% 80% 100% 120%

Cash

ABS

Agency/Govt Related

CMBS

MBS

Treasuries

Mortgage-Backed SecuritiesSector Weights

Mortgage-Backed Securities Bloomberg Barclays US MBS

0% 20% 40% 60% 80% 100% 120%

BB & Below

BBB

A

AA

AAA

Mortgage-Backed SecuritiesCredit Quality - Moody's

Mortgage-Backed Securities Bloomberg Barclays US MBS

TIPS Characteristics


0% 20% 40% 60% 80% 100% 120%

Cash

Treasuries

TIPSSector Weights

TIPS Bloomberg Barclays US Intermediate TIPS

Private Equity Characteristics


0% 5% 10% 15% 20% 25% 30% 35%

Late Stage VC

Mega Buyout

Distressed for Non Control

Direct Lending

Large Buyout

Distressed for Control

Early Stage VC

Mid-Size Buyout

Small-Size Buyout

Private Equity by Strategy

0% 5% 10% 15% 20% 25% 30%

OtherUtilities

Cash EquivalentReal Estate

Telecommunication ServicesEnergy

Consumer StaplesMaterialsFinancials

Health CareConsumer DiscretionaryInformation Technology

Industrials

Private Equity by Sector

Private Equity Characteristics


0% 10% 20% 30% 40% 50% 60% 70%

Other

Korea

Australia

Canada

Japan

India

United Kingdom

China

United States of America

Private Equity by Country

Natural Resources Performance


0% 20% 40% 60% 80% 100%

Puerto Rico

Canada

Spain

United Kingdom

Argentina

United States of America

Energy by Country

0% 5% 10% 15% 20% 25% 30% 35% 40% 45%

East

Midwest

South

West

Timber by US Region

Natural Resources Characteristics


0% 5% 10% 15% 20% 25% 30% 35% 40%

Energy Finance

Midstream

Power

Services

Upstream

Energy by Industry

CharacteristicsReal Estate


0% 10% 20% 30% 40% 50%

Montana Office Properties

Opportunistic

Value-Added

Core

Real Estate by Strategy

0% 5% 10% 15% 20% 25% 30% 35% 40%

Land

Hotel

Industrial

Mixed-Use

Retail

Apartment

Office

Real Estate by Property Type

CharacteristicsReal Estate


0% 5% 10% 15% 20% 25% 30% 35%

Global

Europe

Asia

Midwest

US Diversified

East

South

West

Real Estate by Region

STIP Characteristics


0% 5% 10% 15% 20% 25% 30% 35% 40%

MNY Market

Corp. CP

CDs

Corp. Bonds

Gov't/ Agency

ABCP

Assets by Type

STIP Characteristics


0% 5% 10% 15% 20% 25% 30% 35%

State Agencies

Pension Fund

Local Gov't

Trusts

Participant by Type

State Fund Policy


0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

International Equities

Cash Equivalents

Real Estate

Domestic Equities

Fixed Income

State Fund Asset Allocation

Board Approved Asset Class Range Actual

State Fund Performance


Trust Funds Investment Pool Policy


0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

Cash Equivalents

High Yield

Real Estate

Fixed Income

TFIP Asset Allocation

Board Approved Asset Class Range Actual

Trust Funds Investment Pool Performance


Trust Funds Investment Pool - Fixed Income Characteristics


0% 5% 10% 15% 20% 25% 30% 35% 40%

Cash

ABS

Agency/Govt Related

CMBS

MBS

Treasuries

Corporate

Trust Fund Bond PortfolioSector Weights

TFBP Bloomberg Barclays US Aggregate Bond

0% 10% 20% 30% 40% 50% 60% 70% 80%

BB

BBB

A

AA

AAA

Trust Fund Bond PortfolioCredit Quality - Moody's

TFBP Bloomberg Barclays US Aggregate Bond

2017 CALENDAR

Board Dates Board Packet Mailing Federal Holidays

01 New Year’s Day 16 M.L. King Day

JANUARY S M T W Th F S

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31

FEBRUARY S M T W Th F S

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28

20 Presidents Day

24 Good Friday

MARCH S M T W Th F S

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31

APRIL S M T W Th F S

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30

16 Easter Sunday

14 Mother’s Day 29 Memorial Day

MAY S M T W Th F S

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31

JUNE S M T W Th F S

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30

18 Father’s Day

04 Independence Day

JULY S M T W Th F S

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31

AUGUST S M T W Th F S

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31

04 Labor Day

SEPTEMBER S M T W Th F S

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30

OCTOBER S M T W Th F S

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31

9 Columbus Day 31 Halloween

11 Veterans Day 23 Thanksgiving Day

NOVEMBER S M T W Th F S

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30

DECEMBER S M T W Th F S

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31

25 Christmas Day

Systematic Work and Education Plan 2017 REV

Feb. 14-15 Quarterly Meeting Quarterly Reports, Subcommittee Meetings, 2017 Legislature Matters

Annual Report and Financial Statements (Audit Committee) Financial Audit (Audit Committee) Ethics Policy In-State Loan Programs

Board’s Montana Real Estate Holdings as Landlord INTERCAP Program

Outreach Efforts – Loan and Municipal Programs

April 5 Non-Quarterly Meeting 2017 Legislature Matters

All Policy Review (Scrub and Revise) Capital Market/Asset Allocation Overview Benchmarks used by Board Board’s Website RVK Presentation (TBD)

May 23-24 Quarterly Meeting Quarterly Reports and Subcommittee Meetings, 2017 Legislature Matters

Accounting Review (Audit Committee) Exempt Pay Compensation Review (Human Resource Committee)

Staffing Level Review (Human Resource Committee) Fixed Income Review

Broad Fixed Income US Treasury/Agency Investment Grade Credit MBS TIPS

State Government Customer Relationships State Fund as Principal Investment Client

August 22-23 Quarterly Meeting Quarterly Reports and Subcommittee Meetings CEM Benchmarking MBOI Budget and Legislative Related Action/Decision Real Estate Natural Resources High Yield Internal Controls (Audit Committee) Fiscal Year Performance through June 30th RVK Presentation (TBD)

October 3 Non-Quarterly Meeting – TBD Private Equity

Nov. 14-15 Quarterly Meeting Quarterly Reports and Subcommittee Meetings Annual Report and Financial Statements Submission for FY 2017 (Audit Committee) Affirm or Reset Asset Allocation Ranges Resolution 217 Resolution 218 Resolution 234 PERS/TRS Annual Update Securities Litigation Status (Audit Committee) Securities Lending Exempt Staff Annual Performance Review (Human Resource Committee) Domestic Equities Review

work done 2014 thru 2017_FINAL.xlsx

Completed Completed Completed In-Process

2014 2015 2016 2017X X X Accounting ReviewX X X X Annual Report and Financial Statements X X X X Asset Allocation Range Approval (Board Must Review/Approve Annually as per Policy)X X X X Audit (Financial)

X X Benchmarks used by BoardX X Board as a Rated Investment Credit, a Bond Issuer and a Credit Enhancer

X X X X Board Member Education X X X X Board’s Budget

X X X Capital Market/Asset AllocationX X Cash Management of State MoniesX X X X Cost Reporting including CEM, Inc. AnalysisX X Custodial Bank Relationship, Performance, ContinuityX X Disaster Recovery and Emergency PreparednessX X X X Exempt Staff Performance and Compensation Review (HR Policy Requires Annual Consideration)X X X X Ethics Policy – (Board Policy Requires Annual Affirmations)

X X Fixed Income ReviewX X In-State Loan Program

X X INTERCAP ProgramX X X X Internal Controls

X X Investment Counsultant Independent Presentations (Board Requries at Least Two Annually)X X MT Buildings (Board as Landlord/Tenant Holdings)

X X X X Policy Statements Review (Governance Policy Requires Annual Investment Policy Review)X X X X Legislative Session and Interim MattersX X X Outreach Efforts for Board - Loan and Municipal ProgramsX X X X PERS and TRS RelationshipX X Private Equity ReviewX X Proxy Voting Public EquitiesX X X Public Domestic Equities ReviewX X Public International Equities ReviewX X Real Estate and TimberlandX X X X Resolution 217 Authorization of Investment Vendors (Board Policy Requires Annual Update)X X X X Resolution 218 Continuity of Executive Director

X X X Resolution 234 Continuity of Chief Investment OfficerX X Securities Lending

X X X X Securities LitigationX X X X Staffing Level Review (Required Biannually in Board Policy)

X X State Fund as Principal Investment ClientX X State Government Customer RelationshipsX X Website

MONTANA BOARD OF INVESTMENTS ACRONYM INDEX

Page 1 M:\Boardmtg\Acronym Index.docx – Rev 6/14/17

ACH ............................................................................................. Automated Clearing House ADR ....................................................................................... American Depository Receipts AOF ................................................................................................................All Other Funds ARC .................................................................................... Actuarially Required Contribution BOI ........................................................................................................ Board of Investments CAPP .................................................................................. Consolidated Asset Pension Pool CFA ............................................................................................. Chartered Financial Analyst EM .............................................................................................................. Emerging Market FOIA ........................................................................................... Freedom of Information Act FWP ................................................................................................... Fish Wildlife and Parks FX ............................................................................................................. Foreign Exchange IPS ............................................................................................. Investment Policy Statement LDI .................................................................................................... Liability-Driven Investing MBOH ........................................................................................... Montana Board of Housing MBOI ...................................................................................... Montana Board of Investments MDEP ..................................................................................... Montana Domestic Equity Pool MFFA ................................................................................ Montana Facility Finance Authority MPEP ........................................................................................ Montana Private Equity Pool MPT .................................................................................................. Modern Portfolio Theory MSTA .................................................................. Montana Science and Technology Alliance MTIP ............................................................................................. Montana International Pool MTRP ............................................................................................ Montana Real Estate Pool MTSBA ......................................................................... Montana School Boards Association MVO .......................................................................................... Mean-Variance Optimization NAV ............................................................................................................... Net Asset Value PERS .......................................................................... Public Employees’ Retirement System

MONTANA BOARD OF INVESTMENTS ACRONYM INDEX

Page 2 M:\Boardmtg\Acronym Index.docx – Rev 6/14/17

PFL ..................................................................................................... Partnership Focus List QZAB .................................................................................... Qualified Zone Academy Bonds QSCB ........................................................................... Qualified School Construction Bonds RFBP ......................................................................................... Retirement Funds Bond Pool RFP ....................................................................................................... Request for Proposal SABHRS .............................. Statewide Accounting Budgeting and Human Resource System SLQT .................................................................................... Securities Lending Quality Trust SOC1 ......................................................................... Service Organization Controls 1 (Audit) SSBCI ........................................................................... State Small Business Credit Initiative STIP ........................................................................................... Short Term Investment Pool TFBP .................................................................................................. Trust Funds Bond Pool TFIP ........................................................................................... Trust Funds Investment Pool TIF ................................................................................................... Tax Increment Financing TIFD .................................................................................... Tax Increment Financing District TIPS ........................................................................... Treasury Inflation-Protected Securities TRS ......................................................................................... Teachers’ Retirement System TUCS .............................................................................. Trust Universe Comparison Service VIX ................................................................................................................... Volatility Index

ASSET CLASS ACRONYMS DEPAC – Domestic Equity Pension Asset Class IEPAC – International Equity Pension Asset Class PEPAC – Private Equity Pension Asset Class NRPAC – National Resources Pension Asset Class REPAC – Real Estate Pension Asset Class TIPAC – TIPS Pension Asset Class BFPAC – Broad Fixed Income Pension Asset Class USPAC – UST/AGY Pension Asset Class IGPAC – Investment Grade Corp Pension Asset Class MBPAC – MBS Pension Asset Class HYPAC – High Yield Pension Asset Class DSPAC – Diversified Strategies Pension Asset Class CPAC – Cash Pension Asset Class

1

Terminology Commonly Used and Generally Understood at the Montana Board of Investments (And most typical context used at BOI)

Active management (typically with respect to stocks) Investment method which involves hiring a manager to research securities and actively make investment decisions to buy and sell securities in an effort to outperform an assigned index, rather than purchasing a portfolio of securities that would simply replicate the index holdings (‘passive’ investing). Actuarial assumed rate (pension concept) The investment return rate used by actuaries that enables them to project the investment growth of retirement system assets into the future (typically perpetual). Actuarial funding status (pension concept) A measurement made by actuaries to measure a pension system’s financial soundness (ratio of actuarial liabilities to the actuarial value of the assets available to pay the liabilities). Alpha (investment term) Return on an investment portfolio in excess of the market return or benchmark return; generally used in the context of ‘active’ management (as passive management, by definition, does not seek excess returns, or ‘alpha’). Alternative Investments A wide range of investments, other than traditional assets such as publicly traded stocks and bonds. The most common nontraditional or alternative investments are private equity, real estate, commodities, and hedge funds. Arbitrage (bond program) A structural or systematic difference between investment types which may allow profiting from the ‘difference,’ i.e., arbitrage. The most common context for the use of ‘arbitrage’ at the BOI is the federal law that prevents ‘arbitrage,’ i.e., the profiting of investing tax-exempt securities (e.g. INTERCAP) into taxable yields investments (such as U.S. Treasuries). Asset Allocation and Asset Allocation Range (general investment principle) The Board’s invested assets are divided or allocated into various asset classes such as stocks and bonds, each with its own characteristics, with the objective of attaining an optimal mix of risk and return. The total expected return of a portfolio is primarily determined by the mix or allocation to its underlying assets classes. Given the importance of ‘asset allocation,’ the BOI Board sets the asset allocation ‘range’ for each broad investment type or asset class. Average life (fixed income, particularly bonds) The average time period the debt is expected to be outstanding. This is typically the maturity date for a traditional bond structure, however it will be shorter for bonds having a sinking fund or amortizing payment structure. Barclay’s Aggregate Index (fixed income) A composite of outstanding bond issues, including corporate, structured, and government bonds whose overall investment features such as return and investment type are tracked over many years. This is the most common benchmark used for comparing the performance of a portfolio that invests in U.S. investment grade fixed income securities. Formerly known as the Lehman Aggregate bond index. Basis points (investment jargon) A basis point is 1 100th of a percentage. Ten basis points is one tenth of a percent, typically written as 10 bps.

2

Benchmark (standard investment concept) The concept of employing a particular independent or market investment return as a measurement to judge an investment portfolio’s return; typically chosen investment benchmarks have the following attributes: they are investible, quantifiable, chosen in advance, easily understandable, and have a long history; common examples are the S & P 500 Index and the Barclay’s Aggregate Index. Beta (investment jargon) A measure of the risk (or volatility) of a security or a portfolio in comparison to the market as a whole. If the stock or portfolio moves identically to that market, its beta value is 1; if its price volatility (or movement) is greater than that market’s price volatility, it is said to have beta greater than 1. Cap, as in large ‘cap’ (generally for stocks, i.e., public equities) ‘Cap’ is short for capitalization, as a reference to the market value of a publicly-traded company. The current stock price times the total shares outstanding of the company equals its market capitalization or market ‘cap’; often used contextually such as ‘large-cap,’ ‘mid-cap,’ and ‘small-cap’ for different sized public companies. Clawback (private equity) A clause in the agreement between the general partner and the limited partners of a private equity fund. The clawback gives limited partners the right to reclaim a portion of distributions to a general partner for profitable investments based on significant losses from later investments in a portfolio which ultimately resulted in the general partner receiving more distributions than it was legally entitled to. Core (context varies for equity, fixed income, real estate) In equity and fixed income, ‘core’ refers to investments that are generally always found in the portfolio and normally expect to hold for a very long time e.g. ‘core’ holdings of the largest U.S. companies, or U.S. treasuries; in real estate, ‘core’ generally refers to the best quality of real estate holdings such as prime commercial property in major metropolitan cities that have low leverage and low levels of vacancy. Correlation (common statistical concept) A measure of how two or more investment values or two asset classes move relative to each other during the same time period. A central concept in portfolio construction is to seek investments whose values do not move together at the same time, i.e., are uncorrelated. A correlation of 1 means that two or more investments ‘move’ precisely together. Custom benchmark (or sometimes custom index) A way to measure investment performance using a tailor-made measurement versus a generic industry-standard benchmark. At the BOI, total pension performance is measured against the Board’s ‘custom index’ or ‘custom benchmark’ which is a weighted blend of all the underlying asset class benchmarks used to measure the asset class returns. Derivatives (investment jargon) Investment securities whose performance itself depends (or is ‘derived’) from another underlying investment return. Examples include stock options, puts/calls, and forward currency contracts whose returns are based on the underlying stock or currency. Developed markets (equity) Countries having a long period of stable industrialization; or are the most economically developed. Discount (fixed income, generally) Used most often with respect to bonds, the price paid that is less than face (or ‘par’) value. A $1 million face-value of a bond purchased for less than a million is bought at a ‘discount.’ Described as the difference between a bond’s current market price and its face or redemption value.

3

Diversification (standard investment concept) The concept of spreading risk by putting assets in several investment categories, each having different attributes with respect to type, expected return, risk, and correlation, to best protect against the risk of loss. Duration (bonds) Almost exclusively used when discussing fixed income bonds, a measurement of how sensitive a bonds’ change in price is to a change in general market interest rates, expressed in years (specifically calculated as a weighted average term to maturity of the bond’s cash flows). The greater the duration of a bond, the greater the volatility of price for changes in market interest rates. Efficiency (usually when discussing various stock markets) Used to describe markets where it is very difficult to achieve return in excess of that of the overall market from individual stock selection. When information is widely available on a company and its securities are traded regularly the market is considered ‘efficient.’ Emerging Markets (most often for public equities) Certain international securities markets that are typically small, new, have low turnover, and are located in countries where below-average income prevails and is developing in response to the spread of capitalism. Enhanced (pertaining to stocks) Generally linked with ‘index’ as in enhanced index, an indexed investment management style that has been modified to include the portfolio manager’s idea of how to outperform the index by omitting some stocks in the index and overweighting others in a limited manner designed to enhance returns but at minimal risk. Enhancement (bond program) At BOI, the term generally refers to credit support or a bond or loan guarantee. For example, the Board’s INTERCAP bonds are ‘enhanced’ by the BOI’s performance guarantee bringing down the yearly interest rate. Excess returns (standard investment concept) Returns are ‘excess’ if they are more than the market or more than the benchmark they are measured against. Exempt staff vs. classified staff (specific to Montana state government) “Exempt” refers to the Board’s seven employees who, under state law, do not fall under the state’s standard employment rules (the ‘classified’ staff). Fiduciary (from the Latin verb, fidere, to trust) The concept of trust and watchfulness; a fiduciary is charged with the responsibility of investing the money wisely for the beneficiary’s benefit. Board members are the ultimate ‘fiduciaries’ for the Board’s assets and are obligated to be a good agent. FTE (state government jargon) An acronym in state government: “full time equivalent” as in full time employee. The concept is a slot or position, not the actual individuals. The BOI is currently authorized for 32 FTE’s. Fund of funds (private equity) A concept used in alternative investments referring to using an investment manager to invest in other managers or funds, as opposed to making direct investments in funds.

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GAAP/GASB (accounting terminology) GAAP…Generally Accepted Accounting Principles; Montana state law uses GAAP accounting principles unless specifically allowed otherwise. GASB…Government Accounting Standards Board, the board that sets GAAP standards for U.S. governments (FASB…Financial Accounting Standards Board, the entity for commercial and business accounting standards). General obligation (municipal finance term) Used to describe the promise that a government makes to bond holders, backed by taxing and further borrowing power, it is generally considered the highest level of commitment to bondholders. At the local government level, general obligation bonds typically require a vote of the residents. General partner vs. limited partner (private equity) In private equity, the general partner is responsible for the operations of the partnership and makes the actual underlying investment decisions; the limited partner is the investor, and therefore has limited liability for investment decisions; the BOI is the ‘limited’ partner in its private equity fund investments (and real estate funds as well). Growth (as to style public equities) An investment style that more heavily invests in companies whose earnings are expected to grow at an above average rate to the market. A growth stock usually does not pay a dividend, as the company would prefer to reinvest retained earnings in capital projects to grow the company (vs. ‘value,’ which considers buying established companies they feel are trading at bargain prices to the fundamental analysis of the company’s financial statements and internal competitive factors). Indenture (bond and loan programs) The central document describing the contract between investors and the borrower or user of the proceeds. The Board’s INTERCAP program is structured around a bond indenture.

Hedge fund (as defined by Investopedia) An aggressively managed portfolio of investments that uses advanced investment strategies such as leverage, long, short and derivative positions in both domestic and international markets with the goal of generating high returns (either in an absolute sense or over a specified market benchmark). Hurdle Rate (private equity) a minimum return per annum that must be generated for limited partners of a private equity fund before the general partner can begin receiving a percentage of profits from investments. Index (investment concept) Typically, a single measure of a broadly-based group of investments that can be used to judge, or be compared to the return performance of an individual investment or manager. Indexing (investment concept) Typically refers to investing in a portfolio to match a broad range of investments that are set within a pre-determined grouping, such as the S&P 500, so as to match its performance; such investing is generally labeled ‘passive’ or indexed investing; or buying shares in an Index Fund. In-State loan program (Montana-specific) Programs that are funded by the state’s coal severance tax monies.

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Internal service vs. enterprise fund (state accounting concept) Within Montana state government: a program whose funding is dependent on mandatory participation by another state government program is labeled an ‘internal’ service fund; a program whose funding is dependent on voluntary participation is labeled an enterprise fund. At BOI, the investment program is an internal service fund because participation is not voluntary; the Board’s bond and loan programs, because their use is voluntary, are accounted for as an enterprise. Investment grade (bonds) Bond ratings from Moody’s, Standard and Poor’s, and Fitch high enough to be considered secure enough for most investors (bonds rated AAA – BBB). Below investment-grade bonds (below BBB) are generally considered to have a more speculative outlook and carry more risk of default. IRR (private equity) A measure of investment performance, short for ‘internal rate of return,’ expressed as a percentage (the ‘internal rate of return’ number, or discount rate) that mathematically will equalize the total future cash flows of an investment to the initial cash outflow of the investment; the concept accounts for the time value of money. Leverage (investment concept) As an investment concept, a way to increase a return on an investment through a combination of one’s own money and also by borrowing additional money to enhance such an investment; high ‘leverage’ is also associated with high risk. Mean Variance Optimization Model (‘Modern Portfolio Theory’) A theory that it is possible to construct a portfolio to maximize the return for the least amount of risk or volatility. This theory is based on various asset types and their level of expected return, risk (volatility) and their correlation with each other or how the asset values move with each other. The central idea of the model is to blend investments so that in total, they provide both the best expected return and optimal amount of diversification to minimize deep performance swings (volatility); a central tenant is that long term historical returns are indicative of future returns. Mezzanine finance (private equity) Subordinated debt with an equity ‘kicker’ or ability to share in the equity value of the company. It is typically lower quality because it is generally subordinated to debt provided by senior lenders such as banks, thus is considered higher risk. Multiple (as in “multiple” of invested capital, private equity) The ratio of total cash returned over the life of the investment plus the investment’s residual value over the total cash expended in making the investment. A multiple of 2 means, regardless of the total investment time period, that total cash returned was twice the cash invested. 130/30 Strategy (public equities) Also called ‘partial long short,’ this strategy involves the establishment of a short position in select stocks while taking the proceeds of those shorts and buying additional long positions in stocks. The net effect is an overall market position that is 100% long, but the active decisions on individual stock selections are amplified by this ability to short. If the stock selections are successful, the strategy enables the portfolio to profit more than if a stock had simply not been owned, as with traditional long-only portfolios. Opportunistic (real estate) In real estate, a euphemism for the most risky real estate investments, typically distressed, raw land, newly developed buildings or other high risk investments in the real estate sector, (versus, ‘core,’ which are the best quality fully leased commercial properties).

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Overweight or underweight (investment concept) Generally, the level of holdings of a certain type of investment that is above or below either a benchmark’s weight (portion of total investment), or the percentage held of a particular asset class compared to the Board’s asset allocation policy weight. Also used to describe an external investment manager’s decision to have more (or less) of a particular investment than the percentage or weighting found in the benchmark. Passive management or passive investment (most often in public equities, but not exclusively) An investment style where a fund’s portfolio mirrors a market index, such as the S&P 500, with limited selection decisions by the manager, resulting in market returns. Passive management is the opposite of active management in which a fund’s manager attempts to beat the market with various investment strategies and buy/sell decisions of a portfolio of securities to enhance returns. P/E ratio (equity) The price of a publicly traded stock divided by its estimated or actual earnings is the price/earnings or P/E ratio. This can also be calculated for a stock index or portfolio of stocks. Over the last 100 years, the S&P 500 has had an overall P/E ratio of about 15, or a total index price of about 15 times the annual earnings of its underlying companies. Pacing study (private equity) An analysis of the likely timing and amount of the drawdown of committed but yet uninvested monies and the estimated distributions or returns from the funds held in an alternative investment portfolio, generally used to judge the future size of the portfolio and its potential liquidity needs, i.e., cash funding demands. Par (fixed income) The initial principal amount designated by the issuer of the bond, or face value of a bond. Passive For investments, generally not materially participating in an investment decision, meaning an investment portfolio whose returns follows that of a broad market index, such as an investable stock index, i.e. the S & P 500. Passive weight (generally equities) The percentage of a stock held in a particular index portfolio, or percentage of an overall asset class that is held in passive portfolios. Policy Portfolio A fixed-target asset allocation, as opposed to asset allocation ranges, which theoretically allows gauging whether deviations from the target portfolio had a positive or negative impact on overall performance. Portable alpha (public equities) An investment strategy which involves the active selection of securities while neutralizing overall beta or market risk. This often involves the use of derivative investments such as futures to replicate the market return, either taking a short or long position, while then selecting securities which are expected to add return in an absolute sense or in addition to the market return. As an example, this strategy can be found with certain hedge funds where a market exposure is shorted while individual securities such as specific stocks are purchased that are expected to outperform the general market. The concept of portable applies when the ability to generate positive alpha can be overlaid or ported onto a portfolio. This is not a strategy employed by any of MBOI’s existing managers. Premium (fixed income) Most often the amount paid over the stated face amount (often called ‘par’) of a bond, but also used in other contexts, typically paying more (the premium) than a market price (as in a take-over bid for a company).

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Proxy (publicly traded companies) An agent legally authorized to act on behalf of another party. Shareholders not attending a company’s annual meeting may choose to vote their shares by proxy by allowing someone else to cast votes on their behalf, but the word ‘proxy’ is used more frequently colloquially as a ‘close approximation.’ Prudent expert, prudent person (a central fiduciary concept) These legal terms have long histories of court-determined standards of care, deriving originally under English common law. The BOI is empowered to operate under the ‘prudent expert rule,’ which states that the Board shall manage a portfolio: a) with the care, skill, prudence, and diligence, under the circumstances then prevailing, that a prudent man acting in a like capacity and familiar with such matters would use in the conduct of an enterprise of a like character and with like aims; b) diversify the holdings of each fund within the unified investment program to minimize the risk of loss and to maximize the rate of return unless, under the circumstances, it is clearly prudent not to do so; and (c) discharge the duties solely in the interest of and for the benefit of the funds forming the unified investment program. At an ‘expert’ level; there is more room for accepting risk under the prudent expert rule than the prudent person rule. Rebalancing (general investment term) The process of realigning the weightings of the portfolio of assets. Rebalancing involves periodically buying or selling assets in the portfolio to maintain the original desired level of asset allocation and/or to stay within predetermined asset category range; it is part of a disciplined investment approach within modern portfolio theory. Resolution (government term) Generally, a formal and written action by a governmental (or corporate) body that has long term significance and requiring a vote of the governing body. BOI uses ‘resolutions’ generally only for its most significant and long term actions and/or policies. Securities lending (general investment) Investments that are temporally borrowed by other investors for a fee; the BOI allows most of its publicly traded investments to be loaned for additional marginal income. Standard deviation (common statistical concept) A specific statistic that measures the dispersion of returns from the mean over a specific time period to determine the “historical volatility” of returns for a stock, or portfolio, or asset class; more specifically a single unit (i.e., one standard deviation) of dispersion that accounts for approximately 66% of all data around a mean using a ‘normal’ (or ‘uniform’ or ‘bell-shaped’ curve; as opposed to a skewed or asymmetrical) distribution. The standard deviation is used as a gauge for the amount of expected future volatility. SABHRS (accounting jargon) Montana state government’s State Accounting, Budgeting and Human Resource System; the State’s central information management system. BOI investment and other financial data must tie and be reported on this system, which is the official book of record and includes the state’s financial statements. Style drift (often in reference to public equity managers, but applicable to other managers, too) As the name implies, a divergence from an investor’s professed investment bias or style or objective.

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Tracking error (statistical concept in investments) A measurement of the standard deviation of a portfolio’s return versus the return of the benchmark it was attempting to outperform. The concept is often used when discussing investment managers. For example, some styles are expected to have high ‘tracking errors,’ (e.g., deep ‘value’ investors who buy companies that may be dogs for years), versus passive managers, whose stock volatility is expected to be very close to their benchmark. Tracking error can either be intentional or unintentional; it can also be regarded as an accepted deviation or contrary to the management agreement. High unexpected tracking error is generally a serious concern to be examined and understood. Underwriter (bond program) In investments, the agent who buys investments to be resold to the public; at BOI, the investment firms that buy the Board’s bonds to be resold to the public. Unified Investment Program (Montana Constitution) The Program in the State’s constitution requiring a central investment program which the legislature has assigned to the BOI. Value (as to style when discussing public equities) An investment style that focuses on buying established companies that investors believe are undervalued and trading at bargain prices to the fundamental analysis of the company’s financial statements and internal competitive factors. Venture capital (private equity) A higher-risk/high-return type of investing in startup firms and small businesses with perceived long-term growth potential. Sometimes these are already existing business ventures with limited operating history that need additional management expertise and access to capital. (For start-ups, ‘seed capital,’ or ‘angel investor’ are terms differentiating this even higher risk type of investment.) Volatility (investment jargon) A statistical measure of the dispersion of returns for a given security or market index. Volatility is typically measured by using the standard deviation of returns from the security or market index. Commonly, the higher the volatility, the riskier the security. Yield (general investment, but most often within fixed income) The amount returned to the investor above the original investment generally expressed as a percentage. Yield can be thought of as the expected return from the combination of interest and price accrual or amortization to maturity (in the case of a bond trading at a discount or premium to par). Yield curve (fixed income) A line that plots the prevailing interest rates at a given time for bonds ranging in maturity from as short as three months out to 30 years. When plotted across these various maturities (typically 2, 5, 7, 10 and 30 years), the resultant line is shaped like a curve with generally low interest rates (the yield) for shorter maturities and gradually higher interest rates for longer maturities, because generally investors demand higher interest rates for longer term investments. The yield curve for U.S. Treasury debt is the most common when referring to the prevailing level of interest rates.

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Investment Update - FOIALTS.com · 2017. 9. 30. · September 30, 2017 3 Table of Contents CIO Update 4 Risk Management 10 Private Equity 16 Real Estate 20 Natural Resources 23 Domestic