PERS Investments Yesterday, Today and Tomorrow Workshop/Asset Allocation.pdf · PERS Investments Yesterday, Today and Tomorrow 2 Building blocks Investment markets are complex It

PERS 2016 Board Retreat

PERS Investments Yesterday, Today and Tomorrow

Jim Van HeuitSenior Vice President

William Howard, CFASenior Vice President

John Jackson, CFASenior Vice President

September 12, 2016

1PERS Investments Yesterday, Today and TomorrowKnowledge. Experience. Integrity.

Agenda

● Building Blocks of Asset Class Returns– Components of returns– Contributions to investment forecasts

● Why are things so different now?– Review of current conditions in the context of history

● Pension Asset Allocation Evolution ”It’s not your Grandpa’s portfolio”– Reactions institutional investors to changing asset market conditions

● Are more changes to come?– Possible evolution of the building blocks

● Asset Allocation Process & Goal– Motivation for asset allocation analysis– Steps in the asset allocation analysis

● Where do we go from here? Things to ponder– Forecast asset class performances– Current asset allocation– Forecast ranges of returns

Overview of Investment Topics


Building blocks

● Investment markets are complex

● It is advantageous for the forecasting process to break markets down into “building blocks”

● Risk Premia Building Blocks– Investments span the risk spectrum from very safe Treasury bills to volatile emerging markets equity– Theoretically, investors should require more compensation in terms of higher returns in order to invest in riskier

markets– Forecasts are based on historical return “spreads” across the range of risky assets

● Economic and Financial Building Blocks– Generally speaking, investments are either debt or equity

– Investors are either lenders or owners– Investors are compensated for their contributions to economic activity (e.g., businesses, governments,

mortgage borrowers)– Economic and financial building blocks look at the sources of funds to compensate investors

– Revenues to pay government bond investors– Cash flow to pay interest to corporate bondholders and dividends to shareholders– Reinvestment to promote profit growth

– Forecasts are based on the opportunities available to generate cash flow and how much investors are willing to pay to receive these cash flows

Contributors to Return


Asset Class Returns

Risk Premia Building Blocks

● Investors require greater return for taking greater levels of risk: “risk premia”

● Risk premia have varied widely historically– In some periods, e.g., during and immediately after the financial crisis, equities returned less than bonds– What are the “right” levels for risk premia? How should they change through time?

● Treasury bills provide “risk-free” returns– If purchased and held to maturity the return is known in advance– The U.S. government is not going to default

● Bond risk premia– Term Risk: More time to maturity means greater uncertainty – Credit Risk: Higher probability of default means more uncertainty for future interest payments, and the

repayment of principal– The additional risk means that bonds need to offer a higher return than Treasury bills

● Equity risk premia– Stocks pay dividends which are not fixed in advance like bond interest rate payments– Stock values can fluctuate substantially, more widely than most bonds– The additional risk means that stocks need to offer a higher return than bonds

Building Blocks


Asset Class Returns

● For 30 years the S&P 500 has averaged a 6.3% return premium over 3-month Treasury bills

● The highest return premium was 14.5% at the peak of the tech bubble

● The lowest return premium was -6.4% at the nadir of the financial crisis

● The forecast should be somewhere in between these extremes, but it is unclear where– The historical time period is decisive in determining the forecast

Risk Premia Building Blocks

19861987

1988

1989

1990

19 91

1992

19 93

19 94

1995

1996

1 99 7

1998

1999

2000

2 00 1

2002

2003

2 0 04

2 005

2 00 6

20 07

2008

2009

2010

2 0 11

2012

2013

2 0 14

20152016

(10)

(5)

0

5

10

15

20

for 30 Years Ended June 30, 2016Rolling 40 Quarter Excess Return Relative To CE Fed 3 Mo Bill

Exc

ess

Ret

urn

US Eq S&P 500 US Eq S&P 500 Average

6.30


Asset Class Returns

Economic and Financial Building Blocks

● Economic factors play an important role– GDP growth and its underlying components– Inflation and its underlying components– These values tend to move up and down together

– More growth leads to more inflation– Less growth leads to less inflation

● Treasury bills are still “risk-free” returns– Yields depend on inflation over their brief time to maturity– Investors normally want a positive after-inflation “real” return

● Projected bond returns will be high if investors anticipate high growth and inflation– Bond investors also want a positive real rate of return– Credit spreads will be low if growth reduces the probability of corporate default

● Projected equity returns will be higher if investors anticipate high growth and inflation– Higher economic growth rates generally mean higher profits, dividends and capital appreciation

● Still, uncertainty over “right” levels of real bond and stock returns fluctuate as conditions change over time

● Investors still require greater return for taking greater levels of risk

Building Blocks


Capital Market Projections – Economic Foundations

● Gross domestic product has fluctuated substantially over time– The graph shows trailing 1-

year “real” (after inflation) growth rates

– The shaded areas are recessions which are defined as at least two consecutive quarters of negative growth

● Growth rates depend on increases in capital, labor and productivity

● The financial crisis created a long, deep recession

● The last two periods of expansion have seen relatively slow growth rates

GDP Growth



● GDP growth depends on the growth rates of labor and the productivity of that labor

● Labor growth comes from multiple sources– Fertility– Immigration– Workforce participation

● Productivity growth comes from two primary sources– Increases in capital

equipment– Improvements in technology

● Both components of GDP growth have lagged over the last decade

Components of GDP Growth



● Consumer spending accounts for about 2/3 of GDP

● Consumer spending has not been strong since the financial crisis– Some of the weakness is

exaggerated since the data do not take into account inflation which has been low since the financial crisis

Consumer Spending



● Consumers get money to spend from a variety of sources– Wages and salaries

(“compensation”) are the largest component

– Investments– Rental income– Transfer payments

● The growth in real compensation has been relatively weak since 2000 which has limited consumer spending

Wage Growth



● The consumer price index is one measure of inflation– It represents the changes in

prices of a representative basket of goods that consumers buy

● Inflation occurs when the demand for products exceeds the supply

● Inflation rose in the 1960s (Viet Nam) and 1970s (Arab oil embargo) and was high on average through the 1980s

● Inflation has been relatively low since 1990

● Inflation has been particularly low since the financial crisis

Inflation



● Lower growth and inflation have accommodated lower Treasury bill yields

● Treasury bill yields are currently especially low due to strong demand– Treasury bills have negative

real yields– Demand comes from

overseas investors who face negative real yields in their own countries

– Demand also comes from the Fed which is attempting to keep interest rates low to promote economic growth

Treasury Bill Rates



● Treasury bond yields are also historically low

● Lower inflation allows lower nominal yields to provide a positive real yield

● Current real yields are close to zero

● Like Treasury bills, low bond yields are driven by demand– Many countries have negative real yields even on their 10-year bonds– The Fed purchased longer-dated Treasury bonds to boost the economy

10-Year Treasury Bond Yields


Global Central Bank Activity



● Corporate profits generally fall in advance of a recession– Corporate profits fell

significantly and for an extended period around the financial crisis

● Corporate profits generally rebound after a recession– This pattern held true for a

relatively brief period after the financial crisis

– After the initial bounce profit growth has been anemic

– Recent quarters have seen declines in profits

U.S. Corporate Profits


Capital Market Projections – Equity Valuations

● Earnings patterns for the S&P 500 have followed those of U.S. corporations generally

● Index earnings per share on a nominal basis are where they were in 2011– Earnings have fallen on a real basis

S&P 500 Operating Earnings Per Share



● The price-earnings ratio (P/E) is the number of dollars investors pay for a dollar of earnings– The “forward” means that the P/E in based on forecast earnings

● While earnings have stagnated, the price of the S&P 500 has risen driving up the P/E– The higher the P/E, the less the opportunity for additional increases in stock prices– The current P/E is above the 25-year average but is not nearly as high as it was during the tech bubble

● Other valuation measures are mixed

S&P 500 Price/Earnings



● Corporate profits have two broad uses– They can be reinvested in the firm in an effort to further increase future corporate profits– They can be returned to shareholders in the form of dividends

● Corporations generally increase dividends when they don’t see attractive investment opportunities to promote future profit growth

S&P 500 Dividends Per Share


Capital Market Projections – Bond Valuations

● Bond returns are made up of capital appreciation and yield – When yields fall, bond prices increase and vice versa

● Broad bond market yields have followed Treasury yields down– Bond returns over the last 35 years have been supported by increasing prices due to falling yields

● When bond yields increase prices will fall– The rate of increase will determine future bond returns

Barclays Aggregate Yield


Capital Market Projections – Bond Valuations

● The sensitivity of bond prices to changes in interest rates is known as “duration”– Duration is defined as the percentage change in bond price due to a 1% change in yield– If a bond has a duration of 5, a 1% decline in yield will increase the price of the bond by 5% but a 1% increase

in yield will decrease the bond price by 5%

● Bond durations tend to increase when yields fall– Bond prices are more susceptible to interest rate increases when yields start from lower levels

Barclays Aggregate Interest Rate Sensitivity


Return Projections: Major Asset Classes1989 – 2015

0%

2%

4%

6%

8%

10%

12%

14%

16%

1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Private Equity Non-U.S. Equity Broad U.S. Equity Real Estate U.S. Fixed Inflation


Risk Projections: Major Asset Classes1989 – 2015

0%

5%

10%

15%

20%

25%

30%

35%

40%

1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Private Equity Non-U.S. Equity Broad U.S. Equity Real Estate U.S. Fixed Inflation


Increasing Volatility and Complexity10-Year Projected versus Actual Returns over the Past 20 Years

Expected Return: 7.5%Projected Std Deviation: 6.0%

Actual Return (95-04): 7.7%Actual Std Dev (95-04): 4.0%

2005 2015

Private Equity12%

Real Estate13%

Non-U.S. Equity22%U.S.

SmallCap8%

U.S. Large Cap33%

Fixed 12%

PrivateEquity 4% Real Estate

5%

Non-U.S. Equity14%

U.S. Small Cap5%

U.S. Large Cap20%

Fixed Income52%

Increasing Risk


Actual Return (05-14): 6.2%Actual Std Dev (05-14) 7.7%


Increasing Complexity

1995

Fixed Income100%


Private Equity 2%

Real Estate 3%

Non-U.S. Equity 9%

U.S. Small Cap 3%

U.S. Large Cap 13%Fixed

Income 70%

Private Equity 3%

Real Estate4%

Non-U.S. Equity8%

U.S. SmallCap 3%

U.S. Large Cap 11%Fixed

Income71%

Same Risk, Decreasing ReturnsWhen target risk is held at 6.0%, expected returns fall from 7.5% in 1995 to 4.8% in 2015

Expected Return: 7.5%Standard Deviation: 6.0%

1995 2005 2015

Returns Lowered Over Time



Increasing Complexity

Fixed Income100%


Declining Discount Rates for Public Funds

● In response to declining returns some public funds have reduced their discount rates

● The migration to lower discount rates has been slow and painful– Higher liabilities– Greater unfunded liabilities– Larger contribution requirements

Range of Surveyed Discount Rates


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

100%

4Q95 4Q97 4Q99 4Q01 4Q03 4Q05 4Q07 4Q09 4Q11 4Q13 4Q150%

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

100%

4Q95 4Q97 4Q99 4Q01 4Q03 4Q05 4Q07 4Q09 4Q11 4Q13 4Q15

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

100%

4Q95 4Q97 4Q99 4Q01 4Q03 4Q05 4Q07 4Q09 4Q11 4Q13 4Q150%

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

100%

4Q95 4Q97 4Q99 4Q01 4Q03 4Q05 4Q07 4Q09 4Q11 4Q13 4Q15

Plan Investments by Plan TypeHistorical Average Asset Allocations (20 Years) – Callan Fund Sponsor Database

Source: Callan. Callan’s database includes the following groups: public defined benefit, corporate defined benefit, endowments/foundations, and Taft-Hartley plans. Approximately 10-15% of the database constituents are Callan’s clients. All database group returns presented gross of fees. Past performance is no guarantee of future results.

Public Funds Corporate Funds

Endowment/Foundations Taft-Hartley

Cash

U.S. Fixed

Non-U.S. Fixed

Hedge Funds

U.S. Balanced

Global Balanced

Real Estate

U.S. Equity

Non-U.S. Equity

Global Equity

Other Alts


What Return and Risk Would These Allocations Generate?Callan Public Fund Database Asset Allocations, Historical and Projected Model Results

43.2%

8.5%

39.9%

2.2%1.1%2.9%

0.7%1.5%

1995

43.7%

16.5%

32.0%

1.3% 0.1%3.4%

0.2%1.9%0.9%

34.7%

15.5%

3.7%

27.6%

1.3% 0.2%1.8%

6.0%2.4%

5.0%1.5%

U.S. EquityNon-U.S. EquityGlobal Equity

U.S. FixedNon-U.S. FixedU.S. BalancedGlobal Balanced

Real EstateHedge FundsAlternativesCash

Actual Results 1995-2004

Avg. annual return: 10.10%Annual std. dev.: 9.11%

2005 2015

Actual Results 2005-2014


Projected 2015-2024



2%

4%

6%

8%

10%

12%

14%

16%

10th Percentile 12.40 13.96 13.99 12.05 13.1325th Percentile 11.85 12.78 12.70 11.79 12.38

Median 11.34 12.17 11.89 11.05 11.6775th Percentile 10.84 11.39 11.31 10.43 10.9490th Percentile 10.37 10.54 10.02 9.71 10.29

What Returns Did Fund Sponsors Actually Achieve?10-Year Returns by Fund Sponsor Type: Point in Time Comparison


9.82 10.50 11.06 9.53 10.339.26 9.78 9.87 9.03 9.498.68 8.94 8.60 8.30 8.707.99 7.89 7.96 7.40 7.837.01 7.18 7.06 6.61 7.00

6.53 7.20 6.78 6.47 6.796.12 6.37 6.01 6.03 6.185.73 5.84 5.44 5.57 5.635.26 5.03 4.81 5.10 5.024.64 4.41 4.07 4.64 4.42

Public Funds Corporate Fund Endowments/ Foundations Taft-Hartley Total Fund Sponsors4Q1995 4Q2005 4Q2015 4Q1995 4Q2005 4Q2015 4Q1995 4Q2005 4Q2015 4Q1995 4Q2005 4Q2015 4Q1995 4Q2005 4Q2015


4%

6%

8%

10%

12%

14%

16%

10th Percentile 9.64 12.11 11.89 9.20 11.0825th Percentile 8.75 10.51 10.75 8.25 9.88

Median 7.93 9.38 9.11 7.52 8.6075th Percentile 7.08 8.56 8.34 6.53 7.4690th Percentile 6.64 6.97 6.12 4.66 6.25

What Level of Risk Did Fund Sponsors Actually Experience?10-Year Standard Deviation by Fund Sponsor Type: Point in Time Comparison


12.11 13.88 14.96 11.70 13.3410.93 12.06 12.62 10.34 11.8010.16 11.03 11.09 9.24 10.50

9.31 9.87 10.00 8.15 9.498.21 8.67 9.02 6.34 8.14

12.40 12.72 13.00 11.50 12.6711.63 11.69 12.08 10.89 11.6410.67 10.62 11.09 9.97 10.59

9.21 9.09 9.81 9.16 9.326.78 7.54 8.38 7.83 7.77

Public Funds Corporate Fund Endowments/ Foundations Taft-Hartley Total Fund Sponsors4Q1995 4Q2005 4Q2015 4Q1995 4Q2005 4Q2015 4Q1995 4Q2005 4Q2015 4Q1995 4Q2005 4Q2015 4Q1995 4Q2005 4Q2015


PERS Total Fund Returns

● Over the last 3 decades PERS investment program has been very successful

● The average 10-year return has been almost 9.25%

● This performance exceeds the current 7.75% investment return assumption– Historical return assumptions

were higher

● What is the likelihood of meeting this return hurdle going forward?

30 Years

86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16(2.5)

0.0

2.5

5.0

7.5

10.0

12.5

15.0

17.5

for 30 Years Ended June 30, 2016Rolling 40 Quarter Returns

Ret

urns

7.75

Reference MS PERS-Total Fund

MS PERS-Total Fund Average

9.22


Benefits of an Asset Allocation Review

● The cornerstone of a prudent process for fiduciaries is a careful and thorough examination of their long-term strategic plan

● Explicitly acknowledge change and uncertainty in the capital markets

● Establish reasonable rate-of-return and risk expectations for individual investments

● Establish reasonable rate-of-return and risk expectations for investment portfolios

● Confirm an investment policy to meet return and risk objectives in relation to goals


Capital Market Projections

● Cornerstones of strategic planning—expectations and time horizon

● Projections represent our best thinking regarding the long-term (5 to 10-year) outlook, recognizing our median projections represent the midpoint of a range, rather than a specific number

● Develop results that are readily defensible both for individual asset classes and for total portfolios

● Be conscious of the level of change suggested in strategic allocations for long-term investors

● Reflect common sense and recent market developments

● Balance conflicting goals and conflicting opinions

Guiding Objectives


2016 Capital Market Projections

● The basis for asset allocation are the long-term expected characteristics of each asset class and how they interact with each other.

● Most capital market expectations represent passive exposure (beta only); however, return expectations for real estate, private equity, and hedge funds reflect active management premiums.

● All return expectations are net of fees.

Return and RiskSummary of Callan's Long-Term Capital Market Projections (2016 - 2025)

Asset Class Index Projected Return* Projected Risk

EquitiesBroad Domestic Equity Russell 3000 7.35% 18.70%Large Cap S&P 500 7.25% 17.95%Small/Mid Cap Russell 2500 7.55% 22.75%Global ex-US Equity MSCI ACWI ex USA 7.55% 21.30%International Equity MSCI World ex USA 7.25% 20.05%Emerging Markets Equity MSCI Emerging Markets 7.60% 27.85%

Fixed IncomeShort Duration Barclays 1-3 Yr G/C 2.60% 2.25%Domestic Fixed Barclays Aggregate 3.00% 3.75%Long Duration Barclays Long G/C 3.70% 11.40%TIPS Barclays TIPS 3.00% 5.30%High Yield Barclays High Yield 5.00% 10.50%Non-US Fixed Barclays Global Aggregate ex-USD 1.40% 9.20%Emerging Market Debt EMBI Global Diversified 4.60% 9.90%

OtherReal Estate Callan Real Estate Database 6.00% 16.45%Private Equity TR Post Venture Capital 8.15% 32.80%Hedge Funds Callan Hedge FoF Database 5.25% 9.30%Commodities Bloomberg Commodity 2.75% 18.50%Cash Equivalents 90-Day T-Bill 2.25% 0.90%

Inflation CPI-U 2.25% 1.50%

* Geometric returns are derived from arithmetic returns and the associated risk (standard deviation).


2016 Capital Market ProjectionsCorrelations

● Relationships between asset classes are as important, or more important, than the level of individual asset class assumptions.

● These relationships will have a large impact on the generation of efficient asset mixes using mean-variance optimization.

● Correlations are what define the diversification benefit – or lack thereof – of asset combinations.

2016 Correlation Matrix

Broad Lg Cap Sm/Mid GlobxUS Int'l Eq Emerge Sht Dur Dom Fix Long D TIPS Hi Yield NUS Fix EMD Real Est Pvt Eqt Hedge Fd Comm Cash Eq Inflation

Broad Domestic Equity 1.000

Large Cap 0.997 1.000

Small/Mid Cap 0.965 0.940 1.000

Global ex-US Equity 0.882 0.879 0.853 1.000

International Equity 0.852 0.850 0.820 0.986 1.000

Emerging Markets Equity 0.861 0.855 0.840 0.933 0.860 1.000

Short Duration -0.240 -0.230 -0.260 -0.254 -0.230 -0.280 1.000

Domestic Fixed -0.108 -0.100 -0.130 -0.123 -0.105 -0.150 0.870 1.000

Long Duration 0.136 0.138 0.121 0.106 0.119 0.069 0.729 0.925 1.000

TIPS -0.050 -0.045 -0.065 -0.053 -0.045 -0.065 0.530 0.580 0.527 1.000

High Yield 0.640 0.640 0.610 0.629 0.610 0.610 -0.170 0.020 0.220 0.060 1.000

Non-US Fixed 0.014 0.050 -0.100 0.013 0.060 -0.090 0.480 0.510 0.542 0.340 0.120 1.000

EMD 0.579 0.580 0.550 0.550 0.530 0.540 -0.120 0.030 0.159 0.150 0.600 0.010 1.000

Real Estate 0.735 0.730 0.715 0.669 0.650 0.645 -0.140 -0.020 0.190 0.005 0.560 -0.050 0.450 1.000

Private Equity 0.948 0.945 0.915 0.934 0.905 0.905 -0.240 -0.190 0.062 -0.100 0.640 -0.060 0.560 0.710 1.000

Hedge Funds 0.797 0.795 0.765 0.760 0.735 0.740 -0.120 0.080 0.303 0.055 0.570 -0.080 0.540 0.600 0.770 1.000

Commodities 0.167 0.165 0.165 0.177 0.170 0.175 -0.220 -0.120 -0.042 0.100 0.100 0.050 0.190 0.200 0.180 0.210 1.000

Cash Equivalents -0.043 -0.030 -0.080 -0.040 -0.010 -0.100 0.300 0.100 -0.049 0.070 -0.110 -0.090 -0.070 -0.060 0.000 -0.070 0.070 1.000

Inflation -0.011 -0.020 0.020 0.010 0.000 0.030 -0.200 -0.280 -0.284 0.180 0.070 -0.150 0.000 0.100 0.000 0.200 0.400 0.000 1.000


Asset Allocation

● Allocations were modeled with target returns ranging from 6.5% to 7.5% in 0.25% increments.

● The existing target mix is very close to optimal mix 3.– Differences in the global ex-U.S. and real estate allocations are not significant enough to warrant change

● The target mix has an expected return below the long-term target. – The target mix has an expected 10-year compound return of 7.02%– The long-term target is 7.75%

● Investors are unlikely to be compensated for taking additional risk given the current low rates of expected return and substantial uncertainty in the capital markets.

Range of Asset Mixes

Constraints Optimal Asset MixesAsset Class Target Min Max Mix 1 Mix 2 Mix 3 Mix 4 Mix 5

US Broad Equity 33 0 100 28 30 33 36 40Global Ex-US Equity 28 0 100 21 24 26 29 31Domestic Fixed 20 0 100 33 27 20 12 4Real Estate 10 0 100 10 11 12 13 14Private Equity 8 0 100 7 7 8 9 10Cash Equivalents 1 1 1 1 1 1 1 1Totals 100 100 100 100 100 100

10-Year Compound Return 7.02% 6.50% 6.75% 7.00% 7.25% 7.50%Risk (Standard Deviation) 15.50% 12.75% 14.02% 15.39% 16.90% 18.58%


Asset Allocation

● The target mix lies on the efficient frontier– The target mix is constructed such that no rearrangement of the asset allocation could increase return without

also increasing risk

Efficient Frontier


Range of Projected Returns

● The graph above shows the range of asset values for each mix in any one year in the next ten-year period.– The center dotted line is the median asset value while the bottom of the bar is the 95th percentile– The range is created by 5,000 simulations based on the returns, risks and correlations shown earlier

● The positions and sizes of the bars depend on forecasted asset class performances.

● Asset mixes have close to a 50% probability of achieving the 7.75% return goal in any one year.

● All of the asset mixes have more than a 5% probability of a double digit one-year loss.

Any single year in the next decade

Target M ix 1 M ix 2 M ix 3 M ix 4 M ix 5(30%)(20%)(10%)

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

Ann

ual R

ates

of R

etur

n (%

)

5th Percentile25th PercentileM edian75th Percentile95th Percentile

Prob > 7.75%

37.0%18.7%7.2%

(3.4%)(16.7%)

48.8%

30.7%15.9%6.6%

(2.2%)(13.3%)

46.7%

33.6%17.2%6.9%

(2.7%)(14.9%)

47.8%

36.7%18.5%7.2%

(3.3%)(16.5%)

48.7%

40.4%20.0%7.5%

(4.1%)(18.4%)

49.6%

44.5%21.8%7.9%

(4.9%)(20.5%)

50.2%

7.75%49 47 48 49 50 50



● The ten-year ranges of return result from continuing the 5,000 simulations for a full 10 years.

● The median return is lower over ten years than over any one year due to “volatility drag.”

● The probability of achieving the return target falls to about 44% for both the target and mix 3.

● The annualized range of returns is compressed over 10 years relative to one year.– Very good or poor returns in any one year are unlikely in other years diluting the extreme outcomes– There is still more than a 5% probability of a negative annualized return over the entire time period

Ten-Year Period (annualized)

Target M ix 1 M ix 2 M ix 3 M ix 4 M ix 5(30%)(20%)(10%)

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

Ann

ual R

ates

of R

etur

n (%

)


Prob > 7.75%

15.8%10.5%7.0%3.6%

(1.2%)

44.1%

13.6%9.4%6.5%3.7%

(0.2%)

38.0%

14.6%9.9%6.7%3.6%

(0.7%)

41.2%

15.7%10.4%7.0%3.6%

(1.2%)

44.0%

16.9%11.1%7.2%3.5%

(1.7%)

46.1%

18.1%11.7%7.4%3.3%

(2.2%)

48.1%

7.75%44 38 41 44 46 48



● The exhibit above is based on the same data as the prior exhibit but the returns are not annualized.

● Over the next ten years the assets would be expected to approximately double in size in the median outcomes if cash flows are not considered.

● Double digit nominal cumulative losses are possible in poor markets.– Not only are these absolute losses but they also represent considerable underperformance relative to the

expected returns

10 Years, Cumulative

Target M ix 1 M ix 2 M ix 3 M ix 4 M ix 5(100%)

0%

100%

200%

300%

400%

500%

Cum

ulat

ive

Rat

es o

f Ret

urn

(%)


335.0%170.9%96.6%42.2%

(11.4%)

259.1%145.0%87.5%43.4%(2.3%)

292.1%156.6%92.0%43.0%(6.4%)

330.4%170.0%96.3%42.1%

(11.0%)

376.6%185.4%100.8%40.6%

(15.4%)

429.6%202.2%105.1%38.8%

(20.2%)


Disclaimers

This report is for informational purposes only and should not be construed as legal or tax advice on any matter. Any decision you make on the basis of this content is your sole responsibility. You should consult with legal and tax advisers before applying any of this information to your particular situation.

This report may consist of statements of opinion, which are made as of the date they are expressed and are not statements of fact.

Reference to or inclusion in this report of any product, service or entity should not be construed as a recommendation, approval, affiliation or endorsement of such product, service or entity by Callan.

Past performance is no guarantee of future results.

The statements made herein may include forward-looking statements regarding future results. The forward-looking statements herein: (i) are best estimations consistent with the information available as of the date hereof and (ii) involve known and unknown risks and uncertainties such that actual results may differ materially from these statements. There is no obligation to update or alter any forward-looking statement, whether as a result of new information, future events or otherwise. Undue reliance should not be placed on forward-looking statements.

Documents

PERS Investments Yesterday, Today and Tomorrow Workshop/Asset Allocation.pdf · PERS Investments Yesterday, Today and Tomorrow 2 Building blocks Investment markets are complex It