Transcript IPERS’ International Equity Structure

Iowa Public Employees’ Retirement System
Fixed Income
Performance and Strategy
Presented to the IPERS Investment Board
April 6th, 2001
April 6, 2001
Fixed Income
PRESENTATION OUTLINE
A) Role of Global Fixed Income In IPERS’ Portfolio
B) IPERS’ Objective & Strategy
C) IPERS’ Implementation
D) Performance Review Summary
IPERS
E) Individual Global Fixed Income Manager Reviews
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April 6, 2001
Fixed Income
ROLE OF GLOBAL FIXED INCOME IN
IPERS’ PORTFOLIO
1. Provide current income to fund benefit payments.
2. Diversify equity risk by serving as a lower risk asset class.
3. Provide hedge against deflation.
IPERS
4. Provide incremental return by investing in inefficient markets
(such as High Yield).
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Fixed Income Objective - IPERS’ stated objective is to outperform the Lehman U.S.
Universal Bond Index by 50 basis points over a full market cycle.
April 6, 2001
Fixed Income
IPERS’ OBJECTIVE & STRATEGY
Fixed Income Strategy - IPERS’ strategy is to create a well diversified portfolio of fixed
income securities by investing in instruments with varied characteristics. Specific
strategies utilized include but are not limited to:
Tactical Exposure- The U. S. Universal Index includes allocations to NonU.S., High Yield, CMBS, Emerging Markets and 144A securities. Managers are
allowed to tactically under/over weight these sectors within specific guidelines.
IPERS
Strategic Exposure- Typically, IPERS systematically over-weights mortgage
and high yield bonds and under-weights Treasury securities. These sectors are
deemed less efficient and can provide attractive returns on a risk-adjusted basis.
Sector
Gov’t/Agencies
Corporates
Mortgages
High Yield
Non - U. S.
IPERS’ Actual*
23%
21
44
8
4
Lehman U.S. Universal*
33%
21
33
5
8
*Percentages are as of December 31, 2000
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April 6, 2001
Fixed Income
IPERS’ OBJECTIVE & STRATEGY
Passive Core- IPERS currently has 33% of its portfolio managed passively.
This passive “core” limits active management risk in the domestic fixed income
portfolio.
Non-Dollar Exposure- Some IPERS’ fixed income managers are allowed to
invest in non-dollar bonds on a tactical basis to add incremental return.
IPERS
Duration Neutral- IPERS maintains an overall portfolio duration close to the
market duration. Each Manager’s discretion to vary the duration relative to
their benchmark is controlled.
IPERS’ Portfolio
Lehman U.S. Universal
Difference
Duration*
4.76 years
4.53 years
+0.23 years
* As of 12/31/00
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IPERS has implemented the following investment strategies and built the following manager team:
April 6, 2001
Fixed Income
IPERS’ IMPLEMENTATION
(12-31-00)
TARGET
WEIGHT
STRATEGY
MANAGER
PRODUCT
Passive
Mellon Capital
Lehman Aggregate
IPERS
Total Passive
ACTUAL
WEIGHT
33.0%
32.2%
33.0%
32.2%
1.0%
.60%
Active
Heitman
Private Mortgage
Active
J.P. Morgan
U.S. Universal
17.0%
17.6%
Active
BlackRock
U.S. Universal
17.0%
17.6%
Active
Western Asset
U.S. Universal
17.0%
17.6%
Active
Miller Anderson
Mortgages
8.0%
8.2%
Active
Oaktree Capital
High Yield
7.0%
6.2%
Total Active
Total Portfolio
67%
67.8%
100.0%
100.0%
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April 6, 2001
Fixed Income
IPERS’ Core Plus Portfolios
Approximately 53% of IPERS’ Fixed Income portfolio is mandated to “Core
Plus” accounts that track the Lehman U.S. Universal Index
Three managers currently follow this strategy:
BlackRock
J.P. Morgan
Western Asset
“Core Plus” - allows managers to opportunistically change portfolio
weightings relative to the benchmark
IPERS
Contractual constraints control risk
Examples:
Mortgage Backed Securities = at least 50% and not more than 200% of
index weight
Emerging Market Debt = 0% to 200% of index weight
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April 6, 2001
Annualized Performance (as of 12/00):
1Yr.
3Yr.
5Yr.
10Yr.
IPERS Fixed Income Portfolio
10.13%
6.25%
6.64%
8.63%
Lehman U. S. Universal
10.83%
6.02%
6.44%
7.97%
Lehman Aggregate
11.63%
6.36%
6.46%
7.96%
IPERS
Fixed Income
FIXED INCOME COMPOSITE
PERFORMANCE SUMMARY
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April 6, 2001
Fixed Income
GLOBAL FIXED INCOME
PROGRAM SUMMARY
Over the last 10 years, the IPERS’ fixed income composite performance has
performed well against the market benchmark. This performance is primarily
attributable to three factors:
•Implementation of strategic decisions to over-weight the less efficient
market sectors and under-weight efficient sectors
IPERS
•Longer-than-market average duration exposure during period when interest
rates generally fell;
•Value-adding skill by majority of IPERS’ fixed income managers.
Over the last year, performance was hampered due to a “flight to quality” in the
marketplace. Investors opted for safer investments, such as U.S. Treasuries, in
more efficient markets. This resulted in relative poor performance in less efficient
markets, such as High Yield, where IPERS’ has maintained a strategic overweight.
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April 6, 2001
IPERS
Fixed Income
DOMESTIC FIXED INCOME PERFORMANCE
RELATIVE TO PUBLIC FUND PEERS
COMPASS1 Peer Universe Rankings:
(Public DB Plans > $1B as of 12/00; 48 funds)
Percentile Return Ranking
1
1 Yr.
3 Yr.
5 Yr.
10 Yr.
IPERS’ Fixed Income Composite:
50
34
24
37
Lehman Universal:
34
44
51
85
Lehman Aggregate:
26
21
46
85
Number of Funds:
34
34
34
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COMPASS is analytical software developed by Wilshire. Product includes extensive plan sponsor and manager databases.
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April 6, 2001
IPERS
Fixed Income
INDIVIDUAL
GLOBAL FIXED INCOME
MANAGER REVIEWS
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Mellon Capital Management - Passive Market Index Strategy
April 6, 2001
Fixed Income
Strategy:
Benchmark:
Passively manage a portfolio of U.S. fixed income securities that closely
tracks a broad market index.
Lehman Aggregate Bond Index
Annualized Performance (as of 12/00)
Mellon Capital
Benchmark
+ .16%
3Yr
6.46%
6.36%
5Yr.
6.56%
6.46%
10Yr.
8.05%
7.96%
+ .10%
+ .10%
+.09%
Inception (6/90)
8.24%
8.16%
+ .08%
IPERS
Excess Returns:
1Yr
11.79%
11.63%
Comments: Tracking error positive over all time periods.
Continues to perform very well.
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J.P. Morgan Investment Management - Active
April 6, 2001
Fixed Income
Strategy:
Benchmark:
Invest in a portfolio of fixed income securities whose characteristics
resemble the overall dollar denominated bond market. J.P. Morgan will tend
to own a variety of Treasuries, non-dollar bonds, and both public and private
corporate and mortgage securities. J.P. Morgan has limited discretion to
manage duration and, therefore, seeks to add value through security selection
and rotation among sectors based on relative value.
Lehman U.S. Universal Index since 1/1/00; Lehman Aggregate from 10/15/85
to 1/1/00.
Annualized Performance (as of 12/00):
1 Yr.
3 Yr.
J.P. Morgan
11.23%
6.65%
JPM Custom
10.83%
6.35%
+ .50%
+ .30%
10Yr.
8.71%
8.31%
Inception(9/85)
10.07%
9.68%
+ .66%
+ .40%
+ .39%
IPERS
Excess Returns
5 Yr.
7.11%
6.45%
Comments: Continues to perform well over all time periods.
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Strategy:
April 6, 2001
Fixed Income
BlackRock Financial Management - Active
Benchmark:
Invest in a portfolio of fixed income securities whose characteristics
resemble the overall dollar denominated bond market. BlackRock will tend
to own a variety of Treasuries, hedged non-dollar bonds, both public and
private corporate securities, and public mortgage securities. BlackRock has
limited discretion to manage duration and, therefore, seeks to add value
through security selection and rotation among sectors based on relative value.
Lehman U.S. Universal Index
Annualized Performance (as of 12/00):
Excess Returns:
-0.14%
IPERS
BlackRock
Lehman Universal
1Yr.
10.69%
10.83%
Comments: Performance measurement began January 1, 2000.
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Strategy:
April 6, 2001
Fixed Income
Western Asset - Active
Benchmark:
Invest in a portfolio of fixed income securities whose characteristics
resemble the overall dollar denominated bond market. Western Asset will
tend to own a variety of Treasuries, hedged non-dollar bonds, both public and
private corporate securities, and public mortgage securities. Western Asset has
limited discretion to manage duration and, therefore, seeks to add value
through security selection and rotation among sectors based on relative value.
Lehman U.S. Universal Index
Annualized Performance (as of 12/00):
Excess Returns:
+0.66%
IPERS
Western Asset
Lehman Universal
1Yr.
11.49%
10.83%
Comments: Performance measurement began January 1, 2000.
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Miller Anderson Sherrerd-Active Mortgage Bond Strategy
April 6, 2001
Fixed Income
Strategy:
Benchmark:
Focuses primarily on high quality mortgages and mortgage-backed securities
with a secondary emphasis on asset-backed securities, commercial mortgages,
mortgage derivatives and non-dollar bonds. Miller Anderson utilizes original
economic analysis and proprietary risk models to forecast interest rates and
build a portfolio with high expected real returns and low prepayment risk.
Lehman Mortgage Index
Annualized Performance (as of 12/00):
Miller Anderson
Benchmark
-1.06%
3Yr
5.92%
6.59%
5Yr.
6.84%
6.92%
10Yr.
8.28%
7.82%
-0.67%
-0.08%
+.46%
Inception (6/85)
9.57%
9.14%
+ .43%
IPERS
Excess Returns:
1Yr
10.11%
11.17%
Comments: Short-term and mid-term under-performance starting to impact longer-term performance.
Miller Anderson’s “style” is under review to determine if it is still appropriate within IPERS’ risk16
controlled fixed income structure.
April 6, 2001
Strategy:
Focuses on non-investment grade debt of solvent U.S. corporations. Oaktree’s
investment process utilizes bottom-up, fundamental credit research and riskcontrolled portfolio construction methods while emphasizing higher quality,
cash yielding, senior debentures and avoiding undue principal risk.
Benchmark: Salomon Cash Pay High Yield Bond Index
Annualized Performance (as of 12/00):
Oaktree
Benchmark
1Yr.
-4.34%
-4.42%
Inception (1/98)
0.05%
-1.19%
Excess Returns:
+ .08%
+1.24%
IPERS
Fixed Income
Oaktree Capital Management –Active U.S. High Yield Bonds
Comments: Continues to outperform benchmark.
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Heitman Capital Mortgage - Commercial Mortgage Program
Benchmark:
April 6, 2001
Fixed Income
Strategy:
Focuses on high quality commercial mortgages.
Lehman Brothers Corporate Bond Index
Annualized Performance (as of 12/00):
Heitman
Lehman Corporate Index
+0.23%
3Yr.
8.09%
5.22%
5Yr.
8.22%
5.81%
+2.87%
+2.41%
Inception (6/92)
9.00%
7.39%
+1.61%
IPERS
Excess Returns:
1Yr.
9.63%
9.40%
Comments: All loans continue to perform as specified in their contracts. Board approved small add-on
loan in 2001. Portfolio will terminate as existing loans mature.
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Mellon Bond - Active Cash Management
April 6, 2001
Fixed Income
Strategy:
Benchmark:
Actively invests in cash equivalents with minimal additional risk with the
purpose of earning a yield greater than T- Bills.
Merrill Lynch 91-day Treasury Bill
Annualized Performance (as of 12/00):
Mellon Bond
Benchmark
+1.30%
3Yr.
6.08%
5.41%
5Yr.
5.80%
5.38%
+0.67%
+0.42%
Inception (7/95)
5.93%
5.41%
+0.52%
IPERS
Excess Returns:
1Yr.
7.48%
6.18%
Comments: Continues to add value over benchmark.
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