MAPERS One Day Seminar€¦ · U.S. Small Cap Private Equity REITs ANNUAL NET TOTAL RETURN AND EXPENSE BY ASSET CLASS (1998–2015) Net Total Return Expenses Expense Impact (%) Average

Not FDIC Insured May Lose Value No Bank Guarantee

Andrew Rubin, CFAInstitutional Portfolio Manager

For institutional use only.

MAPERS One Day SeminarMarch 2, 2018

Real Estate and REITs in Pension Portfolios

Agenda

1. Why should institutions invest in commercial real estate?2. Who is investing in commercial real estate and by what means?3. REIT overview and benefits4. Implications for pension investment portfolios5. Q & A

2 For institutional use only.201802-23370

Unless otherwise disclosed to you, in providing this information, Fidelity is not undertaking to provide impartial investment advice, or to give advice in a fiduciary capacity, in connection with any investment or transaction described herein. Fiduciaries are solely responsible for exercising independent judgment in evaluating any transaction(s) and are assumed to be capable of evaluating investment risks independently, both in general and with regard to particular transactions and investment strategies. Fidelity has a financial interest in any transaction(s) that fiduciaries, and if applicable, their clients, may enter into involving Fidelity's products or services.See “Important Information” for a discussion of performance data, some of the principal risks related to any of the investment strategies referredto in this presentation, professional designations and how they are obtained, and other information related to this presentation.

Real Estate is a Significant Percentage of the Overall U.S. Investment Market Basket

For institutional use only.3

Sources: Stock and bond data from Board of Governors of the Federal Reserve, Financial Accounts of the United States, 2016Q4; commercial real estate market size data based on NAREIT analysis of CoStar property data and CoStar estimates of Commercial Real Estate Market Size, 2016Q4.

Commercial Real Estate

$14 Trillion 17%

U.S. Equities$30 Trillion

37%Cash

$2.4 Trillion3%

Bonds$36.5 Trillion

44%

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Estimates of Commercial Property ValueNAREIT estimates the 2016 total dollar value of U.S. Commercial real estate is between $13 and $15 trillion


Sector Square Footage (Millions) Price per Square Foot ($) Value ($ Trillions)

Retail 13,355 $184 $2.5

Multifamily 18,025 $146 $2.6

Office 10,864 $203 $2.2

Self-Storage, Specialty, Towers and Other – – $1.9

Health Care 2,684 $697 $1.9

Industrial 22,233 $70 $1.6

Hospitality 2,604 $498 $1.3

Total 69,236 – $14.0

Source: Nareit calculations using the CoStar All Properties database 2016:Q4 and CoStar’s Commercial Real Estate Market Size Estimates 2016:Q3.

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Real Estate in the Institutional Portfolio


Real estate investment has long been recognized as a core asset class by large and small institutional investors, including pension and retirement funds

Real estate investment provides a unique combination of attributes:

• Hybrid investment returns with elements of both stocks and bonds

• Investment grade real property assets provide a measure of inflation hedging

• Real estate cycle does not coincide with the overall economic cycle

• Moderate correlation with other assets over time provides potential diversification

“Basically, there are only four types of investment categories that you need to consider: Cash, Bonds, Common Stocks and Real Estate.”

– Burton G. Malkiel, PhD (Economist, Princeton), The Random Walk Guide to Investing

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Portfolio Allocations to Real EstateDifferent researchers, methodologies, and time periods


Note: Allocations to any asset class will depend on the optimization methodology employed, the time periodcovered by the analysis, the assets included in the opportunity set, and the expected return assumptions.

Morningstar AnalysisMean Variance Optimization

1990–2007

Morningstar AnalysisMean Variance Optimization

1990–2010

Morningstar AnalysisFat Tail Optimization

1990–2009

Wilshire AnalysisSurplus Optimization

1990–2012

Morningstar AnalysisLiability Relative Investing

1990–2009

21%20%

20%18%

20%

Wilshire AnalysisSurplus Optimization

1990–2015

17%

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Institutional Real Estate AllocationsCurrent and target allocation ranges


• Across all plans investing in real estate, the average actual allocation is 7.5% of total assets, while the targeted allocation is 7.9%

• Public and private sector pension plans are close to their targeted weights

Source: Preqin Real Estate Online July 2017.

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Real Estate Ownership by Institutional Investor Type


• 2,074 U.S. institutions representing combined assets of $8.4 trillion invest in real estate• In the aggregate these institutions have $664 billion invested in the asset class• Public pension funds are the more aggressive real estate investors


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How U.S. Institutions Invest in Real EstatePrivate markets and listed real estate investment trusts (REITs)


• More than one-half of all real estate investors, on an asset weighted basis, gain exposure to the asset class through listed REITs

• The majority invest through a blend of listed REITs and private real estate• The average allocation to listed REITs estate within blended real estate portfolios is 34%


AVERAGE BLEND 34% LISTED : 66% PRIVATE

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REITs Comprise Nearly One-Fifth of the $664 Billion Invested in Real Estate by U.S. Institutions

For institutional use only.10Source: Preqin Real Estate Online July 2017.

Private Real Estate $540 Billion

Listed REITs $124 Billion

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Percentage of Real Estate Investors Using REITs57% of pension fund real estate investors, on an asset weighted basis, gain exposure to the asset class through listed REITs; 40% by number of plans

For institutional use only.11Source: Preqin Real Estate Online July 2017.

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Many Prominent Pension Funds Invest in REITs

For institutional use only.12Source: Preqin Real Estate Online. Representative Examples.

Alaska Permanent Fund CorporationBoeing Company Pension FundCommonwealth of Pennsylvania Treasury DepartmentFlorida State Board of AdministrationGeorgia Teachers' Retirement SystemIndiana Public Retirement SystemLockheed Martin Pension PlanMaryland State Retirement and Pension SystemMassachusetts Pension Reserves Investment Management BoardMichigan Department of TreasuryNew York City Police Pension FundNew York State Common Retirement FundNew York State Teachers' Retirement SystemNorth Carolina Department of State TreasurerOhio Public Employees' Retirement SystemOregon State TreasuryPennsylvania Public School Employees' Retirement SystemPension Benefit Guaranty CorporationState of Connecticut Retirement Plans and Trust FundsState Teachers' Retirement System of OhioTeachers' Retirement System of the City of New YorkUnited Parcel Service of America Pension PlanVirginia Retirement SystemWestern Conference of Teamsters Pension Plan

3M Pension PlanAlaska Retirement Management BoardAlcatel-Lucent Pension FundBank of America Pension FundDow Chemical Company Pension FundE.I.Du Pont De Nemours and Company Pension PlanEmployees' Retirement System of TexasHewlett Packard Pension FundHoneywell International Retirement TrustIBRD Retirement PlansIowa Public Employees' Retirement SystemKaiser Permanente Pension PlanLos Angeles Fire and Police Pension SystemNational Railroad Retirement Investment TrustNew Mexico State Investment CouncilPennsylvania State Employees' Retirement SystemPublic Employees' Retirement System of MississippiSouth Carolina Retirement SystemsStanford Management CompanyState Universities Retirement System of IllinoisTeachers' Retirement System of LouisianaTexas County & District Retirement SystemTexas Municipal Retirement SystemUtah State Retirement Systems

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Why REITs?


• REITs are real estate equities traded on public stock exchanges

• REITs are an efficient way to gain liquid, global real estate exposure

• REITs have historically provided portfolio diversification

• REITs have generated consistent and reliable income streams

• REITs have delivered competitive long-term performance

• REITs are a complement to private real estate

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U.S. REIT Market Overview

Source: National Association of Real Estate Investment Trusts (NAREIT) as of 12/31/17.

• REITs receive special tax considerations in exchange for distributing at least 90% of their cash flow (earnings) to shareholders in the form of dividends

• At year-end 2017 there were 181 publicly traded equity REITs operating in the United States with equity market capitalization totaling over $1 trillion

GROWTH OF U.S. EQUITY REIT UNIVERSE

23.9%

22.6%

18.5%

12.4%

7.3%

8.0%

7.3%

Retail Industrial/Office ResidentialHealth Care Self Storage DiversifiedLodging/Resorts

0

100

200

300

400

500

600

700

800

900

1,000

1,100

1,200

0

20

40

60

80

100

120

140

160

180

200

1986

1987

1988

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

2016

2017

Market C

apitalization in Billions $

# of

REI

Ts

# of Equity REITsEquity REITs Market Capitalization ($ Billions)

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REIT Share of Commercial Real Estate MarketListed equity REITS own 10% of total U.S. commercial real estate (CRE) and 20% of CRE in the markets where they concentrate their investments


-

5

10

15

20

25

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

REIT share of 'REIT-like' properties

REIT share of Total CRE Market

Percent In 2016, the estimated REIT share of 'REIT-like' properties was 19.6%;

the estimated REIT share of the total CRE market

was 9.6%

In 2009, the estimatedREIT share of 'REIT-like’

properties was 8.9%;The estimated REIT

share of the total CREmarket was

4.3%.

Source: CoStar, Nareit 2017.

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REIT Ownership Provides Diversification


200,000+ U.S. structures with a gross asset value over $1.5 trillion.Including:

• Retail (19,000)• Residential (3,700)• Office (3,100)• Industrial (5,400)• Health Care (7,000)• Self-storage (4,800)• Hotels (2,000)• Data Centers (260)• Single Family Rental (135,000)• Cell Towers (95,000)• Timberland (17m acres)

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CEM Benchmarking: REITs Outperformed Other Major Asset Classes: 1998 to 2015

For institutional use only.17Source: CEM Benchmarking, 2017.

-4 -2 0 2 4 6 8 10 12 14

U.S. Other Bonds

Hedgefunds / TAA

U.S. Broad Bonds

Non-U.S. Bonds

Other Real Assets

U.S. Long Bonds

Non-U.S. Equities

U.S. Large Cap

Unlisted Real Estate

U.S. Small Cap

Private Equity

REITs

ANNUAL NET TOTAL RETURN AND EXPENSE BY ASSET CLASS(1998–2015)

Net Total Return

Expenses

Expense Impact (%) Average Annual Total Return Net of Fees (%)

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CEM Benchmarking: REITs Delivered Superior Risk-Adjusted Returns


0

5

10

15

20

25

30

35

0

0.1

0.2

0.3

0.4

0.5

0.6

0.7Volatility (%)Sharpe Ratio Sharpe Ratio

Volatility

VOLATILITY AND RISK-ADJUSTED RETURNS BY ASSET CLASS(1998–2015)

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REITs and Core Real Estate Funds are Complementary


• REITs and core private equity real estate funds have similar, but not identical, long-term investment characteristics creating diversification within the asset class when combined

• This diversification creates the opportunity for the blended portfolio to earn higher returns while reducing the potential for negative or low returns

22%

40%38%

0%2%

44%

54%

0%

5%

35%

45%

16%

<0 0–10% 10%–20% 20%+

DISTRIBUTION OF FIVE-YEAR AVERAGE ANNUAL NET TOTAL RETURNS

Entirely Core Funds

½ Core Funds, ½ REITs

Entirely REITs

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Global Expansion of the REIT ModelIncreasing investment opportunity

For institutional use only.20201802-23370

Q & A


Appendix


Biographies

Andrew Rubin, CFAInstitutional Portfolio ManagerMr. Rubin is an institutional portfolio manager at Fidelity Institutional Asset Management® (FIAM®), an investment organization within Fidelity Investments’ asset management division that is dedicated to serving the needs of consultants and institutional investors, such as defined benefit and defined contribution plans, endowments and financial advisors.

In this role, Mr. Rubin serves as a member of the investment management team, maintaining a deep knowledge of portfolio philosophy, process, and construction, assisting portfolio managers and their CIOs in ensuring portfolios are managed in accordance with client expectations, and contributing to investment thought leadership in support of the team. He is also a principal liaison for portfolio management to a broad range of current and prospective clients and internal partners, providing detailed portfolio reviews and serving as a key conduit of client objectives, requirements, and marketplace insight back to the investment team. Mr. Rubin’s focus is on Real Estate Equity and Debt.

Prior to assuming his current position in August 2014, Mr. Rubin was a director of investment capability management at Fidelity Management & Research Company (FMR Co.) from 2010 to 2014.

Prior to joining Fidelity in 2010, Mr. Rubin was an assistant vice president at Old Mutual Asset Management from 2009 to 2010, where he served as an investment director in the Registered Investment Advisor (RIA) channel. Previously, Mr. Rubin was a summer associate at Batterymarch Financial Management in 2008, and an investment consultant with Natixis Global Asset Management from 2003 to 2007. He has been in the investments industry since 2003.

Mr. Rubin earned his bachelor of science degree in finance from Lehigh University and his master of business administration degree from Cornell University’s S.C. Johnson Graduate School of Management. He is also a CFA® charterholder.


23

Biographies

Ed SchollmeyerVice President, Account ExecutiveEd Schollmeyer is vice president at Fidelity Institutional Asset Management® (FIAM®), Fidelity Investments’ distribution and client service organization dedicated to meeting the needs of consultants and institutional investors, such as defined benefit and defined contribution plans, endowments, and financial advisers.

In this role, Mr. Schollmeyer serves as an account executive, working with consultants, recordkeeping providers, and plan sponsors. He partners with members of Fidelity’s consultant relations and asset management groups to ensure we bring the best of our retirement and investment expertise to FIAM’s relationships with his primary focus on government and public sector clients throughout the United States.

Prior to assuming his current responsibilities in 2008, Mr. Schollmeyer was responsible for relationship sales in Fidelity’s Treasury Management arm, where he focused on government sectors, endowments and colleges. Mr. Schollmeyer joined in Fidelity in 1988 in the Tax Exempt Market, where he held a variety of sales and client management positions.

Mr. Schollmeyer earned his bachelor of arts from Providence College and his master of science from Boston College. He also holds the Financial Industry Regulatory Authority (FINRA) Series 7 and 63 registrations.


24

Important Information

NAREIT is the worldwide representative voice for REITs and listed real estate companies with an interest in U.S. real estate and capital markets. Members are REITs and other businesses that own, operate and manage income-producing real estate, as well as those firms and individuals who advise, study and service those businesses. NAREIT is the exclusive registered trademark of the National Association of Real Estate Investment Trusts, Inc.®, 1875 I St., NW, Suite 600, Washington, DC 20006-5413. Copyright© 2017 by the National Association of Real Estate Investment Trusts, Inc.® All rights reserved.


Important Information

The following information applies to the entirety of this document. Please read it carefully before making any investment. Speak with your relationship manager if you have any questions.

Unless otherwise disclosed to you, in providing this information, Fidelity is not undertaking to provide impartial investment advice, or to give advice in a fiduciary capacity, in connection with any investment or transaction described herein. Fiduciaries are solely responsible for exercising independent judgment in evaluating any transaction(s) and are assumed to be capable of evaluating investment risks independently, both in general and with regard to particular transactions and investment strategies. Fidelity has a financial interest in any transaction(s) that fiduciaries, and if applicable, their clients, may enter into involving Fidelity’s products or services.

RisksPast performance is no guarantee of future results. Investors should be aware that an investment's value may be volatile and involves the risk that you may lose money. Performance for individual accounts will differ from performance for composites and representative accounts due to factors, including but not limited to, portfolio size, trading restrictions, account objectives and restrictions, and factors specific to a particular investment structure. Representative account information is based on an account in that strategy’s composite that generally reflects that strategy’s management and is not based on performance of that account.

The value of a strategy's investments will vary in response to many factors, including adverse issuer, political, regulatory, market, or economic developments. The value of an individual security or a particular type of security can be more volatile than and perform differently from the market as a whole. Nearly all accounts are subject to volatility in non-U.S. markets, either through direct exposure or indirect effects on U.S. markets from events abroad, including fluctuations in foreign currency exchange rates and, in the case of less developed markets, currency illiquidity.

The real estate industry is particularly sensitive to economic downturns. The value of securities of issuers in the real estate industry can be affected by changes in real estate values and rental income, property taxes, interest rates, tax and regulatory requirements, overbuilding, extended vacancies of properties, and the issuer's management skill. As a consequence, investments related to real estate may be more volatile than other investments. Mortgage-backed securities are subject to the risk that mortgagors may not meet their payment obligations and/or prepayment risk. Each investment also has its unique interest rate and payment priority characteristics.

These materials contain statements that are “forward-looking statements,” which are based on certain assumptions of future events. FIAM does not assume any duty to update any forward-looking statement. Actual events may differ from those assumed. There can be no assurance that forward-looking statements, including any projected returns, will materialize or that actual market conditions and/or performance results will not be materially different or worse than those presented.

201802-23370For institutional use only.26

Important Information, continued

Performance Data Performance data is generally presented gross of any fees and expenses, including advisory fees, which when deducted will reduce returns. See the GIPS® Composite Performance Data for performance figures that are net of the maximum investment advisory fee charged any client employing this strategy. Performance fee arrangements, if applicable, will also reduce returns when deducted. See FIAM LLC's Form ADV for more information about advisory fees if FIAM LLC is the investment manager for the account. For additional information about advisory fees related to other FIAM advisory entities, speak with your relationship manager. All results reflect realized and unrealized appreciation and the reinvestment of dividends and investment income, if applicable. Taxes have not been deducted.

FIAM claims compliance with the Global Investment Performance Standards (GIPS®). In conducting its investment advisory activities, FIAM utilizes certain assets, resources, and investment personnel of FMR Co. and its affiliates, which do not claim compliance with GIPS®. In addition, Fidelity Investments Canada ULC (“FIC”) and FIAM are separate firms, each claiming compliance with GIPS. Unless otherwise indicated, references made to product assets under management (“AUM”) are to the GIPS firm AUM for the strategy, which includes all discretionary portfolios.

* * * * * * * *

Fidelity Institutional Asset Management (FIAM) includes the following entities or divisions that provide investment services: Fidelity Institutional Asset Management Trust Company, a New Hampshire trust company (FIAM TC); FIAM LLC, a U.S. registered investment advisor; the Fidelity Institutional Asset Management division of FMR Investment Management (UK) Limited, a UK registered investment manager and U.S. registered investment advisor; and the Fidelity Institutional Asset Management division of Fidelity Management & Research (Hong Kong) Limited, a Hong Kong and U.S. registered investment advisor. FIAM LLC may use the name Pyramis Global Advisors or Pyramis as an additional business name under which it conducts its advisory business.

“Fidelity Investments” and/or “Fidelity” refers collectively to FMR LLC, a U.S. company, and its subsidiaries, including but not limited to Fidelity Management & Research Company (FMR Co.) and FIAM.

Products and services presented here are managed by the Fidelity Investments companies of FIAM LLC or FIAM TC. FIAM products and services may be presented by Fidelity Investments Institutional Services Company, Inc., Fidelity Investments Canada ULC, FIL Limited, or Fidelity Brokerage Services, LLC, Member NYSE, SIPC, all non-exclusive financial intermediaries that are affiliated with FIAM and compensated for such services.

Certain data and other information in this presentation have been supplied by outside sources and are believed to be reliable and current. Data and information from third-party databases, such as eVestment Alliance, Callan, and Morningstar are self-reported by firms that generally pay a subscription fee to use such databases, and the database sponsors do not guarantee or audit the accuracy, timeliness, or completeness of the data and information provided, including any rankings. Rankings or similar data reflect information at the time rankings were retrieved from a third-party database, and such rankings may vary significantly as additional data from managers is reported. Rankings may include a variety of product structures, including some in which certain clients may not be eligible to invest. FIAM cannot verify the accuracy of information from outside sources, and potential investors should be aware that such information is subject to change without notice.

FIAM has prepared this presentation for, and only intends to provide it to, institutional, sophisticated, and/or qualified investors in one-on-one or comparable presentations. Do not distribute or reproduce this report.

Third-party trademarks and service marks are the property of their respective owners. All other trademarks and service marks are the property of FMR LLC or its affiliated companies. FIAM does not provide legal or tax advice and we encourage you to consult your own lawyer, accountant, or other advisor before making an investment.

Professional DesignationsThe Chartered Financial Analyst (CFA) designation is offered by the CFA Institute. To obtain the CFA charter, candidates must pass three exams demonstrating their competence, integrity, and extensive knowledge in accounting, ethical and professional standards, economics, portfolio management, and security analysis, and must also have at least four years of qualifying work experience, among other requirements.

Not FDIC Insured • No Bank Guarantee • May Lose Value


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© 2018 FMR LLC. All rights reserved.

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Documents

MAPERS One Day Seminar€¦ · U.S. Small Cap Private Equity REITs ANNUAL NET TOTAL RETURN AND EXPENSE BY ASSET CLASS (1998–2015) Net Total Return Expenses Expense Impact (%) Average