STATE INVESTMENT COUNCIL MEETING€¦ · capital formation, and changes in productivity. 1.6% 4.1% 1.5% 1.4% 3.3% 0.0% 0.5% 1.0% 1.5% 2.0% 2.5% 3.0% 3.5% 4.0% 4.5% 5.0%. US Non-US

STATE INVESTMENT COUNCIL MEETING

Asset Allocation Recommendation

May 29 2019

Agenda Item 8

Asset Allocation Recommendation Executive Summarybull The Division presented an asset allocation proposal to the IPC on May 22 2019

bull the proposal was the culmination of a detailed review of capital market valuations as well as feedback from the IPC following a full day of discussions during an offsite meeting held in March 2019

bull insights and conclusions drawn from an Asset-Liability study conducted by the Divisionrsquos consultant (Aon Hewitt) and completed in 2018 also informed the discussions and proposal

bull the proposal was supported by the IPC and the Divisionrsquos team of external consultants

bull The Asset Allocation Recommendation includes modest adjustments to existing target allocations

Reduction in allocation to Risk Mitigation Strategies and increase in allocation to US Treasuriesbull the objective to provide downside protection and negative correlation relative to equity risk remains intact

the shift to US Treasuries increases liquidity to rebalance and to pay benefits in the event of a drawdownbull in conjunction with other adjustments to the asset allocation plan the Recommendation would effectively

reduce the targeted allocation to hedge fund strategies from 6 to 3Modest decrease in allocation to US equities offset in part by modest increase in allocation to non-US equities

bull the gradual shift towards a global equity allocation is more aligned with the opportunity set bull this reduction in the home country bias follows a period of strong outperformance for US equities that has

benefited the Pension FundIncrease in allocation to Private Equity

bull the increase is supported by an expected return premium for private investments and a shift in dynamics between public and private markets

bull The Recommendation includes changes to the Policy Benchmarkbull the Division recommends implementation of the new Policy Benchmark effective October 1 2019 to allow for a

transition period

Background on Updated Capital Market Assumptions

The updated Capital Market Assumptions (CMAs) incorporated into the asset allocation study were determined by the same methodology as in the recent past

bull CMAs reflect forward looking returns for a longer-term horizon and are intended to capture secular trends

Third party providers are the source for public equity asset classes and market yields as of year-end determine expectations for fixed income

bull for public markets the Division adopted the results of a third party survey of 34 providersbull this approach is more robust and provides access to a wider-ranging survey

Asset class consultants supported the development of customized CMAs for private market asset classes

bull for private markets CMAs reflect more conservative premiums relative to public markets versus prior CMAs

Generally speaking expected returns are lower versus the most recent asset allocation study with the exception of investment grade fixed income as yields have risen over the past two years

bull lower expected returns partly reflect the offsetting impact of recent strong capital market returns as well as higher valuations and deceleration of global economic growth potential

The Divisionrsquos approach has been reviewed by our team and consultantsbull AHIC Cliffwater TorreyCove and Hamilton Lane reiterated that the process is rigorous and resulted in

reasonable and appropriate results

Key Factors Point to Lower Capital Market Returns

Source Schroders St Louis Federal Reserve Bank and US Census Bureau

Global Growth Rate of the Working Age Population Global Productivity May Moderate

161169

US Non-US DM EM

Capital Per Capita (in $ thousands)

Slowing growth in the labor market andexpectations for a slower rate of productivitysuggest global economic growth maydecelerate over time Greater potential forcapital formation in Emerging Markets suggestsa higher rate of economic growth potential

Going forward financial market returns may be impacted by changing demographic factors capital formation and changes in productivity

US Non-US DM EM

2009-2018 2019-2028

US Non-US DM EM

2009-2018 2019-2028ldquoGrowth in advanced economies will continue to slow gradually as the impact of US fiscal stimulus fades and growth tends toward the modest potential for the group given aging trends and low productivity growthrdquo - International Monetary Fund World Economic Outlook April 2019

SampP 500 PE Multiple (LHS) Ten Year Treasury Yield (RHS)

Mar-99 Mar-01 Mar-03 Mar-05 Mar-07 Mar-09 Mar-11 Mar-13 Mar-15 Mar-17

Key Factors Point to Lower Capital Market Returns (continued)

Source Absolute Strategy Research and Bloomberg

Comparison of Valuations (2009 vs 2019)Global Leverage Remains Elevated

1970 1975 1980 1985 1990 1995 2000 2005 2010 2015

t of G

() As a result of ldquocheap debtrdquo and low interest

rates higher debt levels may ldquocrowd outrdquoinvestment over time Higher capital marketvaluations today may impact returns goingforward Less trade slows global growthprospects over the longer term

Protectionism May Impact Economic Growth

Going forward financial market returns may be impacted by leveragechanges in global trade policies and valuations

ldquoKey sources of risk to the global outlook are the outcome of trade negotiations and the direction financial conditions will take in months aheadhellip A range of catalyzing events in key systemic economies could spark a broader deterioration in investor sentiment and a sudden sharp repricing of assets amid elevated debt burdensrdquo

- International Monetary Fund World Economic Outlook January 2019

2009 2019

Updated Asset Classification Breakdown

Prior Classification Updated Classification

Proposed Changes in Classification Asset Class Targeted Asset Allocation

RISK MITIGATION 500

Risk Mitigation Strategies 500

LIQUIDITY 850

Cash Equivalents 550

US Treasuries 300

INCOME 2150

Investment Grade Credit 1000

High Yield 250

Global Diversified Credit 500

Add to Risk Mitigation Strategies Credit-Oriented HFs 100

Combine into Private Equity Debt-Related PE 200

Combine into Real Estate Debt Related Real Estate 100

REAL RETURN 875

Real Assets 250

Combine into Real Estate Equity Related Real Estate 625

GLOBAL GROWTH 5625

US Equity 3000

Combine into Non-US Equities Non-US Dev Market Eq 1150

Combine into Non-US Equities Emerging Market Eq 650

Combine into Private Equity BuyoutsVenture Cap 825

Asset Class Targeted Asset Allocation

GLOBAL GROWTH

US Equity 3000Non-US DM Equity 1150Emerging Market Equity 650Private Equity 1025REAL RETURN

Real Estate 725Real Assets 250INCOME

High Yield 250Private Credit 600Investment Grade Credit 1000DEFENSIVE

Cash Equivalents 550US Treasuries 300Risk Mitigation Strategies 500

Combine into Private Credit

Capital Market Assumptions

Source AHIC Cliffwater Division of Investment Hamilton Lane Horizon and TorreyCove

Compound Return Vol Compound

Return Vol 1 2 3 4 5 6 7 8 9 10 11 12

Risk Mitigation Strategies 461 368 539 503 100

Cash Equivalents 200 000 100 000 013 100

US Treasuries 261 390 173 526 -005 049 100

Investment Grade Credit 410 560 354 702 013 036 082 100

High Yield 469 1200 649 845 010 014 -002 038 100

Private Credit 760 835 680 808 016 -009 -020 051 087 100

Real Assets 790 1770 956 2287 015 002 -019 032 047 030 100

Real Estate 761 1254 809 1591 015 027 -005 -009 000 060 053 100

US Equity 612 1790 680 1751 023 009 -009 008 062 070 050 018 100

Non-US Dev Market Equity 671 2000 728 1957 023 005 -008 007 059 064 059 010 078 100

Emerging Market Equity 764 2700 860 2661 023 006 -008 009 067 065 057 -001 072 084 100

Private Equity 900 2050 1008 2656 000 006 -054 019 069 075 053 049 073 078 083 100

FY20 Proposal Correlation Matrix RecommendationFY17 CMAs

Risk versus Return by Asset Class and Strategy

0 5 10 15 20 25 30

Risk Mitigation StrategiesIG Credit

Private Credit

High Yield

Real AssetsReal Estate

US EquityNon-US DMEquity

EM Equity

Private Equity

CashUS Treasuries

400 400

900 925 925

325 325

550 525600

Cash Treasuries TIPS High Yield Large Cap Small Cap Dev Non US EM

2009 20190

1973 1978 1983 1988 1993 1998 2003 2008 2013 2018

Asset Allocation With Expectations for Lower Investment Returns

Source AHIC Bloomberg Division of Investment and JPMorgan

Going forward capital market returns are expected to be meaningfully lower vs historical precedent Portfolios better positioned to meet return objectives are also more complex and less liquid

In 1995 Treasuries yielded 78 with a historical volatility of 83 Over the subsequent ten years Treasuries returned 74 Now the Index is yielding 23

Expected Returns Are Lower and Investment Portfolios Are More Complex

Historical Yields for Bonds

1995 ndash All Bond Portfolio 2019 ndash Stock and Bond Portfolio 2019 ndash Well Diversified Portfolio

Expected Return 78Expected Vol 83

In 1995 an all-bond portfolio could have been structured to earn an attractive return for a pension plan

Today a portfolio comprised largely of stocks is expected to fall short of most plansrsquo actuarial assumptions

A well diversified portfolio is better positioned for higher returns with less risk

An important trade-off however is less liquidity for some of the highest yielding asset classes

Capital Market Return Assumptions Have Moved Lower

2 4 6 8 10 12 14 16 18 20

Expected Risk (Volatility)

The NJ Pension Fund Seeks To Earn the Highest Return Per Unit of Risk

The NJ Pension Fundrsquos investment risk should balance the desire to maximize returns with the need for adequate liquidity while maintaining the benefit of diversification

The NJ Pension Fundrsquos well-diversified structure is designed to earn an attractive risk-adjusted return

The Investment Frontier

100 RS

Diversified Portfolio

Stocks amp Bonds

Bonds in 1995

Current NJ Portfolio

Source Division of Investment

Return Per Unit of RiskLess Diversification

More Diversification

Less Diversification

RS Return Seeking

0 10 20 30 40 50 60 70 Current Targeted Asset

Allocation

80 90 100

Expected Long-Term Return 357 405 451 495 537 577 614 650 672 684 716 746

Expected Risk 299 326 412 528 658 796 938 1083 1178 1229 1377 1525

Return Per Unit of Risk 119 124 109 094 082 072 065 060 057 056 052 046

Expected Risk 390 379 453 580 733 899 1071 1248 1364 1427 1608 1790

Allocation to Return Seeking Investments

Well Diversified Portfolio

Stocks and Bonds

Summary of Asset-Liability Study

May 2019

Asset-Liability Study Backgroundbull The primary objective of the asset-liability study is to provide analysis for the asset allocation decision that is informed

by the liability profile of the Fund

bull The Asset-Liability study conducted by Aon models projections for various investment strategies over a wide range (5000) of economic scenarios over a 30 year horizon

bull the model allows for adjustments to key inputs including asset mixes contribution rates actuarial assumptions and capital market assumptions

bull the output of the study provides for the analysis of probability-weighted outcomes to better inform asset allocation decision-makingbull while the Asset-Liability study incorporates actuarial data the output of the study is not intended to provide analysis determined by an

actuarial process instead the output reflects the results of a wide range of economic scenarios

bull The key determinants in meeting the Fundrsquos longer-term financial objectives are the Statersquos funding policy and the asset allocation

bull in this study the funding policy is defined as the Statersquos contribution as a percent of the Actuarially Determined Contribution (ADC) calculated in accordance with statute

bull the Statersquos funding policy is subject to annual Legislative appropriation and is therefore outside the control of the Council and the Division

bull the current funding policy that ldquoramps uprdquo the Statersquos contribution by 10 each fiscal year until the ADC reaches 100 is considered to be the ldquobase caserdquo assumption for this study

bull possible changes to funding policy are evaluated to determine the impact on the asset allocation decision bull the current asset allocation is considered to be the ldquobase caserdquo assumption for this study

bull The Asset Liability study was initiated in the Spring of 2017 this presentation has been subsequently updatedbull while the ldquocurrent staterdquo reflects a 765 Assumed Rate of Return (AROR) as of June 30 2016 (the most recent valuation report available

when the study was initiated) all projections have been updated to reflect the AROR guidance as of March 2018 750 for the July 1 2017 and July 1 2018 actuarial valuations 730 for the July 1 2019 and July 1 2020 actuarial valuations and 700 for the July 1 2021 actuarial valuation and thereafter

Asset-Liability Study Executive Summarybull The current asset allocation appears to have an appropriate level of risk

bull a lower (higher) risk allocation would increase (reduce) the Fundrsquos dependency on contributions and reduce (increase) the size of the range of outcomes

bull a higher risk allocation could improve funded status but could also meaningfully increase the volatility of returnsbull magnified downside risk would increase likelihood of weakening financial position and greater dependency on contributions

bull an appropriate asset allocation appears to be broadly in place with due consideration for the Fundrsquos liability profilebull the Fundrsquos targeted allocation of 75 to return-seeking assets (eg public equities private equity and real estate

assets) is suitable for a fund with a large deficit and a long-term horizonbull ADC levels are relatively inelastic to changes in investment returns less volatility of ADC contribution levels suggests a higher

allocation to return-seeking assetsbull a lower allocation to return-seeking assets would likely result in a higher funding shortfall over timebull a higher allocation to return-seeking assets would result in a more concentrated less efficient and less liquid portfolio

bull In order for the Fund to approach fully funded status over a longer-term period the Fund will be highly dependent upon State local and employee contributions

bull under a base case scenario the Pension fund will achieve a funded status of 93 by FY47 with $252 billion in market value of assets

bull under the base case scenario the market value of pension assets will grow by $175 billion and $465 billion in benefits will be paid for a combined total of $640 billion in increased pension fund value over the 30 year horizon

bull under the base case scenario the majority of the increased pension fund value is attributable to contributions

bull Poorly funded plans face intermediate-term (5-10 years) liquidity risk particularly under a scenario in which State appropriations remain below 100 of the ADC

bull different asset allocations for the underlying plans that constitute the Fund may be warranted should deviations from the current funding plan significantly reduce intermediate-term State appropriations

bull increased investment risk would exacerbate intermediate-term downside risk

Overview of the Current State

Source AHIC - Information taken from July 1 2016 actuarial valuation (reported at 765 discount rate) and projections provided by the Plan actuaries

The Asset Hurdle Rate measures the minimum rate of increase in assets (from investment returns and contributions) in a given year that is required to ensure the unfunded liabilities do not grow It is a measure of the planrsquos dependency on investment returns and contributions

Teachers Pension amp

Annuity Fund (TPAF)

Public Employees Retirement

System (PERS)

Police amp Firemens

Retirement System (PFRS)

State Police Retirement

System (SPRS)

Judicial Retirement

System (JRS)

Total Pension Fund

Market Value of Assets (MVA) ($ millions) $23733 $27127 $24116 $1744 $196 $76916

Actuarial Liability (AL) ($ millions) $57866 $53086 $37470 $3209 $630 $152261

Funded Ratio - MVA AL () 410 511 644 544 312 505

State Contributions as of Total Contributions

Liability Growth Rate (LGR) - Gross Normal Cost 180 200 190 160 290 189 - Interest Cost 765 765 765 765 765 765 - Total 945 965 955 925 1055 954

FY18 Estimated Benefit Payments $4200 $4100 $2500 $200 $100 $11200

Benefit Payments as of MVA ($ millions) 179 152 1030 1260 287 145

Asset Hurdle Rate (LGR Funded Ratio) 232 189 149 171 336 189

3460 23 14 72 72

There is a strong inverse relationship between funded status and dependency on State appropriations

Pension Fund Measures of Financial Health

The Pension Fundrsquos negative cash flow profile and high Asset Hurdle Rate demonstrate that investment returns alone will not be sufficient to meet longer-term financial objectives Contributions will play a significant role

The Pension Fund has a significant negative cash flow profile

TotalSPRS JRSPERS PFRSTPAF

The Asset Hurdle Rate is currently two times the Liability Growth Rate due to the underfunded status of the total fund

bull Main component of long-term economic cost

bull Does not reflect the planrsquos funded status at the end of the forecast period

Present Value of Plan

Contributions

Present Value of Terminal

Funding

Asset Liability Study Background Economic Costs of Pension Fund

Higher Economic Costs generally reflect a greater dependency on contributions and a lower funded status

bull Reflects the planrsquos funded status at the end of the forecast period

bull Surplus assets are valuable as they lower future contributions

bull Unfunded liabilities are costs that will be recognized in future years

Present Value of Fund Contributions

Present Value of Terminal Funding

ECONOMIC COSTS OF PENSION FUND

Asset-Liability Study Results Summary Comparison of Various Asset Allocations

Over longer horizons higher return-seeking allocations (eg the current asset allocation) are expected to result in significantly higher funded status and lower costs Under downside scenarios funded status and economics costs are not meaningfully

different across allocations Increased appetite for return-seeking assets is tempered by intermediate-term financial risk

Higher Return-Seeking portfolios provide significant improvement in funded status with modestly worse outcomes in downside scenarios

Higher Return-Seeking portfolios have lower expected costs with little differentiation of costs across asset allocations in a downside scenario

Source AHIC(1) Long-term expected returns and volatilities reflect capital market assumptions at the time of the study

30 year Economic Cost (in $ billions)

30 year Ending Funded Ratio (MVA AL)

Higher Return-Seeking portfolios provide expected returns closer to the actuarial rate of return (currently 765) At more extreme allocations efficiency declines as concentration risk increases

All scenarios on this page assume the current funding policy remains in place The projected range of funded status outcomes is shown for various asset allocations for the Pension Fund The results reflect the March 2018 decision to reduce the expected return on assets over a 5-year period The results also reflect capital market assumptions at the time of the study

Long-Term Expected

Return

Expected Volatility

(Risk)

Return Per Unit of Risk

Base Case

Downside Risk

Base Case

Downside Risk

0 Return-Seeking 403 570 071 $1701 $1826 45 28

10 Return-Seeking 456 552 083 $1657 $1800 49 30

20 Return-Seeking 506 592 085 $1610 $1784 55 31

30 Return-Seeking 552 680 081 $1561 $1776 61 32

40 Return-Seeking 596 800 075 $1512 $1774 68 32

50 Return-Seeking 637 939 068 $1461 $1777 75 32

60 Return-Seeking 675 1092 062 $1407 $1784 81 31

70 Return-Seeking 710 1252 057 $1357 $1790 89 31

Current Targeted Asset Allocation 729 1342 054 $1330 $1796 93 30

80 Return-Seeking 743 1416 052 $1309 $1801 96 29

90 Return-Seeking 772 1582 049 $1264 $1813 103 28

100 Return-Seeking 799 1749 046 $1221 $1827 111 27

(1) (1) (1)

Public and Private Equity DiscussionCurrent Market Environment and Valuations

May 2019

Public Equity and Private Equity

Public Equity

Private Equity

bull long-term capital appreciation expected to outpace inflation and benefit from economic growth additional return potential from dividend income

bull highly efficient liquid and transparent markets with flexible investment strategies

bull structural headwinds including less favorable demographics slowing productivity and higher public leverage cap growth and earnings potential

bull strong returns appear somewhat dependent on low interest rates modest inflation and low volatility

bull opportunity set is declining particularly in developed markets as aggregate returns have become more concentrated and fewer companies remain in the public markets

Role in the Portfolio Current Market Environment

bull enhanced return opportunities and access to large pool of faster growing companies

bull private equity firms provide value-added expertise and support via improved operations synergies cost savings leverage and strategic relationships

bull private equity has very limited liquidity and significant cash flow uncertainty given the unknown timing of exit

bull purchase price multiples fund raising and dry powder are near all-time record highs requiring even greater selectivity near-term for current vintage year opportunities

bull managers must focus on a value-creation investment thesis to drive returns including top-line growth margin improvement and increased cash flow

bull returns are closely linked with public equities and therefore private equity will face many of the same structural headwinds

ldquoGlobal growth in 2019 is also weighed down by the emerging market and developing economy group where growth is expected to tick down to 44 in 2019hellip Conditions are projected to improve during 2019 as stimulus measures sustain activity in China In 2020 growth is projected to rise to 48 driven almost entirely by an expected strengthening of activity in these economies on the back of policy adjustment and some easing of strains in countries affected by conflict and geopolitical tensionsrdquo

Global Economic Growth Appears to be SlowingldquoGrowth in advanced economies is projected to slow from 22 in 2018 to 18 in 2019 and 17 in 2020 With output gaps estimated as being closed for most economies in the group the cyclical upsurge is set to retreat toward more modest potential rates of growthhellip In the United States growth is expected to decline to 23 in 2019 and soften further to 19 in 2020 with the unwinding of fiscal stimulus The downward revision to 2019 growth reflects the impact of the government shutdown and somewhat lower fiscal spending than previously anticipated while the modest upward revision for 2020 reflects a more accommodative stance of monetary policyhellip Despite the downward revision the projected pace of expansion for 2019 is above the US economyrsquos estimated potential growth rate rdquo

ldquoGrowth in the euro area is set to moderate from 18 in 2018 to 13 in 2019 and 15 in 2020 Although growth is expected to recover in the first half of 2019 as some temporary factors that held activity back dissipate carryover from the weakness in the second half of 2018 is expected to hold the 2019 growth rate down Growth rates have been marked down for many economics notably Germany Italy and Francerdquo

ldquoFollowing a broad-based upswing in cyclical growth that lasted nearly two years the global economic expansion decelerated in the second half of 2018 Activity softened amid an increase in trade tensions and tariff hikes between the United States and China a decline in business confidence a tightening of financial conditions and higher policy uncertainty across many economieshellip Global growth is now projected to slow from 36 in 2018 to 33 in 2019 before returning to 36 in 2020hellip The global growth forecast reflects a combination of waning cyclical forces and a return to tepid potential growth in advanced economiesrdquo

Source International Monetary Fund

US Eurozone EM World

rowth (

2017 2018 2019E 2020E 2021E

March 9 1999-2009 March 9 2009-2019 March 9 1999-2019

USA EAFE + Canada Emerging Markets All Country World Index (ACWI)

Strong Financial Market Returns Over the Past Decade Do Not Appear to be Sustainable

Strong equity market returns over the past ten years reflect in part a recovery from lower valuations following the global financial crisis

Source Bloomberg

Global Public Equity ReturnsMarch 9 1999 ndash March 9 2019

US Japan EM ex-China China Euro Area India

1992-2007 2010-2018EGDP calculations in nominal USD

Emerging Market Economies Are Having A More Pronounced Impact on Economic GrowthShare of Global GDP Growth by Region

Economic transformations tend to lead toaccelerating growth The shift from amanufacturing-driven economy to a moreservice-oriented economy has expandedChinarsquos global reach but has also led tohigher risks as leverage has concurrentlyincreased

The Changing Structure of Chinarsquos Economy

Source Absolute Strategy Research

Industrial Share of Economy Service Share of Economy

Global economic growth is less dependenton the US today versus a quarter centuryago Emerging market countries (mostnotably China and India) will likely have anincreasingly more significant role in globaleconomic expansions going forward

From 1992-2007 the US accounted for 25 of global growth now the US accounts for 14

From 1992-2007 China accounted for 9 of global growth now China accounts for close to 25

In 1995 nearly half of Chinarsquos economy was manufacturing while a third was service

Now service comprises more than half of Chinarsquos economy while manufacturing represents roughly 40

Emerging Market economies have higher potential growth rates and are expected to play a more significant role in global economic expansion in the future

ldquoBeyond 2020 global growth is set to plateau at about 36 over the medium term sustained by the increase in the relative size of economies such as those of China and India which are projected to have robust growth by comparison to slower-growing advanced and emerging market economies (even though Chinese growth will eventually moderate)rdquo - International Monetary Fund World Economic Outlook April 2019

ldquoThe US Federal Reserve in response to rising global risks paused interest rate increases and signaled no increases for the rest of the year The European Central Bank the Bank of Japan and the Bank of England have all shifted to a more accommodative stance China has ramped up its fiscal and monetary stimulus to counter the negative effect of trade tariffsrdquo - International Monetary Fund World Economic Outlook April 2019

175196 200

129168 173

10 Years 15 Years Next 3 Years

US EAFE EM

May-98 May-00 May-02 May-04 May-06 May-08 May-10 May-12 May-14 May-16 May-18

olatili

ty Ind

Dec-04 Dec-06 Dec-08 Dec-10 Dec-12 Dec-14 Dec-16 Dec-18

(billi

Fed BOJ ECB

Global Economic Growth and Monetary Policy

The US has led the global economic recovery as unprecedented monetary policy stimulus was implemented The Fed has subsequently shifted towards a more normalized monetary policy

Global Economic Growth and Projections

Global Monetary Policy ndash Central Bank Balance Sheets

Source IMF Thomson Reuters Bloomberg

Volatility Has Been Subdued

Dec-04 Dec-06 Dec-08 Dec-10 Dec-12 Dec-14 Dec-16 Dec-18Fed ECB BOJ

Monetary policy has diverged as the US has progressed

towards normalization

Extraordinary monetary policy has supported strong capital

market returns

Artificially low interest rates have supported a decline in

capital market volatility

Global Monetary Policy ndash Key Targeted Rates

The Pension Fundrsquos home country bias has meaningfully added value as returns have benefited from above potential US economic growth and favorable earnings over the past decade

Global Earnings Growth and Equity Allocation

Source Factset MSCI and State Street

Global Earnings Growth and Projections

NJ Global Equity Allocation vs ACWI

NJ Global Equity Allocation MSCI ACWI Index

United States Non-US Developed Emerging Markets

The US economy has outpaced other developed markets over the past decade Going forward the emerging markets are expected to realize stronger earnings growth

The Pension Fund has maintained a meaningful ldquohome country biasrdquo This has benefited net returns as US equities outperformed significantly over the past decade

10 Years 15 Years Next 3 YearsUS EAFE EM

Apr-06 Apr-07 Apr-08 Apr-09 Apr-10 Apr-11 Apr-12 Apr-13 Apr-14 Apr-15 Apr-16 Apr-17 Apr-18 Apr-19

SampP 500 PE Average

8738 8900

6786264

96910176

11834 1186112600

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019E 2020E

US Equity Market Earnings and Valuation

Source Factset

Over the past fifteen years EPS growth for the SampP 500 has increased at an average rate of 75 with recent acceleration in earnings driven by tax reform Throughout much of the past decade strong US equity returns have been supported by multiple expansion

SampP 500 Earnings

In 2018 US corporate earnings benefitted from tax reform and accelerating economic growth More recently equity market valuations have been more volatile

SampP 500 Price Earnings Multiple

ldquoEquity valuations ndash which were stretched in some countries ndash have been pared back with diminished optimism about earnings prospects amid escalating trade tensions and expectations of slower global growthrdquo

1269811960

1115010536

13175 1323613682

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019E 2020E

Non-US Developed Markets Earnings and Valuation

Slower economic growth and heightened geopolitical uncertainty have contributed to muted equity market returns in non-US Developed Markets

EAFE Price Earnings Multiple

Source Factset

EAFE Earnings

Over the past fifteen years EPS growth for the EAFE has increased at an average rate of 40 The slower rate of EPS growth is consistent with slower economic growth

Earnings multiples remained range-bound as geopolitical risks and uncertainty have increased

EAFE PE Average

EM PE Average

Emerging Markets Earnings and Valuation

Emerging markets continue to realize favorable earnings growth Valuations have been adversely impacted by a strengthening dollar

Emerging Markets Price Earnings Multiple

Source Factset

Emerging Markets Earnings

Over the past fifteen years EPS growth for emerging markets has increased at an average rate of 59 Going forward emerging market earnings are expected to outpace the global marketplace

Emerging market equities have historically traded at lower multiples versus the global equity marketplace reflecting higher volatility of earnings and returns

57695958

8506 8354

8125 8222 8290

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019E 2020E

The Private Equity Market Is Expanding

Number of Publicly Traded Companies

The Growth of Unicorns

Source Blackstone and Pitchbook

Public Equity vs Private Equity

The Private Equity market continues to expand and companies are incentivized to remain private for extended periods of time as access to private capital has increased Companies that historically IPO-ed at much lower valuations are now staying private longer There has been a similar offsetting trend of available publicly traded companies

Certain structural advantages of private companies have led to a shift in the mix between public and private companies

Factors Impacting The Public Private Equity Decision

A wide range of factors have contributed to a growing trend of companiesgoing and remaining private

Management Control

Regulatory Changes

PRIVATEPUBLIC

Liquidity

IPO costs and ongoing regulatory costs

Competitive Intelligence

Increased Access to Capital Transparency

120 120 116

MSCIWorld

Russell3000 Total

Return

SampP 500Total

Return

PrivateEquity

PE UpperQuartile

MSCI World Russell 3000Total Return

SampP 500Total Return

PrivateEquity

PE UpperQuartile

135 140146

MSCIWorld

Russell3000 Total

Return

SampP 500Total

Return

PrivateEquity

PE UpperQuartile

PrivateEquity

PE UpperQuartile

20 Year 15 Year 10 Year 5 Year

Private equity returns reflect global buyoutsventuregrowthSource Cambridge Associates Pooled Returns as of 9302018

-11 -9-15

12 138

20 20 18

Small and Mid-Cap Large and Mega-Cap Growth and Venture Capital

Bottom 5 Lower Quartile Median Upper Quartile Top 5

Private Equity Has Historically Outperformed Public Equity

While private equity has enjoyed a performance advantage relative to public marketsgeneral partner selection is an important component of a successful private equity program

Public versus Private Equity Historical Returns

Source Cambridge and TorreyCove

There Has Been a Wide Disparity of Returns in Private Equity Over a Twenty Year Period

1738134

68327158

3259 3324

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

983 1048 1043967 982 920

1168 11701301

1900 1983

Buyout Distressed PE Growth Mezzanine Other Real Estate Venture

Capital Availability in the Private Equity Market Remains High

Source Preqin and TorreyCove

Private Equity Committed Uncalled Capital

Private Equity Fundraising

The private equity market continues to expand with large availability of capital driven by strong investor demand

For a seventh consecutive year private equity dry powder has reached a new record level However the ratio of dry powder to deal volume has remained the same

Strong institutional demand has supported heightened private equity fundraising

49x 51x 53x57x 56x 54x

57x 58x 57x 57x

88x 87x 88x

97x103x 100x

106x 106x101x

2011 2012 2013 2014 2015 2016 2017 2018 YTD 2019 3ME 12019Debt Multiples Purchase Price Multiples

9290 89

90 9088

2013 2014 2015 2016 2017 2018

All Strategies Buyout Real Estate Venture

Private Equity Valuations are High

Purchase Price And Debt Multiples for LBOs

Secondary Market Valuations

Growth in private equity assets has also led to higher competition for investmentsand a more efficient secondary market

While liquidity remains limited in private equity the secondary market has grown meaningfully

High private equity purchase price multiples and use of leverage appears to have plateaued in recent years

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

SampP 500 vs EAFE (LHS) Avg SampP500 vs EAFE SampP 500 vs EM (RHS) Avg SampP500 vs MSCI EM

84 82 7988

96 10 95106

118108

155165

172 175 174

2010 2011 2012 2013 2014 2015 2016 2017 2018

Private Equity US Public Small Cap EVT12M EBITDA

Non-US equity valuations are generally more attractive on a relative basis Private market valuations continue to be marked at a significant discount to public equity markets

Public and Private Equity Valuations

Source Bloomberg MSCI and State Street

Global Equity Valuation Comparisons

Public vs Private Equity

Valuations in both the public and private equity markets have expanded over the past decade Publicly traded companies maintain higher valuations reflecting in part a meaningful liquidity premium

Recent outperformance in the US markets in terms of both economic and earnings growth has led to higher relative valuations for US equities

Higher US valuations

Lower US valuations

Global Equity Discussion

May 2019

Executive Summary Aon Hewitt Investment Consulting (AHIC) recommends reducing the US equity overweight within the New Jersey

Division of Investments Public Equity portfolio The DOIrsquos Public Equity policy portfolio has an 8 overweight to US equity which has proved to be favorable in the

past relative to the global market weighted benchmark Our recommendation to reduce the US equity bias within the Public Equity portfolio is based on the following reasons

- A capitalization weighted portfolio approach places the global market as the natural starting point - A higher allocation to US equity relative to its share in the global opportunity set is in essence an active

investment bet on domestic equities - AHIC 10 and 30 year capital market assumptions do not favor US bias (as of Q1 2019)- The potential benefits of global investing are grounded in finance theory consistent with modern portfolio theory

that suggests the ldquomarket portfoliordquo is the most efficient portfolio (in terms of riskreturn trade-off)

United States Developed Ex US Emerging Markets

NJDOI Policy MSCI ACWI MSCI ACWI IMI

NJDOI Policy vs Public Market Index

Forward Looking RiskReward Optimization Q1 2019 Capital Market Assumptions

bull Based on Aon Hewittrsquos Capital Market Assumptions we illustrate below the efficiency of an equity portfolio based on the mix between US and Non-US equity

bull The most efficient portfolios contain 50 US equities and 50 non-US equities (whether we assume active alpha or passive management) Therefore from a relative perspective we recommend a neutral stance between US and non-US equities over a long-term horizon

028028

029 029 029 028028

0 10 20 30 40 50 60 70 80 90 100

Non-US Equity

US Non-US Equity Is now the right time to allocate more to Non-US equity

Given the recent outperformance of US equity AHIC believes now is a reasonable time to reduce US equity overweight

US Equity Outperforms

Non-US Equity Outperforms

Rolling 3 Year Period Return Differentials(US Equity ndash Non-US Equity)

Public and Private Credit DiscussionCurrent Market Environment and Valuations

May 2019

Public Fixed Income and Private Credit

Public Fixed Income

Private Credit

bull gain exposure to the largest and most liquid global asset class (US Treasuries)

bull relatively low volatility asset class with predictable income stream and the safety of the senior most claims in the capital structure

bull flexibility to implement a wide range of investment strategies including yield curve sector capital structure and credit strategies

bull notwithstanding an increase in interest rates in recent years nominal and real yields remain near all-time lows particularly for sovereign debt while US Treasury supply is expected to continue to rise

bull credit spreads do not appear to fully compensate investors for weakening fundamentals and investor protections

bull higher risk-adjusted returns relative to public debt markets attributable to liquidity premium regulatory arbitrage and compensation for complexity

bull ability to capitalize on opportunities presented by disintermediation of financial markets further upside possible for distressed debt

bull high private equity dry powder suggests supplydemand imbalances that favors lenders will persist middle market borrowers remain underserved

bull increasing prevalence of covenant lite credit protections and tight public high yield credit spreads suggest current yields are not commensurate with risk

bull deregulation will likely lead to expansion of direct lending providers resulting in heightened competition amongst lenders and lower net returns

bull changes to risk retention rules could weaken credit protections and increase supply of structured credit

Dec-50 Dec-54 Dec-58 Dec-62 Dec-66 Dec-70 Dec-74 Dec-78 Dec-82 Dec-86 Dec-90 Dec-94 Dec-98 Dec-02 Dec-06 Dec-10 Dec-14 Dec-18

US CPI Urban Consumers YoY NSA 68 Year Average 25 Year Average

May-62 May-70 May-78 May-86 May-94 May-02 May-10 May-18

Treasury Yields Are Near Historic Lows as Inflationary Pressures Remain Subdued

Ten Year Treasury Yield

Treasury yields have been artificially low over the past decade Going forwardsecular trends may lead to sustainably low interest rates versus historical norms

Source Bloomberg

US Consumer Price Inflation

Treasury yields have moved higher over the past several years but remain quite low in historical terms Treasuries are now hovering around their average yields since the onset of the global financial crisis

Inflation has moved lower and has been less volatile over the past quarter century implying real yields may remain lower versus longer-term historical norms

Apr-87 Apr-91 Apr-95 Apr-99 Apr-03 Apr-07 Apr-11 Apr-15 Apr-19

IG All in Yield (LHS) HY All in Yield (RHS) IG Avg HY Avg

Apr-80 Apr-84 Apr-88 Apr-92 Apr-96 Apr-00 Apr-04 Apr-08 Apr-12 Apr-16

2-30 Treasury Curve Avg Steepness

While US Yields Remain Low Yields Appear Attractive Relative to Global Borrowing Costs

Source Bloomberg

Global Sovereign Yield Curve Comparisons

All in Yields for IG and HY

Steepness of the US Treasury Curve

Low global yields and a flat Treasury curve suggest rates are less likely to move sharply higher

Apr-19

Extraordinarily low (and negative) global sovereign yields may serve as an anchor to US interest rates The flattening Treasury yield curve is consistent with less accommodative monetary policy and subdued inflation In the meantime low Treasury yields limit the returns available in credit markets

Canada

Euro Germany FranceItaly Japan

3M 2YR 5YR 10YR 30YR

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

Default Rate (RHS) HY OAS (LHS) Long Term Avg OAS

US Credit Market Valuations and Fundamentals

Credit fundamentals have weakened at the same time spreads have narrowed More recently the backdrop for high yield is somewhat more constructive

Source Bloomberg and Morgan Stanley

HY Credit Spreads and Creditworthiness

IG Credit Spreads and Creditworthiness

HY Credit Fundamentals

IG Credit Fundamentals

Jun-89 Jun-94 Jun-99 Jun-04 Jun-09 Jun-1420

BBB as of US Credit Index (RHS) OAS US Credit Index (LHS) Long Term Avg OAS

Jan-19

Growth in the Private Credit Market Has Coincided With Weakening Investor Protections

Source BAML SampP Capital IQ and TSSP

Investorsrsquo search for yield has driven demand for private credit This strong demand has also led to weakening underwriting standards

Private Credit Market ($ billions)

Debt Covenants Have Weakened

Private Credit Market Valuations Have Increased and Fundamentals Have Weakened

Source BAML Moodys and TSSP

Private Credit Risk versus Return

The risk-return profile for private credit is less attractive today versus the recent past

Average Leverage for B2 Bank Loans

Spread per 1000 WARF pts

1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018

Dividend Yield Premium (LHS) Avg Dividend Yield PremiumEarnings Yield Premium (RHS) Avg Earnings Yield Premium

Cross Sector Valuation Analysis

Source Bloomberg

Stocks vs Bonds

Stocks appear somewhat more attractive relative to bonds in a low interest rate environment

Real Estate and Real Asset DiscussionCurrent Market Environment and Valuations

May 2019

Real Estate and Real Assets

bull inflation-hedging assets that tend to perform well in rising rate environments with predictable cash flow streams and portfolio diversification benefits (lower correlation with other asset classes)

bull operationally-focused real assets provide a more attractive risk-adjusted return profile versus direct investment in highly volatile commodities

bull ability to add value through core and non-core strategies

bull fundamental real estate backdrop broadly characterized by sufficient absorption of new supply increasing rental rates and flat to modestly declining vacancy rates

bull notwithstanding relatively wide spreads versus risk-free rates the low yield environment has left cap rates below longer-term targeted returns suggesting returns will be more heavily dependent upon income versus capital appreciation

bull relatively concentrated geographic exposures and lineup of GPs particularly within infrastructure along with record fund raising high levels of dry powder and rich valuations present challenges for near-term vintage year IRRs

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

Value Added Opportunistic Core Plus Debt Core Distressed

Real Estate Demand Remains Strong and Valuations Remain High

Source Hamilton Lane

Higher valuations declining appreciation and higher interest rates may dampen real estate returns

Real Estate Committed Uncalled Capital By Strategy

Real Estate Cap Rates by Sector

Real estate dry powder surpassed the 2015 high water mark to set a new record in 2018 partly reflecting strong fundraising and low cap rates that have somewhat slowed the pace of deployment

Cap rates have trended lower over time across all sectors of real estate High occupancy rates in multi-family properties along with a strong residential housing market helped push rates to all-time lows

01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18

Volume ($Billions) CBD Office Industrial Retail Apartments

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

Real Estate Fundamentals Vacancies NOI amp Rental Growth RatesOffice

Apartments

Fundamentals across real estate have been broadly constructive

Retail

Industrial

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

AgricultureFarmland Diversified Natural Resources EnergyMetals amp Mining Timberland Water

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

North America Europe Asia Rest of World

Natural Resources Uncalled Capital By Strategy

Defensive infrastructure strategies with high barriers to entry have strong investor interest

2013 2014 2015 2016 2017 2018

Natural Resources Infrastructure

Real Asset Fundraising

Infrastructure Committed Uncalled Capital By Geography

Infrastructure fundraising and dry powder have reached new records for each of the past four years as investor demand for more predictable long-term cash flows has pushed valuations higher Demand for natural resources has been less robust particularly within energy

Real Asset Fundraising and Demand Is Focused on Infrastructure

Risk Mitigation Strategies Discussion

May 2019

Risk Mitigating Strategies (ldquoRMSrdquo) are a collection of investment strategies that seek to protect assets when stocks fall in price

ndash Low asset volatility (standard deviation)

ndash Low stock beta correlation

The NJ Pension Fundrsquos benchmark return for RMS equals 3-month T-bills + 3

RMS is determined to be particularly useful in portfolios experiencing high cash outflows

ndash Internal rate of return gt time-weighted return

RMS is preferred to option strategies which have been costly since 2008 and can exacerbate cash outflows

The NJ Pension Fund currently has a target 5 allocation to RMS and a proposed 3 target allocation

Risk Mitigation Strategies Review

NJ Pension Fund RMS History

ndash September 2012 start date with 4 target allocation

ndash Target allocation increased to 5 in July 2017

RMS Performance

Risk Mitigation Strategies Review (continued)

NJ RMS Portfolio

RMS Benchmark (T-bills+3)

HFRI Conservative

Fund-of-Funds Index

Returns (ending Mar 2019)1 year 404 522 1693 years 379 427 3475 years 300 381 208From Sept 2012 Inception 329 364 326

Risk (from Inception)Volatility (Std Dev) 304 022 227Stock Beta (ACWI) 012 000 016 Stock Correlation (ACWI) 036 004 064 NJ RMS Correlation 100 003 061

NJ RMS Performance Sept 2012 to Mar 2019

Since inception of the RMS program in September 2012 stock volatility measured by the VIX index has averaged well below historical averagesThere have been short-term spikes in volatility since 2012 but levels quickly reverted

Equity Volatility Jan 1990 to Mar 2019

Headwinds for RMS

ldquoFine Tuningrdquo the Risk Mitigation Strategies Portfolio

Proposed reduction in allocation from 5 to 3 of total assets

Maintain same portfolio objectives

ndash Provide downside protection

ndash Low risk (standard deviation of return)

ndash Low equity beta

Improve liquidity for more timely rebalancing within RMS and with other asset classes

Performance benchmark

ndash Retain current long-term objective of 3-month T-bills + 3

ndash Add short-term benchmark (HFRI Conservative Fund-of-Funds Index) that captures short-term performance of underlying strategies within the RMS portfolio

Give greater weightings to RMS strategies that provide downside protectionndash Long volatility strategies with positive convexity

Fossil Fuel-Free Investment Discussion

May 2019

Source Bloomberg

Fossil Fuel-Free Portfolio Study Historical Return Analysis

Ten Year Cumulative Returns Twenty Year Cumulative Returns

Apr-99 Apr-01 Apr-03 Apr-05 Apr-07 Apr-09 Apr-11 Apr-13 Apr-15 Apr-17 Apr-19

SampP 1500 SampP 1500 Oil Gas amp Consumable Fuels

Apr-09 Apr-11 Apr-13 Apr-15 Apr-17 Apr-19

The Energy Sector Is Cyclical

Analysis of historical returns is highlydependent upon start and end dates Theenergy sector is cyclical and tends tooutperform towards the latter end ofeconomic cycles Returns for the energysector have historically experienced a lowcorrelation with other sectors providingportfolios with a diversification benefit

Fossil Fuel-Free Portfolio Study Consensus Expectations for Growth in Fossil Fuel DemandAnalysts expect global population growth to drive energy demand higher for several decades for all fuels (including fossil fuels and renewables)bull assuming significant adoption of renewable fuels and electric vehicles demand for fossil fuels is expected to peak

around the year 2040bull sources and uses of renewable energy currently represent only 2 of the global market share but are growing quicklybull even as renewables take up a larger share demand for fossil fuels is expected to continue to grow

Source BP Statistical Review Worldbank OECD InsideEVs Morgan Stanley Research

Fossil Fuel-Free Portfolio Study Valuations and Investment Analysis

All else equal investments with a higher dividend yield

provide higher current income

All else equal investments with lower PE PCF and

PB ratios have more attractive valuations

All else equal investments with a lower debtequity ratio (less leverage) are

more conservative

Source Bloomberg as of May 20 2019

Dividend Yield PriceEarnings PriceCash Flow PriceBook DebtEquity

SampP 1500 194 187 131 31 1223

Energy Sector 331 170 68 15 519

vs Benchmark 170 87 46 48 42

Integrated Oil 468 142 73 17 330

vs Benchmark 241 76 56 55 27

Fossil Fuel-Free Portfolio Study Engagement through Proxy Voting

The Council may consider establishing proxy voting guidelines that encourage transparency reporting and the mitigation of climate-related business risk

bull the Division is undertaking a comprehensive review of its Proxy Voting Guidelines and will provide recommendations for the ESG Committee and for the Councilrsquos consideration

bull the Division believes these initiatives are consistent with its fiduciary responsibilities and can result to better long-term risk-adjusted returns

The Council may consider addressing the following initiatives in the Proxy Voting Guidelines

bull shareholder resolutions requesting that a company disclose information on financial physical or regulatory risks related to climate change and how the company identifies measures and manages such risks

bull shareholder proposals seeking disclosure of research supporting a companyrsquos policies regarding climate change

bull shareholder proposals requesting a report on greenhouse gas (GHG) and other emissions from company operations andor products

bull shareholder proposals calling for the reduction of GHG and other emissions or adoption of emissionsrsquo goals

Fossil Fuel-Free Portfolio Study Summary and Conclusions

The Division recognizes that climate-related business risk can have a materially adverse impact on the financial results of fossil fuel-related businesses

bull climate-related business risk may support a transition to renewable energy over a long-term investment horizon bull the Division believes that actions taken to prepare for this transition would be in the best financial interest of

the Pension Fundbull such actions may include support for policies that mitigate climate-related business risk as well as investments

in renewable energy that provide for attractive risk-adjusted returns

From an investment perspective peak global demand for fossil fuels appears to be decades awaybull alternative fuel sources remain limited by the slow pace and complexity of the transition to renewable energybull the transition away from fossil fuels is subject to a wide range of possible outcomes driven primarily by the rate

of technological innovation and by a dynamic regulatory environment that may accelerate or decelerate the rate of transition

The Division believes the best financial outcomes for the Pension Fund regarding the business risks associated with climate change will result from engagement

bull shareholder advocacy for reductions in greenhouse gas (GHG) and other emissions andor adoption of emissionsrsquo goals can lead to better long-term risk-adjusted returns

bull shareholder initiatives that promote transparency and require the measurement of business risks associated with climate change afford investors with better protections

The Division will continue to closely monitor and reevaluate the impact of any changes in the energy sector on the Pension Fund on an ongoing basis

bull the future of the energy market is fluid and is subject to changebull looking ahead the Division believes renewable energy investments may present attractive opportunities

May 2019

Summary of Key Asset Allocation Recommendations

bull Adjustments to Risk Mitigation Strategiesbull the Pension Planrsquos funded status and negative cash flow profile demonstrate a need for risk mitigation strategies

particularly in light of a fully-valued financial market backdropbull a commitment to risk mitigation strategies is intended to enhance diversification and provide less-correlated

returns relative to public marketsbull while still low in historical terms higher yields allow for a modest increase in the allocation to US Treasuries as an

alternative approach to provide downside protectionbull a move in favor of Treasuries is limited by the risk of increased correlations as weakness in equity markets

could be triggered by higher rates over time

bull Gradual shift towards a global equity allocation more aligned with opportunity setbull following strong outperformance in US equities the Pension Planrsquos home country bias would be reduced and

would better align with consensus expectations for decelerating long-term potential economic growth in the US

bull Modest increase in allocation to Private Equitybull a modest increase is supported by an expected return premium for private investments and a shift in dynamics

between public and private companies bull the allocation would also be consistent with the finding of the Asset-Liability study the mix of return-seeking and

risk-reducing assets is appropriatebull increase in allocation is tempered by diminished liquidity increased complexity and concerns regarding higher

bull Changes reflected in Policy Benchmark to take effect in October 2019bull certain changes would require updates to the Council Regulationsbull implementation should take place gradually with the majority of the changes in place by the second quarter of

Fiscal Year 2020

Asset ClassCurrent Targeted

Asset Allocation

Asset Allocation Recommendation Benchmark Recommendation

GLOBAL GROWTH 5825 5900

US Equity 3000 2800 SampP 1500

Non-US DM Equity 1150 1250 MSCI EAFE + Canada (ex-prohibited)

Emerging Market Equity 650 650 MSCI Emerging Markets (ex-prohibited)

Private Equity 1025 1200 Cambridge Associates Buyouts Growth Distressed for Control Subordinated Debt and Credit (one-quarter lag)

REAL RETURN 975 1000

Real Estate 725 750 NCREIF ODCE (one-quarter lag)

Real Assets 250 250 Cambridge Private Equity Energy Upstream Energy amp Royalties amp Infrastructure Timber (one-quarter lag)

INCOME 1850 1800

High Yield 250 200 Bloomberg Barclays US High Yield 2 Issuer Cap Index

Private Credit 600 600 Bloomberg Barclays US Corp High Yield Index (one-month lag) + 100 bps

Investment Grade Credit 1000 1000 Bloomberg Barclays US Credit Index A or better

DEFENSIVE 1350 1300

Cash Equivalents 550 500 91-day T-Bills

US Treasuries 300 500 Bloomberg Barclays US Treasury Index

Risk Mitigation Strategies 500 300 91-day T-Bills +300 bps

Expected Return 672 678Risk 1178 1189Sharpe 0401 0402

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Executive Summary

Slide Number 37

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