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The New Mexico State Investment Council (“NMSIC”) Second Quarter 2015: Real Assets Performance Measurement Report
Proprietary & Confidential November 2015
1) 2Q15 Economic Dashboard - Market Outlook
• Agriculture Market Update
• Infrastructure Market Update
• Timberland Market Update
2) 2Q15 Real Assets Performance Measurement Report
Appendix:
A. Definitions
B. 2Q15 Real Assets Flash Report
2
Table of Contents
Disclaimer: This is a public version of the original Performance Measurement Presentation, portions of which have been removed for confidentiality purposes.
1. 2Q15 Economic Dashboard – Market Outlook
Agricultural Market Update
• Ag commodity prices fell roughly 3% during the quarter despite adverse weather in North America along with fears of prolonged weather issues due to El Nino.
– Large declines in food commodities such as edible oils and grains were primary driver of declines. – Global supplies continued to improve, including global wheat, maize and rice remaining at or near last year’s record levels.
• The World Bank expects agricultural prices to average 11% below 2014 levels in 2015, revised downward from the 9% projection in April.
• A strong U.S. dollar will continue to act as a headwind for broad global commodity prices, although this currency pressure will continue to offer improved export competitiveness for ex-U.S. producers.
Source: USDA
U.S. Prices Received by Farmers (1990-2014)
Source: USDA Agricultural Projections to 2023
4
Agricultural Market Update
• As of 2Q15, the NCREIF Farmland Index (“NFI”) quarterly gross time weighted return decreased to 1.2%, approximately 90 bps and 60 bps below 1Q15 and 2Q14, respectively.
• Permanent crops accounted for most of the land appreciation for the NFI, while row crops provided a relatively modest income return for the quarter as downward commodity price movement continue to pressure leasing yields.
• The downturn in the commodity markets has had a much greater impact on row crop performance, due to decreasing farmer profitability, which may lead to rental yield compression for land owners. Row crop performance is expected to further decrease through 2015 as markets adjust to a new commodity price equilibrium.
• Long-term farmland outlook remains positive as continued population growth coupled with finite arable land supply will continue to drive demand for food and high-quality farmland alike.
Source: NCREIF
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60.0% NCREIF Farmland Index Returns (12-month Rolling Returns as of June 30, 2015)
Row Crop Permanent Crop NCREIF Farmland Index
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60.0% NCREIF Farmland Farm Type Index Returns (12-month Rolling Returns as of June 30, 2015)
Gross Row Crop (right axis) Gross Permanent Crop (right axis) Row Crop Income (left axis) Permanent Crop Income (left axis)
Infrastructure General • In the current low yield environment, appetite and competition remain strong for global
infrastructure, particularly core operational assets in developed markets. Deal flow is expected to be robust going forward; however, a number of political and regulatory developments need to be monitored, as they can impact future fundamentals in the market.
• Fundraising remained low over the quarter, with only $4.4 billion raised across six funds according to Preqin, the lowest in a single quarter since 3Q13. However, average fund sizes for those closing continues to increase.
• As of 2Q15, the number of deals executed decreased for the sixth consecutive quarter, although the market is likely to remain very competitive in the current low-yield environment.
Europe • As of 2Q15, significant portfolio sales, including (i) Telediffusion de France (“TDF”) selling its
French towers business, (ii) the €6.6 billion sale of Fortum Sweden and (iii) the sale of Santander’s global renewable portfolio, highlight strong demand.
• During 2Q15, major UK regulatory announcements including the suppressions of Renewable Obligation Certificates (“ROCs”) for onshore wind farms in April 2016 (one year earlier than expected) as well as the expected ineligibility of onshore wind for subsidies under the new Contract for Difference (“CfD”) regime, may negatively impact investors interest. As such, further clarity on the expected CfD regime and the ability of onshore wind to play a role in the U.K. energy mix is expected towards the end of November 2015.
North America • Public-private partnership (“PPP”) activity in the U.S. and Canada continues to develop;
however, industry experts predicts a smaller set of opportunities in the U.S. next year. Asia Pacific • The current swathe of Australian privatizations continues to attract global investors, however,
a growing number of investors are also targeting larger PPPs. For instance, the Australian Parliament approved the sale of NSW power networks TransGrid with the estimated AUD 20 billion sale proceeds going towards funding a new metro rail system, Sydney Metro.
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Unlisted Infrastructure Fundraising
No. of Funds Closed Aggregate Capital Raised ($bn)
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Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2
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Infrastructure Deals Completed
No. of Deals Estimated Aggregate Deal Value ($bn)
6
Source: Preqin Quarterly Infrastructure Update
Timberland Market Update
• Based on Forisk July projections, U.S. housing starts are projected to reach 1.1 million by year-end 2015, a 1.8% decrease from April 2015 projections, due to lower export demand from China. U.S housing starts are expected to peak at 1.6 million in 2019, and decrease thereafter to a 1.5 million long-term average.
• After experiencing a modest run-up in lumber prices over the past few quarters, most major softwood lumber markets have experienced modest declines year-to-date.
• As of 2Q15, southern yellow pine lumber has experienced the largest decline in pricing, dropping 30% below last quarter. Market pricing is expected to remain volatile over the short and medium term periods as excess supply is sold into the market, new (and formerly shut) mills continue opening, and markets balance.
Source: Forisk; Campbell Global; Random Lengths; RISI TimberMart-South
Key Softwood Lumber Price Indicators (West Coast-DF; U.S. South-SYP; British Columbia-SPF)
7
Timberland Market Update
• During 2Q15, the NCREIF Timberland Index (“NTI”) quarterly gross return decreased to 0.5%, 1.2% below 1Q15, due to unfavorable seasonal factors leading to reduced harvests.
• As of 2Q15, annualized income returns continue to improve, although significantly offset by the slowdown in harvesting activities during the quarter.
• The Lake States region continues to demonstrate robust hardwood demand as returns over the last years have outpaced most other NTI regions (northern hardwood (E.g. flooring, furniture) demand has been increasing).
Source: NCREIF
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NCREIF Timberland Index (Rolling 3-Year Return through June 30, 2015)
NTI NTI Income Implied Price Per Acre(right axis)
-20%-15%-10%-5%0%5%10%15%20%25%
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-5%0%5%
10%15%20%25%30%
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NCREIF Timberland Index Regional Comparison(Annualized 12-Month Returns through June 30, 2015)
NTI South NTI PNW NTI South Apprec.(right axis)
NTI PNW Apprec.(right axis)
8
2. 2Q15 Real Assets Performance Measurement Report
Highlights
• New Mexico State Investment Council’s (NMSIC) current target allocation to real assets is 9%*.
• NMSIC began investing in real assets in 2011, and through 2015 has committed approximately $1.6 billion across 21 funds with 14 managers.
• During the quarter, NMSIC made a $75 million commitment to Brazil focused agriculture fund.
• As of 2Q15, NMSIC’s real assets market value represents 2.8% of the aggregate Land Grant Permanent Fund and Severance Tax Permanent Fund assets (“NMSIC’s assets”). When unfunded commitments are included, real assets represents approximately 7.9% of NMSIC’s total plan assets as of 2Q15.
• Over the three-year and since inception periods, performance remains strong generating a 10.4% and 19.5% net time weighted return, respectively, and a 6.1% net since inception IRR. However, over the past year, the portfolio’s shorter term performance was affected by global currency movements against the U.S. dollar and the recent short term fluctuation in energy prices. Over the longer term both these factors are expected to have a lower impact on returns.
• As of 2Q15, 64% of committed capital remains unfunded. Long-term performance is expected to become less volatile as the portfolio matures, funded capital increases, and new commitments are made.
• NMSIC continues to commit capital across the real asset sectors in order to move the allocation within the target range.
Portfolio Highlights
10 *Real Assets forms part of the Real Return allocation. The long term target for Real Return is 12%. Real Assets is targeted to be 75% of the Real Return allocation.
Portfolio Status
• NMSIC’s real assets allocation target is 9% of total plan assets (based on market value).
• Due to the closed-ended nature of many of the real asset commitments, NMSIC will seek additional commitments beyond its target allocation for each sub category within real assets (over-commitment factor).
• The real assets portfolio comprises six sub-sectors with target allocation ranges shown in the adjacent chart.
11
Real Assets Portfolio Allocation
As of 2Q15
Sub-Sector
Target Allocation
RangeCommitted Allocation*
Committed Value (millions)
Net Asset Value
Number of Commitments
Agriculture 0-15% 18.5% $325.0 $29.8 3Commodities 0-10% 0.0% $0.0 $0.0 0Energy 0-40% 28.5% $500.0 $149.1 8Infrastructure 0-40% 25.0% $440.0 $304.0 5Timberland 0-40% 14.2% $250.0 $35.3 3Other 0-15% 2.8% $49.8 $26.8 2
Total 89.0% $1,564.8 $545.0 21Al locations as a % of the 9% rea l assets target.
Portfolio Status
• Since the 2011 inception, NMSIC has committed approximately $1.6 billion to real assets across 21 funds with 14 managers.
• NMSIC’s real asset program incorporates a number of open ended and long dated funds where the capital is either permanently invested or invested for a considerably length of time which contributes to a higher historical pacing than forecast projections. Additional potential exposure to established open ended funds may increase the NAV above the current forecast.
12
Real Assets Portfolio Allocation
1 Fund $50
3 Funds $250
7 Funds $465
5 Funds $325
5 Funds $475
$250 Planned
Commitments $197 $204 $211
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2011 2012 2013 2014 2015 YTD 2016 Projected 2017 Projected 2018 Projected 2019 Projected
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NMSIC Real Assets Allocation Growth as of Calendar Year End
Annual Commitments (left axis) Per Pacing Model (left axis) Total Commitments % of NMSIC's Assets (right axis) NAV % of NMSIC's Assets (right axis)
Commitments in $ represented on left axis (bars) and % of NMSIC Assets represented on right axis (lines).
$76 PerPacing Model
13
Real Assets Portfolio Performance – IRR Analysis
Total Performance
• The adjacent chart presents the inception to date value weighted net IRR’s of NMSIC’s real asset portfolio as well as the market value.
• Given the portfolio is relatively young, early returns were primarily attributable to strong performance from early energy investments with a small relative market value.
• As new commitments are made across asset classes and the portfolio becomes more diversified, overall performance is anticipated to continue to outperform the long-term Consumer Price Index (“CPI”) plus 300 basis points benchmark.
21.9
%
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%
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December 2012 December 2013 December 2014 June 2015
NMSIC Real Asset Portfolio PerformanceInception to Date Net IRRs and Market Value
NMSIC Real Assets Net IRR (%) Market Value ($)
14
Real Assets Portfolio Cash Flows
Quarterly Cash Flow Activity
• During the quarter, NMSIC’s real asset managers called $213.7 million and distributed $14.7 million in income/gains (distributions) and return of capital distributions (withdrawals). The distributions were concentrated in the Agriculture, Energy, and Infrastructure portfolio.
$250,000,000
$300,000,000
$350,000,000
$400,000,000
$450,000,000
$500,000,000
$550,000,000
$600,000,000
2Q15 NAV Components - Real Assets Portfolio
15
Real Assets Portfolio Diversification
Sector Diversification
• As previously mentioned, the portfolio is still early in its life cycle as many funds still have significant capital to invest throughout their investment periods.
• As illustrated below, the chart on the left displays NMSIC’s real assets diversification based on 2Q15 market values as a percentage of total real assets market value, while the chart on the right is based on NAV plus unfunded commitments.
• Sector diversification is expected to change as funds develop and call additional capital for investments.
Agriculture5.5%
Energy27.4%
Infrastructure55.8%
Timberland6.5%
Other4.9%
NMSIC Sector Diversification2Q15 Market Value as a % of Total Real Assets
Agriculture20.8%
Energy31.7%
Infrastructure28.1%
Timberland16.3%
Other3.1%
NMSIC Sector Diversification2Q15 Market Value+Unfunded Commitments as a % of Total
Real Assets Market Value+Unfunded
16
Real Assets Portfolio Diversification
Global Geographic Diversification
• NMSIC’s real asset portfolio is currently weighted to developed Americas and more broadly to OECD countries.
• Emerging Americas currently represents investments in Brazil, Chile, and Mexico representing approximately 13%, 3% and 1% of current Real Assets Portfolio Net Asset Value, respectively.
• Many current and pending investments have global mandates and geographic diversification is expected to change as these commitments are drawn and NMSIC makes additional commitments going forward.
Developed Americas
54.5%
Developed Europe18.8%
Developed Asia6.1%
Emerging Americas16.7%
Emerging Europe0.7%
Emerging Asia1.5% Emerging Middle
East and Africa0.6%
Frontier0.1%
Other1.0%
NMSIC Global Geographic Diversification2Q15 Market Value as a % of Total Real Assets
Appendix A: Definitions
Definitions:
• Internal Rate of Return (“IRR”) – IRR is the average rate earned by each and every dollar invested during the period. This rate is influenced not only by movements in financial markets and decisions made by portfolio managers, but also by the timing and size of cash inflows and outflows and the beginning and ending market values.
• Time-Weighted Return (“TWR”) – A rate-of-return measure of portfolio performance that gives equal weight to each period regardless of any differences in amounts invested in each period. TWR are designed to eliminate the effect that the size and timing of cash flows has on the IRR since the pattern of cash flows varies significantly among funds.
18
New Mexico State Investment Council
Definitions (continued):
19
New Mexico State Investment Council
**Frontier is comprised of 151 countries mainly consisting of other developing countries not listed in the Emerging regions as well as Third World countries.
Developed Americas
(2)Developed Europe
(21)Developed Asia
(5)
Developed Middle East and Africa
(1)
Emerging Americas
(6)Emerging Europe
(5)Emerging Asia
(8)
Emerging Middle East and Africa
(3)Frontier**
(151)United States Austria Austra l ia Is rael Brazi l Czech Republ ic China Egypt Other Developing Canada Belgium Hong Kong Chi le Hungary India South Africa and Third World
Denmark Japan Colombia Morocco Indones ia Turkey counti resEngland New Zealand Mexico Poland South KoreaFinland Singapore Peru Russ ia Malays iaFrance Puerto Rico Phi l ippinesGermany TaiwanGreece Thai landIrelandIta lyLuxembourg NetherlandsNorthern Ireland NorwayPortugalScotlandSpainSwedenSwitzerlandUnited KingdomWales
Geographic Diversification
Definitions (continued):
• The NCREIF Timberland Property Index (NTI) – The NCREIF Timberland Property Index represents data collected from the Voting Members of the National Council of Real Estate Investment Fiduciaries (NCREIF). The NTI is an unlevered domestic index, gross of fees, that aggregates the returns of approximately 451 privately owned institutional investment properties valued at $24.3 billion as of 2Q15. All properties have been acquired, at least in part, on behalf of tax-exempt institutions and held in a fiduciary environment. The properties are wholly owned and joint venture investments consisting of Timberland properties only. Note that the NTI is not an investable or duplicable universe. Also, the NTI may not fully illustrate the performance of the institutional property universe.
• The NCREIF Timberland Fund and Separate Account (NFI-TFI) – The NCREIF Timberland Fund Index is a levered domestic capitalization-weighted index based on each Funds’ Net Asset Value, which represents data collected from the Voting Members of the National Council of Real Estate Investment Fiduciaries (NCREIF). The NFI-TFI is a gross and net of fees time-weighted return index consisting of commingled funds and individually managed accounts held in a fiduciary environment for taxable and tax-exempt investors, and mostly comprised of Timber, Timberland and cash equivalent assets, which are invested at 95% or more in the United States. The Funds comprised in the index may change if (i) existing Funds are removed from the index due to recurring underperformance, (ii) liquidation or termination, as well as (iii) entry of new Funds or new members of NCREIF. The NFI-TFI may not fully illustrate the performance of the institutional property universe.
• The NCREIF Farmland Property Index (NFI) – The NCREIF Farmland Property Index represents data collected from the Data Contributing Members of the National Council of Real Estate Investment Fiduciaries (NCREIF). The NFI is an unlevered domestic index, gross of fees, that aggregates the returns of approximately 630 privately owned institutional investment properties valued at $6.1 billion as of 2Q15. All properties have been acquired, at least in part, on behalf of tax-exempt institutions and held in a fiduciary environment. The properties are wholly owned and joint venture investments consisting of Agricultural properties only. Note that the NFI is not an investable or duplicable universe. Also, the NFI may not fully illustrate the performance of the institutional property universe.
20
New Mexico State Investment Council
Source: www.ncreif.org
Definitions (continued):
• The Consumer Price Index (CPI) – The Consumer Price Index illustrates monthly changes in the weighted average of prices of consumers’ good and services, excluding income taxes, financial instruments, and other saving-related items. Data is collected on a monthly basis by the Bureau of Labor Statistics (BSL economic assistants) in 87 urban areas nationwide and from approximately 80,000 items regrouped in more than 200 categories, which includes 24,000 retail and service establishments, as well as 50,000 landlords or tenants. The Consumer Expenditure Survey derives each item’s weight from their reported expenditures.
21
New Mexico State Investment Council
Source: www.bls.gov/cpi
Appendix B: 2Q15 Real Assets Flash Report
1,757,348,486 9.0% 545,023,568 2.8% 1,002,712,824 5.1% 209,612,095 1.1%
TGRS TNET TGRS TNET TGRS TNET TGRS TNET2.6 1.9 -4.5 -6.6 16.3 10.41.6 3.2 4.4
Funding Status ($)Investment
Vintage YearCommitment
AmountFundedAmount
UnfundedCommitments
CapitalReturned
MarketValue
MarketValue (%)
Market Value+ Unfunded
Commitments (%)
Infrastructure 2012 440,000,000 328,017,964 130,183,350 51,600,358 303,976,485 55.8 28.1
Timber 2014 250,000,000 34,225,917 217,598,557 3,729,565 35,321,778 6.5 16.3
Agriculture 2014 325,000,000 41,289,791 291,808,011 8,105,150 29,829,547 5.5 20.8
Energy 2011 500,000,000 172,752,882 342,027,140 28,092,659 149,090,469 27.4 31.7
Other 2013 49,800,000 35,366,343 21,095,766 9,914,720 26,805,289 4.9 3.1
Total Current PortfolioNew Mexico State Investment Council Other Real Assets 2011 1,564,800,000 611,652,897 1,002,712,824 101,442,452 545,023,568 100.0 100.0
Other
CPI + 300 BPS
Infrastructure
Timber
Agriculture
Energy
New Mexico State Investment Council Other Real Assets
New Mexico State Investment Council Other Real Assets
Second Quarter 2015Portfolio Composition ($)
Total Plan Assets Allocation Market Value Unfunded Commitments Remaining Allocation
5 Year (%)
19,526,094,292
Performance Summary Quarter (%) 1 Year (%) 3 Year (%)
INC APP TGRS TNET INC APP TGRS TNET INC APP TGRS TNET INC APP TGRS TNET TGRS TNET
InfrastructureInfrastructure 303,976,485 1.3 1.9 3.2 2.3 3.9 -0.1 3.8 1.1 24.7 19.5 4Q12 11.9 1.1
TimberTimber 35,321,778 0.6 0.6 1.2 0.9 5.3 9.9 15.6 12.5 13.3 10.9 1Q14 10.7 1.1
AgricultureAgriculture 29,829,547 -0.4 -4.5 -4.9 -12.8 -4.8 -24.4 4Q14 -39.6 0.9
EnergyEnergy 149,090,469 2.0 1.9 3.9 4.7 2.9 -20.3 -17.5 -17.3 5.2 1.7 7.0 3.1 19.9 13.8 2Q11 1.8 1.0
OtherOther 26,805,289 1.6 -2.0 -0.4 -1.1 3.7 -8.4 -5.0 -7.3 14.9 4.8 2Q13 4.0 1.0
Total PortfolioNew Mexico State Investment Council Other Real Assets 545,023,568 1.4 1.2 2.6 1.9 3.5 -7.8 -4.5 -6.6 5.2 10.7 16.3 10.4 27.2 19.5 2Q11 6.1 1.1
IndicesCPI + 300 BPS 1.6 3.2 4.4 4.6 2Q11NCREIF Timberland Property Index “NTI” 0.6 -0.1 0.5 2.9 7.0 10.0 2.7 6.9 9.8 7.2 2Q11NCREIF Fund Index –Timberland Fund Index “NFI-TFI Commingled Value Weight” 0.2 0.0 9.1 8.1 9.2 8.3 6.1 5.3 2Q11NCREIF Farmland Property Index “NFI” 0.6 0.5 1.2 7.5 3.9 11.6 7.9 7.9 16.2 16.0 2Q11CPI 0.9 0.2 1.3 1.5 2Q11
New Mexico State Investment Council Other Real Assets
Second Quarter 2015
NetIRR
EquityMultiple
Returns (%)Market Value
($)
TWR CalculationInception
Quarter 1 Year 3 Year 5 Year Inception
Advisory Disclosures and Definitions
Disclosure Proprietary information prepared for the use of The New Mexico State Investment Council. Past performance is not indicative of future results. Investing involves risk, including the possible loss of principal. Returns are presented on a time weighted basis and shown both gross and net of underlying third party fees and expenses and may include income, appreciation and/or other earnings. In addition, investment level Net IRR’s and equity multiples are reported. The Townsend Group, on behalf of its client base, collects quarterly limited partner/client level performance data based upon inputs from the underlying investment managers. Data collection is for purposes of calculating investment level performance as well as aggregating and reporting client level total portfolio performance. Quarterly limited partner/client level performance data is collected directly1 from the investment managers via a secure data collection site.
1In select instances where underlying investment managers have ceased reporting limited partner/client level performance data directly to The Townsend Group via a secure data collection site, The Townsend Group may choose to input performance data on behalf of its client based upon the investment managers quarterly capital account statements which are supplied to The Townsend Group and the client alike. Benchmarks The potential universe of available real asset benchmarks are infinite. Any one benchmark, or combination thereof, may be utilized on a gross or net of fees basis with or without basis point premiums attached. These benchmarks may also utilize a blended composition with varying weighting methodologies, including market weighted and static weighted approaches.