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SJCERA
Quarterly Report
This report is solely for the use of client personnel. No part of it may be circulated, quoted, or reproduced for distribution outside the client organization without prior written approval fromPension Consulting Alliance, LLC.
Nothing herein is intended to serve as investment advice, a recommendation of any particular investment or type of investment, a suggestion of purchasing or selling securities, or an invi-
tation or inducement to engage in investment activity.
Q3 2017
TABLE OF CONTENTS
1 INTRODUCTION
2 SJCERA PORTFOLIO REVIEW
Risk Return Analysis Total Plan Performance Asset AllocationManager PerformancePerformance Monitoring
3 INVESTMENT MARKET RISK METRICS
4 ECONOMIC OVERVIEW
APPENDIX
Glossary of Terms SJCERA Policy Benchmark Composition Definition of Benchmarks Risk Metric Description
IntroductionThe SJCERA Total Portfolio had an aggregate value of $2.8 billion as of September 30, 2017. During the latest quarter, the Total Portfolio increased in value by
$78.0 million, and over the latest year, the Total Portfolio increased by $211.9 million due to cash flows and investment results US GDP growth increased by 3.0%
(advance estimate) in the third quarter of 2017. GDP growth during the quarter was driven by increases in consumer spending, inventory investment, businessinvestment, and exports. At quarter-end, the unemployment rate ticked down to 4.2%. The seasonally adjusted Consumer Price Index for All Urban Consumersincreased by 4.3% on an annualized basis during the quarter. Commodities increased during the third quarter but are slightly negative over the trailing 1-yearperiod at (0.3%). Global equity returns were positive for the quarter at 5.3% (MSCI ACWI). The US Dollar depreciated against the Euro and the Pound by (3.4%) and
(2.9%), respectively. Conversely, the US Dollar appreciated against the Yen by 10 basis points.
Recent Investment PerformanceThe Total Portfolio matched the policy benchmark over the 25-year period, net of fees. Over the 1-, 3-, 5-, 10-, 15-, and 20-year periods, the Total Portfolio
underperformed the policy benchmark, net of fees, by (1.5%), (1.7%), (0.7%), (1.4%), (0.9%), and (0.4%), respectively. The portfolio underperformed the Median
Public Fund over all time periods measured.
*Mellon Total Fund Public Universe >$1 Billion, gross of fees.
**Policy Benchmark composition is listed in the Appendix.
Total Plan-Gross Total Plan-Net Policy Benchmark Median Public Fund*
0.0
5.0
10.0
15.0
20.0
Re
turn
Quarter 1 Year 3 Year 5 Year 10 Year
3.6
12.5
7.18.6
5.4
2.8
9.9
5.9 6.4
3.82.9
8.4
4.25.7
2.43.1
9.3
5.06.6
3.2
Quarter 1 Year
SJCERA Total Plan
Beginning Market Value 2,676,073 2,542,177
Net Contributions 890 313
Fees/Expenses -5,249 -22,950
Gain/Loss 81,722 240,320
Ending Market Value 2,754,042 2,754,042
Quarter1
Year3
Year5
Year10
Year15
Year20
Year25
Year
SJCERA Total Plan-Gross 3.1 9.3 5.0 6.6 3.2 6.8 6.0 7.8
SJCERA Total Plan-Net 2.9 8.4 4.2 5.7 2.4 6.2 5.5 7.3
Policy Benchmark** 2.8 9.9 5.9 6.4 3.8 7.1 5.9 7.3
Excess Return (Net) 0.1 -1.5 -1.7 -0.7 -1.4 -0.9 -0.4 0.0
As of September 30, 2017
Recent Investment Performance Summary
SJCERA 3
Total Fund Risk/Return Analysis - Latest 3 Years
*Computed as annualized return less the risk free rate, divided by the annualized standard deviation.
**Mellon Total Funds Public Universe >$1 Billion, gross of fees.
0.0
2.0
4.0
6.0
8.0
10.0
12.0
Re
turn
(%)
0.0 2.0 4.0 6.0 8.0 10.0 12.0 14.0
Risk (Standard Deviation %)
Risk Free Rate
Policy Benchmark
Median Public Fund
MSCI ACWI IMI
Blmbg. BC Universal
Russell 3000
SJCERA Total Fund - Gross
Annualized Return, % Annualized Standard Deviation, % Annual Sharpe Ratio*
SJCERA Total Fund - Gross 5.0 4.3 1.1
SJCERA Policy Benchmark 5.9 3.8 1.5
Median Public Fund** 7.1 5.9 1.2
SJCERA Portfolio Review
Gross Investment Performance As of September 30, 2017
SJCERA 4
*Computed as annualized return less the risk free rate, divided by the annualized standard deviation.
**Mellon Total Funds Public Universe >$1 Billion, gross of fees.
0.0
2.0
4.0
6.0
8.0
10.0
12.0
Re
turn
(%)
0.0 2.0 4.0 6.0 8.0 10.0 12.0 14.0
Risk (Standard Deviation %)
Risk Free Rate
Policy Benchmark
Median Public Fund
MSCI ACWI IMI
Blmbg. BC U.S. Universal
SJCERA Total Fund - Gross
Annualized Return, % Annualized Standard Deviation, % Annual Sharpe Ratio*
SJCERA Total Fund - Gross 6.6 4.6 1.4
SJCERA Policy Benchmark 6.4 3.9 1.6
Median Public Fund** 8.6 5.8 1.4
Gross Investment Performance As of September 30, 2017
Total Fund Risk/Return Analysis - Latest 5 Years
SJCERA 5
*7.25% Actuarial Rate from 8/1/2016 to present. 7.5% Actuarial Rate from 1/1/2012-7/31/2016; previously 8.0%
SJCERA Total Plan SJCERA Policy Benchmark Actuarial Rate*
$0.80
$1.00
$1.20
$1.40
$1.60
9/12 3/13 9/13 3/14 9/14 3/15 9/15 3/16 9/16 3/17 9/17
$1.43
$1.36
$1.32
Total Fund Growth of a Dollar - Latest 5 Years
Net Investment Performance As of September 30, 2017
Growth of a Dollar - Latest 5 Years
SJCERA 6
12-month Performance Overview
12-month absolute results have been positive over four of the last five discrete 12-month periods; the SJCERA Total Portfolio outperformed the policy target
benchmark during one of these five periods, net of fees.
SJCERA Total Plan-Gross SJCERA Total Plan - Net SJCERA Policy Benchmark Median Public Fund
0.0
4.0
8.0
12.0
16.0
20.0
-4.0
-8.0
Re
turn
2012-2013 2013-2014 2014-2015 2015-2016 2016-2017
12.5
10.0
-0.5
9.7
12.5
6.97.5
0.2
7.8
9.98.8
6.9
-2.5
7.1
8.4
9.9
7.9
-1.7
7.9
9.3
SJCERA Portfolio Performance
As of September 30, 2017
This section includes an overview of the performance of the SJCERA investment portfolio and a detailed analysis of asset classes and specific mandates.
SJCERA 7
Global Equity, 35.3%
Private App., 11.6%
Stable Fixed In.,
11.5%
Credit, 11.9%Risk
Parity, 13.1%
CRO, 17.3%
Cash, -0.6%
September 30, 2017
Global Equity, 35.1%
Private App., 10.8%
Stable Fixed In.,
11.3%
Credit, 13.1%
Risk Parity, 13.5%
CRO, 15.1%
Cash, 1.0%
September 30, 2016
ACTUAL vs. TARGET ALLOCATIONS As of September 30, 2017
The Total Fund ended the latest quarter overweight Global Equity, while underweight Credit, and Crisis Risk Offset. All other classes were at or near target (i.e. variance ≤1.5%).
Physical ($MM)*
Overlay ($MM)
Net Overlay ($MM)
Net Actual (%)*
Long Term
Targets (%)
Variance (%)*
Total Fund* 2,743 100 100 --- Global Equity 945 24 969 35.3 30 5.3
Private Appreciation 317 0 317 11.6 12 -0.4
Stable Fixed Income 280 36 316 11.5 10 1.5
Credit 327 0 327 11.9 14 -2.1
Risk Parity 358 0 358 13.1 14 -0.9
Crisis Risk OffsetSM 462 11 473 17.3 20 -2.7
Cash 54 (72) -18 -0.6 0 -0.6*Di fferences due to rounding. Inclus ive of overlay a l locations .
‐0.6%
‐2.7%
‐0.9%
‐2.1%
1.5%
‐0.4%
5.3%
‐6.0% ‐4.0% ‐2.0% 0.0% 2.0% 4.0% 6.0%
Variance vs Interim Target Allocations
PhysicalOverlayNet
8
*Policy Benchmark composition is listed in the Appendix.
**50% BC High Yield, 50% S&P Leveraged Loans
***(1/3) BC Long Duration Treasuries, (1/3) BTOP50 Index, (1/3) 5% Annual.
Asset Class MarketValue($000)
%
Annualized
1Quarter
1Year
3Years
5Years
10Years
SJCERA Total Plan 2,754,042 100.0 2.9 8.4 4.2 5.7 2.4
Policy Benchmark* 2.8 9.9 5.9 6.4 3.8
Global Equity 945,481 34.3 5.5 19.4 7.3 10.4 3.5
MSCI AC World Index 5.3 19.3 8.0 10.8 4.4
Private Appreciation 316,519 11.5 2.2 8.9 8.4 10.3 -1.0
MSCI ACWI +2% Lag 4.9 22.0 7.5 13.5 6.6
Stable Fixed Income 279,710 10.2 1.2 3.5 4.0 4.2 6.0
Blmbg BC US. Agg 0.8 0.1 2.7 2.1 4.3
Credit 327,311 11.9 1.4 6.1 3.4 5.2 2.9
Custom Credit Benchmark** 1.5 10.0 3.9 5.7 6.1
Risk Parity 357,638 13.0 3.2 4.4 2.3 -1.4 -
BofA-ML 3mo US TBill +4% 1.3 4.7 4.3 4.2 -
CRO (SM) 461,685 16.8 0.0 -3.8 3.9 5.5 13.3
CRO Benchmark*** 0.8 -2.7 3.1 2.8 4.6
Cash 54,047 2.0 0.3 0.8 0.4 0.2 0.4
BofA Merrill Lynch 3 Month US T-Bill 0.3 0.7 0.3 0.2 0.5
SJCERA Asset Class Performance
Net of Fees Investment Performance As of September 30, 2017
SJCERA 9
Global Equity (net of fees)
*FTSE NAREIT Equity Index from inception until 9/30/2012, 60%FTSE NAREIT Equity/40% FTSE ERPA/NAREIT Developed ex US (Net) 10/31/2012-Present.
Manager - StyleMarketValue($000)
1Quarter
1Year
3Years
5Years
Large Cap Core
BlackRock Russell 1000 - Passive 418,486 4.5 18.6 10.7 14.3
Russell 1000 Index 4.5 18.5 10.6 14.3
Small Cap Value
Capital Prospects 43,075 6.6 24.5 11.5 14.6
Russell 2000 Value Index 5.1 20.5 12.1 13.3
Small Cap Growth
BlackRock Russell 2000 Growth - Passive 33,350 6.3 - - -
Russell 2000 Growth Index 6.2 - - -
International Equity
BlackRock MSCI World ex US Index - Passive 136,459 5.7 19.2 4.9 8.1
MSCI World ex-U.S. (net) 5.6 18.7 4.6 7.8
PIMCO RAE International 151,646 7.5 24.6 5.1 9.5
MSCI EAFE Index 5.5 19.7 5.5 8.9
PIMCO RAE Emerging Markets 99,695 8.2 24.3 5.3 4.2
MSCI Emerging Markets Index 8.0 22.9 5.3 4.4
Public Real Estate Sub-Composite 62,682 1.8 3.1 6.9 7.1
Public Real Estate* 1.8 2.1 7.6 8.1
BlackRock Developed ex US RE - Passive 26,749 3.2 4.6 4.1 -
FTSE EPRA/NAREIT Developed ex U.S. (Net) 3.0 4.2 3.8 -
Invesco REIT 35,934 0.8 1.9 9.2 9.2
FTSE NAREIT Equity REIT Index 0.9 0.7 9.9 9.7
Manager Performance
As of September 30, 2017
SJCERA 10
Manager Performance
As of September 30, 2017
Manager CommentaryDuring the latest three-month period ending September 30, 2017, seven of SJCERA’s eight global equity managers outperformed or matched their respective benchmarks.
BlackRock, the Plan’s passive large cap core manager, matched the Russell 1000 Index during each time period measured.
Capital Prospects, the Plan’s active small cap value manager, underperformed its benchmark, the Russell 2000 Value Index, over the 3-year period by (60) basis points. The manager outperformed its benchmark over the quarter, 1-, and 5-year periods by 1.5%, 4.0%, and 1.3%, respectively.
BlackRock, the Plan's passive small cap growth manager, matched the Russell 2000 Growth Index over the quarter.
BlackRock, the plan’s passive international equity manager, slightly outperformed its benchmark over all time periods measured. This performance is within expectations for a passive mandate.
PIMCO RAE Fundamental - International, SJCERA’s active international equity manager outperformed the MSCI EAFE Index over the quarter, 1-, and 5-year periods by 2.0%, 4.9% and 0.6%, respectively. The fund underperformed over the 3-year period by (40) basis points.
PIMCO RAE Fundamental - Emerging, SJCERA’s active emerging markets equity manager, underperformed the MSCI Emerging Markets Index over the 5-year period by (20) basis points. Over the quarter and 1-year periods, the fund outperformed its benchmark by 0.2% and 1.4%, respectively.
BlackRock, the plan’s Developed ex-US REIT manager international equity manager, has performed in-line with its benchmark over all time periods measured. This performance is within expectations for a passive mandate.
Invesco, the plan’s Core US REIT manager, underperformed the FTSE NAREIT Equity REIT Index over the quarter, 3-, and 5-year periods by (10), (70), and (50) basis points, respectively. Over the 1-year period, the manager outperformed its benchmark by 1.2%.
SJCERA 11
Und
erpe
rforman
ceOutpe
rforman
ce
BlackRock R1000
• Growth of $1 excess returns is relative to each manager’s individual benchmark
$0.80
$0.85
$0.90
$0.95
$1.00
$1.05
$1.10
$1.15
$1.20
$1.25
$1.30
Mar‐06
Jun‐06
Sep‐06
Dec‐06
Mar‐07
Jun‐07
Sep‐07
Dec‐07
Mar‐08
Jun‐08
Sep‐08
Dec‐08
Mar‐09
Jun‐09
Sep‐09
Dec‐09
Mar‐10
Jun‐10
Sep‐10
Dec‐10
Mar‐11
Jun‐11
Sep‐11
Dec‐11
Mar‐12
Jun‐12
Sep‐12
Dec‐12
Mar‐13
Jun‐13
Sep‐13
Dec‐13
Mar‐14
Jun‐14
Sep‐14
Dec‐14
Mar‐15
Jun‐15
Sep‐15
Dec‐15
Mar‐16
Jun‐16
Sep‐16
Dec‐16
Mar‐17
Jun‐17
Sep‐17
Excess Return Growth of $1 Since Manager Inception
BlackRock R1000 BlackRock MSCI World ex US Capital Prospects PIMCO RAE Intl PIMCO RAE EM
Global Equity Manager Excess Returns As of September 30, 2017
12
Private Appreciation (quarter lagged) (net of fees)
*NCREIF ODCE Net + 1% 10/1/2012-present. NCREIF Property Index previously.
Manager - StyleMarketValue($000)
1Quarter
1Year
3Years
5Years
Private Real Estate Sub-Composite Lag 247,870 2.4 8.8 9.0 10.6
Private RE Benchmark* 1.7 8.0 11.4 11.8
Ocean Avenue II 26,528 1.2 11.5 6.0 -
Ocean Avenue III 9,597 0.2 -5.2 - -
Morgan Creek III 9,983 1.6 13.5 - -
Morgan Creek V 9,947 1.2 10.8 10.4 -
Morgan Creek VI 12,595 2.2 9.5 - -
9% Annual 2.2 9.0 9.0 -
Manager CommentaryPrivate Real Estate outperformed its benchmark over the quarter and 1-year periods by 70 and 80 basis points, respectively. Over the longer 3-, and 5-year periods,Private Real Estate underperformed its benchmark by (2.4%) and (1.2%), respectively.
Ocean Avenue II, the Plan’s private equity buyout fund-of-funds manager, underperformed its 9% annual target over the quarter and 3-year period by (1.0%) and(3.0%), respectively. Over the 1-year period, the manager outperformed its target by 2.5%.
Ocean Avenue III, the Plan’s other private equity buyout fund-of-funds manager, underperformed its 9% annual target over the most recent quarter and 1-yearperiod by (2.0%) and (14.2%), respectively.
Morgan Creek III produced a quarterly return of 1.6%, underperforming its 9% annual target by (60) basis points. Over the 1-year period, Morgan Creekoutperformed its target by 4.5%.
Morgan Creek V, the Plan’s multi-strategy fund-of-funds manager, produced a quarterly return of 1.2%, underperforming its 9% annual target by (1.0%). Over the 1-and 3-year periods, the portfolio bested its target by 1.8% and 1.4%, respectively.
Morgan Creek VI, matched its 9% annual target over the quarter and outperformed its target over the 1-year period by 50 basis points.
Manager Performance
As of September 30, 2017
SJCERA 13
InvestmentVintage
YearOriginal Inv. Commitment
Gross Contributions
Management Fees
Return of Capital Distributions Net Income
Unrealized Appreciation Realized Gain
Ending Market Value
Ocean Avenue II* 2013 40,000,000 26,000,000 1,448,976 284,189 2,502,395 (1,831,049) 4,065,726 1,079,590 26,527,683 Ocean Avenue III 2016 50,000,000 10,000,000 418,152 - - (617,657) 157,027 57,139 9,596,509 Mogran Creek III 2015 10,000,000 9,900,000 240,821 - 43,253 (429,474) 555,238 - 9,982,511 Morgan Creek V 2013 12,000,000 9,720,000 677,135 1,612,265 1,401,926 (1,090,977) 1,955,813 2,376,180 9,946,824 Mogran Creek VI 2015 20,000,000 12,400,000 240,822 - 33,203 (521,637) 769,019 (19,026) 12,595,154
Total 68,020,000 3,025,906 1,896,454 3,980,777 (4,490,794) 7,502,823 3,493,883 68,648,681 * Ocean II commitment started at $30 Mil in Q213 and increased to $40 Mil in Q114.
Private Appreciation Investment Activity Statement for Since Inception by Fund
San Joaquin County Employees’ Retirement Association Second Quarter 2017
14
Stable Fixed Income (net of fees)
Manager - StyleMarketValue($000)
1Quarter
1Year
3Years
5Years
Dodge & Cox Fixed Income 90,728 1.3 3.1 3.6 3.6
Bloomberg Barclays U.S. Aggregate Index 0.8 0.1 2.7 2.1
DoubleLine 89,809 1.0 3.5 4.8 4.8
Bloomberg Barclays U.S. Aggregate Index 0.8 0.1 2.7 2.1
PRIMA Capital (lagged)* 99,173 1.3 3.8 3.8 4.3
Blmbg BC U.S. Aggregate (laggged) 1.4 -0.3 2.5 2.2
Manager CommentaryDuring the latest three-month period ending September 30, 2017, two of SJCERA’s three stable fixed income managers outperformed the BB Aggregate Index
Dodge & Cox, the Plan’s core fixed income manager, produced a quarterly return of 1.3%, outperforming the BB Aggregate Index by 50 basis points. The portfoliooutperformed its target over the 1-, 3-, and 5-year periods by 3.0%, 0.9%, and 1.5%, respectively.
DoubleLine, the Plan’s mortgage backed securities manager, provided a return of 1.0% outperforming the BB Aggregate Index by 20 basis points. Over the 1-, 3-,and 5- year periods, the manager outperformed its benchmark by 3.4%, 2.1% and 2.7%, respectively.
Prima Capital, the Plan’s commercial mortgage manager, outperformed the BB Aggregate Index over the 1-, 3-, and 5-year periods by 4.1%, 1.3%, and 2.1%,respectively. Over the quarter, Prima underperformed its benchmark by (10) basis points.
Manager Performance
As of September 30, 2017
SJCERA 15
Und
erpe
rforman
ceOutpe
rforman
ce
• Growth of $1 excess returns is relative to each manager’s individual benchmark
$0.70
$0.80
$0.90
$1.00
$1.10
$1.20
$1.30
Mar‐06
Jun‐06
Sep‐06
Dec‐06
Mar‐07
Jun‐07
Sep‐07
Dec‐07
Mar‐08
Jun‐08
Sep‐08
Dec‐08
Mar‐09
Jun‐09
Sep‐09
Dec‐09
Mar‐10
Jun‐10
Sep‐10
Dec‐10
Mar‐11
Jun‐11
Sep‐11
Dec‐11
Mar‐12
Jun‐12
Sep‐12
Dec‐12
Mar‐13
Jun‐13
Sep‐13
Dec‐13
Mar‐14
Jun‐14
Sep‐14
Dec‐14
Mar‐15
Jun‐15
Sep‐15
Dec‐15
Mar‐16
Jun‐16
Sep‐16
Dec‐16
Mar‐17
Jun‐17
Sep‐17
Excess Return Growth of $1 Since Manager Inception
Dodge & Cox Doubleline PRIMA
Stable Fixed Income Manager Excess Returns As of September 30, 2017
16
Credit* (quarter lagged) (net of fees)
*Beginning January 1, 2015, performance data is lagged one quarter.
Manager - StyleMarketValue($000)
1Quarter
1Year
3Years
5Years
Stone Harbor Absolute Return 65,080 1.2 6.5 2.0 3.4
BofA-ML LIBOR 0.3 0.8 0.5 0.4
Stone Harbor Bank Loans 55,544 0.7 5.8 2.5 -
S&P/LSTA Leveraged Loans 0.8 7.4 3.4 -
Mesa West III 27,095 2.0 8.7 9.2 -
Mesa West IV 10,216 2.6 - - -
Crestline Opportunity II 35,413 3.1 13.6 8.5 -
Marinus 20,857 0.0 14.1 6.3 7.8
Raven II 21,850 1.8 -15.4 -9.1 -
Raven III 18,059 -0.2 -9.2 - -
Medley Opportunity II 39,039 1.7 8.1 6.2 6.7
White Oak Summit Peer 34,158 2.2 9.4 - -
9% Annual 2.2 9.0 9.0 9.0
Manager CommentaryDuring the latest three-month period ending September 30, 2017, four of SJCERA’s ten credit managers outperformed their respective benchmarks. Several of themanagers in this asset class are in the process of investing capital and may underperform as assets are invested (typically known as the j-curve effect).
Stone Harbor, the Plan’s absolute return fixed income manger, outperformed the 3-month Libor index over the quarter , 1-, 3-, and 5-year periods by 0.9%, 5.7%,1.5%, and 3.0%, respectively.
Stone Harbor - Bank Loan underperformed its benchmark by (0.1%), (1.6%), and (0.9%) over the quarter, 1-, and 3-year periods, respectively.
Mesa West RE Income III, one of the Plan’s commercial mortgage managers, produced a quarterly return of 2.0%, underperforming its 9% annual target by 20basis points. During the latest 1-year period, the portfolio underperformed its 9% target by (30) basis points. Lastly, the manager outperformed its target by 20 basispoints over the 3-year period.
Mesa West RE Income IV, one of the Plan's commercial mortgage managers, produced a quarterly return of 2.6%, outperformings its 9% annual target by 40 basis
points.
Manager Performance
As of September 30, 2017
SJCERA 17
Manager Performance
As of September 30, 2017
Crestline Opportunity II, the Plan’s credit, niche alternatives, and hedge fund secondaries manager, outperformed its 9% annual target by 0.9% and 4.6% over the quarter and 1-year periods, respectively. Over the 3-year period, the fund underperformed its benchmark by (50) basis points.
Marinus Capital, the Plan’s fixed income hedge fund manager, is in the process of being liquidated.
Raven Capital, the Plan’s direct lending manger, produced a quarterly return of 1.8%, underperforming its target benchmark by (40) basis points. Over the 1- and 3 -year periods, the portfolio trailed its 9% annual target by (24.4%) and (18.1%), respectively.
Raven Capital III, underperformed its 9% annual target by (2.4%) over the quarter and by (18.2%) over the 1-year period.
Medley Opportunity II, one of the Plan’s direct lending managers, produced a quarterly return of 1.7%, underperforming its benchmark by (50) basis points. Over the 1-, 3-, and 5-year periods, the portfolio underperformed its 9% annual return target by (0.9%), (2.8%), and (2.3%), respectively.
White Oak, the Plan’s new direct lending manager, matched its 9% annual target during the quarter and outperformed over the 1-year period by 40 basis points.
SJCERA 18
RIsk Parity (net of fees)
Manager - StyleMarketValue($000)
1Quarter
1Year
3Years
5Years
Bridgewater All Weather 175,179 3.5 5.6 3.2 2.9
Bridgewater All Weather Blend 1.3 4.7 5.2 5.5
PanAgora Diversified Risk Multi Asset 182,460 3.0 3.3 - -
BofA-ML 3mo US TBill +4% 1.3 4.7 - -
Manager CommentaryDuring the third quarter of 2017, both of SJCERA’s active risk parity managers outperformed their benchmarks.
Bridgewater All Weather, one of the Plan’s risk parity managers, outperformed its benchmark over the quarter and 1-year periods by 2.2% and 0.9%, respectively. The manager underperformed its benchmark over the 3- and 5-year periods by (2.0%) and (2.6%), respectively.
PanAgora DRMA, the Plan’s newest risk parity manager, produced a quarterly return of 3.0%, outperforming its benchmark by 1.7%. Over the 1-year period, the manager underperformed its benchmark by (1.4%).
Manager Performance
As of September 30, 2017
SJCERA 19
Crisis Risk Offset (SM) (net of fees)
*6% Annual +(10% T-bill) until 12/31/15, BTOP 50 as of 1/1/2016
**12% Annual until 12/31/15, 5% Annual as of 1/1/2016
Manager - StyleMarketValue($000)
1Quarter
1Year
3Years
5Years
Long Duration Composite 149,725 0.4 -6.1 - -
Blmbg. Barc. U.S. Treasury: Long 0.6 -6.4 - -
Dodge & Cox Long Duration 149,725 0.4 -6.1 - -
Blmbg. Barc. U.S. Treasury: Long 0.6 -6.4 - -
Systematic Trend Following Sub-Composite 137,334 -1.6 -16.4 5.1 7.6
Barclay BTOP 50 0.5 -6.8 -0.9 0.2
Graham Tactical Trend 73,660 -1.6 -11.8 - -
SG Trend 0.7 -9.3 - -
Mount Lucas - Cash Basis 63,674 -1.5 -22.4 2.8 6.2
BTOP 50 (blend)* 0.5 -6.8 -0.6 2.0
Alternative Risk Premium Sub-Composite 174,625 1.0 10.1 1.2 2.8
5% Annual 1.2 5.0 5.0 5.0
AQR Style Premia 40,937 4.9 10.1 - -
5% Annual 1.2 5.0 - -
Bridgewater Pure Alpha Composite 73,852 0.2 11.2 2.2 3.4
Bridgewater Pure Alpha Composite Blend** 1.2 5.0 7.9 9.5
P/E Diversified Global Macro 59,837 -0.4 5.8 - -
5% Annual 1.2 5.0 - -
Manager Performance
As of September 30, 2017
SJCERA 20
Manager Performance
As of September 30, 2017
Manager CommentaryDuring the latest three-month period ending September 30, 2017, one of SJCERA’s Crisis Risk Offset managers outperformed its respective benchmarks.
Dodge & Cox Long Duration produced a quarterly return of 40 basis points, underperforming the BB US Long Duration Treasuries by (20) basis points. Over the 1-year period, the fund outperformed its benchmarks by 20 basis points.
Graham, one of the Plan’s Systematic Trend Following managers, produced a quarterly return of (1.6%), underperforming the SG Trend Index by (2.3%). The fund underperformed its benchmark by (2.5%)over the 1-year period.
Mount Lucas, one of the Plan’s Systematic Trend Following managers, produced a quarterly return of (1.5%), underperforming the Barclays BTOP 50 Index by (2.0%). Mount Lucas bested its benchmark during the 3- and 5-year periods by 3.4% and 4.2%, respectively.
AQR, one of the Plan’s new Alternative Risk Premia managers, posted a quarterly return of 4.9%, outperforming its 5% annual target by 3.7%.Over the 1-year period, the manager outperformed its benchmark by 5.1%.
Bridgewater Pure Alpha, the Plan’s alpha manager, outperformed over the 1-year period by 6.2%. Over the quarter, 3-, and 5- year periods, the manager underperformed by (1.0%), (5.7%), and (6.1%), respectively.
P/E Diversified, one of the Plan's new Alternative Risk Premia managers underperformed its 5% annual target by (1.6%) over the quarter but outperfomed by 80 basis points over the 1-year periods.
SJCERA 21
San Joaquin County Employees' Retirement Association: Manager Value-Added (Dollar-Impact)As of September 30, 2017
Manager/MandateManager
ReturnBenchmark
Return Dollar Impact Benchmark Added ValuManager BNAVTotal Portfolio MV as of 6/30/2017 2,676,073 2,676,073SJCERA Total 2.9%
Policy Benchmark 2.8%BlackRock Russell 1000
Russell 1000 IndexPIMCO RAE Intl
MSCI EAFEPIMCO RAE Emerging Markets
MSCI Emerging MarketsBlackRock ACWI ex US
MSCI World ex US (net)Bridgewater All Weather
T-bill + 4%Private Real Estate
Private Real Estate BenchmarkPanAgora
T-bill + 4%Capital Prospects
Russell 2000 ValueBlackRock Russell 2000 Growth
Russell 2000 GrowthPRIMA Lag
BC Aggregate (lagged)Dodge & Cox Fixed Income
BC Aggregate Crestline Opportunity II
9% AnnualDoubleLine
BC Aggregate BlackRock Developed ex US RE
FTSE ERPA/NARIET Global ex-US REIT Stone Harbor Absolute Return
3-Month Libor TR USDWhite Oak
9% AnnualMedley Opportunity II
9% AnnualMesa West III
9% AnnualRaven II
9% AnnualStone Harbor Bank Loans
S&P/LSTA Leveraged LoansOcean Avenue II
9% AnnualInvesco REIT
FTSE NARIET IndexMorgan Creek VI
9% AnnualMorgan Creek III
9% AnnualMorgan Creek V
9% AnnualBridgewater Pure Alpha Composite
5% AnnualOcean Avenue III
9% AnnualMarinus
9% AnnualRaven III
9% AnnualP/E Diversified Global Macro
5% AnnualMount Lucas
BTOP 50Graham
SG Trend Index
Total Portlolio MV as of 9/30/2017 2,754,042
-1.6% 0.7% (1,206) 73,660
-0.2% 2.2% (38) 18,059
-0.4% 1.2% (264) 59,837
-1.5% 0.5% (986) 63,674
0.0% 2.2% 0 20,857
2.2% 2.2% 273 12,595
1.6% 2.2% 158 9,983
1.2% 2.2% 119 9,947
0.8% 0.9% 275 35,934
1.2% 2.2% 321 26,528
0.7% 0.8% 387 55,544
1.8% 2.2% 395 21,850
2.0% 2.2% 548 27,095
1.7% 2.2% 676 39,039
2.2% 2.2% 744 34,158
1.2% 0.3% 749 65,080
3.2% 3.0% 855 26,749
1.0% 0.8% 937 89,809
3.1% 2.2% 1,108 35,413
1.3% 0.8% 1,179 90,728
1.3% 1.4% 1,310 99,173
6.3% 6.2% 2,095 33,350
6.6% 5.1% 2,856 43,075
3.1% 1.3% 5,602 182,460
2.4% 1.7% 6,041 247,870
3.5% 1.3% 6,137 175,179
5.7% 5.6% 7,748 136,459
8.2% 8.0% 8,148 99,695
7.5% 5.5% 11,322 151,646
4.5% 4.5% 18,748 418,486
0.2% 1.2% 114 73,852
0.2% 2.2% 20 9,597
(10,000) (5,000) 0 5,000 10,000 15,000 20,000 25,000
Dollar Impact 3Q 2017 ($000)
22
San Joaquin County Employees' Reitrement Association: Manager Value-Added (Return)As of September 30, 2017
Manager/MandateManager
ReturnBenchmark
Return Dollar Impact Benchmark Added Value Manager BNAVTotal Portfolio MV as of 6/30/2017 2,676,073 2,676,073SJCERA Total 2.9%
Policy Benchmark 2.8%
PIMCO RAE Emerging MarketsMSCI Emerging Markets
PIMCO RAE IntlMSCI EAFE
Capital ProspectsRussell 2000 Value
BlackRock Russell 2000 GrowthRussell 2000 Growth
BlackRock ACWI ex USMSCI World ex US (net)
BlackRock Russell 1000Russell 1000 Index
Bridgewater All WeatherT-bill + 4%
BlackRock Developed ex US REFTSE ERPA/NARIET Global ex-US REIT Index
Crestline Opportunity II 9% Annual
PanAgoraT-bill + 4%
Private Real EstatePrivate Real Estate Benchmark
White Oak9% Annual
Morgan Creek VI 9% Annual
Mesa West III 9% Annual
Raven II 9% Annual
Medley Opportunity II 9% Annual
Morgan Creek III 9% Annual
PRIMA LagBC Aggregate (lagged)
Dodge & Cox Fixed IncomeBC Aggregate
Ocean Avenue II9% Annual
Morgan Creek V 9% Annual
Stone Harbor Absolute Return 3-Month Libor TR USD
DoubleLineBC Aggregate
Invesco REITFTSE NARIET Index
Stone Harbor Bank Loans S&P/LSTA Leveraged Loans
Ocean Avenue III9% Annual
Bridgewater Pure Alpha Composite5% Annual
Marinus 9% Annual
Raven III 9% Annual
P/E Diversified Global Macro5% Annual
Mount Lucas BTOP 50
Graham -1.6% 0.7% (1,206)SG Trend Index
Total Portlolio MV as of 9/30/2017 2,754,042
0.2% 2.2% 20 9,597
0.2% 1.2% 114 73,852
0.0% 2.2% 0 20,857
-1.5% 0.5% (986)
0.7% 0.8% 387 55,544
0.8% 0.9% 275 35,934
1.0% 0.8% 937 89,809
1.2% 0.3% 749 65,080
1.2% 2.2% 119 9,947
1.2% 2.2% 321 26,528
1.3% 0.8% 1,179 90,728
1.3% 1.4% 1,310 99,173
1.6% 2.2% 158 9,983
1.7% 2.2% 676 39,039
1.8% 2.2% 395 21,850
2.0% 2.2% 548 27,095
2.2% 2.2% 273 12,595
2.2% 2.2% 744 34,158
2.4% 1.7% 6,041 247,870
3.1% 1.3% 5,602 182,460
26,749
3.1% 2.2% 1,108 35,413
3.2% 3.0% 855
3.5% 1.3% 6,137 175,179
4.5% 4.5% 18,748 418,486
5.7% 5.6% 7,748 136,459
6.3% 6.2% 2,095 33,350
8.2% 8.0% 8,148
6.6% 5.1% 2,856 43,075
99,695
7.5% 5.5% 11,322 151,646
63,674
73,660
-0.2% 2.2% (38) 18,059
-0.4% 1.2% (264) 59,837
-4.0% -2.0% 0.0% 2.0% 4.0% 6.0% 8.0% 10.0%
Manager Return 3Q 2017
23
INVESTMENT MARKET RISK METRICS*
Investment Market Risk Metrics
Takeaways
Growth risk-based assets generated meaningful returns over the quarter.
The U.S. Treasury yield curve continues to flatten, with short-term rates generally increasing and medium and long-term rates
largely remaining stable during the quarter.
Implied equity market volatility (i.e., VIX) remained near historic lows throughout the quarter. This behavior has been directly
mirrored by actual equity market volatility as well as macroeconomic data volatility throughout the globe.
Due to recent price increases, Non-U.S. Developed and Emerging Market equity valuations are no longer as cheap relative
to their own histories (currently in-line with long-term averages, but they remain modestly cheap relative to U.S. levels.
Credit spreads remain tight (risk seeking) in both U.S. investment grade and high yield markets.
Inflation indicators remain well behaved; commodity prices are near decade lows and breakeven inflation levels remain
stable.
PCA’s sentiment indicator remains positive. The sentiment indicator remains solidly green.
* See Appendix for the rationale for selection and calculation methodology used for the risk metrics.
24
US Equity(Ex. 1)
Dev ex‐USEquity(Ex. 2)
EM EquityRelative toDM Equity(Ex. 3)
Private Equity(Ex. 4, 5)
PrivateReal EstateCap Rate(Ex. 6)
PrivateReal EstateSpread(Ex. 7)
US IG CorpDebt Spread
(Ex. 9)
US High YieldDebt Spread
(Ex. 10)
Valuation Metrics versus Historical Range A Measure of Risk
Top Decile
Bottom Decile
Average
UnfavorablePricing
Favorable Pricing
Neutral
Equity Volatility(Ex. 11)
Yield Curve Slope(Ex. 12)
Breakeven Inflation(Ex. 13, 14)
Interest Rate Risk (Ex. 15, 16)
Other Important Metrics within their Historical RangesPay Attention to Extreme Readings
Top Decile
Bottom Decile
Average
Attention!
Attention!
Neutral
25
Information Behind Current Sentiment Reading Bond Spread Momentum Trail ing‐Twelve Months PositiveEquity Return Momentum Trail ing‐Twelve Months Positive PositiveAgreement Between Bond and Equity Momentum Measures? Agree
Growth Risk Visibility (Current Overall Sentiment)
26
(Please note different time scales)
05
101520253035404550
P/E Ra
tio
U.S. Equity Market P/E Ratio1
versus Long‐Term Historical Average
1966
2000
1981
1929
US MarketsLong‐term Average
(since 1880) P/E = 16.8x
US Markets Current P/E as of 9/2017 =30.6x
1 P/E ratio is a Shiller P/E‐10 based on 10 year real S&P 500 earnings over S&P 500 index level.
2009
1901
1921
Exhibit 1
05
1015202530354045
P/E Ra
tio
Developed ex‐U.S. Equity Market P/E Ratio1
versus Long‐Term Historical Average2
Long‐term Average Historical 2
P/E = 16.9x
Intl Developed Markets Current P/E
as of 9/2017 = 16.9x
1 P/E ratio is a Shiller P/E‐10 based on 10 year real MSCI EAFE earnings over EAFE index level.
2 To calculate the LT historical average, from 1881 to 1982 U.S. data is used as developed market proxy. From 1982 to present, actual developed ex‐US market data (MSCI EAFE) is used.
Average 1982‐9/2017 EAFE Only
P/E = 23.3x
Exhibit 2
Developed Public Equity Markets
27
0%
25%
50%
75%
100%
125%
150%
175%
200%
225%
250%
275%
Emerging Markets PE / Developed Markets PE(100% = Parity between PE Ratios)
EM/DM PE Average EM/DM PE Parity
Exhibit 3
Source: Bloomberg, MSCIWorld, MSCI EMF
Asian crisis
Russian crisis , LTCM implosion, currency devaluations
Technology and telecom crash
Commodityprice run‐up
World financial crisisMexican Peso crisis
EM/DM relative PE ratio is slightly below the historical average
Emerging Markets Public Equity Markets
28
U.S. Private Equity Markets
29
0.0%5.0%
10.0%15.0%20.0%
1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017
Transactions as a % of Market Value Trailing‐Four Quarters
Source: NCREIF, PCA calculation
Exhibit 8
Activity has been steadily increasing since Q4 2014.
0.0%
1.0%
2.0%
3.0%
4.0%
5.0%
1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017
Cap
Rate
Spr
ead
Core Cap Rate Spread over 10‐Year Treasury Interest Rate
Core Cap Rate Spread to Treasuries
LT Average Spread
Spread to the 10‐year Treasury marginally narrowed during the third quarter.
Exhibit 7
0.0%2.0%4.0%6.0%8.0%
10.0%12.0%14.0%16.0%18.0%
1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017
Cap
Rate
s
Current Value Cap Rates1Core Cap Rate
LT Average Cap Rate
10 Year Treasury Rate
1A cap rate is the current annual income of the property divided by an estimate of the current value of the property. It is the current yield of the property. dLow cap rates indicate high valuations.
Exhibit 6
Source: NCRIEF
Core real estate cap rates remain low by historical standards (expensive).
Exhibit 6Quarterly Data, Updated to September 30th
Private Real Estate Markets
30
0
100
200
300
400
500
600
700
Spread
Ove
r Treasuries (basis po
ints)
Investment Grade Corporate Bond Spreads
Investment GradeBond Spreads
Average spread since1994 (IG Bonds)
Source: LehmanLive: Barclays Capital US Corporate Investment Grade Index IntermediateComponent.
Investment grade spreads narrowed duringthe third quarter and remain below the long‐term average level.
Exhibit 9
0200
400600800
100012001400
16001800
Spread
Ove
r Treasuries (basis po
ints)
High Yield Corporate Bond Spreads
High Yield BondSpreads
Average spread since1994 (HY Bonds)
Source: LehmanLive: Barclays Capital U.S. Corporate High Yield Index.
Similarly, high yield spreads ticked down overthe quarter and stil l remain below the long‐term average level.
Exhibit 10
Credit Markets U.S. Fixed Income
31
(Please note different time scales)
‐3.0
‐2.0
‐1.0
0.0
1.0
2.0
3.0
4.0
5.0Yield Curve Slope
Source: www.ustreas.gov (10‐yeartreasury yield minus 1‐year treasury yield)
Yield curve slopes that are negative(inverted) portend a recession.
The average 10‐year Treasury interest rate was virtually unchanged over the quarter. The average one‐year Treasury interest rate ti cked up during the quarter. The s lope decreased during the third quarter, and the yield curve remains upward sloping.
Exhibit 12
0.0
10.0
20.0
30.0
40.0
50.0
60.0
70.0
80.0VIX ‐ a measure of equity market fear / uncertainty
Source: http://www.cboe.com/micro/vix/historical.aspx
Exhibit 11
Equity market volatility (VIX) decreased in September and (once again) ended the quarter meaningfully belowthe long‐term average level (≈ 20) at 9.5.
Other Market Metrics
32
(Please note different time scales)
0.00%
0.50%
1.00%
1.50%
2.00%
2.50%
3.00%
10‐Year Breakeven Inflation(10‐year nominal Treasury yield minus 10‐year TIPS yield)
Source: www.ustreas.govDai ly Yield Curve Rates (10‐year nominal treasury yield minus 10‐year TIPs yield)
Breakeven inflation ended September at 1.84%, increasing from the end of June. The 10‐year TIPS real‐yield decreased to 0.49%, and the nominal 10‐year Treasury yield was vi rtually unchanged ending the quarter at 2.33%.
Exhibit 13
0
20
40
60
80
100
120
140
160
Inflation Adjusted BloombergCommodity Price Index (1991 = 100)
Broad commodity prices ticked up during the quarter and continueto remain above the historical lows set in early 2016.
Source: Bloomberg Commodity Index, St. Louis Fed for US CPI a ll urban consumers.
Exhibit 14
Measures of Inflation Expectations
33
‐2.0
0.0
2.0
4.0
6.0
8.0
10.0
Expe
cted
Rea
l Yield of 1
0‐Ye
ar Treasury
Estimate of 10‐Year Treasury Forward‐Looking Real Yield
Sources: www.ustreas.gov for 10‐year constant maturity rates*Federal Reserve Bank of Philadelphia survey of professional forecasts for inflation estimates
Exhibit 15
The forward‐looking annual real yield on 10‐year Treasuries i s estimated at approximately ‐0.05% real, assuming 10‐year annualized inflation of 2.25%* per year.
Average since 1981.
4.004.505.005.506.006.507.007.508.008.509.009.50
10‐Yea
r Treasury Bo
nd Duration
10‐Year Treasury Duration (Change in Treasury price with a change in interest rates)
Source: www.ustreas.gov for 10‐year constant maturity rates, calculation of duration
Lower Risk
Higher Risk Interest rate risk is sti ll near all‐time highs.
Exhibit 16
If the 10‐year Treasury yield rises by 100 basispoints from today's levels, the capital loss fromthe change in price is expected to be ‐8.9%.
Measures of U.S. Treasury Interest Rate Risk
34
ECONOMIC & MARKET OVERVIEW – 3Q 2017
Overview: US GDP growth increased by 3.0% (advance estimate) in the third quarter of 2017. GDP growth during the quarter was driven by increases in consumer spending, inventory investment, business investment, and exports. At quarter-end, the unemployment rate ticked down to 4.2%. The seasonally adjusted Consumer Price Index for All Urban Consumers increased by 4.3% on an annualized basis during the quarter. Commodities increased during the third quarter but are slightly negative over the trailing 1-year period at (0.3%). Global equity returns were positive for the quarter at 5.3% (MSCI ACWI). The US Dollar depreciated against the Euro and the Pound by (3.4%) and (2.9%), respectively. Conversely, the US Dollar appreciated against the Yen by 10 basis points.
Economic Growth
Real GDP increased at an annualized rate of 3.0 percent in the third quarter of 2017.
Real GDP growth was driven by increases in consumer spending, inventory investment, business investment, and exports.
GDP growth was partially offset during the quarter by a decline in housing investment.
Inflation
The Consumer Price Index for All Urban Consumers (CPI-U) increased 4.3 percent during the third quarter on an annualized basis after seasonal adjustment.
Quarterly percentage changes may be adjusted between data publications due to periodic updates in seasonal factors.
Core CPI-U increased by 2.1 percent for the quarter on an annualized basis after seasonal adjustment.
Over the last 12 months, core CPI-U increased 1.7 percent after seasonal adjustment.
Unemployment The US economy gained approximately 274,000 jobs in the third quarter
of 2017.
The unemployment rate decreased to 4.2% at quarter end, the lowest level since February 2001.
The majority of jobs gained occurred in private service providing, education and health services, and professional and business services. The primary contributors to jobs lost were in leisure and hospitality, retail trade, and information.
3.0%3.1%
1.4%2.1%
3.5%
1.4%
-2.0%
0.0%
2.0%
4.0%
2017 Q32017 Q22017 Q12016 Q42016 Q32016 Q2
Annualized Quarterly GDP Growth
4.3%
0.1%
1.5%
3.0%2.0%
3.0%
0.0%1.0%2.0%3.0%4.0%5.0%
2017 Q32017 Q22017 Q12016 Q42016 Q32016 Q2
CPI-U After Seasonal Adjustment
4.2%4.4%4.7%4.7%4.9%4.9%
0.0%2.0%4.0%6.0%8.0%
2017 Q32017 Q22017 Q12016 Q42016 Q32016 Q2
Unemployment Rate
35
ECONOMIC & MARKET OVERVIEW – 3Q 2017
Interest Rates & US Dollar Treasury Yield Curve Changes
US Treasury yields were generally constant over the quarter.
The Federal Reserve kept the federal funds rate between 1.00 percentand 1.25 percent.
The US dollar depreciated against the Euro and the Pound by (3.4%) and(2.9%), respectively. Conversely the US dollar appreciated against theYen by 0.1%.
Source: US Treasury Department
Fixed Income US bonds were essentially flat over the quarter except for Credit and High Yield, returning 1.4% and 2.0%, respectively. Government bonds (US
Treasuries and Agencies) delivered the worst performance at 0.4%.
Over the trailing 1-year period, High Yield materially outperformed all other sectors, producing an 8.9% return over the period. Government bonds (USTreasuries and Agencies) trailed all other bond sectors with a return of minus (1.6%) as rates generally rose over the period.
US Fixed Income Sector Performance (BB Aggregate Index)
Sector Weight QTR 1 Year
Governments* 40.5% 0.5% -1.3%
Agencies 3.4% 0.8% 0.8%
Inv. Grade Credit 25.6% 1.3% 2.2%
MBS 28.1% 1.0% 0.3%
ABS 0.5% 0.4% 0.9%
CMBS 1.8% 0.8% -0.1%
0.0%
1.0%
2.0%
3.0%
4.0%
3 mo
6 mo
1 yr
2 yr
3 yr
5 yr
7 yr
10 yr
20 yr
30 yr
6/30/2017 9/30/2017
0.9%
0.1%
0.4%
-1.6
%
1.4% 2.0%
1.0%
0.3%2.
0%
8.9%
-5.0%
0.0%
5.0%
10.0%
15.0%
QTR 1-Year
Fixed Income Returns
BB Agg BB Govt* BB Credit BB Mortgage BB High Yield
*US Treasuries and Government Related *US Treasuries and Agencies
36
ECONOMIC & MARKET OVERVIEW – 3Q 2017
US Equities
During the quarter, growth stocks outperformed value stocks across the market cap spectrum. In terms of market capitalization, small cap stocks provided the strongest returns across styles. Small cap growth stocks returned this quarter’s strongest return at 6.2%, and large cap value provided the weakest result at 3.1%.
During the trailing 1-year period, US equities provided positive double-digit returns, with the top performers, large cap and broad growth, each returning 21.9%. Conversely, large cap value trailed all other market caps and styles with a return of 15.1%.
0.4%
US Equity Sector Performance (Russell 3000 Index)
Sector Weight QTR 1 Year Financial Services 21.1% 12.7% 14.8% Technology 18.0% 8.9% -3.3% Consumer Disc. 14.0% 7.6% 6.8% Health Care 13.3% 5.9% 5.8% Producer Durables 11.0% -6.8% 26.3% Consumer Staples 7.5% 6.0% 23.1% Energy 6.1% 4.0% 20.1% Utilities 5.3% 3.0% 18.0% Materials & Proc. 3.9% 2.0% 20.5%
International Equities
International Equity Region Performance (in USD) (MSCI ACWI ex US)
Sector Weight QTR 1 Year Europe Ex. UK 32.6% 7.0% 26.4%
Emerging Markets 24.2% 8.0% 22.9%
Japan 16.0% 4.1% 14.5%
United Kingdom 12.4% 5.2% 14.7%
Pacific Ex. Japan 8.2% 3.7% 14.6%
Canada 6.7% 8.1% 15.8%
International equities performed well over the quarter as each region provided positive returns. The best performer was Emerging Markets with a return of 8.0%. The Pacific trailed all other regions with a return of 4.0%.
Over the trailing 1-year period, international equities provided double digit returns across the board. Europe led all other regions with a return of 23.0%, while the Pacific underperformed all other regions with a 14.5% return.
6.3%
20.2
%
5.5%
19.7
%
6.5%
23.0
%
4.0%
14.5
%
8.0%
22.9
%
-5%0%5%
10%15%20%25%30%
QTR 1-Year
International Equity Returns (in USD)
MSCI ACW Ex U.S. MSCI EAFE MSCI Europe MSCI Pacific MSCI EM
4.6%
18.7
%
5.9%
21.9
%
3.3%
15.5
%
4.5%
18.5
%
5.9%
21.9
%
3.1%
15.1
%
5.7%
20.7
%
6.2%
21.0
%
5.1%
20.6
%
-5%0%5%
10%15%20%25%30%
QTR 1-Year
U.S. Equity Returns
R3000 (Broad Core) R3000G (Broad Gr) R3000V (Broad Val)R1000 (Lg Core) R1000G (Lg Gr) R1000V (Lg Val)R2000 (Sm Core) R2000G (Sm Gr) R2000V (Sm Val)
37
ECONOMIC & MARKET OVERVIEW – 3Q 2017
* Performance is annualized for periods greater than one year.
Market Summary – Long-term Performance*
Indexes Month Quarter 1 Year 3 Years 5 Years 10 Years 20 Years Global Equity MSCI AC World Index 2.0% 5.3% 19.3% 8.0% 10.8% 4.4% 6.1% Domestic Equity S&P 500 2.1% 4.5% 18.6% 10.8% 14.2% 7.4% 7.0% Russell 3000 2.4% 4.6% 18.7% 10.7% 14.2% 7.6% 7.2% Russell 3000 Growth 1.6% 5.9% 21.9% 12.6% 15.2% 9.0% 6.5% Russell 3000 Value 3.3% 3.3% 15.5% 8.8% 13.2% 6.0% 7.4% Russell 1000 2.1% 4.5% 18.5% 10.6% 14.3% 7.5% 7.2% Russell 1000 Growth 1.3% 5.9% 21.9% 12.7% 15.3% 9.1% 6.5% Russell 1000 Value 3.0% 3.1% 15.1% 8.5% 13.2% 5.9% 7.3% Russell 2000 6.2% 5.7% 20.7% 12.2% 13.8% 7.8% 7.5% Russell 2000 Growth 5.4% 6.2% 21.0% 12.2% 14.3% 8.5% 6.0% Russell 2000 Value 7.1% 5.1% 20.5% 12.1% 13.3% 7.1% 8.6% Russell Microcap 8.1% 6.7% 22.3% 12.2% 13.9% 6.7% --- CBOE BXM Index 0.9% 2.5% 12.8% 7.1% 7.6% 4.8% 6.4% International Equity MSCI AC World Index ex USA 1.9% 6.3% 20.2% 5.2% 7.5% 1.7% 5.4% MSCI EAFE 2.5% 5.5% 19.7% 5.5% 8.9% 1.8% 5.0% MSCI Pacific 3.3% 6.5% 23.0% 5.0% 9.0% 1.7% 5.8% MSCI Europe 1.1% 4.0% 14.5% 6.9% 8.8% 2.3% 3.7% MSCI EM (Emerging Markets) -0.4% 8.0% 22.9% 5.3% 4.4% 1.7% 6.7% Fixed Income BC Universal -0.4% 1.0% 1.0% 3.1% 2.5% 4.6% 5.3% Global Agg. - Hedged -0.5% 0.8% -0.2% 3.1% 3.1% 4.3% 5.1% BC Aggregate Bond -0.5% 0.8% 0.1% 2.7% 2.1% 4.3% 5.1% BC Government -0.8% 0.4% -1.6% 2.0% 1.3% 3.6% 4.7% BC Credit Bond -0.2% 1.3% 2.0% 3.9% 3.2% 5.5% 5.8% BC Mortgage Backed Securities -0.2% 1.0% 0.3% 2.4% 2.0% 4.1% 5.0% BC High Yield 0.9% 2.0% 8.9% 5.8% 6.4% 7.8% 6.8% BC WGIL All Maturities - Hedged -1.6% 0.6% -1.2% 4.1% 2.9% 4.8% --- Emerging Markets Debt 0.1% 2.3% 4.7% 5.5% 4.4% 7.2% 8.3% Real Estate NCREIF 0.6% 1.9% 7.7% 10.8% 11.6% 5.0% 9.1% FTSE NAREIT All Equity Index -0.6% 1.2% 3.6% 10.3% 9.9% 6.1% 8.6% Commodity Index Bloomberg Commodity Index -0.1% 2.5% -0.3% -10.4% -10.5% -6.8% 0.1%
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APPENDIX
GLOSSARY OF TERMS
Alpha: The premium an investment earns above a set standard. This is usually measured in terms of a common index (i.e., how the stock performs independent of the market). An Alpha is usually generated by regressing a security’s excess return on the S&P 500 excess return.
Annualized Performance: The annual rate of return that when compounded t times generates the same t-period holding return as actually occurred from period 1 to period t.
Batting Average: Percentage of periods a portfolio outperforms a given index.
Beta: The measure of an asset’s risk in relation to the Market (for example, the S&P 500) or to an alternative benchmark or factors. Roughly speaking, a security with a Beta of 1.5 will have moved, on average, 1.5 times the market return.
Bottom-up: A management style that de-emphasizes the significance of economic and market cycles, focusing instead on the analysis of individual stocks.
Dividend Discount Model: A method to value the common stock of a company that is based on the present value of the expected future dividends.
Growth Stocks: Common stock of a company that has an opportunity to invest money and earn more than the opportunity cost of capital.
Information Ratio: The ratio of annualized expected residual return to residual risk. A central measurement for active management, value added is proportional to the square of the information ratio.
R-Squared: Square of the correlation coefficient. The proportion of the variability in one series that can be explained by the variability ofone or more other series a regression model. A measure of the quality of fit. 100% R-square means perfect predictability.
Standard Deviation: The square root of the variance. A measure of dispersion of a set of data from its mean.
Sharpe Ratio: A measure of a portfolio’s excess return relative to the total variability of the portfolio.
Style Analysis: A returns-based analysis using a multi-factor attribution model. The model calculates a product’s average exposure to particular investment styles over time (i.e., the product’s normal style benchmark).
Top-down: Investment style that begins with an assessment of the overall economic environment and makes a general asset allocation decision regarding various sectors of the financial markets and various industries.
Tracking Error: The standard deviation of the difference between the performance of a portfolio and an appropriate benchmark.
Turnover: For mutual funds, a measure of trading activity during the previous year, expressed as a percentage of the average total assets of the fund. A turnover rate of 25% means that the value of trades represented one-fourth of the assets of the fund.
Value Stocks: Stocks with low price/book ratios or price/earnings ratios. Historically, value stocks have enjoyed higher average returns than growth stocks (stocks with high price/book or P/E ratios) in a variety of countries.
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SJCERA POLICY BENCHMARK COMPOSITION
Time Period SJCERA Total Fund Policy Benchmark
1/1/2010 – 5/31/2010 15% Russell 1000, 3% Russell 2000, 3% 9 percent annual, 4% 91-Day Libor, 7% Annual Libor, 20% BC Aggregate, 7% BC Long Government, 7% Bridgewater RA Custom, 2% FTSE NAREIT Equity REIT, 18% MSCI ACWI ex US, 7% NCREIF Property, 6% Schroder Custom, 1% GPR General Property
6/1/2010-7/31/2011 15% Russell 1000, 3% Russell 2000, 3% 9 percent annual, 4% 91-Day Libor, 7% Annual Libor, 20% BC Aggregate, 7% BC Intermediate Government, 7% Bridgewater RA Custom, 2% FTSE NAREIT Equity REIT, 18% MSCI ACWI ex US, 7% NCREIF Property, 6% Schroder Custom, 1% GPR General Property
8/1/2011 – 3/31/2012 17% Russell 3000, 3% 9 percent annual, 6% 91-Day Libor, 5% Annual Libor, 10% 91-Day t-bill, 20% BC Aggregate, 7% Bridgewater RA Custom, 2% FTSE NAREIT Equity REIT, 17% MSCI ACWI ex US, 7% NCREIF Property, 5% Schroder Custom, 1% GPR General Property
4/1/2012 – 8/31/2012 17% Russell 3000, 18% 9 percent annual, 4% 91-Day Libor, 5% 91-Day t-bill +6%, 17% BC Aggregate, 4.5% Bridgewater RA Custom, 5% Parametric, 2% FTSE NAREIT Equity REIT, 17% MSCI ACWI ex US, 2.5% Schroder Custom, 7% NCREIF Property, 1% GPR General Property
9/1/2012 – 9/31/2012 17% Russell 3000, 18% 9 percent annual, 4% 91-Day Libor, 5% 91-Day t-bill +6%, 17% BC Aggregate, 4.5% Bridgewater RA Custom, 5% Parametric, 1% FTSE NAREIT ex U.S., 2% FTSE NAREIT Equity REIT, 17% MSCI ACWI ex US, 2.5% Schroder Custom, 7% NCREIF Property
10/1/2012 – 11/30/2013 16.3% Russell 3000, 18% 9 percent annual, 4% 91-Day Libor, 5% 91-Day t-bill +6%, 17% BC Aggregate, 4.5% Bridgewater RA Custom, 5% Parametric, 1% FTSE NAREIT ex U.S., 1.5% FTSE NAREIT Equity REIT, 16.3% MSCI ACWI ex US, 1.5% MSCI World, 7.5% NCREIF ODCE net +1%, 2.5% Schroder Custom
12/1/2013 – 3/31/2014 16.3% Russell 3000, 18% 9 percent annual, 4% 91-Day Libor, 7% 91-Day t-bill +6%, 17% BC Aggregate, 4.5% Bridgewater RA Custom, 3% Parametric, 1% FTSE NAREIT ex U.S., 1.5% FTSE NAREIT Equity REIT, 16.3% MSCI ACWI ex US, 1.5% MSCI World, 7.5% NCREIF ODCE net +1%, 2.5% Schroder Custom
4/1/2014 – 12/31/2015 16.3% Russell 3000, 18% 9 percent annual, 4% 91-Day Libor, 7% 91-Day t-bill +6%, 14.6% BC Aggregate, 4.5% Bridgewater RA Custom, 3% Parametric, 1% FTSE NAREIT ex U.S., 1.5% FTSE NAREIT Equity REIT, 16.3% MSCI ACWI ex US, 1.5% MSCI World, 7.5% NCREIF ODCE net +1%, 2.4% S&P LSTA Leveraged Loan, 2.5% Schroder Custom
1/1/2016 - Present 37% MSCI ACWI, 16% BC Aggregate, 15% 50% Barclays US High Yield/50% S&P/LSTA Leveraged Loan Index, 14% T-bills +4%, 10% MSCI ACWI + 2%, 6% Crisis Risk Offset Benchmark, 2% T-bills
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DEFINITION OF BENCHMARKS
BC Aggregate: an index comprised of approximately 6,000 publicly traded investment-grade bonds including U.S. Government, mortgage-backed, corporate, and yankee bonds with an approximate average maturity of 10 years.
BC High Yield: covers the universe of fixed rate, non-investment grade debt. Eurobonds and debt issues from countries designated as emerging markets (e.g., Argentina, Brazil, Venezuela, etc.) are excluded, but Canadian and global bonds (SEC registered) of issuers in non-EMG countries are included. Original issue zeroes, step-up coupon structures, 144-As and pay-in-kind bonds (PIKs, as of October 1, 2009) are also included. Must be rated high-yield (Ba1/BB+ or lower) by at least two of the following ratings agencies: Moody's, S&P, Fitch. If only two of the three agencies rate the security, the lower rating is used to determine index eligibility. All issues must have at least one year to final maturity regardless of call features and have at least $150 million par amount outstanding.
BC Multiverse Non-US Hedged: provides a broad-based measure of the international fixed-income bond market. The index represents the union of the BC Global Aggregate Index and the BC Global High Yield Index. In this sense, the term “Multiverse” refers to the concept of multiple universes in a single macro index.
BC US Credit: includes publicly issued U.S. corporate and foreign debentures and secured notes that which are rated investment grade or higher by Moody’s Investor Services, Standard and Poor’s Corporation, or Fitch Investor’s Service, with all issues having at least one year to maturity and an outstanding par value of at least $250 million. Issues must be publicly issued, dollar-denominated and non-convertible.
BC US Government: includes treasuries (i.e., public obligations of the U.S. Treasury that have remaining maturities of more than one year) and agencies (i.e., publicly issued debt of U.S. Government agencies, quasi-federal corporations, and corporate or foreign debt guaranteed by the U.S. Government).
BC Universal: includes market coverage by the Aggregate Bond Index fixed rate debt issues, which are rated investment grade or higher by Moody’s Investor Services, Standard and Poor’s Corporation, or Fitch Investor’s Service, with all issues having at least one year to maturity and an outstanding par value of at least $100 million) and includes exposures to high yield CMBS securities. All returns are market value weighted inclusive of accrued interest.
Citigroup 3-Month Treasury Bills (T-bills): tracks the performance of U.S. Treasury bills with 3-month maturity.
MSCI ACWI x US ND: comprises both developed and emerging markets less the United States. As of August 2008, the index consisted of 23 counties classified as developed markets and 25 classified as emerging markets. This series approximates the minimum possible dividend reinvestment. The dividend is reinvested after deduction of withholding tax, applying the rate to non-resident individuals who do not benefit from double taxation treaties. MSCI Barra uses withholding tax rates applicable to Luxembourg holding companies, as Luxembourg applies the highest rates.
MSCI EAFE Free (Europe, Australasia, Far East) ND: is a free float-adjusted market capitalization index that is designed to measure developed market equity performance, excluding the US & Canada. This series approximates the minimum possible dividend reinvestment. The dividend is reinvested after deduction of withholding tax, applying the rate to non-resident individuals who do not benefit from double taxation treaties. MSCI Barra uses withholding tax rates applicable to Luxembourg holding companies, as Luxembourg applies the highest rates.
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MSCI EM (Emerging Markets) GD: is a free float-adjusted market capitalization index that is designed to measure equity market performance in the global emerging markets. This series approximates the maximum possible dividend reinvestment. The amount reinvested is the entire dividend distributed to individuals resident in the country of the company, but does not include tax credits.
MSCI Europe is a free float-adjusted market capitalization weighted index that is designed to measure the equity market performance of the developed markets in Europe. As of June 2007, this index consisted of the following 16 developed market country indices: Austria, Belgium, Denmark, Finland, France, Germany, Greece, Ireland, Italy, the Netherlands, Norway, Portugal, Spain, Sweden, Switzerland, and the United Kingdom.
MSCI Pacific is a free float-adjusted market capitalization weighted index that is designed to measure the equity market performance of the developed markets in the Pacific region. As of June 2007, this index consisted of the following 5 Developed Market countries: Australia, Hong Kong, Japan, New Zealand, and Singapore.
NAREIT Index: consists of all tax-qualified REITs listed on the New York Stock Exchange, American Stock Exchange, and the NASDAQ National Market System. The data is market weighted.
NCREIF Property Index: the NPI contains investment-grade, non-agricultural, income-producing properties which may be financed in excess of 5% gross market value; were acquired on behalf of tax exempt institutions; and are held in a fiduciary environment. Returns are gross of fees; including income, realized gains/losses, and appreciation/depreciation; and are market value weighted. Index is lagged one quarter.
Russell 1000: measures the performance of the 1,000 largest securities in the Russell 3000 Index. Russell 1000 is highly correlated with the S&P 500 Index and capitalization-weighted.
Russell 1000 Growth: measures the performance of those Russell 1000 securities with a greater-than-average growth orientation. Securities in this index tend to exhibit higher price-to-book and price-earnings ratios, lower dividend yields and higher forecasted growth values than the Value universe.
Russell 1000 Value: measures the performance of those Russell 1000 securities with a less-than-average growth orientation. Securities in this index tend to exhibit lower price-to-book and price-earnings ratios, higher dividend yields and lower forecasted growth values than the Growth universe.
Russell 2000: measures the performance of the 2,000 smallest companies in the Russell 3000 Index, which represents approximately 8% of the total market capitalization of the Russell 3000 Index.
Russell 2000 Growth: measures the performance of those Russell 2000 securities with a greater-than-average growth orientation. Securities in this index tend to exhibit higher price-to-book and price-to-earnings ratios.
Russell 2000 Value: measures the performance of those Russell 2000 securities with a less-than-average growth orientation. Securities in this index tend to exhibit lower price-to-book and price-to-earnings ratios.
Russell 3000: represents the largest 3,000 US companies based on total market capitalization, representing approximately 98% of the investable US equity market.
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RISK METRIC DESCRIPTION – Rationale for selection and calculation methodology
US Equity Markets Metric: P/E ratio = Price / “Normalized” earnings for the S&P 500 Index
To represent the price of US equity markets, we have chosen the S&P 500 index. This index has the longest published history of price, is well known, and also has reliable, long-term, published quarterly earnings. The price=P of the P/E ratio is the current price of the market index (the average daily price of the most recent full month for the S&P 500 index). Equity markets are very volatile. Prices fluctuate significantly during normal times and extremely during periods of market stress or euphoria. Therefore, developing a measure of earnings power (E) which is stable is vitally important, if the measure is to provide insight. While equity prices can and do double, or get cut in half, real earnings power does not change nearly as much. Therefore, we have selected a well known measure of real, stable earnings power developed by Yale Professor Robert Shiller known as the Shiller E-10. The calculation of E-10 is simply the average real annual earnings over the past 10 years. Over 10 years, the earnings shenanigans and boom and bust levels of earnings tend to even out (and often times get restated). Therefore, this earnings statistic gives a reasonably stable, slow-to-change estimate of average real earnings power for the index. Professor Shiller’s data and calculation of the E-10 are available on his website at http://www.econ.yale.edu/~shiller/data.htm. We have used his data as the base for our calculations. Details of the theoretical justification behind the measure can be found in his book Irrational Exuberance [Princeton University Press 2000, Broadway Books 2001, 2nd ed., 2005].
Developed Equity Markets Excluding the US Metric: P/E ratio = Price / “Normalized” earnings for the MSCI EAFE Index
To represent the price of non-US developed equity markets, we have chosen the MSCI EAFE index. This index has the longest published history of price for non-US developed equities. The price=P of the P/E ratio is the current price of the market index (the average daily price of the most recent full month for the MSCI EAFE index). The price level of this index is available starting in December 1969. Again, for the reasons described above, we elected to use the Shiller E-10 as our measure of earnings (E). Since 12/1972, a monthly price earnings ratio is available from MSCI. Using this quoted ratio, we have backed out the implied trailing-twelve month earnings of the EAFE index for each month from 12/1972 to the present. These annualized earnings are then inflation adjusted using CPI-U to represent real earnings in US dollar terms for each time period. The Shiller E-10 for the EAFE index (10 year average real earnings) is calculated in the same manner as detailed above.
However, we do not believe that the pricing and earnings history of the EAFE markets are long enough to be a reliable representation of pricing history for developed market equities outside of the US. Therefore, in constructing the Long-Term Average Historical P/E for developed ex-US equities for comparison purposes, we have elected to use the US equity market as a developed market proxy, from 1881 to 1982. This lowers the Long-Term Average Historical P/E considerably. We believe this methodology provides a more realistic historical comparison for a market with a relatively short history.
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Emerging Market Equity Markets Metric: Ratio of Emerging Market P/E Ratio to Developed Market P/E Ratio
To represent the Emerging Markets P/E Ratio, we have chosen the MSCI Emerging Market Free Index, which has P/E data back to January 1995 on Bloomberg. To represent the Developed Markets PE Ratio, we have chosen the MSCI World Index, which also has data back to January 1995 on Bloomberg. Although there are issues with published, single time period P/E ratios, in which the denominator effect can cause large movements, we feel that the information contained in such movements will alert investors to market activity that they will want to interpret.
US Private Equity Markets Metrics: S&P LCD Average EBITDA Multiples Paid in LBOs and US Quarterly Deal Volume
The Average Purchase Price to EBITDA multiples paid in LBOs is published quarterly by S&P in their LCD study. This is the total price paid (both equity and debt) over the trailing-twelve month EBITDA (earnings before interest, taxes, depreciation and amortization) as calculated by S&P LCD. This is the relevant, high-level pricing metric that private equity managers use in assessing deals. Data is published monthly.
US quarterly deal volume for private equity is the total deal volume in $ billions (both equity and debt) reported in the quarter by Thomson Reuters Buyouts. This metric gives a measure of the level of activity in the market. Data is published quarterly.
US Private Real Estate Markets Metrics: US Cap Rates, Cap Rate Spreads, and Transactions as a % of Market Value
Real estate cap rates are a measure of the price paid in the market to acquire properties versus their annualized income generation before financing costs (NOI=net operating income). The data, published by NCREIF, describes completed and leased properties (core) on an unleveraged basis. We chose to use current value cap rates. These are capitalization rates from properties that were revalued during the quarter. This data relies on estimates of value and therefore tends to be lagging (estimated prices are slower to rise and slower to fall than transaction prices). The data is published quarterly.
Spreads between the cap rate (described above) and the 10-year nominal Treasury yield, indicate a measure of the cost of properties versus a current measure of the cost of financing.
Transactions as a % of Market Value Trailing-Four Quarters is a measure of property turnover activity in the NCREIF Universe. This quarterly metric is a measure of activity in the market.
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Credit Markets Fixed Income Metric: Spreads
The absolute level of spreads over treasuries and spread trends (widening / narrowing) are good indicators of credit risk in the fixed income markets. Spreads incorporate estimates of future default, but can also be driven by technical dislocations in the fixed income markets. Abnormally narrow spreads (relative to historical levels) indicate higher levels of valuation risk, wide spreads indicate lower levels of valuation risk and / or elevated default fears. Investment grade bond spreads are represented by the Barclays Capital US Corporate Investment Grade Index Intermediate Component. The high yield corporate bond spreads are represented by the Barclays Capital US Corporate High Yield Index.
Measure of Equity Market Fear / Uncertainty Metric: VIX – Measure of implied option volatility for US equity markets
The VIX is a key measure of near-term volatility conveyed by implied volatility of S&P 500 index option prices. VIX increases with uncertainty and fear. Stocks and the VIX are negatively correlated. Volatility tends to spike when equity markets fall.
Measure of Monetary Policy Metric: Yield Curve Slope
We calculate the yield curve slope as the 10 year treasury yield minus the 1 year treasury yield. When the yield curve slope is zero or negative, this is a signal to pay attention. A negative yield curve slope signals lower rates in the future, caused by a contraction in economic activity. Recessions are typically preceded by an inverted (negatively sloped) yield curve. A very steep yield curve (2 or greater) indicates a large difference between shorter-term interest rates (the 1 year rate) and longer-term rates (the 10 year rate). This can signal expansion in economic activity in the future, or merely higher future interest rates.
Measures of US Inflation Expectations Metrics: Breakeven Inflation and Inflation Adjusted Commodity Prices
Inflation is a very important indicator impacting all assets and financial instruments. Breakeven inflation is calculated as the 10 year nominal treasury yield minus the 10 year real yield on US TIPS (treasury inflation protected securities). Abnormally low long-term inflation expectations are indicative of deflationary fears. A rapid rise in breakeven inflation indicates an acceleration in inflationary expectations as market participants sell nominal treasuries and buy TIPs. If breakeven inflation continues to rise quarter over quarter, this is a signal of inflationary worries rising, which may cause Fed action and / or dollar decline.
Commodity price movement (above the rate of inflation) is an indication of anticipated inflation caused by real global economic activity putting pressure on resource prices. We calculate this metric by adjusted in the Dow Jones UBS Commodity Index (formerly Dow Jones AIG Commodity Index) by US CPI-U. While rising commodity prices will not necessarily translate to higher US inflation, higher US inflation will likely show up in higher commodity prices, particularly if world economic activity is robust.
These two measures of anticipated inflation can, and often are, conflicting.
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Measures of US Treasury Bond Interest Rate Risk Metrics: 10-Year Treasury Forward-Looking Real Yield and 10-Year Treasury Duration
The expected annualized real yield of the 10 year US Treasury Bond is a measure of valuation risk for US Treasuries. A low real yield means investors will accept a low rate of expected return for the certainly of receiving their nominal cash flows. PCA estimates the expected annualized real yield by subtracting an estimate of expected 10 year inflation (produced by the Survey of Professional Forecasters as collected by the Federal Reserve Bank of Philadelphia), from the 10 year Treasury constant maturity interest rate.
Duration for the 10-Year Treasury Bond is calculated based on the current yield and a price of 100. This is a measure of expected percentage movements in the price of the bond based on small movements in percentage yield. We make no attempt to account for convexity.
Definition of “Extreme” Metric Readings A metric reading is defined as “extreme” if the metric reading is in the top or bottom decile of its historical readings. These “extreme” reading should cause the reader to pay attention. These metrics have reverted toward their mean values in the past.
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RISK METRICS DESCRIPTION – PCA Market Sentiment Indicator
What is the PCA Market Sentiment Indicator (PMSI)? The PMSI is a measure meant to gauge the market’s sentiment regarding economic growth risk. Growth risk cuts across most financial assets, and is the largest risk exposure that most portfolios bear. The PMSI takes into account the momentum17 (trend over time, positive or negative) of the economic growth risk exposure of publicly traded stocks and bonds, as a signal of the future direction of growth risk returns; either positive (risk seeking market sentiment), or negative (risk averse market sentiment).
How do I read the PCA Market Sentiment Indicator (PMSI) graph? Simply put, the PMSI is a color coded indicator that signals the market’s sentiment regarding economic growth risk. It is read left to right chronologically. A green indicator on the PMSI indicates that the market’s sentiment towards growth risk is positive. A gray indicator indicates that the market’s sentiment towards growth risk is neutral or inconclusive. A red indicator indicates that the market’s sentiment towards growth risk is negative. The black line on the graph is the level of the PMSI. The degree of the signal above or below the neutral reading is an indication the signal’s current strength.
How is the PCA Market Sentiment Indicator (PMSI) Constructed? The PMSI is constructed from two sub-elements representing investor sentiment in stocks and bonds:
1. Stock return momentum: Return momentum for the S&P 500 Equity Index (trailing 12-months)2. Bond yield spread momentum: Momentum of bond yield spreads (excess of the measured bond yield over the identical duration
U.S. Treasury bond yield) for corporate bonds (trailing 12-months) for both investment grade bonds (75% weight) and high yieldbonds (25% weight). The scale of this measure is adjusted to match that of the stock return momentum measure.
The black line reading on the graph is calculated as the average of the stock return momentum measure and the bonds spread momentum measure. The color reading on the graph is determined as follows:
1. If both stock return momentum and bond spread momentum are positive = GREEN (positive)2. If one of the momentum indicators is positive, and the other negative = GRAY (inconclusive)3. If both stock return momentum and bond spread momentum are negative = RED (negative)
What does the PCA Market Sentiment Indicator (PMSI) mean? Why might it be useful? There is strong evidence that time series momentum is significant and persistent.18 In particular, across an extensive array of asset classes, the sign of the trailing 12-month return (positive or negative) is indicative of future returns (positive or negative) over the next 12 month period. The PMSI is constructed to measure this momentum in stocks and corporate bond spreads. A reading of green or red is agreement of both the equity and bond measures, indicating that it is likely that this trend (positive or negative) will continue over the next 12 months. When the measures disagree, the indicator turns gray. A gray reading does not necessarily mean a new trend is occurring, as the indicator may move back to green, or into the red from there. The level of the reading (black line) and the number of months at the red or green reading, gives the user additional information on which to form an opinion, and potentially take action.
17 Momentum is defined as the persistence of relative performance. There is a significant amount of academic evidence indicating that positive momentum (e.g., strong performing stocks over the recent past continue to post strong performance into the near future) exists over near-to-intermediate holding periods. See, for example, “Understanding Momentum,” Financial Analysts Journal, Scowcroft, Sefton, March, 2005. 18 “Time Series Momentum” Moskowitz, Ooi, Pedersen, August 2010 http://pages.stern.nyu.edu/~lpederse/papers/TimeSeriesMomentum.pdf
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DISCLOSURES: This document is provided for informational purposes only. It does not constitute an offer of securities of any of the issuers that may be described herein. Information contained herein may have been provided by third parties, including investment firms providing information on returns and assets under management, and may not have been independently verified. The past performance information contained in this report is not necessarily indicative of future results and there is no assurance that the investment in question will achieve comparable results or that the Firm will be able to implement its investment strategy or achieve its investment objectives. The actual realized value of currently unrealized investments (if any) will depend on a variety of factors, including future operating results, the value of the assets and market conditions at the time of disposition, any related transaction costs and the timing and manner of sale, all of which may differ from the assumptions and circumstances on which any current unrealized valuations are based.
Neither PCA nor PCA’s officers, employees or agents, make any representation or warranty, express or implied, in relation to the accuracy or completeness of the information contained in this document or any oral information provided in connection herewith, or any data subsequently generated herefrom, and accept no responsibility, obligation or liability (whether direct or indirect, in contract, tort or otherwise) in relation to any of such information. PCA and PCA’s officers, employees and agents expressly disclaim any and all liability that may be based on this document and any errors therein or omissions therefrom. Neither PCA nor any of PCA’s officers, employees or agents, make any representation of warranty, express or implied, that any transaction has been or may be effected on the terms or in the manner stated in this document, or as to the achievement or reasonableness of future projections, management targets, estimates, prospects or returns, if any. Any views or terms contained herein are preliminary only, and are based on financial, economic, market and other conditions prevailing as of the date of this document and are therefore subject to change.
The information contained in this report may include forward-looking statements. Forward-looking statements include a number of risks, uncertainties and other factors beyond the control of the Firm, which may result in material differences in actual results, performance or other expectations. The opinions, estimates and analyses reflect PCA’s current judgment, which may change in the future.
Any tables, graphs or charts relating to past performance included in this report are intended only to illustrate investment performance for the historical periods shown. Such tables, graphs and charts are not intended to predict future performance and should not be used as the basis for an investment decision.
All trademarks or product names mentioned herein are the property of their respective owners. Indices are unmanaged and one cannot invest directly in an index. The index data provided is on an “as is” basis. In no event shall the index providers or its affiliates have any liability of any kind in connection with the index data or the portfolio described herein. Copying or redistributing the index data is strictly prohibited.
The Russell indices are either registered trademarks or tradenames of Frank Russell Company in the U.S. and/or other countries.
The MSCI indices are trademarks and service marks of MSCI or its subsidiaries.
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