The Board of Investments makes reasonable accommodations for any known disability that may interfere with a person’s ability to participate in public meetings. Persons needing an accommodation must notify the Board (call 444-0001 or write to P.O. Box 200126, Helena, Montana 59620) no later than three days prior to the meeting to allow adequate time to make needed arrangements. REGULAR MEETING OF THE MONTANA BOARD OF INVESTMENTS DEPARTMENT OF COMMERCE 2401 Colonial Drive, 3 rd Floor Helena, Montana May 22 & 23, 2018 AGENDA COMMITTEE MEETINGS A. Audit Committee 8:30 AM 1. Public Comment – Public Comment on issues with Committee Jurisdiction 2. Approval of April 3 & 23, 2018 Committee Minutes 3. Comments from Chair and Reference to Checklist 4. RFP Update - External SOC Auditor 5. Limited Solicitation – Financial Reporting Consulting/Training - Update 6. Report to Legislative Auditor, Changes to Audit Charter - Decisions 7. Status of Internal Control Review – Update and Comments 8. FY18 Financial Statements – Update and Comments B. Human Resource Committee 9:45 AM 1. Public Comment – Public Comment on issues with Committee Jurisdiction 2. Executive Director General Comments 3. Exempt Staff Pay Review and Recommendations – Decisions 4. Executive Director Search Efforts - Update C. Loan Committee 10:45 AM 1. Public Comment – Public Comment on issues with Committee Jurisdiction 2. Approval of April 3, 2018 Committee Minutes 3. INTERCAP Loans – Decisions 4. In-State Loan Program – K3, LLC – Decision BREAK 11:30 AM Tab 1 CALL TO ORDER – Mark Noennig, Chairman 11:45 AM A. Roll Call B. Notice of Video Recording C. Public Comment – Public Comment on issues with Board Jurisdiction D. Approval of the April 3, 2018 and April 5, 2018 Meeting Minutes E. Administrative Business 1. Audit Committee Report – Decisions 2. Human Resource Committee Report – Decisions 3. Loan Committee Report – Decision F. Comments from TRS and PERS Board Members G. Comments from Board Legislative Liaisons Tab 2 EXECUTIVE DIRECTOR REPORTS – David Ewer 12:00 PM A. Member Requests or Follow up from Prior Meeting B. Quarterly Cost Report-Continue with this report? C. Monthly Snapshot D. FY18 Budget Status/Expenditure Review E. Report to Legislative Auditor and Audit Charter Revisions – See Memo under Audit Committee Tab F. Montana Real Estate Holdings - Transfer from Pension to Trust Fund LUNCH SERVED 12:15 PM Tab 3 MONTANA REAL ESTATE HOLDINGS – TRANSFER FROM PENSION TO TRUST FUND - David Ewer - Decision 1:00 PM
Transcript
The Board of Investments makes reasonable accommodations for any known disability that may interfere with a person’s ability to participate in public meetings. Persons needing an accommodation must notify the Board (call 444-0001 or write to P.O. Box 200126, Helena, Montana 59620) no later than three days prior to the meeting to allow adequate time to make needed arrangements.
REGULAR MEETING OF THE MONTANA BOARD OF INVESTMENTS
DEPARTMENT OF COMMERCE 2401 Colonial Drive, 3rd Floor
Helena, Montana May 22 & 23, 2018
AGENDA
COMMITTEE MEETINGS
A. Audit Committee 8:30 AM
1. Public Comment – Public Comment on issues with Committee Jurisdiction 2. Approval of April 3 & 23, 2018 Committee Minutes 3. Comments from Chair and Reference to Checklist 4. RFP Update - External SOC Auditor 5. Limited Solicitation – Financial Reporting Consulting/Training - Update 6. Report to Legislative Auditor, Changes to Audit Charter - Decisions 7. Status of Internal Control Review – Update and Comments 8. FY18 Financial Statements – Update and Comments
B. Human Resource Committee 9:45 AM 1. Public Comment – Public Comment on issues with Committee Jurisdiction 2. Executive Director General Comments 3. Exempt Staff Pay Review and Recommendations – Decisions 4. Executive Director Search Efforts - Update
C. Loan Committee 10:45 AM 1. Public Comment – Public Comment on issues with Committee Jurisdiction 2. Approval of April 3, 2018 Committee Minutes 3. INTERCAP Loans – Decisions 4. In-State Loan Program – K3, LLC – Decision
BREAK 11:30 AM Tab 1 CALL TO ORDER – Mark Noennig, Chairman 11:45 AM
A. Roll Call B. Notice of Video Recording C. Public Comment – Public Comment on issues with Board Jurisdiction D. Approval of the April 3, 2018 and April 5, 2018 Meeting Minutes E. Administrative Business
F. Comments from TRS and PERS Board Members G. Comments from Board Legislative Liaisons
Tab 2 EXECUTIVE DIRECTOR REPORTS – David Ewer 12:00 PM
A. Member Requests or Follow up from Prior Meeting B. Quarterly Cost Report-Continue with this report? C. Monthly Snapshot D. FY18 Budget Status/Expenditure Review E. Report to Legislative Auditor and Audit Charter Revisions –
See Memo under Audit Committee Tab F. Montana Real Estate Holdings - Transfer from Pension to Trust Fund
LUNCH SERVED 12:15 PM Tab 3 MONTANA REAL ESTATE HOLDINGS – TRANSFER FROM PENSION TO TRUST FUND - David Ewer - Decision 1:00 PM
The Board of Investments makes reasonable accommodations for any known disability that may interfere with a person’s ability to participate in public meetings. Persons needing an accommodation must notify the Board (call 444-0001 or write to P.O. Box 200126, Helena, Montana 59620) no later than three days prior to the meeting to allow adequate time to make needed arrangements.
Tab 4 MONTANA LOAN PROGRAM REPORT – Doug Hill 1:40 PM BREAK 1:55 PM Tab 5 BOND PROGRAM REPORT – Louise Welsh, Senior Bond Program Officer 2:10 PM
A. Activity Report B. Staff Approved Loans Report
Tab 6 FIXED INCOME ASSET CLASS REVIEW – 2:30 PM Jon Putnam, CFA, FRM, CAIA, and John Romasko, CFA ADJOURNMENT 3:45 PM
AGENDA – DAY 2 RECONVENE AND CALL TO ORDER – Mark Noennig, Chairman 8:30 AM
A. Roll Call B. Notice of Video Recording C. Public Comment – Public Comment on issues with Board Jurisdiction
Tab 7 INVESTMENT CONSULTANT QUARTERLY REVIEW – RVK, Inc. 8:35 AM
A. Executive Summary B. Capital Markets Review C. Quarterly Review
Tab 8 INVESTMENT POLICIES – Decisions Jon Putnam, CFA, FRM, CAIA, and John Romasko, CFA 9:15 AM Tab 9 PRIVATE INVESTMENTS - NEW COMMITMENTS – 10:00 AM Michael Nguyen Tab 10 INVESTMENT UPDATE 10:20 AM
A. CIO Update – Joe Cullen, CFA, CAIA, FRM B. Risk Management – Dan Zarling, CFA C. Private Equity – Ethan Hurley, CAIA D. Real Estate – Ethan Hurley, CAIA E. Natural Resources – Ethan Hurley, CAIA F. Internally Managed Fixed Income - Jon Putnam, CFA, FRM, CAIA G. Broad Fixed Income – Rande Muffick, CFA H. High Yield – Rande Muffick, CFA I. Domestic Equity – Rande Muffick, CFA J. International Equity – Rande Muffick, CFA K. STIP – John Romasko, CFA L. State Fund – Jon Putnam, CFA, FRM, CAIA M. Trust Fund Investment Pool – Jon Putnam, CFA, FRM, CAIA
BREAK 10:45 AM (CONTINUE INVESTMENT UPTDATE) 11:00 AM RECAP OF STAFF TO DO LIST AND ADJOURNMENT – Mark Noennig, Chairman 12:15 PM Appendix
A. Annual Board Meeting Schedule B. Systematic Work and Education Plan C. Acronym Index D. Terminology List E. Staff Org Chart
MONTANA BOARD OF INVESTMENTS DEPARTMENT OF COMMERCE 2401 Colonial Drive, 3rd Floor
Helena, Montana
MINUTES OF THE MEETING – April 3, 2018
BOARD MEMBERS PRESENT: Mark Noennig, Chairman
Jon Satre Maggie Peterson Jeff Greenfield Diane Fladmo
BOARD MEMBERS ABSENT:
Karl Englund, Vice Chair Terry Cohea
Jack Prothero
LEGISLATIVE LIAISONS PRESENT: Senator Scott Sales
LEGISLATIVE LIAISONS ABSENT:
Representative Kelly McCarthy
STAFF PRESENT:
Polly Boutin, Associate Financial Manager Jason Brent, CFA, Investment Officer
Public Markets Geri Burton, Deputy Director
Dana Chapman, Board Secretary Frank Cornwell, Associate Financial Manager
Joseph M. Cullen, CFA, CAIA, FRM Chief Investment Officer
David Ewer, Executive Director Julie Feldman, CPA, Financial Manager
Julie Flynn, Bond Program Officer Kelsey Gauthier, CPA, Investment Accountant
Tim House, Investment Analyst Douglas Hill, Director of In-State Loan Programs
Ethan Hurley, CAIA Director of Private Investments
Emily Kovarik, CPA, Investment Analyst Teri Kolnik, CFA, Investment Analyst
Eron Krpan, CFA, CIPM, Investment Analyst April Madden, Investment Accountant Rande Muffick, CFA, Director of Public
Market Investments Mary Noack, Network Administrator
Mike Pettit, Director of Investment Operations Jon Putnam, CFA, FRM, CAIA
Director of Fixed Income John Romasko, CFA, Investment Officer
Steve Strong, Investment Analyst Louise Welsh, Senior Bond Program Officer Thomas Winkler, CFA, Investment Analyst
Dan Zarling, CFA, Director of Risk Management
GUESTS:
Jim Voytko, President, Director of Research, Senior Consultant, Principal, RVK, Inc. Orray (Mike) Taft, Associate Consultant, RVK, Inc.
Shawn Graham, Executive Director, Montana Teachers' Retirement System (TRS) Corin Cates-Carney, Capitol Bureau Reporter, Montana Public Radio
Katie Sutton, Director, Montana Organizing Project CALL TO ORDER Chairman Mark Noennig called the regular meeting of the Board of Investments (Board) to order at 11:15 a.m. As noted above a quorum of Board Members was present. Chairman Noennig advised video recording of the meeting was underway and called for public comment. Ms. Katie Sutton addressed the Board. Ms. Sutton is the director of Montana Organizing Project, a collaboration of diverse community, civic, labor and faith groups and community members who work for economic, racial and social justice. Ms. Sutton explained the group has worked on payday lending
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issues and through research about private equity investing learned that Montana as a state invested $25 million in JLL Partners, which subsequently absorbed Ace Cash Express, an entity that does not exist within Montana as it operates outside of state regulations on payday loans. Ms. Sutton questioned the investment, since it does not benefit the local Montana economy and operates in payday loans, which are regulated in Montana, and whether is it a morally sound investment. Executive Director David Ewer stated he was aware of the payday lending concerns, and aware that the phenomenon has different boundaries of state. He added it is a small set of a small set—although not a defense of the issue—and it is true Montana has a small portion in payday loans. Director Ewer stated he welcomed the comments, and it is important to hear from the public. One challenge as a fiduciary for retirement funds, while the Board is not indifferent, is that there are any number of areas of capitalism that are controversial. We do not seek out controversy and strive to balance risk and return. Chairman Mark Noennig thanked Ms. Sutton for attending the meeting and added she is not alone in bringing forward an issue of certain types of investments that may not be good for the citizens of Montana. There are limits as fiduciaries and areas where policy cannot go. Chairman Noennig asked if there was any other public comment. There was none. Chairman Noennig introduced and welcomed Ms. Diane Fladmo as the newest member of the Board.
ADMINISTRATIVE BUSINESS
Chairman Noennig called for approval of the February 13-14, 2018 Board Meeting minutes and asked if there were any changes or corrections.
Member Jon Satre made a motion to approve the February 13-14, 2018 meeting minutes. Member Maggie Peterson seconded the motion. The motion carried.
Executive Director Ewer introduced and welcomed new employee Thomas Winkler. Mr. Winkler comes to Helena from Washington state and joins BOI as a private equity analyst. Audit Committee Report The Audit Committee met prior to the Board meeting. The Committee received a follow-up briefing on the 2017 Financial Statements’ Report. The Legislative Audit Committee officially met and accepted the Reports; staff and some Board members attended. Chairman Satre noted the Audit Committee is preparing a report of action items. Director Ewer and Financial Manager Julie Feldman are incorporating suggestions received into the report. Executive Director Ewer will go before the Legislative Audit Committee when they meet in June. Committee Chairman Satre provided an update on the Request for Proposal (RFP) for an internal controls auditor. The RFP requested two proposals, one for an AUP (Agreed Upon Procedures) which is the type that has been done over the past 9-10 years, and one proposal asking for a Service Organizational Control (SOC) 1, Type 2 report. One response was received in relation to the AUP proposal and four responses were received in relation to the SOC proposal. Upon review, the Audit Committee discussed the options and decided on a SOC, which is more stringent. The Committee is recommending proceeding with a SOC 1, Type 2 Report. The additional per year cost is approximately $20,000. Chairman Noennig asked for the difference between the two types of reports. Chairman Satre explained the AUP, Agreed Upon Procedures, is less stringent. Board staff dictates the areas that are audited. For the SOC Report, the auditor establishes the parameters, reviews them, and then writes an opinion. The Opinion provides documentation that can be reviewed. The Committee voted to proceed and is recommending Board approval for a SOC 1, Type 2 audit.
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Chairman Satre made a motion to approve the Committee’s recommendation to proceed with the RFP process for a SOC 1, Type 2 audit. Member Maggie Peterson seconded the motion. The motion carried.
Chairman Satre noted four vendors responded to the RFP. One is out due to the point score which is greater than the available remaining points for the interview step, and one elected not to proceed. The evaluation team will conduct interviews with the two remaining vendors. Ms. Feldman updated the Committee on the fiscal year 2018 Financial Compliance Audit. Staff will meet with LAD (Legislative Audit Division) staff for the entrance meeting on April 17, 2018. Human Resource Committee Report The HR Committee met prior to the Board meeting. Member Jon Satre acted as Chair (Karl Englund was absent). The Committee reviewed a proposed revision to the organizational chart, which transfers an investment analyst position from risk management to investment operations. Tim House will move and take many of his current duties with him to that position. The full Board needs to approve the change. The HR Committee is recommending approval of the proposed change to the organizational chart.
Acting Committee Chairman Satre made a motion to approve the revised organizational chart as presented. Member Jeff Greenfield seconded the motion. The motion carried.
The other issued discussed by the Committee was the retirement of Executive Director David Ewer. Committee Members thanked Director Ewer for his service, adding it has been a privilege to work with him. Director Ewer has implemented many good and key changes during his tenure. Director Ewer stated it has been a tremendous privilege, and he will continue to work with Board and staff over the next six months. Chairman Noennig congratulated Director Ewer on his upcoming retirement and noted he has done an excellent job. A Board Meeting conference call has been scheduled for April 5 at 3:00 p.m. to discuss the establishment of a process to hire a new executive director. Loan Committee Report The Loan Committee met prior to the Board meeting. Member Maggie Peterson acted as Chair (Jack Prothero was absent). Mr. Doug Hill presented one In-State loan for Cinch Holding, LLC out of Laurel, Montana. The loan is under the million-dollar threshold (which allows staff approval); however, combined with the borrower’s other loans, the total is over $2 million. First Interstate Bank is the participating bank and it will have an SBA portion in second position. The loan does not need full Board approval. Mr. Hill presented a proposal to eliminate BOI’s Montana Veterans’ Home Loan Policy (VA). The Board of Housing (BOH) is by statute responsible for the Program, and therefore has the authority to adopt rules and conditions. BOI purchases the loans. The Loan Committee is recommending the Board eliminate the BOI VA Policy.
Acting Committee Chair Peterson made a motion to adopt the Committee’s recommendation to eliminate the BOI Veterans’ Home Loan Policy. Member Jon Satre seconded the motion. The motion carried.
Mr. Hill provided an update to the Committee regarding the On The Border property. An offer has been made on the property and Mr. Hill will provide an update at a future meeting.
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Ms. Louise Welsh provided an update to the Committee that staff approved nine INTERCAP loans in the third quarter. The current interest rate to borrowers for the INTERCAP Program is 3.15%. Public Employees’ Retirement System (PERS) and Teachers’ Retirement System (TRS) Updates Member Jeff Greenfield did not have anything new to report for TRS. Member Maggie Peterson had no update on PERS, noting they will meet next week. Legislative Liaisons Comments Representative Kelly McCarthy was absent. Senator Scott Sales reported it looks like state revenue is picking up and is expected to meet the forecast passed by the legislature last session. Executive Director Ewer stated BOI made the State Fund transfer to the state’s Fire Suppression Fund last Friday (March 30, 2018).
EXECUTIVE DIRECTOR’S REPORT Overall Comments Director Ewer stated the monthly snapshot, which goes out monthly to Board members, is included in the packet. The audit update has already been provided in the Audit Committee report. A memo on the custodial banking relationship is included. According to the Work and Education Plan, all items of importance are brought before the Board at least once every 24 months. The custodial bank is incredibly important to BOI. Although private equity is covered under private contracts held at BOI, all negotiable securities are held in custody with State Street Bank. BOI’s consultant, RVK, Inc. has a large group of staff dedicated to custodial banking. Director Ewer asked Mr. Joe Cullen and Mr. Mike Pettit if they had any comments regarding State Street and the custodial banking relationship. Mr. Pettit stated the field of custodial banking is highly concentrated, there are only four or five providers. BOI is a complex client, and State Street does a good job. Staff has biweekly conference call meetings with State Street and keep in close communications with their staff; it is a very important relationship. Director Ewer stated BOI does $40-60 billion in transactions each year and staff is supportive of State Street. One issue is turnover, State Street employs around 30,000 employees and they have a deep bench. Staff works with a big team and staff turnover is the most common pinch point. BOI staff have a good, honest relationship with State Street. Staff eliminated the pension pools and converting to CAPP, which would not have been attempted if the relationship was troubled. State Street executed the conversion, and staff thanked them with recognition. There are bumps and issues, but it is a very satisfactory and complicated relationship. Director Ewer asked the accounting staff to comment on the relationship with State Street. Financial Manager Julie Feldman stated it is important that staff are in daily communications, sometimes multiple times a day; when they change personnel, it affects us greatly. Some helpful tools include the tri-annuals and biweekly meetings, where we review best practices or new technologies, and work through any problems with staff which is helpful. The more communication the better. Director Ewer stated his memo on the BOI website is included in the packet and asked Board members to share any comments or suggestions they may have regarding the website. Capital Market Assumptions and Asset Allocation – RVK, Inc. Mr. Jim Voytko stated asset allocation is the single most important investment decision you will make. While governance is also vital, asset allocation is the most difficult and it relates to human decision making.
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The challenges for BOI are not unique and effect all institutional investors. The 2018 capital market assumptions provide the best estimate for the future. The long-term expected return for the pension plan is 6.57%; lower than the last 20 years and lower by 18 basis points than the 2017 study. This stands at odds with the Montana assumed actuarial rate of return of 7.75%, although the rate is not the Board’s decision. A survey five years ago of 90 public funds showed 7.75% in the middle range; however, numbers have drifted lower and are clustered at 7% and 7.25%; 7.75% is now on the high end. At 7.75%, the Montana plan is calling for less contributions than many other plans. The higher the return number, the less contributions they call for. If the expected rate of return were lowered to 6%, the actuary would call for significant increases in contributions. While it may be possible to reach 7.75% or even 8%, the probability indicates less. The goal is to realize the best return, given a certain level of risk, through a mix of stocks, bonds, private equity and real estate, but there are inherent unknowns. For Montana, asset allocation is reviewed every year, and although not necessarily changed, it helps to determine if strategic allocation changes are warranted. Asset allocation itself is aware of plan liabilities, but not an analysis of them. If you have liquidity demands, you may prefer a certain structure, but cash needs could prevent it. You may want 25% in private equity, but pacing for such an allocation may be beyond your resources and/or timetable. An asset allocation study must have pragmatic applications as well. Studies have shown repeatedly that 90% or more of returns can be explained solely by asset allocation. RVK uses a tool for total fund attribution and when applied to a portfolio, it reemphasizes that return level and risk are dependent on asset allocation. With other decisions, you evaluate choices and the associated people; reading if people are trustworthy or not. With asset allocation, there are no people to judge, you make raw estimates of capital markets. It’s you vs. the market only. Tools that are available for asset allocation include Mean Variance Optimization (MVO), which uses mathematics to analyze many different combinations of assets based on likely behaviors to produce the highest return without taking undue risk. The Monte Carlo analysis reminds us it is not a budgeting process, in this case you estimate what you can expect from return and risk; each has its own, and the combinations have different expectations/risks. The MVO tool uses assumptions of likely behavior of each of the asset class building blocks and considers historical data from a passive/index point of view, or, what the asset class does in its simplest measure, usually an index. Additionally, there is an emphasis on diversification. The model provides analysis of diversified portfolios. When we talk about risk, we talk about the volatility of asset values over time. For the Montana plan, the risk measure is more relevant than for other plans. It is a mature plan with negative cash flow; big dips in asset value would mean money out the door. Any model, without judgement and constraints, will amplify the small things and load up the portfolio with one asset. Member Satre noted in 2008-2009, MVO came in for a lot of criticism. The Board, along with RVK, came up with some bolt-ons. Mr. Voytko noted the Great Financial Crisis (GFC) was unusual and very traumatic; it resulted in claims that MVO no longer worked. However, no one has proposed or come up with a different model. The GFC problems were unique and showed a flaw of MVO; with the exception of government bonds, everything went down. Correlations both for stocks and bonds went down, which is extremely unusual and was unique to the situation. One bolt-on is to always look at liquidity as part of the process. The tool can be used to express, hypothetically, where a portfolio meets strict tests of efficiencies. You cannot find a portfolio with more return and less or the same risk. Guardrails are applied around the tool; for example, no portfolio has zero U.S. equity. Sometimes an unconstrained analysis is run and then limitations are added. Mr. Voytko noted the liquidity of the portfolio is determined by assigning rankings, 100 for cash, or 5 for private equity, weighted by the amounts in each asset class and sub asset class. A relatively immature plan can tolerate a large amount of illiquidity; however, with more negative cash flow, the ranking cannot be too low. The BOI plan is at 77, a fairly liquid portfolio, and BOI is not facing a liquidity problem. The
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current portfolio is a capital appreciation portfolio, with a significant portion in equity. The computer and tools favor international equity from a return point of view. But there are issues, benefit payments are made in dollars, and there can be events. Mr. Taft stated the data show the cumulative probability of the BOI portfolio returning 7.75% over the next 10 years is 34% and a 41% probability of reaching 7%. Mr. Voytko added although there is a one in three chance BOI will earn 7.75%, the ideal is 50/50. You can take on more risk and raise the probability of a 7.75% return, or you can change the actuarial benchmark. You must balance between seeking returns and preserving assets. Assumptions change all the time and it is good practice to revisit the possibilities. Across the industry asset managers and consultants are all predicting a downward trend. Keep in mind, forecasting exact returns for asset classes is impossible. For example, plotted actual returns for 10 years for the S&P 500 vs. a universal model back around 2000, forecasted the S&P 500 would return 4.5%, whereas the actual was about 8%. Factors can guide us, but will not get the magnitude right. Behaviors, expected risk, return, and correlation are factors that go into capital market assumptions to create different models. RVK uses a number of internal models. Some of the benefits of MVO are that it is simple and intuitive to follow, and is based on behaviors that are readily available and calculable. They support the asset allocation process and are forward looking, but are still based on history and forecasts only. Executive Director Ewer offered his perspective. Capital market assumptions are done each year. We need to explain the status quo and why it is what it is. The projection says with the retirement systems at a 7.75% actuarial return, there is only a 34% probability of achieving it, or one in three. If that return were set at 7%, it would mean an enormous amount of contributions. The event horizon is 10 years; since inception, the retirement plans have averaged around 7.7%. If, for the life of plans, return is around 7.7%, is the time horizon long enough? The portfolio is equity centric at around 70% and net cash need is accelerating. On the model, we are nowhere close, but we may have enough risk. Actuaries talk in 30-year increments. It is unlikely we could invest our way out of the pension system problems, although the systems remain viable. We could see more changes in actuarial return. Mr. Voytko added there are differences in how consultants and actuaries look at returns. Over long periods, returns smooth out for actuaries, but for BOI, there is the trade-off of protecting assets, or taking actuarial risk. The expression of downside risk of a portfolio in any given year, the more risk you build in seeking return, the more chance that things can go wrong. We need to predict absolute levels of return, risk and correlation. But if you are wrong, if the numbers are double, does it change your asset allocation? The answer is no. Mr. Mike Taft noted the capital market assumption for 2018 has changed from 2017 and absolute expectations continue to come down. Equity markets have been rich, capital preservation of fixed income is expected to stay around 3% to 3.5% and alternatives are all still in the 4-5% range. Expectations are low and are expected to stay that way over the horizon. Public Market Investments – Investment Manager Changes Mr. Rande Muffick reviewed the recent Consolidated Asset Pension Pool (CAPP) transition. Usually, when staff moves money around, a transition manager is hired; however, this was not a transition per se. Two new managers were funded, Jacobs Levy Equity Management, Inc., a domestic large cap 130-30 manager, and Congress Asset Management Company, LLC, a U.S. midcap growth equity manager. Congress was funded at $80 million with cash, taking advantage of the February 9-10 sell off. Jacobs Levy, a partial long/short manager, was funded with proceeds from the MSCI index fund. Staff decided there was no advantage to take stocks out of one fund, give them to a transition manager, and then into a portfolio. Cash from a redemption of $170 million went to Jacobs Levy, then they traded the stocks themselves. Total cost was 2.25 basis points for Jacobs Levy and about 3 basis points for Congress.
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Mr. Steve Strong provided a brief overview of Congress Asset Management Company, LLC. Congress is a midcap growth equity manager out of Boston, and is family controlled. They are fundamental managers; they look at balance sheets, and make their own earnings estimates for their investments. They look for companies that have steady, repeatable growth. It is a high conviction portfolio of about 40 holdings which is a fairly concentrated portfolio. They should provide protection in a down market; the quality bias contributes to that. They have investment committees for each strategy. Prior to the hire, staff met with the head of the committee. Mr. Brent and Mr. Cullen have both visited on site in Boston. They are a pure midcap manager, some managers would let the winners run; however, they move on after reaching $20 billion, a true mid cap manager. Mr. Jason Brent reviewed Jacobs Levy Equity Management, Inc. Staff funded Jacobs Levy in March for $170 million. They are a quantitative manager, a domestic Large Cap 130/30 partial long/short manager. They are a very stable manager, with high level researchers. They have an exceptional track record, and have outperformed long only strategies. The firm has just short of $8 billion with $2 billion in domestic large cap strategies. Retirement Plans Investment Policy Review Mr. Joe Cullen stated staff review investment policies once a year. There are some recommended changes this year, including grouping for consistency and updating some terms, such as market value vs. net asset value. Net asset value is market value minus expenses, payables or receivables; it is more descriptive. Also there are three private asset classes, private equity, real estate and natural resources. Policies have been changed to realign for leverage, and the amount of leverage changes within those three asset classes. Some edits are minor; some are more meaningful, incremental changes. Staff is recommending the Board accept the recommended changes. Overall asset allocation ranges are not changing. The CAPP will have no more than 5% of net asset value managed by any one external manager to ensure no manager has too high a concentration of total assets. The managers with the highest level of assets as of last quarter are index and internal funds, which do not qualify as external. JP Morgan, which manages the large cap core real estate, is a bit under 4%. Previously, capitalization limits were determined to be certain amounts of large and small cap; however, the concern is really on small cap as it is more volatile and risky. The switch in policy focuses on small cap levels, instead of other restrictions. The new policy limits small cap to no greater than 10% relative to the benchmark for small cap equities as opposed to a range of 8-18%. Responding to a question from Member Jeff Greenfield, Mr. Cullen stated as of today small cap makes up 13% of the benchmark; therefore, the portfolio could hold more than 23%, or +10% over the benchmark, (although it could also be zero). The new restrictions are at the CAPP level, not on the asset classes. Non-U.S. equities are very similar to U.S. equities and staff is proposing the same adjustment. Previously, a dedicated emerging markets mandate was used. If a manager is hired to only manage emerging markets, we are not looking at a mandate level, but through to the holdings as a look-through process. Staff is looking at direct co-investments, which are allowed by policy, although there are none currently. Policy allows up to 10% in direct co-investments, should staff choose that option. There are no material changes to the natural resources policy. Public long only and long/short strategies are allowed. Although the majority are private assets, the benchmark is public. Currently there is only a long only ETF. The timber fund has new leverage language, similar to the language already in private equity and real estate; it is being added to Natural Resources. Leverage is zero to 30%. Member Maggie Peterson noted the policy states the 30% ceiling can be exceeded.
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Mr. Cullen explained with the first investment, a credit line is used for investment, and the capital call can exceed the 30% leverage briefly, with intent. Mr. Hurley added managers have been using subscription lines or credit facilities for decades as a cash management tool. Staff wants consistency across investment policies, especially where we recognize leverage is used. It is used very early in the life of the fund to fund the initial investment. There were managers 95% leveraged, and staff thought it was likely a subscription line for the initial funding, which it was. Staff wants the flexibility to account for the infrequent event. Mr. Cullen stated policy for real estate is similar, long only and long/short strategies can be used. The real estate policy previously stated no more than 7.5% of real estate could be in single partnership. The class is separated into core and non-core, which has less liquidity. The restriction is for the non-core portion only, and no longer applies to core real estate. The change is more in line with the intent of the non-core portfolio. For co-investments, staff added an additional restriction to provide greater clarity for when it is reasonable to temporarily exceed the leverage ceiling. The TIPS policy has no changes except for the new effective date; and the broad fixed income policy has no major changes except the change to net asset value. The US Treasury/Agency policy changes the restriction on rating agencies. If rated by three rating agencies, staff wants to have two of them. If a highly rated name is only rated by one agency, staff believes it is acceptable. However, if split rated, staff will focus on the lower rating and take the more conservative approach by taking the lower of the two ratings. Agency Mortgage-Backed Securities and the High Yield Asset Class changed to CAPP, and switched to net asset value. High yield is revised from 5% to a maximum of 10% as staff is looking at emerging market securities, rather than mandates. Another change is the limit of 10% on foreign currencies outside of the U.S. The Cash Asset Class policy is changed to reflect a new benchmark, the US Treasury one-month index. The LIBOR benchmark is being phased out, and staff wanted to implement the change before LIBOR is discontinued. It is a more conservative benchmark and is consistent with liquidly requirements for the asset class. It is the benchmark the Federal Reserve offers. Mr. Cullen stated the last policy revision is for Diversifying Strategies, making the change to net asset value.
Member Jeff Greenfield made a motion to approve the changes to the Retirement Plans Investment Policy as presented. Member Jon Satre seconded the motion. The motion carried.
Proposed Investment Policy Statement Changes Mr. Jon Putnam stated the staff is proposing revisions to the STIP Investment Policy and other funds. Mr. Romasko started with the STIP Policy and reviewed the substantive changes. The theme is for systemic risk, or overall market moves vs. an individual security going bad. The previous policy had arbitrary measures and staff wanted to change those to objective and measurable, limiting estimated risk to no more than the amount of the STIP Reserve. No other changes that would increase risk were made to the Policy. Responding to a question from Chairman Noennig, Mr. Romasko stated staff utilized the worst-case scenario that occurred in 2008 when markets went bad. Staff measured how much the market value of specific asset classes changed. The information will be used as a proxy going forward. Staff will objectively limit estimated risk to no more than the amount of the Reserve.
DRAFT April 3, 2018 Board Meeting Minutes Pending Approval May 22, 2018
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Mr. Romasko provided additional information on the changing benchmark. The problems with LIBOR are related to a significant disconnect between LIBOR and the lending markets. Staff chose the US Treasury one-month maturity, but with a limit of 60 days weighted average.
Member Jon Satre made a motion to approve the revised STIP Investment Policy as presented. Member Maggie Peterson seconded the motion. The motion carried.
Mr. Putnam reviewed proposed changes to the Trust Funds Investment Pool (TFIP) policy. The policy has been changed to a new format. There are no major changes, mainly an update in format with a new appendix. Allocations are staying the same and the policy will be in compliance upon adoption.
Member Jon Satre made a motion to approve the revised Trust Funds Investment Pool Policy as presented. Member Jeff Greenfield seconded the motion. The motion carried.
Mr. Putnam reviewed six policies referenced in his memo, which are similar to the policy revisions at the last meeting. There are few changes, mainly a move to the new format and some clarifications. One major change is staff removed the option to invest in individual corporate securities, although staff have not been investing in them for some time.
Member Jon Satre made a motion to adopt the six investment policy statements as presented. Member Jeff Greenfield seconded the motion. The motion carried.
RECAP OF STAFF TO DO LIST AND ADJOURNMENT
Deputy Director Geri Burton stated there are no items on the “to do” list for the next Board meeting and reminded Board Members of the Board Meeting Teleconference call scheduled this Thursday, April 5, 2018 at 3:00 which will be in the large conference room. Having no further business before the Board, the meeting adjourned at 3:57 p.m. Next Meeting The next regular meeting of the Board will be May 22-23, 2018 in Helena, Montana. Complete copies of reports presented to the Board are on file with the Board of investments. BOARD OF INVESTMENTS
APPROVE: ______________________________ Mark E. Noennig, Chairman ATTEST: ________________________________ David Ewer, Executive Director DATE: __________________________________ BOI/drc 5/1/18
MONTANA BOARD OF INVESTMENTS DEPARTMENT OF COMMERCE 2401 Colonial Drive, 3rd Floor
Helena, Montana
MINUTES OF THE SPECIAL BOARD MEETING CONFERENCE CALL – April 5, 2018
BOARD MEMBERS PRESENT:
Mark Noennig, Chairman via phone Karl Englund, Vice Chair via phone
Diane Fladmo via phone Jeff Greenfield via phone
Maggie Peterson Jack Prothero via phone
Jon Satre
BOARD MEMBERS ABSENT: Terry Cohea
LEGISLATIVE LIAISONS ABSENT:
Representative Kelly McCarthy Senator Scott Sales
STAFF PRESENT:
David Ewer, Executive Director Geri Burton, Deputy Director
Joseph M. Cullen, CFA, CAIA, FRM Chief Investment Officer
Douglas Hill, Director of In-State Loan Programs Dana Chapman, Board Secretary
Mary Noack, Network Administrator
CALL TO ORDER Chairman Mark Noennig called the special conference call meeting of the Board of Investments (Board) to order at 3:00 p.m. As noted above a quorum of Board Members was present. Chairman Noennig advised video recording of the meeting was underway and called for public comment. There was none. Chairman Noennig noted the special meeting was called to determine the recruitment process for hiring a new executive director and he asked Deputy Director Burton to provide an update. Ms. Burton stated the meeting materials provided to Board Members include two draft proposed schedules of the process. The first schedule calls for oral telephone interviews on May 23, and the second targets telephone interviews for the week of June 18. Also included is the executive director job description, which needs some edits. The Board needs to make a couple of decisions: decide on the schedule and determine the hiring process, i.e. whether by the Board, a delegated body or the hiring of an executive search firm. Chairman Noennig noted that although Member Terry Cohea is not in attendance, she did provide comments via email. Member Cohea prefers the longer time line and for the Human Resource Committee to complete the process, rather than hire an executive search firm. Ms. Burton noted which time line will work may depend on whether a search firm is hired. Member Jon Satre asked Ms. Burton to review how the process was handled when Executive Director Ewer was hired.
DRAFT April 5, 2018 Special Board Meeting Minutes Pending Approval May 22, 2018
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Ms. Burton explained last time there was a discussion of hiring a search firm or handling the process internally or with the Board. The decision was for the Board to handle it and the Board delegated the Human Resource Committee, along with the Board chairman, as the hiring committee. The second timetable, which shows phone interviews for the week of June 18, is based on the timetable from the process that was used before. The steps included phone interviews, in person interviews, and when the finalists were determined, an invitation along with their significant others to allow time to tour Helena. For all finalists, the Human Resource Committee requested staff input throughout the process, such as what qualifications they were seeking for the next executive director. Staff was invited at the end of the interviews to ask questions of the finalists and provided input to the hiring committee. Vice Chair Karl Englund added two things. First, the HR Committee was tasked with bringing their decision to the Board as the final authority. The Committee brought one candidate, but could have brought two or three. The Committee conducted the screening and provided the recommendation. It was set up so that any Board Member that wished to attend any part of the process was welcome to do so. The formal vote was taken, and only the Committee members voted, but all were involved in the process. Chairman Noennig asked how the two proposed schedules differ. Ms. Burton explained the first one with phone interviews on May 23, was put together to coincide with the May Board Meeting in an attempt to schedule interviews after the meeting. The first schedule is 83 days, the second schedule is 93 days and contemplates no activity the week of July 4th. Vice Chair Englund noted Board members can participate via the phone, for the initial screening. When the number is pared down for the in-person interviews, that can also be done via the telephone if necessary. It will be the HR Committee, plus the Board Chairman, and any other members who wish to participate. Chairman Mark Noennig called for a motion to authorize the HR Committee and the Board Chairman to conduct the executive director screening process and present a recommendation to the Board with an invitation to others on the Board to participate in the process. Mr. Cullen asked for clarification. If any Board Member can participate, but the HR Committee is in charge, if a person not on the HR Committee attends the interviews, do they vote or are only the HR Committee members allowed to vote? Chairman Noennig stated he understands the HR Committee and Board Chairman are the voting members, but other Board Members can participate. Vice Chair Englund agreed that is his understanding and asked if that was how it was done last time. He added Member Terry Cohea attended the process for the Chief Investment Officer position and she participated. Member Maggie Peterson stated it is important that those not on the HR Committee be able to participate. Vice Chair Englund strongly encouraged those who want to participate to do so. Member Jon Satre agreed. Vice Chair Englund confirmed the voting members are comprised of HR Committee Members and the Board Chairman, who is ex-officio. Chairman Noennig added other Board members get to be present and provide comments, and decisions will likely be by consensus and then the recommendation will go to the full Board.
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Chairman Mark Noennig made a motion to authorize the HR Committee along with the Board Chair to conduct the candidate search to fill the executive director position. Member Jon Satre seconded the motion.
Further Discussion Chairman Noennig stated that excludes hiring an outside search firm. Vice Chair Englund noted the Committee can always come forward during the process and propose hiring a search firm. For the executive director position, we are looking for a variety of skills, including legislative skills, Montana skills, and unless needed, we should avoid spending money on an outside firm. Chairman Noennig and Member Satre agreed. Member Maggie Peterson stated the last searches she was involved with, the fee for the search firms was 30% of a salary between $150,000 and $205,000. She added she is not in favor of hiring a search firm and feels they often do handholding of applicants and advise them what to do and say. We want applicants who want the job and will either impress us or not. Vice Chair Englund added it is true that a firm may find people who are not necessarily looking and are happy where they are, who would not normally apply. But at this time and place, we may generate more than enough interest. Member Satre revised the motion to clarify that the Committee will bring their recommendation to the full Board. Vice Chair Englund reiterated the Committee welcomes the participation of other Board Members throughout the process. If interested, please participate.
The Motion carried. Chairman Noennig stated the next item is the decision of the schedule.
Vice Chair Englund made a motion to adopt the longer timetable schedule. Member Satre seconded the motion.
After discussion, members agreed by consensus to adopt the second schedule, the schedule reflecting phone interviews the week of June 18th, with some room for flexibility. It is the target, subject to revision, if circumstances require it. The Committee will do their best to adhere to the scheduled timetable. Director Ewer added given the week of June 18 is scheduled for phone interviews, it is the prerogative of chairs of committees to call a meeting. Chairman Noennig asked for discussion of any other matters. Director Ewer stated staff needs guidance on finalizing the job description and whether it can be delegated to staff. Staff is fully able to complete it and if the Board wishes, staff will handle it. The Board may also wish to empower staff to release the job description and set up a file to save the incoming materials. Additionally, would the HR Committee prefer to receive all materials, or have staff provide initial screening? Chairman Noennig stated his preference is for staff to finalize the job description with the qualification revisions, and allow the HR Committee and Chair to review it before posting.
DRAFT April 5, 2018 Special Board Meeting Minutes Pending Approval May 22, 2018
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Director Ewer agreed staff will finalize the description and provide it to all Board Members for review. Any revisions need to be submitted by Friday, April 13. Member Maggie Peterson suggested comments be sent by April 11, and posting the position on Friday, April 13, adding she prefers all Board Members have access to review all the resumes. Vice Chair Englund agreed that all should have access to the applicant materials. The CIO hiring process differed, as Board Members needed the technical help of staff to filter applications, which is different than what is needed for the executive director position. Deputy Director Burton stated staff will set up a secure network drive where applications and resumes will be received. On a weekly basis, staff will send resumes received to all Board Members, which avoids waiting until the position deadline to distribute what may be a large number of applications. That is how it was handled for the CIO position. Members discussed the use of a screening matrix, with job requirements, minimum qualifications, etc. and agreed a screening template would be developed prior to the first cut. Deputy Director Burton stated she is happy to assist in creating a screening template. Vice Chair Englund stated the screening template should be developed from the final job description and used by screeners in preparation for the tentative meeting on June 7th to determine the phone interviewees. Those of us who have previously participated, know it will be a long meeting. Director Ewer noted participants all bring a different mindset. Through teamwork, the pool is winnowed down to an “in” bucket, an “out” bucket, and “maybes.” Staff will send the job description revisions, with the qualifications and job announcements to Board Members hopefully by Monday, to receive input back by April 11. Ms. Burton stated the ads will be in state and out of state and cost approximately $22,000; the majority for the Montana Lee newspapers, the Great Falls Tribune, Bozeman Daily Chronicle, etc., at about $17,000 to run various days/times. The posting will also go on the state website, the BOI website, and staff is open to suggestions for other advertising options. Chairman Noennig asked Board Members to provide any ideas for advertising to Ms. Burton. Expense is not the question, we want the best exposure. With no further business before the Board, the meeting was adjourned at 4:00 p.m. Next Meeting The next regular meeting of the Board will be May 22-23, 2018 in Helena, Montana. Complete copies of reports presented to the Board are on file with the Board of investments. BOARD OF INVESTMENTS APPROVE: ______________________________ Mark E. Noennig, Chairman ATTEST: ________________________________ David Ewer, Executive Director DATE: __________________________________ BOI/drc 5/9/18
MEMORANDUM Montana Board of Investments Department of Commerce 2401 Colonial Drive, 3rd Floor Helena, MT 59601 (406) 444-0001
To: Members of the Board
From: David Ewer, Executive Director Date: May 22, 2018 Subject: Executive Director Reports
A. Member Requests or Follow up from Prior Meeting None.
B. Quarterly Cost Report – Included under Tab 2 Continue with this report? C. Monthly Snapshot – Included under Tab 2 D. FY 18 Budget Status/Expenditure Review – Included under Tab 2 E. Report to Legislative Auditor and Audit Charter Revisions – Audit Tab F. Montana Real Estate Holdings Transfer from Pension to Trust Fund – Tab 3
Q1 Q2 Q3 FY 2018Pool 9/30/2017 12/31/2017 3/31/2018 Change¹ to Date
Consolidated Pension Asset Pool (CAPP) 1,177,752$ 981,459$ 1,177,752$ 196,293$ 3,336,963$ Trust Funds Investment Pool (TFIP) 104,601 87,167 104,601 17,434 296,369 Short Term Investment Pool (STIP) 139,854 116,546 139,854 23,308 396,254 All Other Funds (AOF) Investments Managed 213,825 178,188 213,825 35,637 605,838
Total 1,636,032$ 1,363,360$ 1,636,032$ 272,672$ 4,635,424$
Q1 Q2 Q3 FY 2018Pool 9/30/2017 12/31/2017 3/31/2018 Change² to Date
Consolidated Pension Asset Pool (CAPP) 307,800$ 310,467$ 313,300$ 2,833$ 931,567$ Trust Funds Investment Pool (TFIP) 30,986 31,486 31,486 - 93,958 Short Term Investment Pool (STIP) 65,190 65,190 65,190 - 195,570 All Other Funds (AOF) Investments Managed 31,773 31,773 31,773 - 95,319
Total 435,749$ 438,916$ 441,749$ 2,833$ 1,316,414$
Q1 Q2 Q3 FY 2018Pool 9/30/2017 12/31/2017 3/31/2018 Change³ to Date
Consolidated Pension Asset Pool (CAPP) 9,664,896$ 9,939,608$ 13,426,728$ 3,487,120$ 33,031,232$ Trust Funds Investment Pool (TFIP) 403,272 572,441 300,449 (271,992) 1,276,162 Short Term Investment Pool (STIP) - - - - - All Other Funds (AOF) Investments Managed 221,533 177,129 127,109 (50,020) 525,771
Total 10,289,701$ 10,689,178$ 13,854,286$ 3,165,108$ 34,833,165$
Q1 Q2 Q3 FY 2018Pool 9/30/2017 12/31/2017 3/31/2018 Change to Date
Consolidated Pension Asset Pool (CAPP) 11,150,448$ 11,231,534$ 14,917,780$ 3,686,246$ 37,299,762$ Trust Funds Investment Pool (TFIP) 538,859 691,094 436,536 (254,558) 1,666,489 Short Term Investment Pool (STIP) 205,044 181,736 205,044 23,308 591,824 All Other Funds (AOF) Investments Managed 467,131 387,090 372,707 (14,383) 1,226,928
Total 12,361,482$ 12,491,454$ 15,932,067$ 3,440,613$ 40,785,003$
¹ Board Fees: During the second quarter the Board's fees were temporarily reduced, to maintain working capital at appropriate levels.
Total Fiscal Year 2018 Investment Expenses (Unaudited)
Board Fees
Custodial Bank Fees
External Manager Fees
Total FeesAOF: Fees decreased due to an decreased amount invested with an external manager.
² CAPP: Fees increased due to the Board increasing alternative investment funds accounted for by State Street.
TFIP: Fees decreased due to an decreased amount invested with an external manager.
³ CAPP: Fees are higher due to unrecorded alternative investment fees in the first two quarters which were recorded fees in the third quarter.Because reported alternative investments fees are subject to a lag, they are inconsistent quarter to quarter.
Trust Funds Investment Pool Market Value STIP NAV with Reserve 1.009847 DIVERSIFYING STRATEGIES PAC $25,561,551 0.2%
TRUST FUNDS INVESTMENT POOL $2,321,047,291 Average Current Month STIP Yield 1.8386% Total CAPP $11,264,437,117 100.0%
MBOI SnapshotAs of 4/30/2018
Intercap Statistics
Short Term Investment Pool
Active 82.4%
Passive 17.6%
MBOI Active/Passive
Active 71.6%
Passive28.4%
Pension Active/Passive
Internal 50.1%
External 50.0%
MBOI Internal/External
Internal 20.3%
External79.7%
Pension Internal/External
Pensions62.4%
Trust Funds13.8%
State Operating Funds9.0%
Insurance Reserves8.7%
Local Government Funds6.1%
Total Fund
DOMESTIC EQUITY PAC
36.1%
INTERNATIONAL PAC
18.7%
PRIVATE EQUITY PAC
10.8%
US TREASURY AGENCY PAC
8.4%
REAL ESTATE PAC7.2%
MORTGAGE BACKED PAC
4.1%
INVESTMENT GRADE CREDIT PAC
3.5%TIPS PAC
3.4%
HIGH YIELD PAC2.8%
NATURAL RESOURCES PAC
2.4%
BROAD FIXED INCOME PAC
1.3% CASH EQUIVALENTS PAC1.3%
DIVERSIFYING STRATEGIES PAC
0.2%
CONSOLIDATED ASSET PENSION POOL BY ASSET CLASS
MEMORANDUM Montana Board of Investments Department of Commerce 2401 Colonial Drive, 3rd Floor Helena, MT 59601 (406) 444-0001 To: Members of the Board
From: David Ewer, Executive Director Date: May 22, 2018 Subject: Budget Process, Budget Status Reports and Staffing Levels Background There are three different statutory frameworks authorizing the Board to expend money. First, most of the Board’s funding for operations is authorized by the Montana Legislature in House Bill 2, the main appropriations bill. In the 2017 Session, the Legislature set the maximum rate that can be charged by the Board to its investment pools and other investment accounts, at $6,488,749 for FY 2018 and $6,488,640 for FY 2019. This amount covers only the operational costs of managing the investment pools and other investment monies; it does not cover the operational costs of the Board’s municipal bond programs, primarily the INTERCAP Program. Second, there are two significant budget areas that are authorized in law known as a statutory appropriation. The Board’s custodial banking expenses and its INTERCAP Program are authorized in separate statutory appropriations and do not need repeated authorization by the Legislature. The Legislature can change statutory appropriations, but generally, these authorizations are long-standing. Third, the Board is expressly authorized in the unified investment law to deduct investment management and other costs of its investments before distributing income. Most of the Board’s expenses fall within this last category. There are two distinctly separate fund classifications applicable to the Board, internal service fund and enterprise fund. The Board’s investment mission is classified as an internal service fund because this type of fund charges other accounts for the costs of the Board’s services. The entire MBOI investment side is classified as an internal service fund and the Legislature sets the absolute dollar limit that can be applied against the accounts for this fund. The Board’s INTERCAP Program and other municipal bond programs are classified as an enterprise fund because, as the name implies, these programs are enterprise in nature, they can be voluntarily used. The Board’s financial statements present these two funding classifications separately. At each quarterly meeting, the Board receives a breakout of the three main categories of costs incurred for its internal service fund: operations, custodial banking, and external investment charges.
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Budget Status Report Attached in Tables I and II are the budgeted amounts for the account classifications, internal service fund and enterprise fund, respectively, and the amounts expensed-to-date. At the Board’s August meeting, as required by the Board’s Governance Policy, staff will recommend, for Board approval, funding amounts for the various operational categories for its two major fund types. Staff Levels The Board is currently authorized for eight exempt positions and 24 classified positions, for a total of 32 positions.
MEMORANDUM Montana Board of Investments Department of Commerce 2401 Colonial Drive, 3rd Floor Helena, MT 59601 (406) 444-0001 To: Members of the Board From: David Ewer, Executive Director Date: May 22, 2018 Subject: Montana Real Estate Holdings Transfer from Pension to Trust Fund The Board holds four buildings and a small undeveloped parcel in Montana in the real estate category for pension assets. Staff has provided biannual updates to the Board as to the history, value, and other attributes. Staff believes these assets would be a more appropriate and better fit for trust funds. The Montana real estate holdings are managed more for income than for total return. These buildings are currently leased almost exclusively to state agencies; the Board has invited the Administration to consider purchasing all but the 2401 Colonial Drive property (which contains the Board’s office). The Board obtained appraisals in 2016 from Philip L. R. Rowen of McKay Rowen Associates and they have been recently updated. The reports will be available for the Member’s use at the meeting. The “As Is” market value estimates on the various properties are shown below: 2401 Colonial Drive, Helena Final estimate of “As Is” market value: $9,585,000 Date of valuation: March 20, 2018 Estimate of exposure time/marketing time: Less than One Year 2273 Boot Hill Court, Bozeman Final estimate of “As Is” market value: $2,100,000 Date of valuation: January 19, 2018 Estimate of exposure time/marketing time: Less than One Year 100 North Park, Helena Final estimate of “As Is” market value: $6,660,000 Date of valuation: March 20, 2018 Estimate of exposure time/marketing time: Less than One Year 1712 9th Avenue, Helena Date of valuation: March 20, 2018 Final estimate of “As Is” market value: $440,000 Estimate of exposure time/marketing time: Less than One Year California Street vacant lot, Helena Date of valuation: March 20, 2018 Final estimate of “As Is” market value: $400,000 Estimate of exposure time/marketing time: Less than One Year
Shown below is the market value the Board is carrying as of March 31, 2018:
Security Name Base Market Value Period End Date BOZEMAN PROPERTY 2,100,000 3/31/2018 CALIFORNIA STREET PROP 222,692 3/31/2018 MT COLONIAL DRIVE 9,345,000 3/31/2018 NINTH AVENUE 440,000 3/31/2018 NORTH PARK AVENUE 6,615,000 3/31/2018
Staff recommends that a purchase/sale transaction using the final estimates of “As Is” as shown in the appraisals be deemed as acceptable prices and that a transfer of these investments be made sometime after June 30, 2018 but no later than November 30, 2018. Staff will be seeking additional guidance from the Board, which will include whether a final action should be deferred until the August meeting using a resolution, and whether a process should involve identifying two separate groups of staff and legal counsel to advise for the interests of the pension assets and the trust assets. The Board is the fiduciary owner of the Montana real estate properties and must represent fairly the interests of both pension and state trust funds in considering this transfer.
MEMORANDUM Montana Board of Investments Department of Commerce 2401 Colonial Drive, 3rd Floor Helena, MT 59601 (406) 444-0001 To: Board of Directors From: Doug Hill Date: May 22, 2018 Subject: Commercial and Residential Loan Portfolios
As of April 10, 2018, the Commercial loan portfolio balance was $182,617,615, and represents 109 individual loans or participations. Since our last meeting we funded seven IRP loans totaling $180,817, and one Participation loan for $800,000. There are four loan reservations that total $1,479,000 and three loans committed that total $28,533,322. The commercial loan portfolio, excluding the Veterans Home Loan Program and Science & Technology, has a yield of 3.15%.
There is one commercial loan past due over 30 days, totaling $956,000. This loan is to Purdy-Hatzenbeller Investments, LLC, which is the On the Border property in Great Falls. There is an offer to purchase the property for $975,000 and we are working with the buyer to finalize the offer.
The Residential loan portfolio reflected an outstanding balance, as of April 18, 2018, of $4,778,059, and represents 115 loans. The portfolio has a yield of 6.65%. There were no outstanding reservations. There were no loans over 90 days past due.
The Veterans Home Mortgage portfolio reflected an outstanding balance, as of April 18, 2018, of $36,385,254, and represents 215 loans. There were 9 reservations totaling $1,701,601. There is $1,913,142 balance available. The portfolio has a yield of 1.80%. There was one loan over 90 days past due totaling $178,238, or 0.5% of the portfolio.
Internal Fixed Income Management Overview
May 2018
Table of Contents Fixed Income Basics
◦ What is “Fixed Income”? 3◦ Terminology 4◦ Risk Factors 7
Interest Rate Risk / Duration◦ Interest Rate Sensitivity 8◦ Basic Duration Calculation 9◦ Zero Coupon Bond 10◦ Simple Coupon Bond 11◦ Factors that Affect Duration 12
Internal Fixed Income Management◦ Internal Fixed Income Portfolios 13◦ Objectives of Fixed Income 14◦ Investment Philosophy 15◦ Management Process 16◦ Costs 17◦ Competitive Advantage 18
Fixed Income Resources◦ Fixed Income Resources 19◦ Credit Research 20◦ Credit Matrix 21◦ Bloomberg (Demonstration) 22◦ Summary 23
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What is “Fixed Income”?
• A contractual obligation to pay principal and interest over time.
• Bonds are issued by government or corporate entities.
• Obligations represent a claim on assets.
• Coupons are contractually driven and may be fixed or floating rate.
• Maturities are predefined and generally range from 1 day to 30 years.
3
Fixed Income Terminology• Principal – The initial size of a bond or investment.
• Coupon – The interest rate paid on a bond. This can be either fixed rate or floating rate. A floating interest rate is typically tied to a benchmark such as U.S. T-Bills. Payments can be monthly, semi-annual or annual.
• Maturity – The agreed date that the full amount of the bond or investment must be paid back to the lender plus interest.
• Interest – The amount that must be paid to compensate the lender/investor for the use of funds.
4
Fixed Income Terminology
• Sector – An area of the economy in which businesses share the same or related products or services, an economic sector. Alternatively, a group of securities that exhibit similar characteristics, an asset type sector.
• Ratings – An assessment of the creditworthiness of a borrower. Bond ratings from Moody’s, S&P and Fitch between AAA and BBB- are investment grade. BB and below are below investment grade/high yield.
• Average Credit Quality – The average credit rating for each bond in the portfolio adjusted for its relative weight in the portfolio.
• Duration – A measure of a bond or portfolio’s sensitivity to changes in interest rates. As duration increases, the bond or portfolio’s sensitivity to interest rates increases.
• Weighted Average Maturity or Life – Measures of how quickly the outstanding principal will be repaid. The higher the number the longer it is expected to take for the debt to be paid.
5
Fixed Income Terminology
• Yield to Maturity (YTM) – The total return anticipated on a bond or portfolio if it is held until maturity and all coupon payments are reinvested at the YTM.
• Yield Curve – A curve that plots the prevailing interest rate for bonds at different maturities.
• Spread – A measurement of the difference in yield between a non-Treasury bond and a U.S. Treasury bond. The U.S. Treasury is considered the risk free alternative.
• Inflation – The rate at which the general level of prices for goods and services is increasing. As inflation increases, the purchasing power of money falls.
6
Primary Fixed Income Risk Factors
• Interest Rates – The price of bonds moves inversely to interest rate changes. Interest rates are composed of the following:
• Real Risk-Free Rate – Compensation above inflation that a lender demands of an investment with zero risk. Changes with the preference to lend or spend.
• Inflation Risk – Inflation can erode the purchasing power of cash flows received over the life of a bond.
• Maturity Risk – All else being equal, the longer the maturity the greater the sensitivity to interest rate changes.
• Default Risk– Borrower may have less ability or willingness to meet their contractual obligations and may default.
• Liquidity Risk – Most bonds are traded over the counter (OTC). May not be a willing buyer/seller. Pricing may be opaque. In times of market stress, liquidity may be reduced.
7
Interest Rate Sensitivity
When interest rates fallThe value of outstanding bonds rises because the income they pay is more than what investors could receive on a new bond with similar characteristics.
When interest rates riseThe value of outstanding bonds falls because the income they pay is less than what investors could receive on a new bond with similar characteristics.
8
Basic Duration Calculation (Macaulay Duration)
Duration is an important measure for investors to consider, as bonds with higher durations carry more interest rate risk and have higher price volatility than bonds with lower durations.
Macaulay Duration = Present value of a bond's cash flows, weighted by length of time to receipt and divided by the bond's current market value.
where:t = period in which the coupon is receivedC = periodic coupon paymenty = the periodic yield to maturity or required yieldn = number periodsM = maturity value (in $)P = market price of bond
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Macaulay duration is the point where the weights of the cash flows are in balance. The duration of a zero coupon bond is always equal to its time to maturity.
Zero Coupon Bond - Macaulay Duration Calc
Present value of the cash flows for a $100 five year zero coupon bond with a 5% return. Cash flows are weighted by length of time to receipt and divided by the bond's current market value.
Total $100.00 $391.50Divided by Market Value $391.50 / $78.35 = 5
10
Macaulay duration is the point where the weights of the cash flows are in balance. The duration of a coupon bond is always less than its time to maturity.
Simple Coupon Bond - Macaulay Duration Calc
Present value of the cash flows for a $100 five year 5% coupon bond. Cash flows are weighted by length of time to receipt and divided by the bond's current market value.
Total $125.00 $454.29Divided by Market Value $454.29 / $100 = 4.54
11
Factors that Affect Duration
• Bond Price – Generally, the higher the bond price, the lower the duration• Coupon – Generally, the higher the coupon, the lower the duration• Maturity – Generally, the longer the maturity, the higher the duration• Changing interest rates – Present value calculations change with shifting
interest rates. Not considered in Macaulay duration. • Optionality – Call or put provisions. Not considered in Macaulay
duration.
Effective duration is typically used when evaluating fixed income securities or portfolios. Effective duration expands on Macaulay duration by estimating the sensitivity of bond value to changes in interest rates. It also incorporates an option pricing model to estimate the sensitivity of bond value to embedded options.
12
Internal Fixed Income Portfolios$8.8 Billion as of 03/31/18
Short Term Investment Pool,
$3.09B
Trust Fund Bond Portfolio, $2.08BState Fund Bond
Portfolio, $1.17B
CAPP - Intermediate Corporates, $370.21M
CAPP - Intermediate Treasuries, $1.08B
CAPP - Mortgage Backed Securities, $459.32M
CAPP - Long Treasuries, $26.08M
CAPP - TIPS, $381.75M
Separate Accounts , $159.54M
PORTFOLIO Year Ended 03/31/18 Transaction $ Transaction #Short Term Investment Pool $32,552,701,305 1,365Intermediate Treasuries $1,164,517,137 83Trust Fund Bond Portfolio $1,089,573,080 136State Fund Bond Portfolio $497,880,079 80Intermediate Corporates $459,483,345 110TIPS $304,652,425 33Separate Accounts $158,160,425 77Intermediate Mortgages $153,293,364 24Long Treasuries $24,770,243 1Grand Total $36,405,031,402 1,909
13
Objectives of Fixed Income
• Total Return = Income + Change in Market Value• Income is primarily generated from coupon payments paid at
regular intervals• Market value is driven by movements in yields (U.S. Treasury rates
and spreads)
• Diversification • Fixed income provides a different risk profile to the portfolio than
other asset classes• More likely to preserve principal in a stressed market environment
• Liquidity• Ability to raise cash in times of extreme market stress• Varying degrees of liquidity for different types of bonds
14
Investment Philosophy
• Long term focus - consistent steady results
• Active management style
• Avoid credit problems• Downside risk is more significant than potential upside return
• Coupon payments are the primary source of returns
• Trading costs should be minimized
15
Management Process
• Develop portfolio objectives and constraints in consultation with clients and investment staff
• Choose an appropriate benchmark and define the investment guidelines
• Construct portfolio based on guidelines• Duration based on interest rate and economic outlook versus market• Relative value between sectors / securities
• Monitor portfolio• Regular review of portfolio characteristics relative to the benchmark• Continual evaluation of current securities and potential opportunities• Regular meetings to discuss news, market events, portfolio structure, relative value,
market color
• All team members participate in portfolio management
• Continual search for efficiency improvements• Electronic trading• Systematic credit research process• Bloomberg screens
16
Costs
• Costs are low relative to other methods of gaining exposure
Internal (Pension funds): 2.4 bps, average AUM of $1.89B Cost per the 2017 CEM Benchmark study
iShares IG Corporate Bond ETF (LQD): 15 bps, AUM $32.1B
• CreditSights• Tearsheets• Industry Reports• Company Research Reports• Credit Risk Ranking Report
• Gimme Credit• Industry Reports• Analyst Data Sheets• Company Research Reports
• Brokers• Bloomberg
20
CREDIT SCORING FACTORS Range Analyst Comments Score Score4/4/2018 10/15/2017
Industry RisksThings to consider: # of competitors, barriers to entry, # of key suppliers, product alternatives, degree of rivalry, supply/demand balance, cyclicality, potential secular changes, regulatory environment, political risks
(-1 to +1)
The market is characterized by good longterm demand driven by increased need for food. The long-term strength is offset by the frequent short-term fluctuation in margins from supply demand imbalance. The extent of negative effect of trade wars is uncertain. 0 0
Company RisksThings to consider: Market position, competitive strengths & weakneses, business strategy, value of franchise, M&A potential, country/currency exposures, pending litigation, reputational/ethical risks, intellectual property
(-1 to +1)The combined (POT AGI) is expected to be Nutrien is the largest and most diverse fertilizer producer. 1 1
Management / OwnershipThings to consider: Proven track record, industry experience, ESG, adequate systems & controls, contingency planning, compensation structure, activist shareholders
(-1 to +1)The combined management team has a long track record of solid management 1 1
Debt/Capital RatiosThings to consider: Historic coverage ratios, projected coverage ratios, cushion for slippage, key factors affecting sensitivity, Financials Only: capital ratios, loan/deposit ratio, risk based capital
(-2 to +2)Coverage ratios deteriorated due to difficult market conditions and increased capex 0 0
Financial FlexibilityThings to consider: Cash flow, working capital, availability of bank lines, ability to sell assets, access to public debt markets, CAPEX needs, Financials Only: reserves, credit quality, combined ratio, liquidity coverage ratio, loan/deposit ratio
(-2 to +2)
Good access to markets and credit lines 1 1
Capital StructureThings to consider: Leverage, amount of debt outstanding, shareholder equity, repayment schedule, seniority of claim, 144A
(-1 to +1)large share buybacks increased leverage 0 0
Earnings growthThings to consider: Revenue growth, margins, taxes, enterprise value, forward earnings estimates, stock valuation, segment/geographic distribution, Financials Only: Net interest margin, loan or premium growth
(-1 to +1)
Expect strong earnings growth with the combination. Good diversity of PKN along with low cost provider and access to largest market. Growth could be constrained by China soybean tariff. 0 1
Terms of IssueThings to consider: size of issuance, change of control provisions, use of funds
(-1 to +1)Normal for Industry 0 0
Total Score 3 4
Nutrien Ltd.
21
Bloomberg
• Company financial analysis• Individual bond analysis• Trading platform (AIM)• Trade History• PORT+
Demonstration of capabilities
22
Summary
• Conservative investment philosophy within investment grade fixed income
• Well-defined management process
• Investment grade fixed income management is a core competency at the MBOI
23
Executive Summary andCapital Markets ReviewMontana Board of Investments
Period Ended: March 31, 2018
1 Executive Summary Page 3
2 Capital Markets Review Page 8
Table Of Contents
Page 3
EXECUTIVE SUMMARY
1
Economic and Capital Market Review Returns for the 1st quarter of 2018 were largely negative for the major asset classes in which the MBOI Retirement Plans are invested. Public equity markets experienced a notable increase in volatility amidst concerns regarding U.S. inflation expectations, with the S&P 500 Index returning -0.76% and the MSCI ACW Ex-US returning -1.18%. Fixed income returns were also negative, with the Bloomberg US Aggregate Bond Index returning -1.46% for the quarter. Real estate and private equity, however, contributed positive returns with the MBOI real estate portfolio up 2.03% and the private equity portfolio up 3.41%. Several key drivers of 1st quarter performance are outlined in Figure 1.
Figure 1: Drivers of 1st Quarter Asset Class Performance
Positive Drivers Negative Drivers Continued Economic Growth Expectations – The Federal Open Market Committee (FOMC) continued to communicate their observations of an improving economy and healthy labor market. As a result, they increased policy rates at the March meeting, setting the new target range for the Federal Funds rate at 1.50% to 1.75%, with market participants citing minimal price action after the announcement due to it being widely anticipated.
Strong Corporate Earnings – Expectations for corporate earnings growth were high in the first quarter, and these expectations were realized as companies reported results in April and May of 2018. As of the writing of this executive summary, S&P 500 earnings increased at a rate of 24.2% versus Q1 2017.
Increased Equity Market Volatility – Domestic equity markets experienced a sharp increase in volatility coupled with broad based declines. The decline was most acute in February, when equity markets dropped more than 10%. Key drivers of market weakness were increased fears of inflationary pressure, coupled with growing trade tensions between the United States and China.
Rising Interest Rates – Driven by a combination of inflation concerns and expected increases in issuance to support fiscal stimulus, Treasury yields were higher across all maturities leading to negative returns across rate-sensitive fixed income indices. Notably, the yield on the 10-year nominal Treasury increased 34 basis points over the quarter, while the yield curve flattened by 4 basis points as measured across the 2-year to 10-year maturities.
Figure 2: Key Market Index Returns
Period Ending March 31, 2018
Index Asset Class Q1/
CYTD 1
Year 5
Year 10
Year S&P 500 (Cap Wtd) US Large Cap Equity -0.76 13.99 13.31 9.49 Russell 2000 US Small Cap Equity -0.08 11.79 11.47 9.84 MSCI EAFE (Net) Int’l Developed Markets -1.53 14.80 6.50 2.74 MSCI Emerging Markets (Net) Int’l Emerging Markets 1.42 24.93 4.99 3.02 Bloomberg US Agg Bond US Fixed Income -1.46 1.20 1.82 3.63 NCREIF ODCE (Gross) Private Real Estate 1.97 7.11 10.41 4.16 Bloomberg Commodity (TR) Commodities -0.40 3.71 -8.32 -7.71
Page 4
2
MBOI Performance Highlights: Total Fund Figure 3 shows the performance of the MBOI pension plans, as represented by the Public Employees’ Retirement Plan. A short commentary regarding performance at the total fund level is also provided below.
Figure 3: MBOI Total Fund Performance (Net of Fees) Period Ending March 31, 2018
QTD FYTD 1 Year
3 Years
5 Years
7 Years
10 Years
Total Fund Composite (Net) 0.11 7.13 10.38 7.15 8.66 8.46 6.52 Public Employees Benchmark -1.26 6.42 9.13 7.15 9.12 8.82 6.76 Difference 1.37 0.71 1.25 0.00 -0.46 -0.36 -0.24
Rank 22 54 57 20 4 1 6 1 Fiscal year to date covers the trailing period beginning July 1, 2017.
RVK Commentary
Positive Returns for Plans – The first quarter provided a positive return of 0.11% net of fees. At the asset class level, most returns were negative, with the exception of real estate and private equity. The relatively strong absolute returns in these two sectors helped tip the Total Fund into positive territory.
Continued Strength of Peer Rankings – MBOI rankings versus peers remain strong across all trailing periods beyond one year. The plans continue to rank near the top decile over all annualized periods from three years and beyond. In addition, on a risk-adjusted basis, the plans continue to perform well, providing higher returns than peers with less risk over a ten-year period. A graphic demonstrating this relationship can be found on page 12 of the Performance Report.
Strong Relative Performance for Most Asset Class Composites – The asset class composites provided strong relative performance against their respective benchmarks for the quarter. The Domestic Equity Pool outperformed its benchmark by 20 basis points, and the International Equity Pool outperformed its benchmark by 51 basis points. The Real Estate Pool outperformed its benchmark by 1,012 basis points, while the Natural Resources Pool outperformed by 245 basis points. The Trust Funds Investment Pool outperformed its index by 32 basis points, and the Short Term Investment Pool underperformed marginally by 5 basis points. The Broad Fixed Income Pool outperformed its benchmark by 49 basis points for the quarter, while the Investment Grade Credit Pool underperformed by 5 basis points.
Private Equity Relative Performance – Private equity outperformed its custom benchmark by 389 basis points for the quarter. As of March 31, 2017 the index represents the MSCI US Small Cap Index. Prior to this transition, it consisted of the S&P 1500 Comp Index + 4% (1 Qtr Lag).
Page 5
3
MBOI Performance Highlights: Asset Class Composites
The MBOI completed an initiative over the past few quarters to streamline the accounting and reporting for retirement plan assets. The most notable change involved the creation of the “Consolidated Asset Pension Pool” (CAPP). Under the CAPP structure, all retirement plans hold an allocation to a single investment pool (CAPP), as well as an allocation to the Short Term Investment Pool (STIP). As of March 31, 2018, CAPP assets totaled approximately $11.2 billion, and STIP assets totaled approximately $3.1 billion.
The performance relative to benchmarks and peers for the major asset class composites held within the CAPP are summarized on pages 13-19 of the quarterly performance report. A high level commentary on each asset class is also provided below (in addition to non-retirement asset pools, such as the Trust Funds Investment Pool). Unless stated otherwise, all returns are reported on a net of fees basis. For several asset class pools (e.g., TIPS, Natural Resources, Diversifying Strategies), historical performance remains limited to only 1 year or less, as these asset pools were only recently established by the MBOI.
Montana Domestic Equity Pool – The MBOI Domestic Equity Pool returned -0.41% for the quarter, outperforming the Domestic Equity Custom Index by 20 basis points. Relative to peers, the pool ranked in the 40th percentile for the quarter. While the past few quarters have been more supportive of active management opportunities, the strategy as a whole has lagged relative to the Domestic Equity Custom Index over the long term. Despite the underperformance versus the benchmark, the domestic equity portfolio has performed reasonably well versus peers, ranking above median in nearly all periods.
Montana International Equity Pool – The MBOI International Equity Pool returned -0.55% for the quarter, outperforming the International Equity Custom Benchmark by 51 basis points. Relative to peers, the pool ranked in the 56th percentile for the quarter; however, for the trailing 1-, 3-, 5- and 7-year periods, the international equity pool exceeded its benchmark. Relative to peers the pool has lagged over longer term trailing periods, although it has been gradually improving over the last 3 years.
Montana Broad Fixed Income – Broad Fixed Income returned -0.97% for the quarter, outperforming the Bloomberg US Aggregate Bond Index by 49 basis points. The composite has performed well relative to the index and peers over trailing periods beyond 3 years.
Trust Funds Investment Pool – The Trust Funds Investment Pool returned -1.14% for the quarter, outperforming the Bloomberg US Aggregate Bond Index by 32 basis points. The strong relative performance of the pool continues to benefit from strong internal management of the bond pool, coupled with a small allocation to real estate.
Investment Grade Credit – The Investment Grade Credit Pool returned -1.55% for the quarter, underperforming the Bloomberg US Corporate Intermediate Bond Index by 5 basis points. As a new investment pool in the CAPP, relative performance for this pool only extends back 12 months, thus a meaningful assessment of relative performance of this pool will take additional time.
US Treasury and Agency – The US Treasury and Agency pool returned -0.74% for the quarter, slightly outperforming the Bloomberg US Treasury Intermediate Term Index. As a new investment pool in the CAPP, relative performance for this pool only extends back 12 months, thus a meaningful assessment of relative performance of this pool will take additional time.
Page 6
4
High Yield – The High Yield Bond Pool returned -1.04% for the quarter, slightly underperforming the Bloomberg US High Yield 2% Issuer Cap Index by 18 basis points. As a new investment pool in the CAPP, relative performance for this pool only extends back 12 months, thus a meaningful assessment of relative performance of this pool will take additional time.
Mortgage Backed – The Mortgage-Backed Securities pool return -0.88% for the quarter, outperforming the Bloomberg US MBS Index by 31 basis points. As a new investment pool in the CAPP, relative performance for this pool only extends back 12 months, thus a meaningful assessment of relative performance of this pool will take additional time.
TIPS – The TIPS pool returned -0.38% for the quarter, outperforming the Bloomberg US Treasury Inflation Notes 1-10 Year Index by 2 basis points. As a new investment pool in the CAPP, relative performance for this pool only extends back 12 months, thus a meaningful assessment of relative performance of this pool will take additional time.
Natural Resources – The Natural Resources pool returned -0.39% for the quarter, outperforming the MSCI ACW Commodity Producers Index (USD) (Net) by 245 basis points. As a new investment pool in the CAPP, relative performance for this pool only extends back 12 months, thus a meaningful assessment of relative performance of this pool will take additional time. However, more so than most other pools in the portfolio, the underlying investments in this pool differ substantially from those held in the benchmark. Thus relative performance should be viewed with caution, particularly over short term investment horizons.
Real Estate Pool – The Real Estate Pool returned 2.03% for the quarter, outperforming the Real Estate Custom Index by 1,012 basis points. Relative to peers, the pool ranked near median over long term periods beyond 5 years. Over the 10-year period, the Real Estate Pool has outperformed the index. Drivers continue to be the timing of entry into the asset class, as well as material differences between benchmark and portfolio holdings. Nonetheless, performance continues to improve, and has notably outperformed the benchmark over 1-, 3-, 5-, and 7-year periods.
Diversifying Strategies – The Diversifying Strategies Pool was established during the quarter, and thus quarterly performance is unavailable at this time. The portfolio currently consists of a 10-year nominal Treasury security, although expectations are to build out the Pool across diversifying assets over future quarters.
Short Term Investment Pool – The Short Term Investment Pool returned 0.37% for the quarter, which marginally underperformed relative to the iMoneynet Money Fund Median1 and the ICE 1-Month LIBOR rate. The absolute return of the pool over the past year was 126 basis points.
Private Equity Pool – The Private Equity Pool returned 3.41% for the quarter, which outperformed the MSCI US Small Cap Index by 389 basis points. Private equity continues to provide valuable diversification and return enhancement for the MBOI pension plans. Over 10 years, the portfolio has returned 8.63% net of fees, which exceeds all but the Domestic Equity asset class over the long run. While the pool has lagged its index substantially in recent years, this performance is generally expected due to the magnitude and duration of the public equity bull market.
1 The iMoneynet Money Fund Median is reported on a gross of fees basis.
BofA ML 3 Mo US T-BillNCREIF ODCE (Gross)Wilshire US REITHFRI FOF CompBloomberg Cmdty (TR)
Real GDP YoY (%)
USD Total Wtd IdxWTI Crude Oil per Barrel ($)Gold Spot per Oz ($)
S&P 500 (Cap Wtd)
PMI - Manufacturing
Unemployment Rate (%)
Federal Funds Rate (%)Breakeven Infl. - 1 Yr (%)Breakeven Infl. - 10 Yr (%)CPI YoY (Headline) (%)
Key Economic Indicators
Treasury Yield Curve (%)
Key Economic IndicatorsThe quarter began with a substantial global equity market rally in January. Drivers of the rally included improving global economic fundamentals, continuation of generally accommodative monetary policies among global central banks, and continued corporate earnings growth. The market rally reversed sharply in February in response to an uptick in inflation expectations, a repricing of the yield curve, and a dramatic spike in equity market volatility. The quarter ended with developed equity markets in negative territory, US duration sensitive assets down moderately, and global bond markets maintaining slight gains in part due to a weakening US Dollar. The Federal Open Market Committee set the federal funds target range at 1.50% to 1.75%, an increase of 0.25%, and maintained guidance for two additional rate increases in 2018. US economic data continued to generally indicate a robust economic expansion. Non-farm payroll growth averaged in excess of 200,000 job gains per month while Purchasing Manager’s data for both the US manufacturing and non-manufacturing sectors indicated continued expansion.
First Quarter Economic Environment
UnemploymentRate (%)
Since 1948
CPI Year-over-Year (% change)
Since 1914
US Govt Debt (% of GDP)Since 1940
VIX Index(Volatility)Since 1990
Consumer ConfidenceSince 1967
Russell 2000MSCI EAFE (Net)MSCI EAFE SC (Net)MSCI Emg Mkts (Net)Bloomberg US Agg Bond
0.00
0.50
1.00
1.50
2.00
2.50
3.00
3.50
3M 6M 1Y 3Y 5Y 7Y 10Y 20Y 30Y
Mar-18 Dec-17 Mar-17 Mar-16 Mar-15
0
2
4
6
8
10
12
20
40
60
80
100
120
0
10
20
30
40
50
60
70
20
40
60
80
100
120
140
160
-20-15-10-505
1015202530
2.4
Treasury data courtesy of the US Department of the Treasury. Economic data courtesy of Bloomberg Professional Service.Breakeven Inflation does not have 20 years of history; therefore, its 20-year average is shown as N/A.
Page 9
US Equity Review As of March 31, 2018
Broad MarketDespite strong returns in January, US equity markets faltered during the final two months of the quarter, delivering mixed results across market cap and style. The S&P 500 Index’s return of -0.76% marks the first negative quarter for the index since Q3 2015. Declines were relatively widespread, with nine of eleven sectors producing negative returns.
Market CapIncreased global macroeconomic uncertainty indirectly favored small cap stocks, which tend to be more domestically-focused, providing greater insulation from global headwinds.
Style and SectorGrowth stocks led value stocks for the quarter as the Russell 1000 Growth Index outperformed its value counterpart by 4.25% for the quarter. Technology stocks led all other sectors posting 3.53% with consumer discretionary following close behind with 3.09% for the quarter.
Style and Capitalization Market Performance (%)
S&P 500 Index Sector Performance (%)
First Quarter Review
Valuations
US Large-Cap Equity
R1000 12M P/ESince 1995
US Small-Cap Equity
R2000 12M P/ESince 1995
US Large-Cap Value Equity
R1000V 12M P/ESince 1995
US Large-Cap Growth Equity
R1000G 12M P/ESince 1995
US Large-Cap Equity
Shiller S&P 10Y P/ESince 1900
18.63
21.25
5.13
6.95
11.79
13.98
13.99
13.81
2.30
1.42
-2.64
-2.83
-0.08
-0.69
-0.76
-0.64
-10 0 10 20 30
R 2000 Growth
R 1000 Growth
R 2000 Value
R 1000 Value
R 2000
R 1000
S&P 500
R 3000 QTD
1 Yr
1.89
-4.86
10.54
27.68
13.95
11.27
1.69
18.04
-0.16
-0.89
16.91
-3.30
-7.48
-5.52
3.53
-1.56
-1.22
-5.02
-0.95
-5.88
-7.12
3.09
-20 -5 10 25 40
UtilitiesTeleCom
Materials
Information TechIndustrials
Health Care
Real EstateFinancials
Energy
Cons Staples
Cons Discretion QTD
1 Yr
0
5
10
15
20
25
30
35
10
15
20
25
30
20
40
60
80
100
10
15
20
25
10
20
30
40
50
Valuation data courtesy of Bloomberg Professional Service and Robert J. Shiller, Irrational Exuberance, Second Edition.P/E metrics shown represent the 5th through 95th percentiles to minimize the effect of outliers.
Page 10
Non-US Equity Review As of March 31, 2018
Developed IntlEquity
MSCI EAFE12M P/E
Since 1995
Intl EquityMSCI ACW x US
12M P/ESince 1995
MSCI Style and Capitalization Market Performance (%)
MSCI Region Performance (%)
EmergingMarkets Equity
MSCI EM12M P/E
Since 1995
Developed Intl Growth Equity
MSCI EAFE Grth12M P/E
Since 1995
Developed Intl Value Equity
MSCI EAFE Val12M P/E
Since 1995
First Quarter Review
Valuations
Developed MarketsDeveloped international markets lagged during the quarter, ending with negative returns and underperforming their domestic counterparts. Market movements were affected by headlines related to global trade negotiations, however there were also significant political events within developed international markets.
Emerging MarketsEmerging markets outperformed domestic and developed international for both the quarter and the trailing one year period. MSCI Emerging Markets Index outpaced the MSCI EAFE Index by 295 basis points during the quarter.
Market Cap & StyleDeveloped international growth stocks continued to outperform value stocks, while small cap stocks outperformed large cap stocks, ending the quarter in slightly positive territory. Contrary to the rest of the world, emerging market value outperformed growth.
24.93
15.78
14.49
23.49
17.51
12.19
14.80
16.53
1.42
-0.68
-1.98
0.24
-1.04
-2.03
-1.53
-1.18
-10 0 10 20 30
Emg Mkts
Pacific
Europe
EAFE SC
EAFE Growth
EAFE Value
EAFE
ACW Ex US QTD
1 Yr
24.93
4.91
19.64
8.43
-8.42
11.91
15.51
1.42
-7.35
0.83
-3.73
-5.30
-3.88
-1.25
-15 -5 5 15 25 35
Emg Mkts
Canada
Japan
Pacific ex Japan
Middle East
United Kingdom
Europe Ex UK QTD1 Yr
0
20
40
60
80
100
0
10
20
30
40
0
10
20
30
40
50
60
0
10
20
30
40
50
0
10
20
30
40
50
Valuation data courtesy of Bloomberg Professional Service.P/E metrics shown represent the 5th through 95th percentiles to minimize the effect of outliers.All returns are shown net of foreign taxes on dividends.
Page 11
Fixed Income Review As of March 31, 2018
Fixed Income Performance (%)Broad MarketTreasury yields increased across all maturities leading to negative returns across rate-sensitive fixed income indices. The Bloomberg Barclays US Aggregate Bond Index posted a return of -1.46% during the quarter. Longer duration bonds were hit the hardest with the Bloomberg Barclays US Long Government/Credit Index returning -3.58%.
Credit MarketInvestment grade and high yield credit spreads widened modestly, ending a nine-quarter streak of spread tightening. Emerging Market DebtNon-US dollar denominated emerging market debt was the best performing sub-asset class within fixed income over the quarter, returning 4.44%. In contrast, hard currency and corporate emerging market debt ended the quarter with negative returns after four consecutive quarters of posting positive returns.
First Quarter Review
Valuations
US Aggregate Bonds
Bloomberg US Agg SpreadsSince 2000
US Corporate Bonds
Bloomberg US Corp Spreads
Since 1989
US CreditBonds
Bloomberg US Credit Spreads
Since 2000
US Treasury Bonds10-Yr US Treasury
YieldsSince 1953
US High-Yield Bonds
Bloomberg US Corp:HY Spreads
Since 2000
12.99
3.34
8.49
6.98
4.64
3.78
0.62
0.77
0.75
2.70
1.33
0.92
0.43
1.20
4.44
-1.78
2.50
1.37
1.58
-0.86
-0.39
-1.19
-0.53
-2.32
-1.20
-0.79
-1.18
-1.46
-10 0 10 20
JPM GBI-EM Glbl Dvf'd (USD)(Unhedged)
JPM Emg Mkts Bond Global
FTSE Wrld Gov't Bond
Bloomberg Global Agg Bond
CS Leveraged Loan
Bloomberg US Corp: Hi Yld
Bloomberg US ABS
Bloomberg US MBS
Bloomberg US Agcy
Bloomberg US Corp: Credit
Bloomberg US CMBS Inv Grade
Bloomberg US Trsy: US TIPS
Bloomberg US Trsy
Bloomberg US Agg QTD
1 Yr
0
2
4
6
8
10
12
14
0.0
0.2
0.4
0.6
0.8
1.0
1.2
0.0
0.5
1.0
1.5
2.0
2.5
3.0
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
0123456789
10
Valuation data courtesy of Bloomberg Professional Service.Valuations shown represent the 5th through 95th percentiles to minimize the effect of outliers.
Page 12
Alternatives Review As of March 31, 2018
General Market - Diversified Inflation Strategies (DIS)DIS managers posted weak returns despite increases in market-based measures of future inflation and heightened press attention about the potential for further acceleration of inflationary pressure. Market expectations of future inflation also increased modestly from 1.98% to 2.06% based on 10 Year Treasury breakevens. Managers with greater exposure to floating rate credit-sensitive fixed income and foreign currency performed toward the top of the peer group. Managers with significant MLP exposure within global listed infrastructure allocations lagged by the widest margins.
General Market - Real EstateThe Core private real estate index, NCREIF-ODCE, returned 2.2% during Q1, comprised of 1.0% income and 1.2% appreciation. Investors in publicly traded real estate significantly underperformed their private market counterparts during the quarter as measured by Wilshire US REIT Index return of -7.48%.
General Market - Hedge FundsHedge funds produced modestly positive returns during the first quarter of 2018, though heightened levels of market volatility created significant dispersion across strategies. FoHFs that outperformed benefitted from manager selection within the discretionary macro space, where several managers correctly bet on rising interest rates and produced near double digit returns or higher during the quarter. Managers within the multi-strategy space produced negative returns on average according to HFR, but the firms RVK tracks closely were modestly positive during the quarter, producing average returns near 1%.
General Market - Global Tactical Asset Allocation (GTAA)GTAA managers provided modestly positive performance and for the most part, tended to outperform traditional asset classes. Globally-oriented managers that rely on fundamental, value-based investment processes have continued to allocate to various exposures in emerging markets, which they believe to be undervalued.
Annual Asset Class Performance As of March 31, 2018
NCREIF ODCE (Gross) performance is reported quarterly.
Page 14
Disclaimer of Warranties and Limitation of Liability - This document was prepared by RVK, Inc. (RVK) and may include information and data from some or all of the following sources: client staff; custodian banks; investment managers; specialty investment consultants; actuaries; plan administrators/record-keepers; index providers; as well as other third-party sources as directed by the client or as we believe necessary or appropriate. RVK has taken reasonable care to ensure the accuracy of the information or data, but makes no warranties and disclaims responsibility for the accuracy or completeness of information or data provided or methodologies employed by any external source. This document is provided for the client’s internal use only and does not constitute a recommendation by RVK or an offer of, or a solicitation for, any particular security and it is not intended to convey any guarantees as to the future performance of the investment products, asset classes, or capital markets.
Quarterly Investment PerformanceAnalysisMontana Board of Investments
Period Ended: March 31, 2018
QTD FYTDCYTD/1 Year
3Years
5Years
7Years
10Years
20Years
2017 2016 2015 2014 2013SinceIncep.
InceptionDate
Public Employees' Retirement - Net 0.11 7.13 10.38 7.15 8.66 8.46 6.52 6.14 14.80 7.32 1.86 8.07 17.38 6.95 04/01/1997
All Public Plans > $3B Total Fund Median 0.00 7.66 11.13 7.04 7.91 7.65 6.38 6.65 16.02 7.96 0.51 6.76 14.47 8.10
Rank 22 54 57 20 4 1 7 76 65 57 6 7 7 N/A
Montana Board of Investments
Retirement PlansComparative Performance
As of March 31, 2018
Net performance shown is net of all manager fees and expenses (Net-All). All Public Plans > $3B Total Fund Median is reported gross of fees.Benchmark returns reflect unmanaged indices which are not impacted by management fees. Fiscal year ends on 06/30.
All Public Plans > $3B Total Fund Median 0.00 7.66 11.13 7.04 7.91 7.65 6.38 6.65 16.02 7.96 0.51 6.76 14.47 8.10
Rank 22 54 57 20 4 1 6 75 65 57 5 7 8 N/A
Net performance shown is net of all manager fees and expenses (Net-All). All Public Plans > $3B Total Fund Median is reported gross of fees.Benchmark returns reflect unmanaged indices which are not impacted by management fees. Fiscal year ends on 06/30.
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Montana Board of Investments
Retirement PlansComparative Performance
As of March 31, 2018
QTD FYTDCYTD/1 Year
3Years
5Years
7Years
10Years
20Years
2017 2016 2015 2014 2013SinceIncep.
InceptionDate
Game Wardens' Retirement - Net 0.11 7.13 10.38 7.17 8.65 8.44 6.51 6.08 14.81 7.31 1.88 8.03 17.34 6.90 04/01/1997
All Public Plans > $3B Total Fund Median 0.00 7.66 11.13 7.04 7.91 7.65 6.38 6.65 16.02 7.96 0.51 6.76 14.47 8.10
Rank 22 54 57 21 4 1 7 33 65 65 5 7 7 N/A
Net performance shown is net of all manager fees and expenses (Net-All). All Public Plans > $3B Total Fund Median is reported gross of fees.Benchmark returns reflect unmanaged indices which are not impacted by management fees. Fiscal year ends on 06/30.
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Montana Board of InvestmentsAsset Allocation by SegmentRetirement Plans
Consolidated Asset Pension Pool (CAPP) 11,218,972,872 Short Term Investment Pool (STIP) 230,236,623
Allocation(%)
97.992.01
0.32100.00
Total FundShort Term Investment Pool (STIP)
December 31, 2017 : $11,449,209,494
Consolidated Asset Pension Pool (CAPP)%
49.9835.703.493.613.081.281.660.89
Allocations shown may not sum up to 100% exactly due to rounding. Retirement Plan market values may differ from State Street due to uninvested amounts notincluded in segment totals.
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March 31, 2018 : $16,647,771,251 Market Value($)
Allocation(%)
Consolidated Asset Pension Pool (CAPP) 11,218,972,866 67.39
Short Term Investment Pool 3,091,719,799 18.57
Trust Funds Investment Pool 2,337,078,586 14.04
Montana Board of Investments
Investment PoolsAsset Allocation
As of March 31, 2018
Allocations shown may not sum up to 100% exactly due to rounding.
Performance shown is net of all manager fees and expenses (Net-All). Benchmark returns reflect unmanaged indices which are not impacted by management fees. Fiscal year ends on 06/30. Please see Addendum for custom index specification. Since inception performance may vary from State Street reported performance due to calculation methodology differences.
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March 31, 2018 : $11,218,972,878 Market Value($)
Allocation(%)
Domestic Equity 3,945,662,594 35.17
International Equity 2,080,998,929 18.55
Private Equity 1,206,815,336 10.76
US Treasury & Agency 1,075,494,334 9.59
Real Estate 801,646,009 7.15
Mortgage - Backed 459,321,548 4.09
TIPS 382,673,681 3.41
Investment Grade Credit 370,205,883 3.30
High Yield 315,741,458 2.81
Natural Resources 265,988,435 2.37
Broad Fixed Income 146,336,649 1.30
Cash Pension 142,009,544 1.27
Diversifying Strategies 26,078,478 0.23
Montana Board of Investments
Consolidated Asset Pension Pool (CAPP)Asset Allocation
As of March 31, 2018
Allocations shown may not sum up to 100% exactly due to rounding.
Consolidated Asset Pension Pool (CAPP)Comparative Performance
As of March 31, 2018
Performance shown is net of all manager fees and expenses (Net-All). Benchmark returns reflect unmanaged indices which are not impacted by management fees. Fiscal year ends on 06/30. Please see Addendum for custom index specification. Since inception performance may vary from State Street reported performance due to calculation methodology differences.
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Montana Board of Investments
Consolidated Asset Pension Pool (CAPP)Comparative Performance
Performance shown is net of all manager fees and expenses (Net-All). Benchmark returns reflect unmanaged indices which are not impacted by management fees. Fiscal year ends on 06/30. Please see Addendum for custom index specification. Since inception performance may vary from State Street reported performance due to calculation methodology differences.
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Montana Board of InvestmentsComparative PerformanceInvestment Pools
Performance shown is net of all manager fees and expenses (Net-All). For additional information on the Private Equity Custom Index, please see the Addendum.*Performance is based on prior quarter's fair market value adjusted for cash flows during the most recent quarterly period.Benchmark returns reflect unmanaged indices that are not impacted by management fees. Fiscal year ends on 06/30.Since Inception performance may vary from State Street reported performance due to calculation methodology differences.
Performance shown is gross of fees. Fiscal year ends on 06/30. Since inception performance may vary from State Street reported performance due to calculation methodology differences.
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QTD/CYTD
FYTD 1 Year3
Years5
Years7
Years10
Years2017 2016 2015 2014 2013
SinceIncep.
InceptionDate
Domestic Large Cap Equity - Net -0.69 10.59 13.71 10.57 13.37 12.54 9.41 21.66 11.30 1.76 13.82 33.14 7.50 07/01/2007
Domestic Small Cap Equity - Gross -0.04 10.67 12.85 9.51 13.05 11.80 11.11 16.27 19.97 -0.93 6.16 41.54 12.85 03/01/2003
IM U.S. Small Cap Equity (SA+CF) Median -0.17 9.50 12.09 9.15 12.50 11.50 11.06 15.18 20.87 -2.33 5.36 41.31 12.79
Rank 48 40 44 45 40 42 49 44 57 36 43 49 48
Montana Board of Investments
Equity CompositesComparative Performance
As of March 31, 2018
Net performance shown is net of all manager fees and expenses (Net-All). Gross returns are compared to median performance of similar managers. A peer group of similar managers may not exist for all composites. Fiscal year ends on 06/30. Since inception performance may vary from State Street reported performance due to calculation methodology differences.
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Montana Board of Investments
Equity CompositesComparative Performance
As of March 31, 2018
QTD/CYTD
FYTD 1 Year3
Years5
Years7
Years10
Years2017 2016 2015 2014 2013
SinceIncep.
InceptionDate
International Large Cap Passive - Net -1.00 10.51 17.00 6.89 6.32 4.57 N/A 27.79 4.87 -4.71 -3.70 14.95 7.74 06/01/2009
MSCI ACW Ex US Index (USD) (Net) -1.18 10.16 16.53 6.18 5.89 4.26 2.70 27.19 4.50 -5.66 -3.87 15.29 7.47
Gross of fees performance is not available (N/A) for the International Small Cap composite which currently consists of DFA Intl Sm Co;I (DFISX), DFA Emg Mkts Sm Cap;I (DEMSX),BlackRock ACWI Ex-US Small Cap (CF), Templeton Investment Counsel (SA), and American Century Investment Mgmt (SA).
Net performance shown is net of all manager fees and expenses (Net-All). Gross returns are compared to median performance of similar managers. A peer group of similar managers may not exist for all composites. Fiscal year ends on 06/30. Since inception performance may vary from State Street reported performance due to calculation methodology differences.
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QTD/CYTD
FYTD 1 Year3
Years5
Years7
Years10
Years2017 2016 2015 2014 2013
SinceIncep.
InceptionDate
Domestic Large Cap Passive - Net -0.64 10.61 13.63 10.49 13.14 12.60 9.49 21.34 12.01 0.83 13.73 32.41 5.41 05/01/2000
Domestic Large Cap 130/30 - Gross -1.01 11.41 13.14 9.80 14.03 13.35 10.27 21.10 10.22 2.26 15.59 37.83 10.16 03/01/2008
IM U.S. Large Cap Core Equity (SA+CF) Median -0.44 10.79 14.02 10.23 13.32 12.73 9.75 21.82 10.50 1.39 13.43 32.98 9.57
Rank 69 43 66 58 29 27 29 62 55 37 21 13 28
Montana Board of Investments
Equity Sub CompositesComparative Performance
As of March 31, 2018
Net performance shown is net of all manager fees and expenses (Net-All). Gross returns are compared to median performance of similar managers. A peer group of similar managers may not exist for all composites. Fiscal year ends on 06/30. Since inception performance may vary from State Street reported performance due to calculation methodology differences.
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QTD/CYTD
FYTD 1 Year3
Years5
Years7
Years10
Years2017 2016 2015 2014 2013
SinceIncep.
InceptionDate
Domestic Large Cap Equity
BlackRock MSCI US Equity Index (CF) - Net -0.63 10.61 N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A 10.61 07/01/2017
MSCI US Index (USD) (Gross) -0.63 10.60 14.03 10.55 13.23 12.65 9.52 21.90 11.61 1.32 13.36 32.61 10.60
IM U.S. Large Cap Core Equity (SA+CF) Median -0.44 10.79 14.02 10.23 13.32 12.73 9.75 21.82 10.50 1.39 13.43 32.98 9.57
Rank 79 47 60 51 20 22 8 26 44 58 15 11 9
Montana Board of Investments
Domestic Equity ManagersComparative Performance
As of March 31, 2018
Net performance shown is net of all manager fees and expenses (Net-All). Gross returns are compared to median performance of similar managers. A peer group of similar managers may not exist for all funds. Fiscal year ends on 06/30. Since inception performance may vary from State Street reported performance due to calculation methodology differences.
IM U.S. Mid Cap Growth Equity (SA+CF) Median 2.98 14.07 19.94 9.27 13.19 11.86 11.05 25.47 5.51 0.79 8.63 36.40 9.97
Rank 53 44 53 45 60 30 33 60 23 42 71 36 43
Net performance shown is net of all manager fees and expenses (Net-All). Gross returns are compared to median performance of similar managers. A peer group of similar managers may not exist for all funds. Fiscal year ends on 06/30. Since inception performance may vary from State Street reported performance due to calculation methodology differences.
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Montana Board of Investments
Domestic Equity ManagersComparative Performance
As of March 31, 2018
QTD/CYTD
FYTD 1 Year3
Years5
Years7
Years10
Years2017 2016 2015 2014 2013
SinceIncep.
InceptionDate
Domestic Small Cap Equity
Vaughan Nelson Management (SA) - Net -1.92 5.98 4.20 5.96 11.24 10.04 11.22 6.83 20.50 0.16 9.09 39.30 9.66 03/01/2007
Russell 2000 Val Index -2.64 4.43 5.13 7.87 9.96 9.42 8.61 7.84 31.74 -7.47 4.22 34.52 6.07
IM U.S. Small Cap Growth Equity (SA+CF) Median 2.90 14.22 20.28 10.06 13.59 12.14 11.70 23.71 11.40 -0.74 4.13 45.47 14.16
Rank 87 92 89 66 N/A N/A N/A 72 36 44 30 N/A 72
Gross of fees performance is not available (N/A) for the following funds: SPDR S&P 500 ETF (SPY), Domestic Equity Pool STIF, and iShares:Core S&P Md-Cp (IJH).
The current annual expense ratios for the SPDR S&P 500 ETF (SPY), Domestic Equity Pool STIF, and iShares:Core S&P Md-Cp (IJH) are 0.09%, 0.15%, and 0.09%, respectively.
Net performance shown is net of all manager fees and expenses (Net-All). Gross returns are compared to median performance of similar managers. A peer group of similar managers may not exist for all funds. Fiscal year ends on 06/30. Since inception performance may vary from State Street reported performance due to calculation methodology differences.
International Equity ManagersComparative Performance
As of March 31, 2018
Net performance shown is net of all manager fees and expenses (Net-All). Gross returns are compared to median performance of similar managers. A peer group of similar managers may not exist for all funds. Fiscal year ends on 06/30. Since inception performance may vary from State Street reported performance due to calculation methodology differences.
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Montana Board of Investments
International Equity ManagersComparative Performance
IM ACWI Ex US Value (SA+CF) Median -1.26 9.79 15.45 6.83 7.61 6.19 4.36 26.02 4.87 -3.25 -3.87 20.09 4.88
Rank 4 2 4 12 N/A N/A N/A 8 89 9 N/A N/A 11
Net performance shown is net of all manager fees and expenses (Net-All). Gross returns are compared to median performance of similar managers. A peer group of similar managers may not exist for all funds. Fiscal year ends on 06/30. Since inception performance may vary from State Street reported performance due to calculation methodology differences.
Page 20
Montana Board of Investments
International Equity ManagersComparative Performance
Gross of fees performance is not available (N/A) for the following funds: iShares:MSCI EAFE ETF (EFA), International Equity Pool STIF, DFA Intl Sm Co;I (DFISX), iShares:MSCI EmMkts (EEM), and DFA Emg Mkts Sm Cap;I (DEMSX).
The current annual expense ratios for the iShares:MSCI EAFE ETF (EFA), International Equity Pool STIF, DFA Intl Sm Co;I (DFISX), iShares:MSCI Em Mkts (EEM), and DFA EmgMkts Sm Cap;I (DEMSX) are 0.32%, 0.18%, 0.53%, 0.69%, and 0.73%, respectively.
Net performance shown is net of all manager fees and expenses (Net-All). Gross returns are compared to median performance of similar managers. A peer group of similar managers may not exist for all funds. Fiscal year ends on 06/30. Since inception performance may vary from State Street reported performance due to calculation methodology differences.
IM U.S. High Yield Bonds (SA+CF) Median -0.54 1.90 4.19 4.86 4.91 6.16 7.89 7.58 14.10 -2.15 2.61 7.57 7.59
Rank 69 81 89 68 59 58 N/A 79 32 75 56 31 44
Montana Board of Investments
Fixed Income ManagersComparative Performance
As of March 31, 2018
Net performance shown is net of all manager fees and expenses (Net-All). Gross returns are compared to median performance of similar managers. Fiscal yearends on 06/30. Since inception performance may vary from State Street reported performance due to calculation methodology differences.
Page 22
Montana Board of Investments
Fixed Income ManagersComparative Performance
As of March 31, 2018
QTD/CYTD
FYTD 1 Year3
Years5
Years7
Years10
Years2017 2016 2015 2014 2013
SinceIncep.
InceptionDate
Oaktree U.S. High Yield (SA) - Net -1.74 N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A -1.74 01/01/2018
Bloomberg US HY 2% Issuer Cap Index -0.86 1.58 3.78 5.18 5.00 6.32 8.32 7.50 17.13 -4.43 2.46 7.44 -0.86
Trust Funds Bond Portfolio and Post Trad'l High Yield LP (CF) are part of the Trust Funds Investment Pool.
Net performance shown is net of all manager fees and expenses (Net-All). Gross returns are compared to median performance of similar managers. Fiscal yearends on 06/30. Since inception performance may vary from State Street reported performance due to calculation methodology differences.
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QTD/CYTD
FYTD 1 Year3
Years5
Years7
Years10
Years2017 2016 2015 2014 2013
SinceIncep.
InceptionDate
Long U.S. Treasuries Portfolio N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A 3.20 03/01/2018
Bloomberg 20+ Yr Trsy Strips Index -4.57 0.43 6.57 0.11 5.31 11.01 8.25 13.66 1.41 -3.74 46.38 -20.95 4.41
Net performance shown is net of all manager fees and expenses (Net-All). Gross returns are compared to median performance of similar managers. Fiscal yearends on 06/30. Since inception performance may vary from State Street reported performance due to calculation methodology differences.
Z/L Long Term H20 Trust Fund 0.38 1.01 1.24 1.00 0.90 2.86 3.47 1.08 1.39 1.15 1.76 -0.96 4.71 09/01/2005
Montana Board of Investments
Trust AccountsComparative Performance
As of March 31, 2018
Performance shown is gross of fees. Fiscal year ends on 06/30. Since inception performance may vary from State Street reported performance due to calculation methodology differences.
Page 25
Performance NotesAll gross and net performance data is provided by State Street Analytics (SSA). Reported gross returns for the retirement plans prior to 07/01/2002 are net of all fees.Gross performance for the retirement plans is calculated with fee accruals provided by Montana's Accounting department.
Retirement plan custom benchmarks are provided by State Street Bank and are calculated daily using actual allocations.
Gross of fees performance is not available (N/A) for the following funds: SPDR S&P 500 ETF (SPY), Domestic Equity Pool STIF,iShares:Core S&P Md-Cp (IJH), DFA Intl Sm Co;I (DFISX), iShares:MSCI EAFE ETF (EFA), International Equity Pool STIF,iShares:MSCI Em Mkts (EEM), and DFA Emg Mkts Sm Cap;I (DEMSX). The current annual expense ratios are as listed below.
Index NotesThe Domestic Equity Custom Index consists of 100% S&P 1500 Comp Index through 04/30/2017 and 100% MSCI USA IM Index(USD) (Net) thereafter.The International Equity Custom Index consists of 100% MSCI EAFE Index (USD) (Net) through 10/31/2006, 100% MSCI ACW ExUS Index (USD) (Net) through 06/30/2007, 92.5% MSCI ACW Ex US Index (USD) (Net) and 7.5% MSCI ACW Ex US SC IM Index(USD) (Net) through 02/28/2014, and 100% MSCI ACW Ex-US IM Index thereafter.
The Reams Custom Index consists of 100% Bloomberg US Unv Bond Index through 03/31/2017 and 100% Bloomberg US AggBond Index thereafter.
The Real Estate Custom Index consists of 100% NCREIF ODCE Index (AWA) (Net) (1 Qtr Lag) through 03/31/2017 and 100% MSCIUS REIT Index (USD) (Net) thereafter.
The Private Equity Custom Index consists of 100% S&P 1500 Comp Index+4% (1 Qtr Lag) through 03/31/2017 and 100% MSCI USSmall Cap Index (USD) (Gross) thereafter.
Trust Accounts Comments
The Potter Trust Fund and the Harold Hamm Endowment were added in 06/2016.MUS Workers Compensation was added in 04/2016.
Manager Transition Comments
Jacobs Levy Partial L/S (SA) was funded in 03/2018.
Congress Mid Cap Growth (SA) was funded in 02/2018.Oaktree U.S. High Yield (SA) and Shenkman High Yield Fixed Income (SA) were funded in 12/2017.
Analytic Investors 130/30 (SA) was liquidated in 09/2017.
BlackRock MSCI US Equity Index (CF), BlackRock MSCI US Sm Cap Equity Index (CF), and iShares:Core S&P Md-Cp (IJH) werefunded in 06/2017.
SPDR S&P 500 ETF (SPY) and iShares:MSCI EAFE ETF (EFA) were re-funded in 06/2017.
INTECH Enhanced Plus was liquidated in 06/2017.Residual assets from the liquidation of AllianceBernstein Int'l Value (SA), Martin Currie (SA), Hansberger Global Investors (SA), andAberdeen Total Return Bond Strategy (SA) were distributed in 06/2017.BlackRock Equity Index Fund A (CF) and BlackRock Mid Cap Equity Index A (CF) were liquidated in 05/2017.
DFA Emg Mkts Sm Cap;I (DEMSX) was funded in 02/2017.
SPDR S&P 500 ETF (SPY) was liquidated in 01/2017.
iShares:MSCI Em Mkts (EEM) was funded in 12/2016.SPDR S&P 500 ETF (SPY) was initially funded in 09/2015, was then liquidated in 12/2015, and was re-funded in 10/2016.
Wells Capital Management (SA), Domestic Equity Pool SPIF, and International Equity Pool SPIF were liquidated in 10/2016. WellsCapital Management (SA) residual assets from liquidation were distributed in 03/2017.Nicholas Investment Partners was liquidated in 07/2016. Residual assets from liquidation were distributed in 03/2017.
Effective 07/2016, the Metropolitan West Capital Management legal entity merged into the Wells Capital Management Incorporatedlegal entity. The Metropolitan West Capital Mgmt (SA) has been updated to Wells Capital Management (SA) to reflect the change.
iShares S&P SmallCap 600 Index ETF (IJR) was liquidated in 01/2016.
Effective 05/2014, ING rebranded to Voya. The ING Investment Management (SA) has been updated to Voya InvestmentManagement (SA) to reflect the change.
Miscellaneous Comments
Fiscal year ends on 06/30.
Expense Ratios
SPDR S&P 500 ETF (SPY): 0.09%
Domestic Equity Pool STIF: 0.15%DFA Intl Sm Co;I (DFISX): 0.53%
Disclaimer of Warranties and Limitation of Liability - This document was prepared by RVK, Inc. (RVK) and may include information and data from some or all of the following sources: client staff; custodian banks; investment managers; specialty investment consultants; actuaries; plan administrators/record-keepers; index providers; as well as other third-party sources as directed by the client or as we believe necessary or appropriate. RVK has taken reasonable care to ensure the accuracy of the information or data, but makes no warranties and disclaims responsibility for the accuracy or completeness of information or data provided or methodologies employed by any external source. This document is provided for the client’s internal use only and does not constitute a recommendation by RVK or an offer of, or a solicitation for, any particular security and it is not intended to convey any guarantees as to the future performance of the investment products, asset classes, or capital markets.
MEMORANDUM Montana Board of Investments Department of Commerce 2401 Colonial Drive, 3rd Floor Helena, MT 59601 (406) 444-0001 To: Members of the Board From: Jon Putnam, Director of Fixed Income Date: May 23, 2018 Subject: Proposed Investment Policy Statement Changes Proposed Investment Policy Statements as well as the existing Investment Policy Statements follow this memo for the following accounts:
• Butte Area One Restoration Fund ($21.7M as of 03/18) • Clark Fork Restoration Fund ($32.6M as of 03/18) • East Helena Compensation Fund ($5.9M as of 03/18) • Smelter Hill Uplands Restoration Fund ($10.1M as of 03/18) • Upper Clark Fork River Basin Reserve Fund ($18.9M as of 03/18) • Upper Clark Fork River Basin Restoration Fund ($116.1M as of 03/18)
All of the accounts are expendable accounts funded from settlements related to environmental damage. The Objectives and Guidelines for all accounts have been updated to conform with the new format. In addition, changes are requested which are intended to give accounts a less rigid structure. The cash flows for these accounts are highly uncertain. Staff does not want to be in a position where we are a forced seller of any investment. Staff regularly communicates with these accounts to determine any changes to known cash flows. Cash flow projections from the client are what drive the asset allocation for these portfolios. All proposed investment policies have been changed to eliminate the allocation to individual Corporate Bonds. Staff believes that utilizing the Trust Funds Investment Pool (TFIP) rather than individual corporate bonds provides better diversification and liquidity while giving accounts the potential for higher returns over a longer time frame. All proposed investment policies have also been changed to remove any limit on the Short-Term Investment Pool (STIP). STIP is the safest investment alternative and staff wants to ensure that we can always meet the safety and liquidity needs of an account.
Butte Area One Restoration Fund proposed investment policy has been changed to increase the 70% limit on Trust Funds Investment Pool to a 97% limit. The 10% limit on Treasuries and 50% limit on Agencies has been replaced with a 60% limit on Treasuries/Agencies. In addition, we have added the restriction that Treasuries/Agencies can have a maximum maturity of 6 years. Clark Fork Restoration Fund proposed investment policy has been changed to increase the 40-80% range on Trust Funds Investment Pool to a 97% limit. The 10% limit on Treasuries and 30% limit on Agencies has been replaced with a 60% limit on Treasuries/Agencies. In addition, we have added the restriction that Treasuries/Agencies can have a maximum maturity of 6 years. East Helena Compensation Fund proposed investment policy has been changed to increase the 40-60% range on Trust Funds Investment Pool to a 97% limit. The 40% limit on Treasuries and 40% limit on Agencies has been replaced with a 60% limit on Treasuries/Agencies. In addition, we have added the restriction that Treasuries/Agencies can have a maximum maturity of 6 years. Smelter Hill Uplands Restoration Fund proposed investment policy has been changed to increase the 10-30% range on Trust Funds Investment Pool to a 97% limit. The 20% limit on Treasuries and 80% limit on Agencies has been replaced with a 60% limit on Treasuries/Agencies. In addition, we have added the restriction that Treasuries/Agencies can have a maximum maturity of 6 years. Upper Clark Fork River Basin Reserve Fund proposed investment policy has been changed to modify the 90-100% range on Trust Funds Investment Pool to a 97% limit. The 50% limit on U.S. Government/Agency Securities has been replaced with a 60% limit on Treasuries/Agencies. In addition, we have added the restriction that Treasuries/Agencies can have a maximum maturity of 6 years. Upper Clark Fork River Basin Restoration Fund proposed investment policy has been changed to increase the 50-90% range on Trust Funds Investment Pool to a 97% limit. The 30% limit on Treasuries and 30% limit on Agencies has been replaced with a 60% limit on Treasuries/Agencies. In addition, we have added the restriction that Treasuries/Agencies can have a maximum maturity of 6 years.
Schedule I-Q Investment Objectives and Guidelines
Butte Area One Restoration Fund
Proposed Effective Date of Schedule: May 23, 2018
This schedule is effective upon adoption by the Board of Investments and supersedes all previous Investment Objectives and Guidelines for this specific portfolio.
Introduction: The purpose of this policy statement is to provide a framework for the Butte Area One Restoration Fund (MBOI account MU3F) investments under the guidance of the Board. The Butte Area One Restoration Fund originated in 2008, a Consent Decree was entered between the State of Montana, the United States and Atlantic Richfield Company (ARCO), to settle certain litigation and to provide for the funding of restoration action at the Butte Area One. Funds are used by the Natural Resource Damage Program of the Montana Department of Justice (NRDP) to restore, replace or acquire the equivalent of injured natural resources or lost services. Statement of Purpose: The purpose of these objectives and guidelines is to:
1. Establish the investment objectives and performance standards of the Butte Area One Restoration Fund account; and
2. Provide diversified investment exposure within the guidelines in a prudent and cost-effective manner.
Investment Objective: Strategic: The objective of the Butte Area One Restoration Fund portfolio is to attain above benchmark total return within the parameters of the Investment Guidelines set forth below with an emphasis on investment income and preservation of principal. Performance: Success in achieving this objective will be measured by comparing the risk and return of the account to the Trust Funds Investment Pool benchmark and the Short-Term Investment Pool benchmark and the Bloomberg/Barclays 1-5 Year Treasury Index, each weighted proportionately to the portfolio’s holdings, over a five-year moving average.
Time Horizon: The Butte Area One Restoration Fund is an expendable fund. Major expenditures are expected to continue through 2019. Additional expenditures are expected in future years, as projected and periodically updated by the NRDP. The Board expects to meet or exceed all objectives over a long-term investment horizon. Over shorter periods, the anticipated market volatility and specific actions, including risk mitigation efforts of the Board may lead to unfavorable, but expected, deviation from these objectives. Investment Guidelines: The Montana Board of Investments will have full discretion to manage the Butte Area One Restoration Fund portfolio consistent with the investment guidelines stated below. Compliance with the following guidelines for permitted investments and other restrictions is the sole responsibility of the Staff. Any exceptions or compliance violations are to be reported to the Board of Investments at the next scheduled quarterly Board meeting. Permitted Investments: The Butte Area One Restoration Fund may only invest in the following:
1. U.S. Treasury Bonds 2. U.S. Agency Bonds 3. Trust Funds Investment Pool (TFIP) 4. Short-Term Investment Pool (STIP)
Other Restrictions:
1. A maximum of 97% of the market value of the portfolio will be invested in the Trust Funds Investment Pool (TFIP).
2. A maximum of 60% of the market value of the portfolio will be invested in U.S. Treasury and Agency bonds.
3. The maximum maturity of U.S. Treasury and Agency bonds will be 6 years. If at any time, due to market fluctuations or any other circumstances, any of the guidelines are not maintained, Staff will use its best efforts to conform to these limits in a timely manner, while considering current market conditions and the associated costs of rebalancing. At the Board’s next regularly scheduled quarterly meeting, the CIO shall inform the Board of any cases that the allocations were outside the limits and either inform the Board of the actions that were taken to return the portfolio back within guidelines or a plan to do so.
Page 1 of 3 Approved April 7, 2015
MONTANA BOARD OF INVESTMENTS BUTTE AREA ONE RESTORATION FUND (MU3F) (FUND 08219)
INVESTMENT POLICY STATEMENT
INTRODUCTION The purpose of this investment policy statement is to outline the account objectives, permissible investments, and constraints that will guide the management of the portfolio. The policy is designed to give the investment manager flexibility to achieve in a prudent manner the investment objectives of the client, the Department of Justice (DOJ) to implement the remedial action (“the Remedy”) on the Butte Area One 5 in accordance with the ARCO Settlement Consent Decree. BACKGROUND INFORMATION In August 2008, a Consent Decree was entered between the State of Montana and Atlantic Richfield Company (ARCO), in order to settle certain litigation and to provide for the funding of the restoration action at Butte Area One (BAO). The settlement involves, among other things, payment by ARCO of $28.0 million including accrued interest from April 1, 2006. Those funds and the earnings from the investment of those funds are to be used by the State for the purpose of restoration of the BAO over an estimated seven year period. Major construction is projected to begin during calendar year 2009 and end during calendar year 2018. The project being financed through this fund is for projects that restore, replace or acquire the equivalent of injured natural resources or lost services. The nature of restoration work includes the potential for cost overruns and unexpected expenses. DOJ will use its best efforts to inform the Board of Investments of any expected overruns or changes in the cash draw schedule and will attempt to provide notice of such changes as much in advance as possible. OBJECTIVES Risk and Return: Earnings alone will not be sufficient to fund expected expenditures nor will the principle provided by the settlement be sufficient. A combination of current income, total return, and use of principle will be necessary to fund the expected expenditures. It will require a return in excess of the assumed risk free rate to fund current projected expenditures, as well as possible future cost over runs. This account has an average ability to assume interest rate risk. Some risk of loss of principal must be taken to provide a return sufficient to fund objectives. An allocation to the Trust Funds Investments Pool (TFIP) will be made to obtain exposure to a diversified fixed income portfolio. An allocation to U.S. Treasuries, U.S. Agencies and Corporate securities may be made to provide a greater certainty of cash flows from maturities. Risk tolerance will decline if long-term investments have to be liquidated earlier than estimated to meet the cash draw down schedule. There was $28.1 million in the account as of December 31, 2008, invested solely in the Short-term Investment Pool (STIP).The risk and return factors along with other considerations result in the expected asset allocation shown below.
Page 2 of 3 Approved April 7, 2015
MONTANA BOARD OF INVESTMENTS BUTTE AREA ONE RESTORATION FUND (MU3F) (FUND 08219)
INVESTMENT POLICY STATEMENT
Asset Allocation
OTHER CONSIDERATIONS Liquidity Needs: Material annual expenditures are projected in each year through 2018 in the initial cash draw down schedule provided by DOJ. The timing of expenditures within the calendar year will be somewhat uncertain, thus necessitating a significant cash balance be available to meet these needs without forcing an inordinate amount of TFBP sales in any one year. There will be significant seasonality in the pattern of expenditures. Liquidity needs will be met with a combination of cash on hand, earnings, maturities and sales of investments. The minimum Short Term Investment Pool (STIP) balance will be the expected next one year of expenditures less expected maturities of individual securities prior to any adjustment to reflect funding needs. Maturity Horizon: The maturity horizon of the investments utilized is designed to meet the liabilities of the client with income, maturities and a reasonable amount of sales of securities and TFIP units. The liabilities are the cash needs for restoration expenditures as provided by the DOJ at the outset of the account and as modifications are made in ensuring years. At this time expenditures are expected to occur commencing immediately and each year through 2015, with the majority occurring during years 2010 - 2015. Investment Limits: 1. To reduce the risk of loss on individual corporate bonds, investment purchases in any one credit will
be limited to 1% of the market value of the fund at the date of purchase or 2% of the lowest projected fund balance before the securities mature, whichever is lower.
2. Corporate bond sector (Industrial, Finance, and Utility) exposure shall be constrained to no more than a 4% exposure at the time of purchase, or 6% at any time over the future projected fund balance.
3. The quality rating of any corporate bond shall be in the top of the single-A rating classification or better at the time of purchase. (e.g., A1/A+ or higher), and have at least two ratings.
4. Exposure to the securities of any one U.S. Agency are limited to 5%, and in no event will an agency security be purchased if it carries a rating lower than that of the U. S. Government.
Fixed Income Range U.S. Treasury Bonds 0-10% U.S. Agency Bonds 0-50% Corporate Bonds 0-10% Trust Funds Investment Pool (TFIP) 0-70% Short Term Investment Pool (STIP) 0-50%
Total Fixed Income 100%
Page 3 of 3 Approved April 7, 2015
MONTANA BOARD OF INVESTMENTS BUTTE AREA ONE RESTORATION FUND (MU3F) (FUND 08219)
INVESTMENT POLICY STATEMENT
Legal Considerations: This fund is governed by state regulations, specifically, the "prudent expert principle" which requires the Board of Investments to: (a) discharge the duties with the care, skill, prudence, and diligence, under the circumstances then prevailing, that a prudent person acting in a like capacity with the same resources and familiar with like matters exercises in the conduct of an enterprise of a like character with like aims; (b) diversify the holdings of each fund within the unified investment program to minimize the risk of loss and to maximize the rate of return unless, under the circumstances, it is solely prudent not to do so; and (c) discharge the duties solely in the interest of and for the benefit of the funds forming the unified investment program. The Montana Constitution does not allow equity type investments in non-retirement funds. ADMINISTRATIVE Securities Lending: Section 17-1-113, MCA, authorizes the Board to lend securities held by the state. The Board may lend its publicly traded securities held in the investment pools, through an agent, to other market participants in return for compensation. Currently, through an explicit contract, State Street Bank and Trust, the state's custodial bank, manages the state's securities lending program. The Board seeks to assess the risks, such as counterparty and reinvestment risk, associated with each aspect of its securities lending program. The Board requires borrowers to maintain collateral at 102 percent for domestic securities and 105 percent for international securities. To ensure that the collateral ratio is maintained, securities on loan are marked to market daily and the borrower must provide additional collateral if the value of the securities on loan increases. In addition to the strict collateral requirements imposed by the Board, the credit quality of approved borrowers is monitored continuously by the contractor. From time to time, Staff or the investment manager may restrict a security from the loan program upon notification to State Street Bank. Staff will monitor the securities lending program, and the CIO will periodically report to the Board on the status of the program. Cash Investments Cash investments held at the pool level, any managed account within it, or any separate account entail an element of credit risk. Thus, only approved cash investment vehicles are permitted. These include the custodian’s STIF vehicle, STIP, or any SEC-registered money market fund, all of which specifically address credit risk in their respective investment guidelines.
Schedule I-R Investment Objectives and Guidelines
Clark Fork Restoration Fund
Proposed Effective Date of Schedule: May 23, 2018
This schedule is effective upon adoption by the Board of Investments and supersedes all previous Investment Objectives and Guidelines for this specific portfolio.
Introduction: The purpose of this policy statement is to provide a framework for the Clark Fork Restoration Fund (MBOI account MU3H) investments under the guidance of the Board. The Clark Fork Restoration Fund originated in 2008, a Consent Decree was entered between the State of Montana, the United States and Atlantic Richfield Company (ARCO), to settle certain litigation and to provide for the funding of restoration action the Clark Fork River, from Warm Springs Ponds to the former Milltown Reservoir. Funds are used by the Natural Resource Damage Program of the Montana Department of Justice (NRDP) to restore aquatic and terrestrial resources. Statement of Purpose: The purpose of these objectives and guidelines is to:
1. Establish the investment objectives and performance standards of the Clark Fork Restoration Fund account; and
2. Provide diversified investment exposure within the guidelines in a prudent and cost-effective manner.
Investment Objective: Strategic: The objective of the Clark Fork Restoration Fund portfolio is to attain above benchmark total return within the parameters of the Investment Guidelines set forth below with an emphasis on investment income and preservation of principal. Performance: Success in achieving this objective will be measured by comparing the risk and return of the account to the Trust Funds Investment Pool benchmark and the Short-Term Investment Pool benchmark and the Bloomberg/Barclays 1-5 Year Treasury Index, each weighted proportionately to the portfolio’s holdings, over a five-year moving average. Time Horizon: The Clark Fork Restoration Fund is an expendable fund. Expenditures are expected in future years, as projected and periodically updated by the NRDP. The Board expects to meet or exceed all objectives over a long-term investment horizon. Over shorter periods, the anticipated market volatility and specific actions, including risk mitigation efforts of the Board may lead to unfavorable, but expected, deviation from these objectives.
Investment Guidelines: The Montana Board of Investments will have full discretion to manage the Clark Fork Restoration Fund portfolio consistent with the investment guidelines stated below. Compliance with the following guidelines for permitted investments and other restrictions is the sole responsibility of the Staff. Any exceptions or compliance violations are to be reported to the Board of Investments at the next scheduled quarterly Board meeting. Permitted Investments: The Clark Fork Restoration Fund may only invest in the following:
1. U.S. Treasury Bonds 2. U.S. Agency Bonds 3. Trust Funds Investment Pool (TFIP) 4. Short-Term Investment Pool (STIP)
Other Restrictions:
1. A maximum of 97% of the market value of the portfolio will be invested in the Trust Funds Investment Pool (TFIP).
2. A maximum of 60% of the market value of the portfolio will be invested in U.S. Treasury and Agency bonds.
3. The maximum maturity of U.S. Treasury and Agency bonds will be 6 years. If at any time, due to market fluctuations or any other circumstances, any of the guidelines are not maintained, Staff will use its best efforts to conform to these limits in a timely manner, while considering current market conditions and the associated costs of rebalancing. At the Board’s next regularly scheduled quarterly meeting, the CIO shall inform the Board of any cases that the allocations were outside the limits and either inform the Board of the actions that were taken to return the portfolio back within guidelines or a plan to do so.
Page 1 of 3 Approved: April 2015
MONTANA BOARD OF INVESTMENTS CLARK FORK RESTORATION FUND (MU3H) (FUND 08221)
INVESTMENT POLICY STATEMENT
INTRODUCTION The purpose of this investment policy statement is to outline the account objectives, permissible investments, and constraints that will guide the management of the portfolio. The policy is designed to give the investment manager flexibility to achieve in a prudent manner the investment objectives of the client, the Department of Justice (DOJ), to implement the remedial action (“the Remedy”) on the Clark Fork River Restoration in accordance with the ARCO Settlement Consent Decree. BACKGROUND INFORMATION In August 2008, a Consent Decree was entered between the State of Montana and Atlantic Richfield Company (ARCO), in order to settle certain litigation and to provide for the funding of the restoration action at the Clark Fork River (CFR) Operable Unit. The settlement involves, among other things, payment by ARCO of $26.7 million plus accrued interest from April 1, 2006. Those funds and the earnings from the investment of those funds are to be used by the State for the purpose of restoration of the CFR over an estimated ten to twelve year period. Major construction is projected to begin during calendar year 2009 and end during calendar year 2019. The project being financed through this fund is the restoration of the Clark Fork River and associated riparian areas from Warm Springs Ponds to Milltown Reservoir and related projects. The nature of restoration work includes the potential for cost overruns and unexpected expenses. DOJ will use its best efforts to inform the Board of Investments of any expected overruns or changes in the cash draw schedule and will attempt to provide notice of such changes as much in advance as possible. OBJECTIVES Risk and Return: Earnings alone will not be sufficient to fund expected expenditures nor will the principle provided by the settlement be sufficient. A combination of current income, total return, and use of principle will be necessary to fund the expected expenditures. It will require a return in excess of the assumed risk free rate to fund current projected expenditures, as well as possible future cost over runs. This account has an average ability to assume interest rate risk. Some risk of loss of principal must be taken to provide a return sufficient to fund objectives. An allocation to the Trust Funds Bond Pool (TFBP) will be made to obtain exposure to a diversified fixed income portfolio. An allocation to U.S. Treasuries, U.S. Agencies and Corporate securities may be made to provide a greater certainty of cash flows from maturities. Risk tolerance will decline if long-term investments have to be liquidated earlier than estimated to meet the cash draw down schedule. There was $26.8 million in the account as of December 31, 2008, invested solely in the Short-term Investment Pool (STIP). The risk and return factors along with other considerations result in the expected asset allocation shown below.
FIXED INCOME Range
U.S. Treasury Bonds 0-10%
U.S. Agency Bonds 0-30%
Corporate Bonds 0-10%
Trust Fund Bond Pool (TFBP) 40-80%
Short-term Investment Pool (STIP) 0-25%
Total Fixed Income 100%
Page 2 of 3 Approved: April 2015
MONTANA BOARD OF INVESTMENTS CLARK FORK RESTORATION FUND (MU3H) (FUND 08221)
INVESTMENT POLICY STATEMENT
OTHER CONSIDERATIONS Liquidity Needs: Material annual expenditures are projected in each year through 2019 in the initial cash draw down schedule provided by DOJ. The timing of expenditures within the calendar year will be somewhat uncertain, thus necessitating a significant cash balance be available to meet these needs without forcing an inordinate amount of TFBP sales in any one year. There will be significant seasonality in the pattern of expenditures. Liquidity needs will be met with a combination of cash on hand, earnings, maturities and sales of investments. The minimum Short Term Investment Pool (STIP) balance will be the expected next one year of expenditures less expected maturities of individual securities prior to any adjustment to reflect funding needs. Maturity Horizon: The maturity horizon of the investments utilized is designed to meet the liabilities of the client with income, maturities and a reasonable amount of sales of securities and TFBP units. The liabilities are the cash needs for restoration expenditures as provided by the DOJ at the outset of the account and as modifications are made in ensuring years. At this time expenditures are expected to occur commencing immediately and each year through 2019, with the majority occurring during years 2012 - 2019. Investment Limits: 1. To reduce the risk of loss on individual corporate bonds, investment purchases in any one credit will
be limited to 1% of the market value of the fund at the date of purchase or 2% of the lowest projected fund balance before the securities mature, whichever is lower.
2. Corporate bond sector (Industrial, Finance, and Utility) exposure shall be constrained to no more than a 4% exposure at the time of purchase, or 6% at any time over the future projected fund balance.
3. The quality rating of any corporate bond shall be in the top of the single-A rating classification or better at the time of purchase. (e.g., A1/A+ or higher), and have at least two ratings.
4. Exposure to the securities of any one U.S. Agency are limited to 5%, and in no event will an agency security be purchased if it carries a rating that is less than top-rated (AAA) at the time of purchase.
Legal Considerations: This fund is governed by state regulations, specifically, the "prudent expert principle" which requires the Board of Investments to: (a) discharge the duties with the care, skill, prudence, and diligence, under the circumstances then prevailing, that a prudent person acting in a like capacity with the same resources and familiar with like matters exercises in the conduct of an enterprise of a like character with like aims; (b) diversify the holdings of each fund within the unified investment program to minimize the risk of loss and to maximize the rate of return unless, under the circumstances, it is solely prudent not to do so; and (c) discharge the duties solely in the interest of and for the benefit of the funds forming the unified investment program. The Montana Constitution does not allow equity type investments in non-retirement funds.
Page 3 of 3 Approved: April 2015
MONTANA BOARD OF INVESTMENTS CLARK FORK RESTORATION FUND (MU3H) (FUND 08221)
INVESTMENT POLICY STATEMENT
ADMINISTATIVE Securities Lending: Section 17-1-113, MCA, authorizes the Board to lend securities held by the state. The Board may lend its publicly traded securities held in the investment pools, through an agent, to other market participants in return for compensation. Currently, through an explicit contract, State Street Bank and Trust, the state's custodial bank, manages the state's securities lending program. The Board seeks to assess the risks, such as counterparty and reinvestment risk, associated with each aspect of its securities lending program. The Board requires borrowers to maintain collateral at 102 percent for domestic securities and 105 percent for international securities. To ensure that the collateral ratio is maintained, securities on loan are marked to market daily and the borrower must provide additional collateral if the value of the securities on loan increases. In addition to the strict collateral requirements imposed by the Board, the credit quality of approved borrowers is monitored continuously by the contractor. From time to time, Staff or the investment manager may restrict a security from the loan program upon notification to State Street Bank. Staff will monitor the securities lending program, and the CIO will periodically report to the Board on the status of the program. Cash Investments Cash investments held at the pool level, any managed account within it, or any separate account entail an element of credit risk. Thus, only approved cash investment vehicles are permitted. These include the custodian’s STIF vehicle, STIP, or any SEC-registered money market fund, all of which specifically address credit risk in their respective investment guidelines.
Schedule I-S Investment Objectives and Guidelines
East Helena Compensation Fund
Proposed Effective Date of Schedule: May 23, 2018
This schedule is effective upon adoption by the Board of Investments and supersedes all previous Investment Objectives and Guidelines for this specific portfolio.
Introduction: The purpose of this policy statement is to provide a framework for the East Helena Compensation Fund (MBOI account MU3S) investments under the guidance of the Board. The East Helena Compensation Fund originated in 2006 through a legal settlement with and subsequent claim in bankruptcy on the ASARCO company. The action was taken for natural resource restoration damages and compensatory damages for lost use of resources. Funds will be used by the Natural Resource Damage Program of the Montana Department of Justice (NRDP) for wildlife habitat restoration, recreation and open space. Statement of Purpose: The purpose of these objectives and guidelines is to:
1. Establish the investment objectives and performance standards of the East Helena Compensation Fund account; and
2. Provide diversified investment exposure within the guidelines in a prudent and cost-effective manner.
Investment Objective: Strategic: The objective of the East Helena Compensation Fund portfolio is to attain above benchmark total return within the parameters of the Investment Guidelines set forth below with an emphasis on investment income and preservation of principal. Performance: Success in achieving this objective will be measured by comparing the risk and return of the account to the Trust Funds Investment Pool benchmark and the Short-Term Investment Pool benchmark and the Bloomberg/Barclays 1-5 Year Treasury Index, each weighted proportionately to the portfolio’s holdings, over a five-year moving average. Time Horizon: The East Helena Compensation Fund is an expendable fund. Major expenditures are expected in future years, as projected and periodically updated by the NRDP. The Board expects to meet or exceed all objectives over a long-term investment horizon. Over shorter periods, the anticipated market volatility and specific actions, including risk mitigation efforts of the Board may lead to unfavorable, but expected, deviation from these objectives.
Investment Guidelines: The Montana Board of Investments will have full discretion to manage the East Helena Compensation Fund portfolio consistent with the investment guidelines stated below. Compliance with the following guidelines for permitted investments and other restrictions is the sole responsibility of the Staff. Any exceptions or compliance violations are to be reported to the Board of Investments at the next scheduled quarterly Board meeting. Permitted Investments: The East Helena Compensation Fund may only invest in the following:
1. U.S. Treasury Bonds 2. U.S. Agency Bonds 3. Trust Funds Investment Pool (TFIP) 4. Short-Term Investment Pool (STIP)
Other Restrictions:
1. A maximum of 97% of the market value of the portfolio will be invested in the Trust Funds Investment Pool (TFIP).
2. A maximum of 60% of the market value of the portfolio will be invested in U.S. Treasury and Agency bonds.
3. The maximum maturity of U.S. Treasury and Agency bonds will be 6 years. If at any time, due to market fluctuations or any other circumstances, any of the guidelines are not maintained, Staff will use its best efforts to conform to these limits in a timely manner, while considering current market conditions and the associated costs of rebalancing. At the Board’s next regularly scheduled quarterly meeting, the CIO shall inform the Board of any cases that the allocations were outside the limits and either inform the Board of the actions that were taken to return the portfolio back within guidelines or a plan to do so.
Page 1 of 3 Approved: April 7, 2015
MONTANA BOARD OF INVESTMENTS EAST HELENA COMPENSATION FUND
(FUND 08231) INVESTMENT POLICY STATEMENT
INTRODUCTION The purpose of this investment policy statement is to outline the account objectives, permissible investments, and constraints that will guide the management of the portfolio. The policy is designed to give the investment manager flexibility to achieve in a prudent manner the investment objectives of the client, Department of Justice – Natural Resource Damage Program (NRD) to implement the restoration and oversight of environmental cleanup on and around the former site of the ASARCO smelter in East Helena. BACKGROUND INFORMATION In 2006, the State made substantial natural resource damages claims against ASARCO, in the ASARCO bankruptcy proceeding, based upon injuries to natural resources resulting from releases of hazardous substances at ASARCO’s East Helena Smelter. The State sought both natural resource restoration damages and compensatory damages for lost use of such resources. In 2008, a tentative settlement was worked out with ASARCO to resolve these NRD claims, along with EPA’s claims for the site. That settlement provided for the State to receive $5.0 million as partial consideration for its East Helena compensatory NRD claim. The State’s other East Helena claim was resolved as part of the Montana Custodial Trust Settlement with ASARCO and the United States. In 2009, those tentative settlements were challenged in the bankruptcy proceeding by Grupo Mexico and other creditors, but the settlements were upheld by the Court. In December 2009 the final bankruptcy plan was approved by the Court and there was a closing in which the $5.0 million was transferred to NRD Program Account No. 08231, plus about $880,000 interest earnings as provided for in the bankruptcy plan. The State is now holding this money in this account for purposes of natural resource restoration in East Helena, and for purposes of the State overseeing the Montana Custodial Trust’s clean-up of the site. The State is waiting to see how the Trust’s clean-up plan will be implemented before developing its restoration plan. OBJECTIVES Risk and Return: Earnings alone will not be sufficient to fund expected expenditures nor will the principal provided by the settlement be sufficient. A combination of current income, total return, and use of principal will be necessary to fund the expected expenditures. It will require a return in excess of the assumed risk free rate to fund current projected expenditures, possible future cost overruns, and leave residual funds for future expenses such as operation and maintenance. This account has an average ability to assume interest rate risk. Some risk of loss of principal must be taken to provide a return sufficient to fund objectives. An allocation to the Trust Funds Investment Pool (TFIP) will be made to obtain exposure to a diversified fixed income portfolio return while reducing idiosyncratic risk. An allocation to U.S. Treasuries, U.S. Agencies and Corporate securities may be made to provide a greater certainty of cash flows from maturities. Risk tolerance will decline if long-term investments have to be liquidated earlier than estimated to meet the cash draw down schedule.
Page 2 of 3 Approved: April 7, 2015
The risk and return factors along with other considerations result in the expected asset allocation shown below.
OTHER CONSIDERATIONS Liquidity Needs: Material annual expenditures are projected in each year through 2017 in the initial cash draw down schedule provided by NRD. The timing of expenditures within the calendar year will be somewhat uncertain, thus necessitating a significant cash balance be available to meet these needs without forcing an inordinate amount of TFIP sales in any one year. There will be significant seasonality in the pattern of expenditures. Liquidity needs will be met with a combination of cash on hand, earnings, maturities and sales of investments. The minimum Short Term Investment Pool (STIP) balance will be the expected next one year of expenditures less expected maturities of individual securities prior to any adjustment to reflect funding needs. Maturity Horizon: The maturity horizon of the investments utilized is designed to meet the liabilities of the client with income, maturities and a reasonable amount of sales of securities and TFIP units. The liabilities are the cash needs for remediation expenditures as provided by the NRD at the outset of the account and as modifications are made in ensuing years. At this time expenditures are expected to occur commencing immediately and each year through 2017. Investment Limits: 1. To reduce the risk of loss on individual corporate bonds, investment purchases in any one credit will be
limited to 2% of the market value of the fund at the date of purchase or 4% of the lowest projected fund balance before the securities mature, whichever is lower.
2. Corporate bond sector (Industrial, Finance, and Utility) exposure shall be constrained to no more than a 8% exposure at the time of purchase, or 12% at any time over the future projected fund balance.
3. The quality rating of any corporate bond shall be in the top of the single-A rating classification or better at the time of purchase. (e.g., A1/A+ or higher), and have at least two ratings.
4. Exposure to the securities of any one U.S. Agency are limited to 10%, and in no event will an agency security be purchased if it carries a rating that is lower than the U.S. Treasury at the time of purchase.
Legal Considerations: This fund is governed by state regulations, specifically, the "prudent expert principle" which requires the Board of Investments to: (a) discharge the duties with the care, skill, prudence, and diligence, under the circumstances then prevailing, that a prudent person acting in a like capacity with the same resources and familiar with like matters exercises in the conduct of an enterprise of a like character with like aims; (b) diversify the holdings of each fund within the unified investment program to minimize the risk of loss and to maximize the rate of return unless, under the circumstances, it is solely prudent not to do so; and (c) discharge the duties solely in the interest of and for the benefit of the funds forming the unified investment program. The Montana Constitution does not allow equity type investments in non-retirement funds.
ASSET ALLOCATIONFIXED INCOME Range
U.S. Treasury Bonds 0-40%U.S. Agency Bonds 0-40%Corporate Bonds 0-20%Trust Funds Investment Pool 40-60%Short-term Investment Pool 10-60%
Total Fixed Income 100%
Page 3 of 3 Approved: April 7, 2015
ADMINISTRATIVE Securities Lending: Section 17-1-113, MCA, authorizes the Board to lend securities held by the state. The Board may lend its publicly traded securities held in the investment pools, through an agent, to other market participants in return for compensation. Currently, through an explicit contract, State Street Bank and Trust, the state's custodial bank, manages the state's securities lending program. The Board seeks to assess the risks, such as counterparty and reinvestment risk, associated with each aspect of its securities lending program. The Board requires borrowers to maintain collateral at 102 percent for domestic securities and 105 percent for international securities. To ensure that the collateral ratio is maintained, securities on loan are marked to market daily and the borrower must provide additional collateral if the value of the securities on loan increases. In addition to the strict collateral requirements imposed by the Board, the credit quality of approved borrowers is monitored continuously by the contractor. From time to time, Staff or the investment manager may restrict a security from the loan program upon notification to State Street Bank. Staff will monitor the securities lending program, and the CIO will periodically report to the Board on the status of the program. Cash Investments Cash investments held at the pool level, any managed account within it, or any separate account entail an element of credit risk. Thus, only approved cash investment vehicles are permitted. These include the custodian’s STIF vehicle, STIP, or any SEC-registered money market fund, all of which specifically address credit risk in their respective investment guidelines.
Schedule I-T Investment Objectives and Guidelines Smelter Hill Uplands Restoration Fund
Proposed Effective Date of Schedule: May 23, 2018
This schedule is effective upon adoption by the Board of Investments and supersedes all previous Investment Objectives and Guidelines for this specific portfolio.
Introduction: The purpose of this policy statement is to provide a framework for the Smelter Hill Uplands Restoration Fund (MU3I) investments under the guidance of the Board. The Smelter Hill Uplands Restoration Fund originated in 2008, a Consent Decree was entered between the State of Montana, the United States and Atlantic Richfield Company (ARCO), to settle certain litigation and to provide for the funding of restoration action on lands injured by emissions from the Anaconda Smelter. Funds are used by the Natural Resource Damage Program of the Montana Department of Justice (NRDP) to remediate and restore damaged lands. Statement of Purpose: The purpose of these objectives and guidelines is to:
1. Establish the investment objectives and performance standards of the Smelter Hill Uplands Restoration Fund account; and
2. Provide diversified investment exposure within the guidelines in a prudent and cost-effective manner.
Investment Objective: Strategic: The objective of the Smelter Hill Uplands Restoration Fund portfolio is to attain above benchmark total return within the parameters of the Investment Guidelines set forth below with an emphasis on investment income and preservation of principal. Performance: Success in achieving this objective will be measured by comparing the risk and return of the account to the Trust Funds Investment Pool benchmark and the Short-Term Investment Pool benchmark and the Bloomberg/Barclays 1-5 Year Treasury Index, each weighted proportionately to the portfolio’s holdings, over a five-year moving average. Time Horizon: The Smelter Hill Uplands Restoration Fund is an expendable fund. Expenditures are expected in future years, as projected and periodically updated by the NRDP. The Board expects to meet or exceed all objectives over a long-term investment horizon. Over shorter periods, the anticipated market volatility and specific actions, including risk mitigation efforts of the Board may lead to unfavorable, but expected, deviation from these objectives.
Investment Guidelines: The Montana Board of Investments will have full discretion to manage the Smelter Hill Uplands Restoration Fund portfolio consistent with the investment guidelines stated below. Compliance with the following guidelines for permitted investments and other restrictions is the sole responsibility of the Staff. Any exceptions or compliance violations are to be reported to the Board of Investments at the next scheduled quarterly Board meeting. Permitted Investments: The Smelter Hill Uplands Restoration Fund may only invest in the following:
1. U.S. Treasury Bonds 2. U.S. Agency Bonds 3. Trust Funds Investment Pool (TFIP) 4. Short-Term Investment Pool (STIP)
Other Restrictions:
1. A maximum of 97% of the market value of the portfolio will be invested in the Trust Funds Investment Pool (TFIP).
2. A maximum of 60% of the market value of the portfolio will be invested in U.S. Treasury and Agency bonds.
3. The maximum maturity of U.S. Treasury and Agency bonds will be 6 years. If at any time, due to market fluctuations or any other circumstances, any of the guidelines are not maintained, Staff will use its best efforts to conform to these limits in a timely manner, while considering current market conditions and the associated costs of rebalancing. At the Board’s next regularly scheduled quarterly meeting, the CIO shall inform the Board of any cases that the allocations were outside the limits and either inform the Board of the actions that were taken to return the portfolio back within guidelines or a plan to do so.
Page 1 of 3 Approved: April 7, 2015 MONTANA BOARD OF INVESTMENTS
SMELTER HILL UPLANDS RESTORATION FUND (MU3I) (FUND 08222) INVESTMENT POLICY STATEMENT
INTRODUCTION The purpose of this investment policy statement is to outline the account objectives, permissible investments, and constraints that will guide the management of the portfolio. The policy is designed to give the investment manager flexibility to achieve in a prudent manner the investment objectives of the client, the Department of Justice (DOJ) to implement the remedial action (“the Remedy”) on the Smelter Hill Uplands Restoration in accordance with the ARCO Settlement Consent Decree. BACKGROUND INFORMATION In August 2008, a Consent Decree was entered between the State of Montana and Atlantic Richfield Company (ARCO), in order to settle certain litigation and to provide for the funding of the restoration action at Smelter Hill Uplands (SMU). The settlement involves, among other things, payment by ARCO of $13.3 million including accrued interest from April 1, 2006. Those funds and the earnings from the investment of those funds are to be used by the State for the purpose of restoration of the SMU over an estimated seven year period. Major construction is projected to begin during calendar year 2009 and end during calendar year 2015. The project being financed through this fund is for the restoration of the environment, vegetation and soils on lands affected by the Anaconda smelter. The nature of restoration work includes the potential for cost overruns and unexpected expenses. DOJ will use its best efforts to inform the Board of Investments of any expected overruns or changes in the cash draw schedule and will attempt to provide notice of such changes as much in advance as possible. OBJECTIVES Risk and Return: Earnings alone will not be sufficient to fund expected expenditures nor will the principle provided by the settlement be sufficient. A combination of current income, total return, and use of principle will be necessary to fund the expected expenditures. It will require a return in excess of the assumed risk free rate to fund current projected expenditures, as well as possible future cost over runs. This account has an average ability to assume interest rate risk. Some risk of loss of principal must be taken to provide a return sufficient to fund objectives. An allocation to the Trust Funds Bond Pool (TFBP) will be made to obtain exposure to a diversified fixed income portfolio. An allocation to U.S. Treasuries, U.S. Agencies and Corporate securities may be made to provide a greater certainty of cash flows from maturities. Risk tolerance will decline if long-term investments have to be liquidated earlier than estimated to meet the cash draw down schedule. There was $13.3 million in the account as of December 31, 2008, invested solely in the Short-term Investment Pool (STIP).The risk and return factors along with other considerations result in the expected asset allocation shown below.
Page 2 of 3 Approved: April 7, 2015 MONTANA BOARD OF INVESTMENTS
SMELTER HILL UPLANDS RESTORATION FUND (MU3I) (FUND 08222) INVESTMENT POLICY STATEMENT
OTHER CONSIDERATIONS Liquidity Needs: Material annual expenditures are projected in each year through 2019 in the initial cash draw down schedule provided by DOJ. The timing of expenditures within the calendar year will be somewhat uncertain, thus necessitating a significant cash balance be available to meet these needs without forcing an inordinate amount of TFBP sales in any one year. There will be significant seasonality in the pattern of expenditures. Liquidity needs will be met with a combination of cash on hand, earnings, maturities and sales of investments. The minimum Short Term Investment Pool (STIP) balance will be the expected next one year of expenditures less expected maturities of individual securities prior to any adjustment to reflect funding needs. Maturity Horizon: The maturity horizon of the investments utilized is designed to meet the liabilities of the client with income, maturities and a reasonable amount of sales of securities and TFBP units. The liabilities are the cash needs for restoration expenditures as provided by the DOJ at the outset of the account and as modifications are made in ensuring years. At this time expenditures are expected to occur commencing immediately and each year through 2015, with the majority occurring during years 2010 - 2013. Investment Limits: 1. To reduce the risk of loss on individual corporate bonds, investment purchases in any one credit will be
limited to 1% of the market value of the fund at the date of purchase or 2% of the lowest projected fund balance before the securities mature, which ever is lower.
2. Corporate bond sector (Industrial, Finance, and Utility) exposure shall be constrained to no more than a 4% exposure at the time of purchase, or 6% at any time over the future projected fund balance.
3. The quality rating of any corporate bond shall be in the top of the single-A rating classification or better at the time of purchase. (e.g., A1/A+ or higher), and have at least two ratings.
4. Exposure to the securities of any one U.S. Agency are limited to 5%, and in no event will an agency security be purchased if it carries a rating that is less than top-rated (AAA) at the time of purchase.
Legal Considerations: This fund is governed by state regulations, specifically, the "prudent expert principle" which requires the Board of Investments to: (a) discharge the duties with the care, skill, prudence, and diligence, under the circumstances then prevailing, that a prudent person acting in a like capacity with the same resources and familiar with like matters exercises in the conduct of an enterprise of a like character with like aims; (b)
ASSET ALLOCATION
FIXED INCOME Range
U.S. Treasury Bonds 0-20%
U.S. Agency Bonds 0-80%
Corporate Bonds 0-20%
Trust Fund Bond Pool (TFBP) 10-30%
Short-term Investment Pool (STIP) 0-40%
Total Fixed Income 100%
Page 3 of 3 Approved: April 7, 2015 MONTANA BOARD OF INVESTMENTS
SMELTER HILL UPLANDS RESTORATION FUND (MU3I) (FUND 08222) INVESTMENT POLICY STATEMENT
diversify the holdings of each fund within the unified investment program to minimize the risk of loss and to maximize the rate of return unless, under the circumstances, it is solely prudent not to do so; and (c) discharge the duties solely in the interest of and for the benefit of the funds forming the unified investment program. The Montana Constitution does not allow equity type investments in non-retirement funds. ADMINISTATIVE Securities Lending: Section 17-1-113, MCA, authorizes the Board to lend securities held by the state. The Board may lend its publicly traded securities held in the investment pools, through an agent, to other market participants in return for compensation. Currently, through an explicit contract, State Street Bank and Trust, the state's custodial bank, manages the state's securities lending program. The Board seeks to assess the risks, such as counterparty and reinvestment risk, associated with each aspect of its securities lending program. The Board requires borrowers to maintain collateral at 102 percent for domestic securities and 105 percent for international securities. To ensure that the collateral ratio is maintained, securities on loan are marked to market daily and the borrower must provide additional collateral if the value of the securities on loan increases. In addition to the strict collateral requirements imposed by the Board, the credit quality of approved borrowers is monitored continuously by the contractor. From time to time, Staff or the investment manager may restrict a security from the loan program upon notification to State Street Bank. Staff will monitor the securities lending program, and the CIO will periodically report to the Board on the status of the program. Cash Investments Cash investments held at the pool level, any managed account within it, or any separate account entail an element of credit risk. Thus, only approved cash investment vehicles are permitted. These include the custodian’s STIF vehicle, STIP, or any SEC-registered money market fund, all of which specifically address credit risk in their respective investment guidelines.
Schedule I-U Investment Objectives and Guidelines
Upper Clark Fork River Basin Reserve Fund
Proposed Effective Date of Schedule: May 23, 2018
This schedule is effective upon adoption by the Board of Investments and supersedes all previous Investment Objectives and Guidelines for this specific portfolio.
Introduction: The purpose of this policy statement is to provide a framework for the Upper Clark Fork River Basin Reserve Fund (MU22) investments under the guidance of the Board. The Upper Clark Fork River Basin Reserve Fund originated in 1999, a Consent Decree was entered between the State of Montana, the United States and Atlantic Richfield Company (ARCO), to settle certain litigation and to provide for the funding of restoration action on and around the Clark Fork River and tributaries generally above the confluence of the Little Blackfoot River. Funds are used by the Natural Resource Damage Program of the Montana Department of Justice (NRDP) to cover potential cost over-runs of the Streamside Tailings Operable Unit if any and then to the Upper Clark Fork River Basin Restoration Fund. Statement of Purpose: The purpose of these objectives and guidelines is to:
1. Establish the investment objectives and performance standards of the Upper Clark Fork River Basin Reserve Fund account; and
2. Provide diversified investment exposure within the guidelines in a prudent and cost-effective manner.
Investment Objective: Strategic: The objective of the Upper Clark Fork River Basin Reserve Fund portfolio is to attain above benchmark total return within the parameters of the Investment Guidelines set forth below with an emphasis on investment income and preservation of principal. Performance: Success in achieving this objective will be measured by comparing the risk and return of the account to the Trust Funds Investment Pool benchmark and the Short-Term Investment Pool benchmark and the Bloomberg/Barclays 1-5 Year Treasury Index, each weighted proportionately to the portfolio’s holdings, over a five-year moving average.
Time Horizon: The Upper Clark Fork River Basin Reserve Fund is an expendable fund. Expenditures are expected in future years, as projected and periodically updated by the NRDP. The Board expects to meet or exceed all objectives over a long-term investment horizon. Over shorter periods, the anticipated market volatility and specific actions, including risk mitigation efforts of the Board may lead to unfavorable, but expected, deviation from these objectives. Investment Guidelines: The Montana Board of Investments will have full discretion to manage the Upper Clark Fork River Basin Reserve Fund portfolio consistent with the investment guidelines stated below. Compliance with the following guidelines for permitted investments and other restrictions is the sole responsibility of the Staff. Any exceptions or compliance violations are to be reported to the Board of Investments at the next scheduled quarterly Board meeting. Permitted Investments: The Upper Clark Fork River Basin Reserve Fund may only invest in the following:
1. U.S. Treasury Bonds 2. U.S. Agency Bonds 3. Trust Funds Investment Pool (TFIP) 4. Short-Term Investment Pool (STIP)
Other Restrictions:
1. A maximum of 97% of the market value of the portfolio will be invested in the Trust Funds Investment Pool (TFIP).
2. A maximum of 60% of the market value of the portfolio will be invested in U.S. Treasury and Agency bonds.
3. The maximum maturity of U.S. Treasury and Agency bonds will be 6 years. If at any time, due to market fluctuations or any other circumstances, any of the guidelines are not maintained, Staff will use its best efforts to conform to these limits in a timely manner, while considering current market conditions and the associated costs of rebalancing. At the Board’s next regularly scheduled quarterly meeting, the CIO shall inform the Board of any cases that the allocations were outside the limits and either inform the Board of the actions that were taken to return the portfolio back within guidelines or a plan to do so.
MONTANA BOARD OF INVESTMENTS INVESTMENT POLICY STATEMENT
UPPER CLARK FORK RIVER BASIN (UCFRB) RESERVE FUND (FUND 02200) MAY 2015 INTRODUCTION The purpose of an investment policy statement is to give the investment manager guidance in developing an investment program to achieve the objectives agreed upon and enable the client, the Department of Justice (DOJ), to monitor the progress of the plan. OBJECTIVES Return Requirement: To maximize the total rate of return through a diversified portfolio of fixed income assets. Current Income: At this time there is no need for current income. Risk Tolerance: This is a State special revenue fund having an average ability to assume interest rate risk. Risk tolerance will decline if long-term investments have to be liquidated earlier than estimated. CONSTRAINTS Liquidity: Liquidity needs are low, except for investment purposes. Time Horizon: The fund is considered a long-term fund that has a time horizon beyond one year. Tax Considerations: This fund is tax exempt; therefore, tax advantaged investments will not be used. Legal Considerations: This fund is governed by state regulations, specifically, the "prudent expert principle" which requires the Board of Investments to: (a) discharge its duties with the care, skill, prudence, and diligence, under the circumstances then prevailing, that a prudent person acting in a like capacity with the same resources and familiar with like matters exercises in the conduct of an enterprise of a like character with like aims; (b) diversify the holdings of each fund within the unified investment program to minimize the risk of loss and to maximize the rate of return unless, under the circumstances, it is solely prudent not to do so; and (c) discharge the duties solely in the interest of and for the benefit of the funds forming the unified investment program. The Montana Constitution does not allow equity type investments in non-retirement funds. Unique Circumstances: The Governor is the trustee and has appointed a trustee restoration council consisting of the natural resource agency heads, his chief of staff and the Attorney General, as well as a citizen’s task force to make recommendations on how to use the restoration fund. Cash Investments: Cash investments held at the pool level, any managed account within it, or any separate account entail an element of credit risk. Thus, only approved cash investment vehicles are permitted. These include the custodian’s STIF vehicle, STIP, or any SEC-registered money market fund, all of which specifically address credit risk in their respective investment guidelines. Client Preference: None
2
UPPER CLARK FORK RIVER BASIN (UCFRB) RESERVE FUND
BACKGROUND INFORMATION June 1999 On April 19, 1999, a consent decree entered into between the Atlantic Richfield Company (ARCO) and the State of Montana was approved by the Court, partially settling the lawsuit, Montana v. ARCO, USDC No. CV-83-317-H-PGH. In addition to payment of litigation costs and transfer to the State of two million dollars worth of land, ARCO has agreed to pay the State $118 million on or before July 18, 1999, plus interest from April 6, 1998. The interest to be paid by ARCO is to be based on the yield of the TFBP and the total cash payment should be approximately $128 million. The settlement amount is for environmental damages arising from injuries to the State’s natural resources in the upper Clark Fork River Basin. Under the terms of the consent decree, and as required by law, the settlement amount and the interest thereon are to be deposited in the UCFRB Restoration Fund and may be used only to restore, replace or acquire the equivalent of the natural resources which were injured as a result ARCO’s and its predecessors releases of hazardous substances. July 1999 On July 19, 1999 ARCO paid the State $151,357,147. $10 million was deposited into this account. DOJ has instructed us to establish a $10 million separate account that will include all future earnings. This money may be needed to complete the remediation of Silver Bow Creek under the Streamside Tailings Operable Unit (SSTOU) ROD and related consent decree. If this money is not needed for the SSTOU remediation, it will eventually be used for natural resource restoration. This money should be placed in long-term investments because withdrawal is not likely to occur during next 10 years. During July we purchased $8 million units in the Trust Fund Bond Pool (TFPB). Since 1999 Fund was fully invested in the TFBP by November of 1999. Since that time we have been reinvesting the income back in the TFBP.
6/01 6-02 6-03 Ranges U.S. Government/Agency Securities
Domestic 0% 0% 0% 0-50%
Corporate Securities
Domestic 0 0 0 0-30
Foreign (U.S. Pay) 0 0 0 0-10 Subtotal 0 0 0 0-30
Trust Funds Bond Pool (TFBP) 99.4 99.8 99.8 90-100 Short-Term Investment Pool (STIP) 0.6 0.2 0.2 0-10
Total Fixed-Income 100.0% 100.0% 100.0% 100.0%
Schedule I-V Investment Objectives and Guidelines
Upper Clark Fork River Basin Restoration Fund
Proposed Effective Date of Schedule: May 23, 2018
This schedule is effective upon adoption by the Board of Investments and supersedes all previous Investment Objectives and Guidelines for this specific portfolio.
Introduction: The purpose of this policy statement is to provide a framework for the Upper Clark Fork River Basin Restoration Fund (MBOI account MU21) investments under the guidance of the Board. The Upper Clark Fork River Basin Restoration Fund originated in 1999, a Consent Decree was entered between the State of Montana, the United States and Atlantic Richfield Company (ARCO), to settle certain litigation and to provide for the funding of restoration action on and around the Clark Fork River and tributaries generally above the confluence of the Little Blackfoot River. Funds are used by the Natural Resource Damage Program of the Montana Department of Justice (NRDP) to restore, rehabilitate or replace injured natural resources. Statement of Purpose: The purpose of these objectives and guidelines is to:
1. Establish the investment objectives and performance standards of the Upper Clark Fork River Basin Restoration Fund account; and
2. Provide diversified investment exposure within the guidelines in a prudent and cost-effective manner.
Investment Objective: Strategic: The objective of the Upper Clark Fork River Basin Restoration Fund portfolio is to attain above benchmark total return within the parameters of the Investment Guidelines set forth below with an emphasis on investment income and preservation of principal. Performance: Success in achieving this objective will be measured by comparing the risk and return of the account to the Trust Funds Investment Pool benchmark and the Short-Term Investment Pool benchmark and the Bloomberg/Barclays 1-5 Year Treasury Index, each weighted proportionately to the portfolio’s holdings, over a five-year moving average.
Time Horizon: The Upper Clark Fork River Basin Restoration Fund is an expendable fund. Expenditures are expected in future years, as projected and periodically updated by the NRDP. The Board expects to meet or exceed all objectives over a long-term investment horizon. Over shorter periods, the anticipated market volatility and specific actions, including risk mitigation efforts of the Board may lead to unfavorable, but expected, deviation from these objectives. Investment Guidelines: The Montana Board of Investments will have full discretion to manage the Upper Clark Fork River Basin Restoration Fund portfolio consistent with the investment guidelines stated below. Compliance with the following guidelines for permitted investments and other restrictions is the sole responsibility of the Staff. Any exceptions or compliance violations are to be reported to the Board of Investments at the next scheduled quarterly Board meeting. Permitted Investments: The Upper Clark Fork River Basin Restoration Fund may only invest in the following:
1. U.S. Treasury Bonds 2. U.S. Agency Bonds 3. Trust Funds Investment Pool (TFIP) 4. Short-Term Investment Pool (STIP)
Other Restrictions:
1. A maximum of 97% of the market value of the portfolio will be invested in the Trust Funds Investment Pool (TFIP).
2. A maximum of 60% of the market value of the portfolio will be invested in U.S. Treasury and Agency bonds.
3. The maximum maturity of U.S. Treasury and Agency bonds will be 6 years. If at any time, due to market fluctuations or any other circumstances, any of the guidelines are not maintained, Staff will use its best efforts to conform to these limits in a timely manner, while considering current market conditions and the associated costs of rebalancing. At the Board’s next regularly scheduled quarterly meeting, the CIO shall inform the Board of any cases that the allocations were outside the limits and either inform the Board of the actions that were taken to return the portfolio back within guidelines or a plan to do so.
Page 1 of 3 Approved May 2015
MONTANA BOARD OF INVESTMENTS INVESTMENT POLICY STATEMENT
UPPER CLARK FORK RIVER BASIN (UCFRB) RESTORATION FUND MU21
INTRODUCTION The purpose of this investment policy statement is to outline the account objectives, permissible investments, and constraints that will guide the management of the portfolio. The policy is designed to give the investment manager flexibility to achieve in a prudent manner the investment objectives of the client, the Department of Justice (DOJ) to implement restoration actions on the Upper Clark Fork River Basin in accordance with the ARCO Settlement Consent Decree. BACKGROUND INFORMATION June 1999 On April 19, 1999, a consent decree entered into between the Atlantic Richfield Company (ARCO) and the State of Montana was approved by the Court, partially settling the lawsuit, Montana v. ARCO, USDC No. CV-83-317-H-PGH. In addition to payment of litigation costs and transfer to the State of two million dollars worth of land, ARCO has agreed to pay the State $118 million on or before July 18, 1999, plus interest from April 6, 1998. The interest to be paid by ARCO is to be based on the yield of the TFBP and the total cash payment should be approximately $128 million. The settlement amount is for environmental damages arising from injuries to the State’s natural resources in the upper Clark Fork River Basin. Under the terms of the consent decree, and as required by law, the settlement amount and the interest thereon are to be deposited in the UCFRB Restoration Fund and may be used only to restore, replace or acquire the equivalent of the natural resources which were injured as a result ARCO’s and its predecessors releases of hazardous substances. July 1999 On July 19, 1999 ARCO paid the State $151,357,147. $119,348,156 was deposited into this account. This payment included the $118 million principal due plus interest from April 6, 1998. DOJ is forecasting project spending of $5-7 million a year starting in calendar year 2001. In addition, Fish, Wildlife & Parks will be able to spend $3.7 million over the next 10 years. DOJ will also have some administrative expenses before 2001. During July we purchased $70 million units in the TFPB and $20.5 million (par) corporate securities. 1999 - 2008 From 1999, the Citizen’s Task Force and the Trustee Restoration Council had been recommending that only interest earned on the principle in the coming years be expended, unless the trustee finds that it is appropriate to invade the principle to fund significant or time-critical projects. The account balance had been growing since spending had not exceeded income. 2009 In September 2009 the State purchased the Spotted Dog Ranch for a price of $15.2 million. Expenditures are expected to be in the $10 to $12 million range annually through 2018.
Page 2 of 3 Approved May 2015
MONTANA BOARD OF INVESTMENTS INVESTMENT POLICY STATEMENT
UPPER CLARK FORK RIVER BASIN (UCFRB) RESTORATION FUND MU21
OBJECTIVES Risk and Return: A combination of current income, total return, and use of principle will be necessary to fund expected expenditures. It will require a return in excess of the assumed risk free rate to fund current projected expenditures, as well as possible future cost over runs. This account has an average ability to assume interest rate risk. Some risk of loss of principal must be taken to provide a return sufficient to fund objectives. An allocation to the Trust Funds Investments Pool (TFIP) will be made to obtain exposure to a diversified fixed income portfolio. An allocation to U.S. Treasuries, U.S. Agencies and Corporate securities may be made to provide a greater certainty of cash flows from maturities. Risk tolerance will decline if long-term investments have to be liquidated earlier than estimated to meet the cash draw down schedule.
ASSET ALLOCATION
(at Market)
Fixed Income Range
U.S. Treasury Bonds 0-30%
U.S. Agency Bonds 0-30%
Corporate Bonds 0-10%
Trust Funds Investment Pool (TFIB) 50-90%
Short Term Investment Pool (STIP) 0-30%
Total Fixed Income 100% OTHER CONSIDERATIONS Liquidity Needs: Material annual expenditures are projected in each year through 2018 in the initial cash draw down schedule provided by DOJ. The timing of expenditures within the calendar year will be somewhat uncertain, thus necessitating a significant cash balance be available to meet these needs without forcing an inordinate amount of TFIP sales in any one year. There will be significant seasonality in the pattern of expenditures. Liquidity needs will be met with a combination of cash on hand, earnings, maturities and sales of investments. The minimum (STIP) balance will be the expected next one year of expenditures less expected maturities of individual securities prior to any adjustment to reflect funding needs. Maturity Horizon: The maturity horizon of the investments utilized is designed to meet the liabilities of the client with income, maturities and a reasonable amount of sales of securities and TFIP units. The liabilities are the cash needs for restoration expenditures as provided and updated by the DOJ. Expenditures are projected to occur through 2020.
Page 3 of 3 Approved May 2015
MONTANA BOARD OF INVESTMENTS INVESTMENT POLICY STATEMENT
UPPER CLARK FORK RIVER BASIN (UCFRB) RESTORATION FUND MU21
Investment Limits: 1. To reduce the risk of loss on individual corporate bonds, investment purchases in any one credit
will be limited to 1% of the market value of the fund at the date of purchase or 2% of the lowest projected fund balance before the securities mature, whichever is lower.
2. Corporate bond sector (Industrial, Finance, and Utility) exposure shall be constrained to no more than a 4% exposure at the time of purchase, or 6% at any time over the future projected fund balance.
3. The quality rating of any corporate bond shall be in the top of the single-A rating classification or better at the time of purchase. (e.g., A1/A+ or higher), and have at least two ratings.
4. Exposure to the securities of any one U.S. Agency are limited to 5%, and in no event will an agency security be purchased if it carries a rating lower than that of the U. S. Government.
Legal Considerations: This fund is governed by state regulations, specifically, the "prudent expert principle" which requires the Board of Investments to: (a) discharge the duties with the care, skill, prudence, and diligence, under the circumstances then prevailing, that a prudent person acting in a like capacity with the same resources and familiar with like matters exercises in the conduct of an enterprise of a like character with like aims; (b) diversify the holdings of each fund within the unified investment program to minimize the risk of loss and to maximize the rate of return unless, under the circumstances, it is solely prudent not to do so; and (c) discharge the duties solely in the interest of and for the benefit of the funds forming the unified investment program. The Montana Constitution does not allow equity type investments in non-retirement funds. ADMINISTRATIVE Securities Lending: Section 17-1-113, MCA, authorizes the Board to lend securities held by the state. The Board may lend its publicly traded securities held in the investment pools, through an agent, to other market participants in return for compensation. Currently, through an explicit contract, State Street Bank and Trust, the state's custodial bank, manages the state's securities lending program. The Board seeks to assess the risks, such as counterparty and reinvestment risk, associated with each aspect of its securities lending program. The Board requires borrowers to maintain collateral at 102 percent for domestic securities and 105 percent for international securities. To ensure that the collateral ratio is maintained, securities on loan are marked to market daily and the borrower must provide additional collateral if the value of the securities on loan increases. In addition to the strict collateral requirements imposed by the Board, the credit quality of approved borrowers is monitored continuously by the contractor. From time to time, Staff or the investment manager may restrict a security from the loan program upon notification to State Street Bank. Staff will monitor the securities lending program, and the CIO will periodically report to the Board on the status of the program. Cash Investments: Cash investments held at the pool level, any managed account within it, or any separate account entail an element of credit risk. Thus, only approved cash investment vehicles are permitted. These include the custodian’s STIF vehicle, STIP, or any SEC-registered money market fund, all of which specifically address credit risk in their respective investment guidelines.
• Dollar Value Added – The total dollar return of the portfolio including income and capital gains.
• Net Cash Need - The total dollar amount distributed from portfolio assets to meet the deficit of contributions minus distributions.
• A red bar indicates an aggregate net outflow by all plans even though some plans may have experienced net inflows.• Though aggregates are shown, each plan is independent and not able to rely on other plans to meet their respective
liabilities.
5March 31, 2018
10,658 11,449 308 1,099
02,0004,0006,0008,000
10,00012,00014,000
3/31/2017 Dollar ValueAdded
Net Cash Need 3/31/2018
Mil
lio
ns
Asset Changes1 Year
Decrease Increase
8,512 11,449
1,227 4,165
02,0004,0006,0008,000
10,00012,00014,000
3/31/2013 Dollar ValueAdded
Net Cash Need 3/31/2018
Mil
lio
ns
Asset Changes5 Year
Decrease Increase
7,699 11,449
2,079 5,829
0
5,000
10,000
15,000
3/31/2008 Dollar ValueAdded
Net Cash Need 3/31/2018
Mil
lio
ns
Asset Changes10 Year
Decrease Increase
March 31, 2018 6
CIO Update – Size of Pension Plans and Change during Previous Year
• If all assets were perfectly correlated our expected standard deviation would be 16.1%• By using non perfectly correlated assets, our expected standard deviation is 13.2%
(Based on RVK’s estimates of standard deviation and correlation)
March 31, 2018 10
Risk Management Diversification
• What does a reduction in standard deviation do?
Current Estimate Given Asset Allocation• Arithmetic Return of 6.6% • Standard Deviation of 13.2%• Equals Compound Return of 5.8%
Estimate Given Increase in Standard Deviation• Arithmetic Return of 6.6% • Standard Deviation of 18.2%• Equals Compound Return of 5.1%
• Higher volatility is detrimental to returns
Estimate Given Standard Deviation @ 0%• Arithmetic Return of 6.6% • Standard Deviation of 0%• Equals Compound Return of 6.6%
March 31, 2018 11
Risk Management Diversification
March 31, 2018 12
Risk Management Diversification
Equities make up 74% of the portfolio but contribute to 96.5% of the expected standard deviation.
-10.0%
0.0%
10.0%
20.0%
30.0%
40.0%
50.0%
Asset Class Weight % Contribution to Std Dev
Risk Management Estimated Pension Liquidity
13March 31, 2018
One Day = Treasuries and Cash at Pens ion and CAPP
Two Weeks = ETF's and Investment Grade Fixed Income
One Month = Domestic and International Large Cap, Mid Cap Equities
Three Month = Domestic and International Smal l Cap Equities , Emerging Market Equities and High Yield Fixed Income
Greater Than One Year = Private Equity, Real Es tate and Natura l Resources
19.6%
11.7%
43.7%
10.5%
14.5%
0% 5% 10% 15% 20% 25% 30% 35% 40% 45% 50%
GREATER THAN ONE YEAR
3 MONTH
ONE MONTH
TWO WEEKS
ONE DAY
Risk Management CAPP Holdings
14March 31, 2018
0% 1% 2% 3% 4% 5% 6% 7% 8% 9%
FACEBOOK INC
BANK OF AMERICA CORP
JPMORGAN CHASE & CO
AMAZON.COM INC
ALPHABET INC
MICROSOFT CORP
APPLE INC
TSY INFL IX N/B
US AGENCY
US TREASURY N/B
Top 10 Securities
0% 5% 10% 15% 20% 25% 30%
ARTISAN PARTNERS - PP
INVESCO - PP
LAZARD ASSET MGMT - PP
TIMESSQUARE CAPITAL MGMT -PP
STATE STREET
DFA
T. ROWE PRICE - PP
JP MORGAN
INTERNAL FIXED INCOME
BLACKROCK
Top 10 Managers
Risk Management CAPP Geographic
15March 31, 2018
18.6%
3.7%
5.8%
8.5%
10.5%
52.9%
6.3%
1.1%
2.0%
2.7%
3.7%
84.2%
0% 20% 40% 60% 80% 100%
REST OF WORLD
HKD
GBP
JPY
EUR
USD
Currency
MBOI CAPP MSCI ACWI IMI
28.0%
3.0%
3.0%
8.5%
5.8%
51.7%
13.8%
1.2%
1.6%
2.7%
2.7%
77.9%
0% 20% 40% 60% 80% 100%
REST OF WORLD
GERMANY
CANADA
JAPAN
UK
USA
Country
MBOI CAPP MSCI ACWI IMI
0.1%
1.5%
21.2%
22.4%
54.7%
1.3%
0.7%
8.1%
10.4%
79.5%
0% 20% 40% 60% 80% 100%
REST OF WORLD
LATIN-S AMERICA
ASIA PACIFIC
EMEA
N AMERICA
Region
MBOI CAPP MSCI ACWI
Private Equity Environment
• In 2017, there were 4,191 buyout deals announced, worth a total of $347B, steady from the previous year, when 4,271 deals had an aggregate value of $340B. North America had the most activity, with 2,284 deals announced worth $175B, while Europe announced 1,473 deals worth $98B, Asia announced 195 deals worth $63B and the rest of the world announced 239 deals worth $12B
• US buyout investment activity totaled $72B during 1Q18, the largest quarterly total in 5 years• M&A activity got off to a sluggish start in 1Q18, across North America and Europe, 4,867 deals
were completed, totaling $617B in value—18% and 25% year-over-year decreases, respectively, while volume was down, their total disclosed value jumped
• Leveraged buyout purchase price multiples hit a record high of 11.2x EBITDA in 2017, up from 10x in 2016, according to a recent report by Bain & Co
• 2017 US VC investment amounted to $83B, the highest amount in the last 10 years, 1Q18 US VC investment surpassed the total amount invested in all of 2009, while the number of deals continues to trend down, the value of deals continues to trend up
• The 1Q18 saw 43 companies raise $12B from the US IPO market, the largest quarterly proceeds raised since 2Q15
• Secondary market total transaction volume for 2017 was approx. $48B, a significant increase over the 2016 figure of approx. $33B and an all-time high, pricing in the secondary market was at historic highs in 2017, with the average price for a private equity fund interests at 96% of NAV, moreover, many of the highest-quality buyout funds were trading meaningfully above par in 2017 with pricing above 110% of NAV not uncommon
16March 31, 2018
Private Equity Environment
• A record 80% of leveraged loans are covenant-lite today, notes Fitch Ratings, versus just 25% “at the credit cycle peak before the last recession,” although covenant-lite terms give lenders less recourse in the event of deteriorating financials at private equity portfolio companies, they actually make the PE-backed firms and the funds that own them more resilient
• Total leverage for LBOs in the broadly syndicated and institutional middle market now stands at 6.3x on average and was only topped in 2007 when it was 6.5x
• The percentage of large cap LBOs leveraged over 6x is 66% and over 7x is 40%, the percentage of middle market LBOs leveraged over 6x is 50% and over 7x is 17%
• 921 private equity funds closed on a total of $453B in 2017, up 9.4% from $414B by 1,243 funds in 2016, an all-time fundraising record for the private equity industry
• Dry powder levels now exceed $1T, this is not necessarily positive for the industry as entry prices for assets remain very high, and with so much available capital competing for deals, this will only increase the challenge for fund managers looking to deploy capital in 2018
• While record amounts of dry powder, cheap debt and highly favorable borrowing terms continue to contribute to higher prices, dry powder also provides for increased liquidity to support continued private equity-backed mergers and acquisitions and recapitalizations
• Inception to Date* – 12.6% Net Internal Rate of Return as of 12/31/17* Inception of the Private Equity Asset Class – 11/12/87
16.3%
12.1%
8.6%
0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
12.0%
14.0%
16.0%
18.0%
1 Year 5 Year 10 Year
Private EquityTotal Returns
3.8%
-5.1%
-2.9%
-12.0%
-10.0%
-8.0%
-6.0%
-4.0%
-2.0%
0.0%
2.0%
4.0%
6.0%
1 Year 5 Year 10 Year
Private EquityRelative Return to Benchmark
Private Equity Characteristics and Activity
• Total Market Value of $1.2B as of 3/31/18• North American-centric at approx. 83%, approx. 17% rest of the world• Direct/primary fund exposure focus, 75% vs. Fund-of-Funds at
approximately 25%• Buyout focused • Increasing allocation to direct lending strategies, Asia• Negative net cash flow of $2.8M for quarter ending 3/31/18• Three new commitments during the quarter
• Builders VC Fund I, LP - $20M• OCP Asia Fund III, LP - $75M• Deerpath Capital Advantage Fund IV, LP - $30M
19March 31, 2018
Real Estate Environment
• Despite continued political concerns, real estate markets mirrored the global economic recovery with 4Q17 volumes coming in at $228B, bringing full-year activity to $698B, 6% higher than 2016, both EMEA and APAC recorded strong full-year performance, jumping 22% and 13% respectively, while the Americas saw volumes dip by 12%
• Prices remain stable, propped up by low interest rates and continued demand from yield hungry domestic and foreign investors
• The Green Street Commercial Property Price Index increased by less than 0.5% in April, the index, which measures values across five major property sectors, has been trending sideways for the past two years; however, while in aggregate, commercial property pricing has changed little over the past year, values for some property types have been moving higher and others are falling
• Broadly speaking, while slowing, market fundamentals remain healthy with low vacancy rates and rising rents and net operating income
• Low supply growth has been one of the defining positive attributes of this real estate recovery, new supply has been problematic in only a few sectors and markets, with supply and demand roughly in balance, we can expect inflationary-type rent growth for the near future
• Secondary markets throughout the US continue to see increased demand due to higher yields, solid population growth, good transportation links as well as access to cheaper labor and construction costs
20March 31, 2018
Real Estate Environment
• 47 real estate funds held a final close in 1Q18, raising an aggregate $33B in investor commitments which could increase by an additional 10%, according to Preqin, if this increase materializes, the quarter will surpass the previous record set in 1Q08 when 79 funds secured $35B
• Real estate dry powder globally continues to climb and rose to $266B as of this past March, up from $249B at the end of 2017
• The NCREIF Fund Index – Open-End Diversified Core Equity (ODCE) delivered a 1Q18 total return of 2.2%, up 13bps from 4Q17, the full year 2017 total return was 7.6%
• The 1Q18 NCREIF Property Index return was 1.7%, this was down 10bps from4Q17, full year 2017 return was 7.0%, with a 4.68% income return and a 2.2% appreciation return
• While cap rates are holding their ground even as interest rates move higher, value gains are expected to moderate during the remainder of 2018, with income and income growth driving performance
• Continued lengthening of the business cycle and rising interest rates putting upward pressure on pricing are the biggest concerns for investors this year, however the strong economy and demand shouldn’t hinder values too much
21March 31, 2018
PerformanceReal Estate
Relevant Benchmark: Real Estate - PAC Custom Blend
22March 31, 2018
• Inception to Date* – 6.3% Net Internal Rate of Return as of 12/31/17* Inception of the Real Estate Asset Class – 9/28/06
• Inception to Date* MT Office Portfolio – 6.0% Net Internal Rate of Return as of 12/31/17
* Inception of the MT Office Portfolio– 5/1/11
7.2%
11.0%
3.3%
-4.0%
-2.0%
0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
12.0%
1 Year 5 Year 10 Year
Real EstateTotal Returns
11.5%
2.9%
0.3%0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
12.0%
1 Year 5 Year 10 Year
Real EstateRelative Return to Benchmark
Real Estate Characteristics and Activity
• Total Net Asset Value of approx. $801M as of 3/31/18• North American-centric, broadly diversified, approx. 2% non-US• Broadly diversified across property types• Increased focus on property type specific operators• Negative net cash flow of $25M for quarter ending 3/31/18• No new commitments during the quarter• Total Leverage – 46.9% as of 12/31/17
• Core – 15.5%• Non-Core – 60.7%
23March 31, 2018
Natural Resources Environment
• Douglas-fir log prices continue to surge in the Pacific Northwest reaching levels not seen since the mid 90s
• Export demand for logs going to Asia remains strong• Log prices in the US South have stabilized after softening since early 2016 due to excess supply in
must US South markets while US South lumber pricing continues to rise• The Global Sawlog Price Index increased 9.8% during 2017 with the biggest increases in sawlog
prices occurring in the Nordic countries, Eastern Europe and Western North America• Sawlog pricing increases in the Western US were driven primarily by a combination of restricted
log flows due to wildfires, low sawlog inventories and a strong domestic lumber market• NCREIF Timberland Property Index returned 3.63% for 2017, reflecting a 2.77% EBITDDA return
and a 0.84% return from appreciation, up 103bps from 2016, the Pacific Northwest led regional returns at 7% for 2017
• US construction spending continues was flat in January, while total housing starts increased 1.9% in March from the previous month to a seasonally adjusted annual rate of 1.319M
• US timberland performance in 2018 is expected to reflect a boost in demand from increased investment in processing capacity throughout the US, while US residential construction demand continues to rise
• The additional benefit of a constrained supply of timber in Canada and a 20 percent duty on Canadian softwood lumber imports should work to push up US wood product producers’ market share in the US and increase demand on local sources of timber to feed rising production demands
24March 31, 2018
Natural Resources Environment and Performance
• With respect to the oil recovery, the picture has been quite positive since the summer of 2017 as the price for WTI crude has rallied from approx. $45 per barrel to a range of approx. $60 to $65 per barrel largely driven by improving investor sentiment, net inventory withdrawals and the sustained OPEC production cuts
• Natural gas has not had the same recent positive price movements that oil has had in spite of some meaningful factors in its favor, like the coldest winter since 2010-2011 in major Northeast cities and remains range bound
• Geopolitical risks always have the potential to affect oil prices, this year and beyond• US continues to grow its exports of O&G and is likely to become world’s largest oil producer• US rig count continues to grow and broaden geographically• Oil demand growth remains strong, world demand for oil increased 1.6M b/d in 2017• Just 14 natural resource-oriented funds reached a final close in 1Q18, the lowest Q1 total of any
year in the past decade; however, the average size of $967M is the fourth highest quarterly average over the same period, suggesting that capital remains concentrated among fewer managers, energy funds continue to dominate the fundraising market, representing 64% of funds closed and 83% of capital raised in the quarter
• After five consecutive years of growth, natural resources dry powder decreased to $70B
Performance• Inception to Date* Energy Portfolio – 6.3% Net Internal Rate of Return as of 12/31/17
* Inception of the Energy Portfolio – 6/30/04• Inception to Date* Timber Portfolio – 3.9% Net Internal Rate of Return as of 12/31/17
* Inception of the Timber Portfolio – 3/29/11
25March 31, 2018
Natural Resources Characteristics and Activity
• Total Market Value of Natural Resources - $265M as of 3/31/18o Total Market Value of Energy Portfolio - $155M as of 3/31/18o Total Market Value of Timberland Portfolio $110M as of 3/31/18
• Both the energy and timber portfolios are North American-centric, but broadly diversified regionally
• Growing international exposure in the energy portfolio with recent commitment to Denham International Power Fund, LP
• Energy broadly diversified across the energy value chain, timber broadly diversified across species and age class
• Energy experienced negative net cash flow of $207K for quarter ending 3/31/18 • Timber experienced negative net cash flow of $5.9M for quarter ending
3/31/18 • No new commitments during the quarter• Timber Portfolio Total Leverage – 5.67% as of 12/31/17
26March 31, 2018
Internally Managed Fixed Income Environment
• The U.S. Treasury curve flattened dramatically over the last year. The 2yr Treasury was up 101 bps and the 10yr Treasury was up 35 bps.
• The Federal Reserve raised interest rates three times over the last year, most recently 25 bps in March.
• The market currently expects the Federal Reserve to raise interest rates 2 more times in 2018.
• Inflation has been rising modestly with Core CPI reaching 2.1% in March. The 10-year breakeven inflation level has been rising since June and ended the quarter at 2.06%.
• Agency spreads tightened slightly over the last year and were a little below their 5-year average at quarter end.
• Intermediate Corporate spreads hit a decade low during 1Q18 but ended the quarter slightly higher.
• MBS spreads increased slightly over the last year and were close to their 5-year average at quarter end.
27March 31, 2018
Internally Managed Fixed Income Environment
• Intermediate Corporate (1.19%) was the best performing sector over the last year and Intermediate Treasury (-0.16%) was the worst performing sector.
• Intermediate Corporate (-1.50%) was the worst performing sector in 1Q18 and Intermediate TIPS (-0.40%) was the best performing sector.
• Bond market liquidity remained healthy in 1Q18. Investment Grade market volume as measured by FINRA (Financial Industry Regulatory Authority) averaged $19.1B/day vs. the 5-year average of 14.6B/day.
• Total investment grade corporate issuance fell 12.2% y/y but was still a healthy $365.7B in 1Q18.
• The Federal Reserve continued to incrementally reduce its balance sheet in 1Q18 with a reduction of approx. $29.3B in Treasuries and $10.6B in Agency MBS.
28March 31, 2018
US Treasury / Agency Performance, Characteristics and Activity
Performance• Outperformed by 20 bps since inception (04/01/17), net of fees.
Characteristics and Activity• No change to allocation during the quarter. However, trade volume
was approx. $240M as the portfolio facilitated movement between asset classes during the quarter.
• Duration was slightly shorter than the benchmark at quarter end.• Portfolio was slightly underweight the 1-3 year portion of the curve
and slightly overweight the 5-10 year portion of the curve relative to the benchmark at quarter end.
• US Agency CMBS were slightly above and US Agency securities were slightly below the middle of the range relative to guidelines at quarter end.
29March 31, 2018
TIPS Performance, Characteristics and Activity
Performance• Outperformed by 1 bp since inception (04/01/17), net of fees.
Characteristics and Activity• No change to TIPS allocation during the quarter. • No significant deviation from the benchmark characteristics.
30March 31, 2018
Mortgage-Backed Securities Performance, Characteristics and Activity
Performance• Outperformed by 48 bps since inception (04/01/17), net of fees.
Characteristics and Activity• No change to MBS allocation during the quarter. • Duration was slightly below the benchmark at quarter end. • The portfolio was near the bottom of the range in ABS securities relative to
the guidelines at quarter end. • The portfolio was slightly above the middle of the range in Non-Agency
CMBS relative to guidelines at quarter end.
31March 31, 2018
Investment Grade Credit Performance, Characteristics and Activity
Performance• Outperformed by 10 bps since inception (04/01/17), net of fees.
Characteristics and Activity• No change to Intermediate Corporate allocation during the quarter. • Duration was neutral to the benchmark at quarter end. • Portfolio was slightly underweight the 1-3 year portion of the curve and
slightly overweight the 5-10 year portion of the curve relative to the benchmark at quarter end.
• Overweight Financials, underweight Industrials and neutral Utilities at quarter end.
• Credit quality of the portfolio was slightly higher than the index at quarter end.
32March 31, 2018
Broad Fixed Income Performance
33March 31, 2018
• Following the restructuring of the fixed income sub-asset classes, the Broad Fixed Income asset class performance since April 1, 2017 includes only the external fixed income manager, Reams.
• For the quarter, the Broad Fixed Income asset class outperformed its benchmark by 49 basis points, as a more conservative posture that is overweight Treasury securities began to produce positive relative performance in a market that saw a moderate move toward safety.
Broad Fixed Income Performance
Relevant Benchmark: Broad Fixed Income – PAC Custom Blend
34March 31, 2018
1.2%
2.1%
4.5%
0.0%0.5%1.0%1.5%2.0%2.5%3.0%3.5%4.0%4.5%5.0%
1 Year 5 Year 10 Year
Broad Fixed IncomeTotal Returns
0.0%0.3%
0.9%
-2.0%
-1.5%
-1.0%
-0.5%
0.0%
0.5%
1.0%
1.5%
2.0%
1 Year 5 Year 10 Year
Broad Fixed IncomeRelative Return to Benchmark
Broad Fixed Income Characteristics and Activity
35March 31, 2018
• This asset class continues to be positioned defensively with a large overweight position in US Treasury debt and a heavy cash position. It is also underweight corporate debt and agency debt.
• Duration ended the quarter at neutral versus the benchmark, but fluctuated between short to neutral during the period. The intra-quarter adjustments to duration were a modest positive contributor to relative performance in the period.
• The asset class has outperformed its benchmark for the 5 year and 10 year periods ended March 31.
• There was a $100 million outflow at the end of February prompted by changes in the asset allocation at the plan level.
High Yield Environment
36March 31, 2018
• High yield markets saw increased volatility, particularly early in the quarter as concerns about the business cycle and trade tensions rattled markets.
• Although high yield spreads widened by about 50 basis points they still ended March near 20 year lows.
• Solid domestic economic growth continues to bolster high yield fundamentals. Default rates remain well below long-term averages and the passage of U.S. tax reform should help the profitability of issuers.
• High yield bonds managed to outperform investment grade corporates, posting a return of -0.86% for the quarter as higher coupons helped to offset price declines.
• The high yield markets continue to reflect a risk appetite and a reaching for yield by investors, which is evident in both the low level of high yield spreads as well as the tight spreads between low and high quality issues.
High Yield Performance
37March 31, 2018
• A higher-quality, defensive positioning within the high yield asset class remained a slight drag on performance during the quarter as despite overall widening spreads, CCC rated debt outperformed the higher quality issues in the high yield universe.
• Overall, the high yield asset class underperformed by -18 basis points for the quarter.
• For the 1-year period ended March 31, the asset class underperformed by -118 basis points, yet posted higher returns than other fixed income investments.
High Yield Characteristics and Activity
38March 31, 2018
• By design, the high yield asset class at MBOI carries a significant weighting in downside-protecting portfolios.
• Duration of the high yield asset class is near that of the benchmark (Bloomberg Barclays US High Yield 2% Issuer Cap Index) and the sector exposure is well diversified.
• No new commitments were made to the asset class in the quarter.• Recall that two new high yield managers were funded in December:
Oaktree Capital Management and Shenkman Capital Management. The initial funding amount for each manager was $50 million.
Domestic Equity Environment
39March 31, 2018
• US equities posted negative returns for the quarter as volatility returned to the markets after being absent during 2017.
• Although economic activity remained strong and corporate profits continued to look robust, concerns over rising interest rates and trade disputes between the US and international partners led to the increased volatility.
• Large capitalization stocks and mid cap stocks posted the most negative returns for the quarter. Growth stocks handily beat value stocks, continuing a longer term trend.
• At the end of March, the S&P 500 Index was valued at 16.5x estimated next 12- month earnings.
Domestic Equity Performance
40March 31, 2018
• The domestic equities asset class outperformed its benchmark during the first quarter by 20 basis points.
• Size allocation (overweight to mid-cap and small-cap stocks) added to performance for the quarter, while manager selection effect was positive as well.
• The performance of the actively managed portfolios collectively continues to be encouraging.
• The asset class slightly lagged its benchmark for the 1 year and 5 year periods ended March 31.
• Index funds account for the majority of allocation to large-cap stocks.• Mid-cap and small-cap stocks remain overweight relative to the
benchmark.• Cash is less than 1% at the asset class level.• A new mid-cap growth manager, Congress Asset Management was hired
and funded in February with $80 million.• A new partial long/short manager, Jacobs Levy Equity Management was
hired and funded in March with $170 million.
International Equity Environment
45March 31, 2018
• International stocks recorded mostly negative returns for the quarter with only emerging market stocks posting slightly positive returns.
• International corporate profits continued to exceed expectations but trade tensions and the prospect of higher interest rates unnerved investors during the quarter.
• Small capitalization stocks posted better returns than their large capitalization peers across most international markets. As in the US, growth stocks outpaced value stocks.
• Emerging market stocks outperformed developed market stocks, driven by technology shares and firm commodity prices.
• The negative developed market local returns were somewhat offset by positive currency effects from a weaker dollar.
International Equity Environment and Performance
46March 31, 2018
• At quarter end, the MSCI World ex-US Index (developed markets) was valued at 14x estimated next 12-month earnings, while the MSCI Emerging Markets Index was valued at 12.5x estimated next 12-month earnings.
• The international equities asset class outperformed its benchmark during the first quarter by 52 basis points.
• Size allocation (overweight to small-cap stocks) contributed positively to performance in the quarter as did an overweight to emerging markets. Manager selection also added to relative performance.
• Actively managed portfolios as a whole continue to earn their keep.• The asset class outperformed its benchmark for the 1 year and 5 year
periods ended March 31.
International Equity Performance
Relevant Benchmark: International Equity – PAC Custom Blend
47March 31, 2018
18.2%
6.7%
2.4%
0.0%2.0%4.0%6.0%8.0%
10.0%12.0%14.0%16.0%18.0%20.0%
1 Year 5 Year 10 Year
International EquityTotal Returns
1.1%0.5%
-0.6%
-5.0%
-3.0%
-1.0%
1.0%
3.0%
5.0%
1 Year 5 Year 10 Year
International EquityRelative Return to Benchmark
International Equity – Active Managers Performance
48March 31, 2018
-8.0%-6.0%-4.0%-2.0%0.0%2.0%4.0%6.0%8.0%
10.0%
Acad
ian
Amer
ican
Cen
t.
Balli
e G
iffor
d
DFA
EM S
C
DFA
Intl
SC
Fran
klin
Tem
p
Inve
sco
Laza
rd
1 YearRelative Return to Benchmark
0.0%1.0%2.0%3.0%4.0%5.0%
Acad
ian
DFA
Intl
SC
10 YearRelative Return to Benchmark
0.0%1.0%2.0%3.0%4.0%5.0%
Acad
ian
DFA
Intl
SC
5 YearRelative Return to Benchmark
-15.0%-10.0%
-5.0%0.0%5.0%
10.0%
Acad
ian
Amer
ican
Cen
t.
DFA
Intl
SC
Fran
klin
Tem
p
3 YearRelative Return to Benchmark
International Equity Characteristics and Activity
49March 31, 2018
• The large-cap allocation retains a significant weight to index funds.
• Small-capitalization stocks remain overweight relative to the benchmark.
• An overweight to emerging markets has been in place since December 2016.
• Cash is approximately 1% at the asset class level.
• An allocation to a partial long/short portfolio is being evaluated.
Trust Fund, State Fund & STIP Environment
• The U.S. Treasury curve flattened dramatically over the last year. The 2yr Treasury was up 101 bps and the 10yr Treasury was up 35 bps.
• The Federal Reserve raised interest rates three times over the last year, most recently 25 bps in March.
• The market currently expects the Federal Reserve to raise interest rates 2 more times in 2018.
• The risk premium of 3 month LIBOR over Treasuries increased 20 basis points over the last twelve months.
• Inflation has been rising modestly with Core CPI reaching 2.1% in March. The 10-year breakeven inflation level has been rising since June and ended the quarter at 2.06%.
• Agency spreads tightened slightly over the last year and were a little below their 5-year average at quarter end.
• Corporate spreads hit a decade low during 1Q18 but ended the quarter slightly higher.
50March 31, 2018
Trust Fund, State Fund & STIP Environment
• MBS spreads increased slightly over the last year and were close to their 5-year average at quarter end.
• Bond market liquidity remained healthy in 1Q18. Investment Grade market volume as measured by FINRA (Financial Industry Regulatory Authority) averaged $19.1B/day vs. the 5-year average of 14.6B/day.
• Total investment grade corporate issuance fell 12.2% y/y but was still a healthy $365.7B in 1Q18.
• The Federal Reserve continued to incrementally reduce its balance sheet in 1Q18 with a reduction of approx. $29.3B in Treasuries and $10.6B in Agency MBS.
51March 31, 2018
Short Term Investment Pool Characteristics and Performance
Characteristics• Treasuries, Agencies and Government money market funds made up
21% of the Pool on 3/31/18 compared to 25% for the prior year. • Local Government participants’ percentage increased to 39% on
3/31/18 from 34% the prior year.• The STIP assets were $3.09 billion on 3/31/18 up $367 million over the
last 12 months.• The STIP reserve was $30.3 million on 3/31/18 up $2.5 million during
the quarter.
Performance• Outperformed the index by 5 bps over the last 12 months, net of fees. • Good performance versus the index over 3, 5 & 10 years.
52March 31, 2018
State Fund Characteristics and Performance
Characteristics• Sold $15M of the S&P 500 index fund in early January.• $14.7M transfer to the Fire Suppression account was completed on
03/30/18. • Continued the process of diversifying core real estate exposure in
1Q18.• Duration was neutral to the benchmark at quarter end. • Maintained our overweight to spread product with a bias toward
higher quality corporates.
Performance• Solid performance over every time frame vs. the benchmark• Bond portfolio outperformed by 33 bps over the last year.
53March 31, 2018
Trust Funds Investment Pool Characteristics and Performance
Characteristics• Total additions to TFIP were $36.7M during the quarter.• There was no change to the high yield allocation during the last year. • Continued the process of diversifying core real estate exposure in 1Q18.• Duration was neutral to the benchmark at quarter end.• Maintained our overweight to Corporates, CMBS and ABS and underweight
to Treasuries and MBS.
Performance• Solid performance over every time frame vs. the benchmark• TFIP outperformed by 65 bps over the last year, net of fees. • Bond portfolio outperformed by 35 bps over the last year.
Staffing Level Review (Human Resource Committee) Trust Fund Investment Pool Review International Equities Asset Class Review August 21-22 Quarterly Meeting
Quarterly Reports (Fiscal Year Performance) and Subcommittee Meetings CEM Benchmarking MBOI Budget and Legislative Related Action/Decision Real Estate Asset Class Review High Yield Asset Class Review Internal Controls (Audit Committee)
October 2 Non-Quarterly Meeting Diversified Strategies Asset Class Review Cash Management of State Monies Proxy Voting Public Equities
ACH ............................................................................................. Automated Clearing House ADR ....................................................................................... American Depository Receipts AOF ................................................................................................................All Other Funds ARC .................................................................................... Actuarially Required Contribution BOI ........................................................................................................ Board of Investments CAPP .................................................................................. Consolidated Asset Pension Pool CFA ............................................................................................. Chartered Financial Analyst EM .............................................................................................................. Emerging Market FOIA ........................................................................................... Freedom of Information Act FWP ................................................................................................... Fish Wildlife and Parks FX ............................................................................................................. Foreign Exchange IPS ............................................................................................. Investment Policy Statement LDI .................................................................................................... Liability-Driven Investing MBOH ........................................................................................... Montana Board of Housing MBOI ...................................................................................... Montana Board of Investments MDEP ..................................................................................... Montana Domestic Equity Pool MFFA ................................................................................ Montana Facility Finance Authority MPEP ........................................................................................ Montana Private Equity Pool MPT .................................................................................................. Modern Portfolio Theory MSTA .................................................................. Montana Science and Technology Alliance MTIP ............................................................................................. Montana International Pool MTRP ............................................................................................ Montana Real Estate Pool MTSBA ......................................................................... Montana School Boards Association MVO .......................................................................................... Mean-Variance Optimization NAV ............................................................................................................... Net Asset Value PERS .......................................................................... Public Employees’ Retirement System
PFL ..................................................................................................... Partnership Focus List QZAB .................................................................................... Qualified Zone Academy Bonds QSCB ........................................................................... Qualified School Construction Bonds RFBP ......................................................................................... Retirement Funds Bond Pool RFP ....................................................................................................... Request for Proposal SABHRS .............................. Statewide Accounting Budgeting and Human Resource System SLQT .................................................................................... Securities Lending Quality Trust SOC1 ......................................................................... Service Organization Controls 1 (Audit) SSBCI ........................................................................... State Small Business Credit Initiative STIP ........................................................................................... Short Term Investment Pool TFBP .................................................................................................. Trust Funds Bond Pool TFIP ........................................................................................... Trust Funds Investment Pool TIF ................................................................................................... Tax Increment Financing TIFD .................................................................................... Tax Increment Financing District TRS ......................................................................................... Teachers’ Retirement System TUCS .............................................................................. Trust Universe Comparison Service VIX ................................................................................................................... Volatility Index
ASSET CLASS ACRONYMS DEPAC – Domestic Equity Pension Asset Class IEPAC – International Equity Pension Asset Class PEPAC – Private Equity Pension Asset Class NRPAC – National Resources Pension Asset Class REPAC – Real Estate Pension Asset Class TIPAC – TIPS Pension Asset Class BFPAC – Broad Fixed Income Pension Asset Class USPAC – UST/AGY Pension Asset Class IGPAC – Investment Grade Corp Pension Asset Class MBPAC – MBS Pension Asset Class HYPAC – High Yield Pension Asset Class DSPAC – Diversified Strategies Pension Asset Class CPAC – Cash Pension Asset Class
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Terminology Commonly Used and Generally Understood at the Montana Board of Investments (And most typical context used at BOI)
Active management (typically with respect to stocks) Investment method which involves hiring a manager to research securities and actively make investment decisions to buy and sell securities in an effort to outperform an assigned index, rather than purchasing a portfolio of securities that would simply replicate the index holdings (‘passive’ investing). Actuarial assumed rate (pension concept) The investment return rate used by actuaries that enables them to project the investment growth of retirement system assets into the future (typically perpetual). Actuarial funding status (pension concept) A measurement made by actuaries to measure a pension system’s financial soundness (ratio of actuarial liabilities to the actuarial value of the assets available to pay the liabilities). Alpha (investment term) Return on an investment portfolio in excess of the market return or benchmark return; generally used in the context of ‘active’ management (as passive management, by definition, does not seek excess returns, or ‘alpha’). Alternative Investments A wide range of investments, other than traditional assets such as publicly traded stocks and bonds. The most common nontraditional or alternative investments are private equity, real estate, commodities, and hedge funds. Arbitrage (bond program) A structural or systematic difference between investment types which may allow profiting from the ‘difference,’ i.e., arbitrage. The most common context for the use of ‘arbitrage’ at the BOI is the federal law that prevents ‘arbitrage,’ i.e., the profiting of investing tax-exempt securities (e.g. INTERCAP) into taxable yields investments (such as U.S. Treasuries). Asset Allocation and Asset Allocation Range (general investment principle) The Board’s invested assets are divided or allocated into various asset classes such as stocks and bonds, each with its own characteristics, with the objective of attaining an optimal mix of risk and return. The total expected return of a portfolio is primarily determined by the mix or allocation to its underlying assets classes. Given the importance of ‘asset allocation,’ the BOI Board sets the asset allocation ‘range’ for each broad investment type or asset class. Average life (fixed income, particularly bonds) The average time period the debt is expected to be outstanding. This is typically the maturity date for a traditional bond structure, however it will be shorter for bonds having a sinking fund or amortizing payment structure. Barclay’s Aggregate Index (fixed income) A composite of outstanding bond issues, including corporate, structured, and government bonds whose overall investment features such as return and investment type are tracked over many years. This is the most common benchmark used for comparing the performance of a portfolio that invests in U.S. investment grade fixed income securities. Formerly known as the Lehman Aggregate bond index. Basis points (investment jargon) A basis point is 1 100th of a percentage. Ten basis points is one tenth of a percent, typically written as 10 bps.
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Benchmark (standard investment concept) The concept of employing a particular independent or market investment return as a measurement to judge an investment portfolio’s return; typically chosen investment benchmarks have the following attributes: they are investible, quantifiable, chosen in advance, easily understandable, and have a long history; common examples are the S & P 500 Index and the Barclay’s Aggregate Index. Beta (investment jargon) A measure of the risk (or volatility) of a security or a portfolio in comparison to the market as a whole. If the stock or portfolio moves identically to that market, its beta value is 1; if its price volatility (or movement) is greater than that market’s price volatility, it is said to have beta greater than 1. Cap, as in large ‘cap’ (generally for stocks, e.g., public equities) ‘Cap’ is short for capitalization, as a reference to the market value of a publicly-traded company. The current stock price times the total shares outstanding of the company equals its market capitalization or market ‘cap’; often used contextually such as ‘large-cap,’ ‘mid-cap,’ and ‘small-cap’ for different sized public companies. Clawback (private equity) A clause in the agreement between the general partner and the limited partners of a private equity fund. The clawback gives limited partners the right to reclaim a portion of distributions to a general partner for profitable investments based on significant losses from later investments in a portfolio which ultimately resulted in the general partner receiving more distributions than it was legally entitled to. Core (context varies for equity, fixed income, real estate) In equity and fixed income, ‘core’ refers to investments that are generally always found in the portfolio and normally expect to hold for a very long time e.g. ‘core’ holdings of the largest U.S. companies, or U.S. treasuries; in real estate, ‘core’ generally refers to the best quality of real estate holdings such as prime commercial property in major metropolitan cities that have low leverage and low levels of vacancy. Correlation (common statistical concept) A measure of how two or more investment values or two asset classes move relative to each other during the same time period. A central concept in portfolio construction is to seek investments whose values do not move together at the same time, i.e., are uncorrelated. A correlation of 1 means that two or more investments ‘move’ precisely together. Custom benchmark (or sometimes custom index) A way to measure investment performance using a tailor-made measurement versus a generic industry-standard benchmark. At the BOI, total pension performance is measured against the Board’s ‘custom index’ or ‘custom benchmark’ which is a weighted blend of all the underlying asset class benchmarks used to measure the asset class returns. Derivatives (investment jargon) Investment securities whose performance itself depends (or is ‘derived’) from another underlying investment return. Examples include stock options, puts/calls, and forward currency contracts whose returns are based on the underlying stock or currency. Developed markets (equity) Countries having a long period of stable industrialization; or are the most economically developed. Discount (fixed income, generally) Used most often with respect to bonds, the price paid that is less than face (or ‘par’) value. A $1 million face-value of a bond purchased for less than a million is bought at a ‘discount.’ Described as the difference between a bond’s current market price and its face or redemption value.
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Diversification (standard investment concept) The concept of spreading risk by putting assets in several investment categories, each having different attributes with respect to type, expected return, risk, and correlation, to best protect against the risk of loss. Duration (bonds) Almost exclusively used when discussing fixed income bonds, a measurement of how sensitive a bonds’ change in price is to a change in general market interest rates, expressed in years (specifically calculated as a weighted average term to maturity of the bond’s cash flows). The greater the duration of a bond, the greater the volatility of price for changes in market interest rates. Efficiency (usually when discussing various stock markets) Used to describe markets where it is very difficult to achieve return in excess of that of the overall market from individual stock selection. When information is widely available on a company and its securities are traded regularly the market is considered ‘efficient.’ Emerging Markets (most often for public equities) Certain international securities markets that are typically small, new, have low turnover, and are located in countries where below-average income prevails and is developing in response to the spread of capitalism. Enhanced (pertaining to stocks) Generally linked with ‘index’ as in enhanced index, an indexed investment management style that has been modified to include the portfolio manager’s idea of how to outperform the index by omitting some stocks in the index and overweighting others in a limited manner designed to enhance returns but at minimal risk. Enhancement (bond program) At BOI, the term generally refers to credit support or a bond or loan guarantee. For example, the Board’s INTERCAP bonds are ‘enhanced’ by the BOI’s performance guarantee bringing down the yearly interest rate. Excess returns (standard investment concept) Returns are ‘excess’ if they are more than the market or more than the benchmark they are measured against. Exempt staff vs. classified staff (specific to Montana state government) “Exempt” refers to the Board’s seven employees who, under state law, do not fall under the state’s standard employment rules (the ‘classified’ staff). Fiduciary (from the Latin verb, fidere, to trust) The concept of trust and watchfulness; a fiduciary is charged with the responsibility of investing the money wisely for the beneficiary’s benefit. Board members are the ultimate ‘fiduciaries’ for the Board’s assets and are obligated to be a good agent. FTE (state government jargon) An acronym in state government: “full time equivalent” as in full time employee. The concept is a slot or position, not the actual individuals. The BOI is currently authorized for 32 FTE’s. Fund of funds (private equity) A concept used in alternative investments referring to using an investment manager to invest in other managers or funds, as opposed to making direct investments in funds.
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GAAP/GASB (accounting terminology) GAAP…Generally Accepted Accounting Principles; Montana state law uses GAAP accounting principles unless specifically allowed otherwise. GASB…Government Accounting Standards Board, the board that sets GAAP standards for U.S. governments (FASB…Financial Accounting Standards Board, the entity for commercial and business accounting standards). General obligation (municipal finance term) Used to describe the promise that a government makes to bond holders, backed by taxing and further borrowing power, it is generally considered the highest level of commitment to bondholders. At the local government level, general obligation bonds typically require a vote of the residents. General partner vs. limited partner (private equity) In private equity, the general partner is responsible for the operations of the partnership and makes the actual underlying investment decisions; the limited partner is the investor, and therefore has limited liability for investment decisions; the BOI is the ‘limited’ partner in its private equity fund investments (and real estate funds as well). Growth (as to style public equities) An investment style that more heavily invests in companies whose earnings are expected to grow at an above average rate to the market. A growth stock usually does not pay a dividend, as the company would prefer to reinvest retained earnings in capital projects to grow the company (vs. ‘value,’ which considers buying established companies they feel are trading at bargain prices to the fundamental analysis of the company’s financial statements and internal competitive factors). Indenture (bond and loan programs) The central document describing the contract between investors and the borrower or user of the proceeds. The Board’s INTERCAP program is structured around a bond indenture.
Hedge fund (as defined by Investopedia) An aggressively managed portfolio of investments that uses advanced investment strategies such as leverage, long, short and derivative positions in both domestic and international markets with the goal of generating high returns (either in an absolute sense or over a specified market benchmark). Hurdle Rate (private equity) a minimum return per annum that must be generated for limited partners of a private equity fund before the general partner can begin receiving a percentage of profits from investments. Index (investment concept) Typically, a single measure of a broadly-based group of investments that can be used to judge, or be compared to the return performance of an individual investment or manager. Indexing (investment concept) Typically refers to investing in a portfolio to match a broad range of investments that are set within a pre-determined grouping, such as the S&P 500, so as to match its performance; such investing is generally labeled ‘passive’ or indexed investing; or buying shares in an Index Fund. In-State loan program (Montana-specific) Programs that are funded by the state’s coal severance tax monies.
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Internal service vs. enterprise fund (state accounting concept) Within Montana state government: a program whose funding is dependent on mandatory participation by another state government program is labeled an ‘internal’ service fund; a program whose funding is dependent on voluntary participation is labeled an enterprise fund. At BOI, the investment program is an internal service fund because participation is not voluntary; the Board’s bond and loan programs, because their use is voluntary, are accounted for as an enterprise. Investment grade (bonds) Bond ratings from Moody’s, Standard and Poor’s, and Fitch high enough to be considered secure enough for most investors (bonds rated AAA – BBB). Below investment-grade bonds (below BBB) are generally considered to have a more speculative outlook and carry more risk of default. IRR (private equity) A measure of investment performance, short for ‘internal rate of return,’ expressed as a percentage (the ‘internal rate of return’ number, or discount rate) that mathematically will equalize the total future cash flows of an investment to the initial cash outflow of the investment; the concept accounts for the time value of money. Leverage (investment concept) As an investment concept, a way to increase a return on an investment through a combination of one’s own money and also by borrowing additional money to enhance such an investment; high ‘leverage’ is also associated with high risk. Mean Variance Optimization Model (‘Modern Portfolio Theory’) A theory that it is possible to construct a portfolio to maximize the return for the least amount of risk or volatility. This theory is based on various asset types and their level of expected return, risk (volatility) and their correlation with each other or how the asset values move with each other. The central idea of the model is to blend investments so that in total, they provide both the best expected return and optimal amount of diversification to minimize deep performance swings (volatility); a central tenant is that long term historical returns are indicative of future returns. Mezzanine finance (private equity) Subordinated debt with an equity ‘kicker’ or ability to share in the equity value of the company. It is typically lower quality because it is generally subordinated to debt provided by senior lenders such as banks, thus is considered higher risk. Multiple (as in “multiple” of invested capital, private equity) The ratio of total cash returned over the life of the investment plus the investment’s residual value over the total cash expended in making the investment. A multiple of 2 means, regardless of the total investment time period, that total cash returned was twice the cash invested. 130/30 Strategy (public equities) Also called ‘partial long short,’ this strategy involves the establishment of a short position in select stocks while taking the proceeds of those shorts and buying additional long positions in stocks. The net effect is an overall market position that is 100% long, but the active decisions on individual stock selections are amplified by this ability to short. If the stock selections are successful, the strategy enables the portfolio to profit more than if a stock had simply not been owned, as with traditional long-only portfolios. Opportunistic (real estate) In real estate, a euphemism for the most risky real estate investments, typically distressed, raw land, newly developed buildings or other high risk investments in the real estate sector, (versus, ‘core,’ which are the best quality fully leased commercial properties).
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Overweight or underweight (investment concept) Generally, the level of holdings of a certain type of investment that is above or below either a benchmark’s weight (portion of total investment), or the percentage held of a particular asset class compared to the Board’s asset allocation policy weight. Also used to describe an external investment manager’s decision to have more (or less) of a particular investment than the percentage or weighting found in the benchmark. Passive management or passive investment (most often in public equities, but not exclusively) An investment style where a fund’s portfolio mirrors a market index, such as the S&P 500, with limited selection decisions by the manager, resulting in market returns. Passive management is the opposite of active management in which a fund’s manager attempts to beat the market with various investment strategies and buy/sell decisions of a portfolio of securities to enhance returns. P/E ratio (equity) The price of a publicly traded stock divided by its estimated or actual earnings is the price/earnings or P/E ratio. This can also be calculated for a stock index or portfolio of stocks. Over the last 100 years, the S&P 500 has had an overall P/E ratio of about 15, or a total index price of about 15 times the annual earnings of its underlying companies. Pacing study (private equity) An analysis of the likely timing and amount of the drawdown of committed but yet uninvested monies and the estimated distributions or returns from the funds held in an alternative investment portfolio, generally used to judge the future size of the portfolio and its potential liquidity needs, i.e., cash funding demands. Par (fixed income) The initial principal amount designated by the issuer of the bond, or face value of a bond. Passive For investments, generally not materially participating in an investment decision, meaning an investment portfolio whose returns follows that of a broad market index, such as an investable stock index, i.e. the S & P 500. Passive weight (generally equities) The percentage of a stock held in a particular index portfolio, or percentage of an overall asset class that is held in passive portfolios. Policy Portfolio A fixed-target asset allocation, as opposed to asset allocation ranges, which theoretically allows gauging whether deviations from the target portfolio had a positive or negative impact on overall performance. Portable alpha (public equities) An investment strategy which involves the active selection of securities while neutralizing overall beta or market risk. This often involves the use of derivative investments such as futures to replicate the market return, either taking a short or long position, while then selecting securities which are expected to add return in an absolute sense or in addition to the market return. As an example, this strategy can be found with certain hedge funds where a market exposure is shorted while individual securities such as specific stocks are purchased that are expected to outperform the general market. The concept of portable applies when the ability to generate positive alpha can be overlaid or ported onto a portfolio. This is not a strategy employed by any of MBOI’s existing managers. Premium (fixed income) Most often the amount paid over the stated face amount (often called ‘par’) of a bond, but also used in other contexts, typically paying more (the premium) than a market price (as in a take-over bid for a company).
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Proxy (publicly traded companies) An agent legally authorized to act on behalf of another party. Shareholders not attending a company’s annual meeting may choose to vote their shares by proxy by allowing someone else to cast votes on their behalf, but the word ‘proxy’ is used more frequently colloquially as a ‘close approximation.’ Prudent expert, prudent person (a central fiduciary concept) These legal terms have long histories of court-determined standards of care, deriving originally under English common law. The BOI is empowered to operate under the ‘prudent expert rule,’ which states that the Board shall manage a portfolio: a) with the care, skill, prudence, and diligence, under the circumstances then prevailing, that a prudent man acting in a like capacity and familiar with such matters would use in the conduct of an enterprise of a like character and with like aims; b) diversify the holdings of each fund within the unified investment program to minimize the risk of loss and to maximize the rate of return unless, under the circumstances, it is clearly prudent not to do so; and (c) discharge the duties solely in the interest of and for the benefit of the funds forming the unified investment program. At an ‘expert’ level; there is more room for accepting risk under the prudent expert rule than the prudent person rule. Rebalancing (general investment term) The process of realigning the weightings of the portfolio of assets. Rebalancing involves periodically buying or selling assets in the portfolio to maintain the original desired level of asset allocation and/or to stay within predetermined asset category range; it is part of a disciplined investment approach within modern portfolio theory. Resolution (government term) Generally, a formal and written action by a governmental (or corporate) body that has long term significance and requiring a vote of the governing body. BOI uses ‘resolutions’ generally only for its most significant and long term actions and/or policies. Securities lending (general investment) Investments that are temporally borrowed by other investors for a fee; the BOI allows most of its publicly traded investments to be loaned for additional marginal income. Standard deviation (common statistical concept) A specific statistic that measures the dispersion of returns from the mean over a specific time period to determine the “historical volatility” of returns for a stock, or portfolio, or asset class; more specifically a single unit (i.e., one standard deviation) of dispersion that accounts for approximately 66% of all data around a mean using a ‘normal’ (or ‘uniform’ or ‘bell-shaped’ curve; as opposed to a skewed or asymmetrical) distribution. The standard deviation is used as a gauge for the amount of expected future volatility. SABHRS (accounting jargon) Montana state government’s State Accounting, Budgeting and Human Resource System; the State’s central information management system. BOI investment and other financial data must tie and be reported on this system, which is the official book of record and includes the state’s financial statements. Style drift (often in reference to public equity managers, but applicable to other managers, too) As the name implies, a divergence from an investor’s professed investment bias or style or objective.
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Tranche A division or portion of a pool or whole; specifically: an issue of bonds derived from a pooling of like obligations (such as securitized mortgage debt) that is differentiated from other issues especially by maturity or rate of return. Tracking error (statistical concept in investments) A measurement of the standard deviation of a portfolio’s return versus the return of the benchmark it was attempting to outperform. The concept is often used when discussing investment managers. For example, some styles are expected to have high ‘tracking errors,’ (e.g., deep ‘value’ investors who buy companies that may be dogs for years), versus passive managers, whose stock volatility is expected to be very close to their benchmark. Tracking error can either be intentional or unintentional; it can also be regarded as an accepted deviation or contrary to the management agreement. High unexpected tracking error is generally a serious concern to be examined and understood. Underwriter (bond program) In investments, the agent who buys investments to be resold to the public; at BOI, the investment firms that buy the Board’s bonds to be resold to the public. Unified Investment Program (Montana Constitution) The Program in the State’s constitution requiring a central investment program which the legislature has assigned to the BOI. Value (as to style when discussing public equities) An investment style that focuses on buying established companies that investors believe are undervalued and trading at bargain prices to the fundamental analysis of the company’s financial statements and internal competitive factors. Venture capital (private equity) A higher-risk/high-return type of investing in startup firms and small businesses with perceived long-term growth potential. Sometimes these are already existing business ventures with limited operating history that need additional management expertise and access to capital. (For start-ups, ‘seed capital,’ or ‘angel investor’ are terms differentiating this even higher risk type of investment.) Volatility (investment jargon) A statistical measure of the dispersion of returns for a given security or market index. Volatility is typically measured by using the standard deviation of returns from the security or market index. Commonly, the higher the volatility, the riskier the security. Yield (general investment, but most often within fixed income) The amount returned to the investor above the original investment generally expressed as a percentage. Yield can be thought of as the expected return from the combination of interest and price accrual or amortization to maturity (in the case of a bond trading at a discount or premium to par). Yield curve (fixed income) A line that plots the prevailing interest rates at a given time for bonds ranging in maturity from as short as three months out to 30 years. When plotted across these various maturities (typically 2, 5, 7, 10 and 30 years), the resultant line is shaped like a curve with generally low interest rates (the yield) for shorter maturities and gradually higher interest rates for longer maturities, because generally investors demand higher interest rates for longer term investments. The yield curve for U.S. Treasury debt is the most common when referring to the prevailing level of interest rates.
