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New Jersey Is an Equal Opportunity Employer • Printed on Recycled and Recyclable Paper
Agenda Item 4
June 24, 2011 MEMORANDUM TO: State Investment Council
FROM: Timothy M. Walsh Director SUBJECT: Bridgewater Presentation
We have invited Bridgewater Associates (“Bridgewater”) to make presentation to the State Investment Council on their global outlook. Bridgewater is an employee-owned institutional asset management firm founded in 1975 with over $94 billion in assets under management. Their flagship product, Pure Alpha, incorporates their best active management ideas into a single highly diversified portfolio. Pure Alpha, with $56 billion in assets, is utilized both as part of portable alpha programs and as a standalone hedge fund investment. Pure Alpha has produced an annualized return of 10.6% since its inception in 1991 with only three down years. They are considered a pioneer in the industry in the separation of alpha and beta and risk budgeting. Representing Bridgewater will be James L. Haskel, Portfolio Strategist and Joel Whidden, Senior Relationship Manager. Jim is a senior member of the research group with expertise in portfolio structuring and the foreign exchange, interest rate, commodity, and equity markets. Jim is a contributor to Bridgewater’s Daily Observations. He also works with Bridgewater’s clients to develop investment strategies that meet their objectives and to provide insight into the research group’s thinking on global markets and economic conditions. Jim has been with the firm since 2003. Prior to joining Bridgewater, Jim was at Goldman Sachs from 1996-2003, both as a fixed-income portfolio manager in the Asset Management Division and a Senior Investment Strategist to Goldman’s high net worth clients. From 1991-1994, Jim was an Associate Economist at Caxton Associates, a multi asset-class money management firm. He began his career as an economics researcher at the American Enterprise Institute. Jim received his M.P.P. from Harvard University: The John F. Kennedy School of Government (1996), and a B.A. from Franklin and Marshall College (1990). Joel joined Bridgewater in 2002. In Public Fund Marketing, Joel is responsible for new business development and client service for Public Funds within North America. Prior to joining Bridgewater, Joel spent 12 years in Institutional Asset Management Sales. Most recently, Joel served as Director of Public Fund Sales at Deutsche Asset Management and Co-Director of Public Fund Sales at Sanford C. Bernstein. He received his BBA from Texas Christian University in 1991.
DEPARTMENT OF THE TREASURY DIVISION OF INVESTMENT
P.O. BOX 290 TRENTON, NJ 08625-0290
ANDREW P. SIDAMON-ERISTOFF State Treasurer
CHRIS CHRISTIE Governor KIM GUADAGNO Lt. Governor
One Glendinning PlaceWestport, CT 06880
(203) 226-3030www.bwater.com
Joel Whidden – Senior Relationship ManagerJim Haskel – Senior Portfolio Strategist
Global Outlook & Implications for InvestingPresented to:
June 30, 2011
- 2 -
ECONOMIC/MARKET DYNAMIC
Long-term real GDP growth is driven by rising productivity and labor force increases. Expansions and contractions of credit cause swings around this trend.
The business cycle is caused by self-correcting expansions and contractions of credit.
The long term debt cycle is a self-reinforcing credit expansion/contraction, which perpetuates itself through asset prices, net worth, and leverage.
These cycles occur within two types of monetary systems.
Linked
Flexible
- 3 -
MOST GROWTH& INFLATION
LEAST GROWTH& INFLATION
(INTEREST RATES & CURRENCIES
SHOULD BE HIGHER)
(INTEREST RATES & CURRENCIES
SHOULD BE LOWER)
WHAT THE WORLD LOOKS LIKE
with LinkedFX Rates
with FlexibleFX Rates
with FlexibleFX Rates
with LinkedFX Rates
e.g. Periphery Europe e.g. US, UK, Japan e.g. Brazil e.g. China
Developed, Debtor Countries Emerging, Creditor Countries
- 4 -
GROWTH SUPPORTED BY EXTREMELY STIMULATIVE POLICIES
Global Government Deficit (%PGDP)
-12%
-10%
-8%
-6%
-4%
-2%
0%
00 01 02 03 04 05 06 07 08 09 10 11
-8%
-6%
-4%
-2%
0%
2%
4%
6%
8%
00 01 02 03 04 05 06 07 08 09 10 11
Global Growth Global Real Short Rate
Global Central Bank Balance Sheet (% PGDP)
10%
12%
14%
16%
18%
20%
22%
24%
26%
28%
00 01 02 03 04 05 06 07 08 09 10 11
Accelerated during crisis
- 5 -
DIVERGENCE BETWEEN DEVELOPED AND EMERGING WORLD
Emerging Markets Output vs. Potential
-4%
-3%
-2%
-1%
0%
1%
2%
3%
4%
5%
00 01 02 03 04 05 06 07 08 09 10 11 12
CPI Y/Y
-6%
-4%
-2%
0%
2%
4%
6%
8%
10%
12%
05 06 07 08 09 10 11
Dev World EM WorldReal Short Rates
-3%
-2%
-1%
0%
1%
2%
3%
4%
5%
00 01 02 03 04 05 06 07 08 09 10 11
Developed World Emerging World
Developed World Output vs. Potential
-5%
-4%
-3%
-2%
-1%
0%
1%
2%
3%
4%
00 01 02 03 04 05 06 07 08 09 10 11 12
- 6 -
‐6%
‐4%
‐2%
0%
2%
4%
6%
8%
00 01 02 03 04 05 06 07 08 09 10 11
Fed Target Rate Estimated interest rate impact of QE Projected forward path
QE1: effective 350bp rate cut
end of QE2:effective 150bp tightening
QUANTITATIVE EASING COMING TO AN END
($500)
$0
$500
$1,000
$1,500
$2,000
$2,500
Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11
Actual Fed QE Rate Trailing 4wks Annualized Announced Fed QE Rate Annualized
- 7 -
US Total Debt %GDP
0%
50%
100%
150%
200%
250%
300%
350%
400%
20 25 30 35 40 45 50 55 60 65 70 75 80 85 90 95 00 05 10
Source: Global Financial Data Inc. and Bridgewater Analysis.
THE DEVELOPED WORLD HAS REACHED ITS DEBT LIMITS: US
- 8 -
UK Debt (% PGDP)
0%
50%
100%
150%
200%
250%
300%
350%
400%
450%
90 92 94 96 98 00 02 04 06 08 10
Financial Sector HH NonFin Business Public Sector
Japan Debt (% PGDP)
0%
50%
100%
150%
200%
250%
300%
350%
400%
450%
500%
90 92 94 96 98 00 02 04 06 08 10
Financial Sector HH NonFin Business Public Sector
Euroland Debt (% PGDP)
0%
50%
100%
150%
200%
250%
300%
350%
400%
91 93 95 97 99 01 03 05 07 09
Financial Sector HH NonFin Business Public Sector
Australia Debt (% PGDP)
0%
50%
100%
150%
200%
250%
300%
90 92 94 96 98 00 02 04 06 08 10
Financial Sector HH NonFin Business Public Sector
THE DEVELOPED WORLD HAS REACHED ITS DEBT LIMITS
- 9 -
GROWTH SLOWDOWN
3m Growth Estimate
-10%
-5%
0%
5%
10%
15%
00 01 02 03 04 05 06 07 08 09 10 11 12
Developed World Emerging World
- 10 -
PERIPHERY EUROPE INSOLVENTTypical Monetary Policy Response Given
Growth and Inflation Conditions
-4%
-3%
-2%
-1%
0%
1%
2%
Ger
man
y
Fran
ce
Italy
Por
tuga
l
Spa
in
Gre
ece
Irela
nd
Cor
e
Per
iphe
ry
Eur
olan
d
Euroland Total Non-financial Debt (%GDP)
140%
160%
180%
200%
220%
240%
260%
280%
300%
320%
95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11
Core Periphery
Government Impact on Growth, Last 6m %GDP
-4.5%-4.0%-3.5%-3.0%-2.5%-2.0%-1.5%-1.0%-0.5%0.0%
Ger
man
y
Fran
ce
Italy
Por
tuga
l
Spa
in
Gre
ece
Irela
nd
Cor
e
Per
iphe
ry
Eur
olan
d
Previous IMF Bailouts compared to Euro Periphery(Bubble Size Indicates $ Value of External Debt)
0%
2%
4%
6%
8%
10%
12%
14%
0% 50% 100% 150% 200% 250%External Debt (%GDP)
Cur
rent
Acc
ount
Def
icit
(%G
DP)
Greece 2010
T hailand 1997
R ussia 1998
Ukraine 2008
P o rtugal 2010
Spain 2010
Ireland 2010
A rgentina 2001
M exico 1994
B razil 1998
Ko rea 1997
Indo nesia 1997T urkey 2000
Direct IMF lending cases do not include IMF lending to Hungary and Pakistan in 2008.External debt figures adjusted based on Bridgewater estimates of impact of pass-through lending and liabilities of foreign bank subsidiaries.
- 11 -
RUNNING OUT OF MONEY
Core Financial Institution Lending to Periphery as % of Bank Capital
40%
50%
60%
70%
80%
90%
100%
110%
00 01 02 03 04 05 06 07 08 09 10 11
European Periphery Funding Requirements (Next 3 yrs, Euro Blns)
0
400
800
1,200
1,600
2,000
Remaining LendingCapacity
PRT IRE GRC ESP Peripheral 4 Peripheral 4 + BankRun
Peripheral 4 + BankRun + ECB Punt
Government Funding Bank Capital Bank Funding Crisis (Wholesale)
ECB Gov't Bond Purchases ECB Covered Bond Purchases Bank Borrowing from ECB
IMF
EFSF
Greece Package
EFSM
- 12 -
EM DANGERS: OVERLY ACCOMMODATIVE POLICY
China Real Short Rate
-3%
-2%
-1%
0%
1%
2%
3%
4%
00 01 02 03 04 05 06 07 08 09 10 11 12
USA Real Short Rate
-3%
-2%
-1%
0%
1%
2%
3%
4%
5%
00 01 02 03 04 05 06 07 08 09 10 11 12
Emerging Market Inflation (Headline)
0%
1%
2%
3%
4%
5%
6%
7%
8%
9%
10%
00 01 02 03 04 05 06 07 08 09 10 11
Impact Weight of Food in CPIDeveloped World: 23%Emerging World: 56%
Net New Private Sector Credit (3mma %GDP)
-10%
0%
10%
20%
30%
40%
50%
05 06 07 08 09 10 11
China USA
- 13 -
IMPLICATIONS FOR INVESTORS
Balance in your asset allocation is key, because there are a wide dispersion of potential outcomes.
While balance is always best, it is particularly important at this point in time
Good uncorrelated alpha can provide valuable diversification
- 14 -
PORTFOLIOS CONCENTRATED IN EQUITIES
Expectations are based on Bridgewater Associates’ understanding of global markets. There is no guarantee that the results shown can or will be achieved. Past results are not necessarily indicative of future results. WHERE SHOWN, HYPOTHETICAL OR SIMULATED PERFORMANCE RESULTS HAVE CERTAIN INHERENT LIMITATIONS. UNLIKE AN ACTUAL PERFORMANCE RECORD, SIMULATED RESULTS DO NOT REPRESENT ACTUAL TRADING OR THE COSTS OF MANAGING THE PORTFOLIO. ALSO, SINCE THE TRADES HAVE NOT ACTUALLY BEEN EXECUTED, THE RESULTS MAY HAVE UNDER OR OVER COMPENSATED FOR THE IMPACT, IF ANY, OF CERTAIN MARKET FACTORS, SUCH AS LACK OF LIQUIDITY.SIMULATED TRADING PROGRAMS IN GENERAL ARE ALSO SUBJECT TO THE FACT THAT THEY ARE DESIGNED WITH THE BENEFIT OF HINDSIGHT. NO REPRESENTATION IS BEING MADE THAT ANY ACCOUNT WILL OR IS LIKELY TO ACHIEVE PROFITS OR LOSSES SIMILAR TO THOSE SHOWN.
Traditional Asset Allocation Beta Dollar Weights
Traditional Asset Allocation Beta Risk Impact
Equities – 62% Mortgages – 9%Nominal Gov t Bonds – 9% Cash – 5%Real Estate – 5% Corp. Bonds – 5%IL Bonds – 3% Commodities – 2%
Equities – 88% Real Estate – 6%Corp. Bonds – 2% Mortgages – 2%Nominal Gov t Bonds – 2% Commodities – 1%Currency – 0% IL Bonds – 0%
Drawdowns
-45%
-40%
-35%
-30%
-25%
-20%
-15%
-10%
-5%
0%
70 71 72 73 74 75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11
Traditional Asset Allocation Equity Component
Correlation: 0.96
- 15 -
RISK ALLOCATION AND ENVIRONMENTAL BALANCE
Balanced Asset Allocation
Please refer to Note 1 for relevant disclosures.
Traditional Asset Allocation
Risk Allocation
Environmental Balance
Rising
Falling
Growth Inflation
Equities Real EstateCorp. Bonds MortgagesNominal Govt Bonds CommoditiesCurrency IL Bonds
Nominal Govt BondsIL BondsEquities
CommoditiesEmerging Market CreditCorporate Credit
Rising
Falling
Growth Inflation
- 16 -
-100%
100%
300%
500%
700%
900%
1100%
1925 1930 1935 1940 1945 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010
All Weather USD Strategy Cumulative Total Return (Gross of Fees, ln)
All Weather StrategyTraditional Beta PortfolioEquities
Total Returns
Cash ReturnsAnnualized Returns
Excess Returns
11.5%8.9%10.0%
3.9%3.9%3.9%
7.7%5.1%6.1%
Through May-2011
Sharpe Ratio
0.740.400.32
Data is estimated as of the date shown. Bridgewater started managing All Weather in 1996. Past results are not necessarily indicative of future results. WHERE SHOWN, HYPOTHETICAL OR SIMULATED PERFORMANCE RESULTS HAVE CERTAIN INHERENT LIMITATIONS. UNLIKE AN ACTUAL PERFORMANCE RECORD, SIMULATED RESULTS DO NOT REPRESENT ACTUAL TRADING OR THE COSTS OF MANAGING THE PORTFOLIO. ALSO, SINCE THE TRADES HAVE NOT ACTUALLY BEEN EXECUTED, THE RESULTS MAY HAVE UNDER OR OVER COMPENSATED FOR THE IMPACT, IF ANY, OF CERTAIN MARKET FACTORS, SUCH AS LACK OF LIQUIDITY. SIMULATED TRADING PROGRAMS IN GENERAL ARE ALSO SUBJECT TO THE FACT THAT THEY ARE DESIGNED WITH THE BENEFIT OF HINDSIGHT. NO REPRESENTATION IS BEING MADE THAT ANY ACCOUNT WILL OR IS LIKELY TO ACHIEVE PROFITS OR LOSSES SIMILAR TO THOSE SHOWN. Source: Global Financial Data Inc. and Bridgewater Analysis.
HISTORICAL PERFORMANCE
- 17 -
Disclosures
Please read the following notes and disclosures as they provide important information and context for the research and performance presented herein. Additional information is available upon request except where the proprietary nature of the information precludes its dissemination.
- 18 -
NOTESNote 1 : For illustrative purposes only. The example does not necessarily indicate the actual historical or current implementation of Bridgewater’s strategies. Markets listed may or may not be currently traded and list is subject to change without notice.
Note 2 : For the top chart, the data used to calculate the performance of the “Top 30 Managers” in the charts comes from the eVestment Alliance database and is rolling annual data. The chart reports the average returns of the 30 managers whose benchmarks were available with the most recent available AUM. All U.S. fixed income managers that submit data to eVestment Alliance are included in the analysis except where omission of returns by the managers necessitates exclusion. Corporate spread changes are shown on an inverted basis to reflect the inverse relationship between the yields and prices of bonds. Both return streams are shown on a rolling one-year basis.For the bottom chart, returns are shown through the most recent quarter end for the Dow Jones Credit Suisse Hedge Fund index and Bridgewater’s proprietary index of beta streams. Beta streams are based on representative indices; where indices are not available, proprietary indices, based on Bridgewater’s understanding of hedge fund strategies and global financial markets, are used.
- 19 -
ALL WEATHER STRATEGY:NET PERFORMANCE
All WeatherTotal Return in USD
Last 1 Year 18.4%Last 3 Years 2.4%Last 5 Years 5.4%
Last 10 Years 7.9%Annualized Returns (Jun-96 through May-11)
Annualized Return 8.8%Standard Deviation 11.0%
Sharpe Ratio 0.51
All Weather Strategy Performance (Net of Fees)
Net Since Inception Jun-96 through May-11
Past results are not necessarily indicative of future results.
- 20 -
PORTFOLIO NOTESThis page contains the allocation information for the historical simulation of the Traditional Asset Allocation, from 1970 onwards, as well as forward looking assumptions for expected returns, volatility, tracking error, and correlations used in this analysis. The portfolio capital allocation weights (illustrated below) are estimates based either upon Bridgewater Associates’ understanding of standard asset allocation (which may change without notice) or information provided by or publicly available from the recipient of this presentation. Asset class returns are actual market returns where available and otherwise a proxy index constructed based on Bridgewater Associates understanding of global financial markets. Information regarding specific indices and simulation methods used for proxies is available upon request (except where the proprietary nature of information precludes its dissemination). Results are hypothetical or simulated and gross of fees unless otherwise indicated. HYPOTHETICAL OR SIMULATED PERFORMANCE RESULTS HAVE CERTAIN INHERENT LIMITATIONS. UNLIKE AN ACTUAL PERFORMANCE RECORD, SIMULATED RESULTS DO NOT REPRESENT ACTUAL TRADING OR THE COSTS OF MANAGING THE PORTFOLIO. ALSO, SINCE THE TRADES HAVE NOT ACTUALLY BEEN EXECUTED, THE RESULTS MAY HAVE UNDER OR OVER COMPENSATED FOR THE IMPACT, IF ANY, OF CERTAIN MARKET FACTORS, SUCH AS LACK OF LIQUIDITY. SIMULATED TRADING PROGRAMS IN GENERAL ARE ALSO SUBJECT TO THE FACT THAT THEY ARE DESIGNED WITH THE BENEFIT OF HINDSIGHT. NO REPRESENTATION IS BEING MADE THAT ANY ACCOUNT WILL OR IS LIKELY TO ACHIEVE PROFITS OR LOSSES SIMILAR TO THOSE SHOWN.
AlphaAlphaAlphaAlphaAlphaAlphaAlphaAlphaAlphaAlphaAsseAsseAsseAsseAsseAsseAsseAsseAsseAsseAsseAsseAsseAsseAsseAsseAsseAsseAsseAsseAsseAsset
Cor
pora
te B
onds
Equi
ties
Equi
ties
Equi
ties
Equi
ties
Hed
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und
Infla
tion-
Link
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Mor
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Nom
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Gov
t Bon
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Rea
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Com
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Cor
pora
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Cur
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Cur
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Cur
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Cur
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Cur
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Cur
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Cur
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Cur
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Cur
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Cur
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Cur
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Equi
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Infla
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Mor
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Rea
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U.S
. Cor
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(Ext
ende
d)
U.S
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xten
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U.S
. Priv
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Equi
ty /
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xten
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U.S
. Sm
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xten
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Wor
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(Ext
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U.S
. IL
Bond
s (E
xten
ded)
U.S
. MBS
(Ext
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U.S
. Gov
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nds
(Ext
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d)
U.S
. Rea
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(Ext
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Com
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(GSC
I - E
xten
ded)
U.S
. Cor
pora
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onds
(Ext
ende
d)
AUD
vsU
SD
CAD
vsU
SD
CH
FvsU
SD
DKK
vsU
SD
EUR
vsU
SD
GBP
vsU
SD
HKD
vsU
SD
JPYv
sUSD
NO
KvsU
SD
NZD
vsU
SD
SEKv
sUSD
SGD
vsU
SD
U.S
. Lar
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xten
ded)
U.S
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xten
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U.S
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(Ext
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U.S
. IL
Bond
s (E
xten
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U.S
. MBS
(Ext
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U.S
. Gov
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(Ext
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U.S
. Rea
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ExposureAsset Class Exposure Allocation Return Volatility RatioAlpha Corporate Bonds U.S. Corporate Bonds (Extended) 2.30% 0.75% 3.00% 0.25 1.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.40 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00
Alpha Equities U.S. Large-Cap Equities (Extended) 20.00% 1.00% 4.00% 0.25 0.00 1.00 0.40 0.40 0.40 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.40 0.40 0.40 0.40 0.00 0.00 0.00 0.00
Alpha Equities U.S. Private Equity / VC (Extended) 3.00% 2.50% 10.00% 0.25 0.00 0.40 1.00 0.40 0.40 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.40 0.40 0.40 0.40 0.00 0.00 0.00 0.00
Alpha Equities U.S. Small-Cap Equities (Extended) 5.00% 1.50% 6.00% 0.25 0.00 0.40 0.40 1.00 0.40 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.40 0.40 0.40 0.40 0.00 0.00 0.00 0.00
Alpha Equities World Equities Ex-US (Extended) 14.00% 1.80% 6.00% 0.30 0.00 0.40 0.40 0.40 1.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.40 0.40 0.40 0.40 0.00 0.00 0.00 0.00
Alpha Hedge Fund Cash 5.00% 4.90% 7.00% 0.70 0.00 0.00 0.00 0.00 0.00 1.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00
Alpha Inflation-Linked Bonds U.S. IL Bonds (Extended) 3.00% 0.25% 1.00% 0.25 0.00 0.00 0.00 0.00 0.00 0.00 1.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.40 0.00 0.00 0.00
Alpha Mortgages U.S. MBS (Extended) 4.60% 0.50% 2.00% 0.25 0.00 0.00 0.00 0.00 0.00 0.00 0.00 1.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.40 0.00 0.00
Alpha Nominal Govt Bonds U.S. Gov't Bonds (Extended) 4.60% 0.50% 2.00% 0.25 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 1.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.40 0.00
Alpha Real Estate U.S. Real Estate (Extended) 5.00% 1.50% 6.00% 0.25 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 1.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.40
Asset Commodities Commodities (GSCI - Extended) 2.00% 5.95% 23.79% 0.25 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 1.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.20 0.20 0.20 0.20 0.20 -0.10 -0.20 0.50
Asset Corporate Bonds U.S. Corporate Bonds (Extended) 4.60% 2.22% 8.87% 0.25 0.40 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 1.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.40 0.40 0.40 0.30 0.00 0.80 0.70 0.40
Asset Currency AUDvsUSD 0.69% 0.00% 12.28% 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 1.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00
Asset Currency CADvsUSD 1.05% 0.00% 6.65% 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 1.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00
Asset Currency CHFvsUSD 0.91% 0.00% 13.93% 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 1.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00
Asset Currency DKKvsUSD 0.08% 0.00% 12.83% 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 1.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00
Asset Currency EURvsUSD 4.26% 0.00% 13.00% 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 1.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00
Asset Currency GBPvsUSD 3.19% 0.00% 11.56% 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 1.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00
Asset Currency HKDvsUSD 0.22% 0.00% 5.00% 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 1.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00
Asset Currency JPYvsUSD 3.05% 0.00% 13.38% 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 1.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00
Asset Currency NOKvsUSD 0.11% 0.00% 11.73% 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 1.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00
Asset Currency NZDvsUSD 0.03% 0.00% 14.86% 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 1.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00
Asset Currency SEKvsUSD 0.30% 0.00% 12.50% 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 1.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00
Asset Currency SGDvsUSD 0.11% 0.00% 5.50% 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 1.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00
Asset Equities U.S. Large-Cap Equities (Extended) 40.00% 4.25% 16.99% 0.25 0.00 0.40 0.40 0.40 0.40 0.00 0.00 0.00 0.00 0.00 0.20 0.40 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 1.00 1.00 1.00 0.75 -0.20 0.20 0.20 0.60
Asset Equities U.S. Private Equity / VC (Extended) 3.00% 5.90% 23.60% 0.25 0.00 0.40 0.40 0.40 0.40 0.00 0.00 0.00 0.00 0.00 0.20 0.40 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 1.00 1.00 1.00 0.75 -0.20 0.20 0.20 0.60
Asset Equities U.S. Small-Cap Equities (Extended) 5.00% 5.15% 20.58% 0.25 0.00 0.40 0.40 0.40 0.40 0.00 0.00 0.00 0.00 0.00 0.20 0.40 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 1.00 1.00 1.00 0.75 -0.20 0.20 0.20 0.60
Asset Equities World Equities Ex-US (Extended) 14.00% 5.24% 17.47% 0.30 0.00 0.40 0.40 0.40 0.40 0.00 0.00 0.00 0.00 0.00 0.20 0.30 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.75 0.75 0.75 1.00 -0.15 0.15 0.15 0.45
Asset Inflation-Linked Bonds U.S. IL Bonds (Extended) 3.00% 1.49% 5.97% 0.25 0.00 0.00 0.00 0.00 0.00 0.00 0.40 0.00 0.00 0.00 0.20 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 -0.20 -0.20 -0.20 -0.15 1.00 0.10 0.20 0.00
Asset Mortgages U.S. MBS (Extended) 9.20% 1.77% 7.09% 0.25 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.40 0.00 0.00 -0.10 0.80 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.20 0.20 0.20 0.15 0.10 1.00 0.80 0.10
Asset Nominal Govt Bonds U.S. Gov't Bonds (Extended) 9.20% 1.62% 6.48% 0.25 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.40 0.00 -0.20 0.70 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.20 0.20 0.20 0.15 0.20 0.80 1.00 0.20
Asset Real Estate U.S. Real Estate (Extended) 5.00% 5.11% 20.46% 0.25 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.40 0.50 0.40 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.60 0.60 0.60 0.45 0.00 0.10 0.20 1.00
Exposure TypeCorrelation matrix, Sharpe ratios and return expectations based on Bridgew ater assumptions. Beta volatilities estimated using historical data from the period 01/01/1970 - 05/01/2011.
Asset Class
Exposure
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This page contains the allocation information for the historical simulation of the Traditional Asset Allocation prior to 1970. The portfolio capital allocation weights (illustrated below) are estimates based either upon Bridgewater Associates’ understanding of standard asset allocation (which may change without notice) or information provided by or publicly available from the recipient of this presentation. Asset class returns from January 1920 to the present are actual market returns where available and otherwise a proxy index constructed based on Bridgewater Associates understanding of global financial markets. Information regarding specific indices and simulation methods used for proxies is available upon request (except where the proprietary nature of information precludes its dissemination). Results are hypothetical or simulated and gross of fees unless otherwise indicated. HYPOTHETICAL OR SIMULATED PERFORMANCE RESULTS HAVE CERTAIN INHERENT LIMITATIONS. UNLIKE AN ACTUAL PERFORMANCE RECORD, SIMULATED RESULTS DO NOT REPRESENT ACTUAL TRADING OR THE COSTS OF MANAGING THE PORTFOLIO. ALSO, SINCE THE TRADES HAVE NOT ACTUALLY BEEN EXECUTED, THE RESULTS MAY HAVE UNDER OR OVER COMPENSATED FOR THE IMPACT, IF ANY, OF CERTAIN MARKET FACTORS, SUCH AS LACK OF LIQUIDITY. SIMULATED TRADING PROGRAMS IN GENERAL ARE ALSO SUBJECT TO THE FACT THAT THEY ARE DESIGNED WITH THE BENEFIT OF HINDSIGHT. NO REPRESENTATION IS BEING MADE THAT ANY ACCOUNT WILL OR IS LIKELY TO ACHIEVE PROFITS OR LOSSES SIMILAR TO THOSE SHOWN.
PORTFOLIO NOTES
Capital Allocation
U.S. Equities 65%U.S. 10-year Bonds 35%
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Bridgewater All Weather Strategy Gross Performance Disclosure:For the period June 1996 (the inception of the strategy) through August 2001 the performance is based on the total return of the Bridgewater All Weather Strategy as implemented for Bridgewater's principals and their affiliates and was not fully hedged to the US Dollar. The All Weather Strategy currently is fully hedged, and the performance reflected after August 2001 includes these hedging transactions. For the period of August 2001 through present the performance shown is the actual total returns of the longest running fully funded All Weather account. For the entire history excess returns are calculated by subtracting the cash return of the US repo rate from the total returns described above. Of note, the All Weather Strategy’s target leverage, volatility and return, as well as the asset mix varied from June 1996 to July 2005. From August 2005 through the present the strategy has targeted 10% volatility, albeit adjusting target leverage, volatility, return and the asset mix during extreme recessionary or depressionary economic environments. Bridgewater manages additional All Weather portfolios not included in this performance history.
The performance provided is gross of management fees and includes the reinvestment of all interest, gains, and losses. Returns will be reduced by the investment advisory fees and any other expenses that may be incurred in the management of the account. Investment advisory fees are described in Part II of Bridgewater’s Form ADV. No representation is being made that any account will or is likely to achieve returns similar to those shown. Trading in futures is risky and can result in losses as well as profits. PAST RESULTS ARE NOT NECESSARILY INDICATIVE OF FUTURE RESULTS.
Bridgewater All Weather Strategy Net Performance Disclosure:For the period June 1996 (the inception of the strategy) through August 2001 the performance is based on the total return of the Bridgewater All Weather Strategy as implemented for Bridgewater's principals and their affiliates and was not fully hedged to the US Dollar. The All Weather Strategy currently is fully hedged, and the performance reflected after August 2001 includes these hedging transactions. For the period of August 2001 through present the performance shown is the actual total returns of the longest running fully funded All Weather account. For the entire history excess returns are calculated by subtracting the cash return of the US repo rate from the total returns described above. Of note, the All Weather Strategy’s target leverage, volatility and return, as well as the asset mix varied from June 1996 to July 2005. From August 2005 through the present the strategy has targeted 10% volatility, albeit adjusting target leverage, volatility, return and the asset mix during extreme recessionary or depressionary economic environments. Bridgewater manages additional All Weather portfolios not included in this performance history.
The performance provided is net of fees and includes the reinvestment of all interest, gains, and losses. The net of fees returns have been calculated using our standard fee schedule for a minimum size account, which are the highest fees we have or would currently charge an account. Investment advisory fees are described in Part II of Bridgewater’s Form ADV. No representation is being made that any account will or is likely to achieve returns similar to those shown. Trading in futures is risky and can result in losses as well as profits. PAST RESULTS ARE NOT NECESSARILY INDICATIVE OF FUTURE RESULTS.
Performance as of the current month is estimated and subject to change.
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All Weather Simulated Portfolio Note:Prior to June 1996, All Weather is simulated and gross of all fees (including investment management fees). All Weather is constructed using a proprietary mix and weighting of assets. The returns used to construct All Weather are actual market returns where available and Bridgewater Associates' estimates otherwise. Bridgewater Associates' estimates for various market returns are based on Bridgewater Associates' understanding of global financial markets and may change without notice. The benchmark cash return is defined as the Repo rate since 1991 and prior to 1991 the lesser of the 3 month T-bill times 1.05 and the 3 month Euro rate.
Simulated Performance Disclosure:WHERE SHOWN, HYPOTHETICAL OR SIMULATED PERFORMANCE RESULTS HAVE CERTAIN INHERENT LIMITATIONS. UNLIKE AN ACTUAL PERFORMANCE RECORD, SIMULATED RESULTS DO NOT REPRESENT ACTUAL TRADING OR THE COSTS OF MANAGING THE PORTFOLIO. ALSO, SINCE THE TRADES HAVE NOT ACTUALLY BEEN EXECUTED, THE RESULTS MAY HAVE UNDER OR OVER COMPENSATED FOR THE IMPACT, IF ANY, OF CERTAIN MARKET FACTORS, SUCH AS LACK OFLIQUIDITY. SIMULATED TRADING PROGRAMS IN GENERAL ARE ALSO SUBJECT TO THE FACT THAT THEY ARE DESIGNED WITH THE BENEFIT OF HINDSIGHT. NO REPRESENTATION IS BEING MADE THAT ANY ACCOUNT WILL OR IS LIKELY TO ACHIEVE PROFITS OR LOSSES SIMILAR TO THOSE SHOWN.
Terminology: Value added (or excess return) is calculated by subtracting the official returns of each account's specified benchmark from the total return experienced by the account over a given period.
Volatility of value added (or tracking error) refers to the standard deviation of monthly value added over a given time period. Standard deviation of monthly value added is one possible measurement of portfolio risk. Past value added and past volatility are not necessarily indicative of future value added and future volatility. There can be no assurance that the future value added and future volatility actually reflected in accounts will be at historical levels or levels either specified in the investment objectives or suggested by our forecasts.Target volatility (or target tracking error) is an indication of the long-term expected volatility of value added.Sharpe ratio is calculated by dividing the excess return above cash over a given period by the volatility of the excess return during the same period. Information Ratio is calculated by dividing the excess return above a given benchmark over a given period by the volatility of the excess return during the same period.Alpha: The risk taken by active managers above and beyond their passive, benchmark-replicating positions.Beta: The risk in a portfolio that arises from passively holding asset classes.Portfolio VaR: A measure of the amount of a total portfolio’s risk, taking into consideration correlations within and across asset classes.Var Share: A measure of the portion of a total portfolio’s risk allocated to a particular return stream when all of its return streams are assumed to be fully correlated to each other.CoVar Share: A measure of the portion of a total portfolio’s risk allocated to a particular return stream when the cross correlations of all of the return streams are taken into account.Drawdowns: Where shown, drawdowns are from previous peak.
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Expected Performance Disclosure:The performance is for informational and educational purposes only and should not be relied upon as a prediction of future market performance or Bridgewater management performance. Reasonable people may disagree with the assumptions used and expectations developed there from and there is no guarantee the expectations shown can be achieved. Expected or forward looking performance is based on Bridgewater analysis of market data, quantitative research of the underlying forces that influence asset classes andour active management policies. Expected performance is considered hypothetical and is subject inherent limitations such as the impact of concurrent economic or geo-political elements not addressed in the analysis and market factors, such as lack of liquidity. Bridgewater Associates, its Strategies and/or employees may have long or short positions in and/or buy or sell securities or derivatives referred to or implied in this research. There is no guarantee that such a scenario, and the impact on any given account or Strategies, would not be considered detrimental in nature when similar mandates are compared in isolation. Additionally, where Strategies are traded similarly performance may materially diverge based on, among other factors, the approved instruments, markets, and target risk for each Strategy or market. In the event of any discrepancy between the information and expectations presented herein and the actual language in the Offering Memorandum ("OM"), the OM shall prevail.
Volatility Disclosure:Expected or target volatility is one objective of Bridgewater's active management style. Statements regarding expectations or targets should not be considered a guarantee that such results will be achieved. Expected or target volatility is only one measure of risk. Discussions of risk management processes or theories contained herein should not be construed as a statement that Bridgewater has the ability to control risk or that the investments discussed are low risk.
Individually Managed Accounts:Individually managed account performance will vary based on constraints, funding levels and other factors.
Research/Outlook Disclosure:Bridgewater research utilizes (in whole and in part) data and information from public, private, and internal sources. Some internally generated information may be considered theoretical in nature and is subject to inherent limitations associated therein. External sources include International Energy Agency, International Monetary Fund, National Bureau of Economic Research, Organisation for Economic Co-operation and Development, United Nations, US Department of Commerce, World Bureau of Metal Statistics as well as information companies such as BBA Libor Limited, Bloomberg Finance L.P., CEIC Data Company Ltd., Consensus Economics Inc., Consumer Metrics Institute, Credit Market Analysis Ltd., Ecoanalitica, Emerging Portfolio Fund Research, Inc., Global Financial Data, Inc., Global Trade Information Services, Inc., Hewitt Associates, LLC, Intex Solutions, Inc., Markit Economics Limited, Mergent, Inc., Moody’s Analytics, Inc., MSCI, RealtyTrac, Inc., RP Data Ltd., Standard and Poor’s, Thomson Reuters, TrimTabs Investment Research, Inc. and Wood Mackenzie Limited. While we consider information from external sources to be reliable, we do not assume responsibility for its accuracy.
The views expressed are solely those of Bridgewater Associates, LP and are subject to change without notice. Reasonable people may disagree. You should assume that Bridgewater Associates, LP has a significant financial interest in one or more of the positions and/or securities or derivatives discussed. Bridgewater Associates, LP employees may have long or short positions in and buy or sell securities or derivatives referred to in this research. Those responsible for preparing this research receive compensation based upon various factors, including, among other things, the quality of their work and firm revenues.
The research in this presentation is for informational and educational purposes only and is not an offer to sell or the solicitation of an offer to buy the securities or other instruments mentioned. It does not constitute a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual investors. Investors should consider whether any advice or recommendation in this research is suitable for their particular circumstances and, where appropriate, seek professional advice, including tax advice. Investment decisions should not be based solely on simulated, hypothetical or illustrative information. The price and value of the investments referred to in this research and the income therefrom may fluctuate. Past performance is not a guide to future performance, future returns are not guaranteed, and a loss of original capital may occur. Certain transactions, including those involving futures, options, and other derivatives, give rise to substantial risk and are not suitable for all investors. Fluctuations in exchange rates could have adverse effects on the value or price of, or income derived from, certain investments.
Bridgewater Associates has no obligation to provide recipients hereof with updates or changes to such data. No part of this material may be (i) copied, photocopied or duplicated in any form by any means or (ii) redistributed without the prior written consent of Bridgewater ® Associates, LP.
ERISA Investors:None of the advice or recommendations related to the overall portfolio that Bridgewater may provide is intended to form the primary basis for any investment decisions with respect to the plan’s assets. Recommendations and advice should be independently evaluated based on whatever other sources deemed appropriate, including legal and tax advice. Bridgewater may recommend one or more Bridgewater products in connection with our advice and recommendations, which would result in additional fees being paid to Bridgewater. Bridgewater’s status as an ERISA fiduciary with respect to the management of any existing or future Bridgewater product(s) in which you invest would be (or continue to be) set forth in that product’s applicable governing instruments.
New Jersey Is an Equal Opportunity Employer • Printed on Recycled and Recyclable Paper
Agenda Item 5b
June 24, 2011
MEMORANDUM TO: State Investment Council
FROM: Timothy M. Walsh
Director
SUBJECT: Venture Capital Presentation
SIS will make a presentation on the Venture Capital market. The presentation materials follow
this cover.
DEPARTMENT OF THE TREASURY
DIVISION OF INVESTMENT
P.O. BOX 290
TRENTON, NJ 08625-0290
ANDREW P. SIDAMON-ERISTOFF
State Treasurer
CHRIS CHRISTIE
Governor
KIM GUADAGNO
Lt. Governor
