CITY OF LOS ANGELES
DEPARTMENT OF WATER AND POWER
INTRADEPARTMENTAL CORRESPONDENCE
Date:
May 1,2012
To:
Retirement Board Members
q,
From:
Subject:
Sangeeta Bhatia, Retirement Plan Manager
Board Agenda Item No. 14: Discussion of Investment Policy Benchmark;
and Possible Action (May 9, 2012, Regular Retirement Board Meeting)
At the Regular Board meeting held on April 11, 2012, Board Member Robert Rozanski
noted the Investment Policy benchmark, against which the overall pension portfolio is
measured, was different from the individual asset class mandate benchmarks.' He
requested a report explaining the difference.
I
The attached report from Pension Consulting Alliance responds to Mr. Rozanski's
inquiry.
As of March 31, 2012, the Investment Policy benchmark included the following
components.
•
•
•
•
•
•
•
35% Russell 3000 (Large Cap Equities)
33% Barclays Capital Universal (Fixed-Income)
22% MSCI ACWI ex US IMI Net Dividends (International Equities)
5% T-Bills +3% (Hedge Funds and GILS)
2% Russell 3000 + 3% (Private Equity)
2% NCREIF (Real Estate)
1% T-Bills (Cash)
SB:je
Attachment
14.1
Date:
April 27, 2012
To:
Water & Power Employees' Retirement Plan (WPERP)
From:
Pension Consulting Alliance, Inc. (PCA)
RE:
Strategic Class v. Roll-up Benchmarks
~
cc:
Neil Rue, CFA - PCA
David Sancewich - PCA
Kay Ceserani - PCA
Summary
PCA was asked to discuss and compare WPERP's current broad strategic class benchmarks
against custom "roll-up" benchmarks. The roll-up benchmarks were constructed for each broad
strategic class based on the underlying managers' actual allocation and benchmarks over time.
In summary, there is solid rationale for utilizirig broad class benchmarks and the performance
difference between the two conceptual benchmarks is negligible.
Discussion
When evaluating the performance of a portfolio or a specific manager, it's important to compare
it against an appropriate benchmark. There are dozens of index providers used to gauge the
performance of any given investment including Standard & Poor's, Russell, MSCI, and Barclays
Capital. In general, an appropriate benchmark represents the investable universe (or
opportunity set) while also adhering to broadly-accepted industry standards. 1 Such standards
are easily implemented through the broad-class benchmark framework. While specific manager
benchmarks tend to be more focused, strategic class benchmarks are broader in nature in an
attempt to capture the full nature of the risk premiums investors are seeking to capture and
exploit. In addition, the easiest and cheapest options to implement across the major classes are
passive indexes that mirror the investment performance of the broad benchmarks. In the case
of an investor of WPERP's scale, such passive strategies cost Virtually nothing to implement.
WPERP has historically selected broad market-representative benchmarks for the three major
strategic classes (US equity, international equity, and fixed income). As the markets have
evolved, the benchmark providers have also evolved, creating broader benchmarks to capture
See, for example, A Primer for Investment Trustees, ©2011, The Research Foundation of the CFA Institute. This publication
highlights that broad class benchma/1(s provide reasonable proxies for the types of capital ma/1(et risks that must be borne by
investors in order to capture investment returns over time. In addition, the most common metrics utilized to measure investment
performance rely upon broadly published benchma/1(s. Finally, the basic standard for a benchma/1( is that it be (i) unambiguous,
(ii) measurable, (iii) investable, (iv) appropriate, (v) measurable in advance, and (vi) owned (Le., the publisher adheres to high­
quality accountability standards). Widely-followed broad class benchma/1(s easily meet these standards.
·14.2
the total opportunity set. Both the BC Universal and MCSI IMI benchmark series are examples
of such evolution. Plan sponsors, including WPERP, have shifted to broader strategic class
benchmarks that developed with the expanding opportunity set. For example. in 2003, WPERP
moved from the S&P 500 Index to the Russell 3000 Index to evaluate the US equity strategic
class in an effort to better account for the allocation to small cap stocks in WPERP's portfolio.
For the same reasons in 2008, WPERP shifted from the standard MSCI series to the new MSCI
IMI Series to evaluate and structure the international equity strategic class. The WPERP fixed
income strategic class benchmark was adjusted over 10 years ago to account for the Plan's
allocation to extended segments, largely represented by high yield.
Based on the rational above, PCA finds WPERP's broad strategic class benchmarks to be
suitable to evaluate the combined performance of the managers within each class.
Findings
PCA reviewed the structure of each of the three major strategic classes historically over the last
five years as of March 31, 2012. Utilizing monthly benchmark performance and month-end
allocations, PCA constructed performance results for broad roll-up benchmarks, defined as
manager-specific benchmark portfolios weighted by manager allocations.
The tables below highlight the performance differences for the strategic class benchmarks
versus their respective'roll-up benchmarks as of March 31, 2012. Performance results for
WPERP's domestic equity benchmark, the Russell 3000 Index, and its corresponding roll-up
benchmark are essentially the same for all periods shown. Due to structural differences, the
international equity and fixed income roll-up portfolios have produced slightly different
performance results than their corresponding broad strategic class benchmarks.
PCA's analysis found that the broad strategic class benchmarks, representing the investable
universes, exhibit the essentially the same characteristics of the roll-up benchmarks and have
produced similar performance results over all periods shown.
Summary of Roll-Up versus Broad Benchmark Comparisons
Domestic Equity
Short-term (quarter and 1 year) performance variances ±O.1 %
Long-term (3 and 5 year) performance variances ±O.2%
Both benchmarks exhibit the same positioning across sector, capitalization, and style
International Equity
Short-term (quarter and 1 year) performance variances ±O.3%
Long-term (3 and 5 year) performance variances ±O.5%
Roll-up benchmark underweight developed markets and overweight emerging markets by 4.3%
14.3
Fixed Income
Short-term (quarter and 1 year) performance variances ±0.1 %
Long-term (3 and 5 year) performance variances ±0.6%
. Both benchmarks exhibit the same positioning across sectors
Roll-up benchmark underweight extended segments (specifically, 144a and Eurobonds)
Benchmark Perfonnance Comparison
Domestic Equity
7.2
7.3
-0.1
24.3
24.5
-0.2
2.2
2.3
-0.1
20.0
19.5
-1.0
-1.4
0.3
-7.3
-7.2
-0.1
0.5
0.4
BC Universal
Roll-up Benchmark
0.8
0.8
7.6
7.7
7.9
8.5
6.2
6.6
Difference
0.0
-0.1
-0.6
-0.4
Russell 3000 (blend)*
Roll-up Benchmark
12.9
12.9
Difference
0.0
MSCI ACWI ex US IMI NO (blend)**
Roll-up Benchmark
11.6
11.3
Difference
International Equity
Fixed Income
·S&P 500 through 3/31/03 and Russell 3000 from 4/1/03 to the present
-MSCI ACWI ex US through 12/31/08 and MSCI ACWI ex US IMI ND from 1/1/09 to present
PCA also reviewed the characteristics, as of March 31, 2012, of each of the broad strategic
class benchmarks versus the roll-up benchmarks to determine if there were any material
differences.
As the table below shows, WPERP's US equity strategic benchmark, the Russell 3000 Index,
and the roll-up benchmark exhibit the same positioning across sectors, capitalization, and style
as of March 31, 2012.
Consumer Disc
Consumer Sta les
Ener
Financials
Health Care
Industrials
Information Tech
Materials
Telecom Svc
Utilities
Total
12.0
9.3
10.5
15.9
11.5
11.3
19.7
4.0
2.4
3.4
100.0
12.0
9.3
10.4
15.9
11.5
11.3
19.7
4.0
2.4
3.4
100.0
All Growth
All Value
Partial Gr & Val
Total
14.4
35.6
34.6
29.8
100.0
35.6
34.6
29.8
100.0
WPERP's international equity strategic class benchmark, the MSCI ACWI ex US IMI ND, and
the roll-up benchmark exhibit the same positioning across sectors as of March 31, 2012 (see
table below). However, the roll-up benchmark is currently overweight emerging markets and
underweight developed markets by 4.3% as compared to the MSCI ACWI ex US IMI ND. This
allocation difference is due to the static nature of WPERP's current policy.
Consumer Disc
Consumer Sta les
Ener
Financials
Health Care
Industrials
Information Tech
Materials
Telecom Svc
Utilities
Total
10.5
10.5
9.4
9.4
10.7
23.1
6.5
11.8
7.1
11.8
5.3
3.7
100.0
10.7
23.1
6.5
11.9
7.1
11.8
5.3
3.7
100.0
WPERP's fixed income strategic class benchmark, the BC Universal Index, and the roll-up
benchmark are positioned somewhat similarly across sectors as of March 31, 2012 (see table
below). However, the roll-up benchmark has an underweight allocation to the extended
segments because WPERP's two large core managers are benchmarked to the BC Aggregate
Index which does not include these extended segments.
Governments
Inv. Grade Credit
A encies
MBS
ABS
CMBS
33.7
17.5
5.9
26.9
0.2
1.7
35.3
18.2
6.2
28.2
0.2
1.8
14.5
23.6
17.5
1.8
37.5
5.9
4.3
25.6
19.2
1.9
46.7
2.7
2.9
27.1
18.0
2.1
36.1
10.6
6.7
4.1
11.6
0.9
The following tables reflect WPERP'sbroad strategic class portfolios as of March 31, 2012. It is
important to note, that a manager's allocation within their respective portfolio has fluctuated over
time as new policy targets were implemented and when markets expanded/contracted.
WPERP US Equity Portfolio
T. Rowe Price
413,720,344
15%
Russell 1000 Value
MFS
424,127,113
16%
Russell 1000 Value
Fred AI er
424,953,081
16%
Russell 1000 Growth
T. Rowe Price
442,040,947
16%
Russell 1000 Growth
BlackRock
784,215,643
29%
Russell 1000
Earnest
105,635,130
4%
Russell 2000 Value
Frontier
108,075,829
4%
Russell 2000 Growth
Total
2,702,768,087
100%
Russell 3000
WPERP International Equity Portfolio
P ramis
Invesco
Interim OM
The Boston Co
T.Rowe
The Boston Co
Interim EM
Total
25%
MSCI World ex US IMI NO
MSCI World ex US IMI NO
MSCI World ex US IMI NO
26%
7%
7%
9%
100%
MSCI World ex US IMI NO
MSCIEMIMINO
MSCI EMIMI NO
MSCIEMIMINO
MSCI ACWI IMI NO
26%
0%
429,587,055
191,439
424,352,836
430708512
119,348,198
124,797,563
149,728,891
1,678,714,494
WPERP Fixed Income Portfolio
JP Mor an
1,075,618,434
Wells Core
Wells HY
Loomis HY
Total
1,079,976,440
119,308,404
128,384,759
BC Hi h Yield
BC Universal
2,403,288,037
, 4.6