Fixed Income
Attachment 4
CalPERS – Performance Review – June 30, 2009
Michael C. Schlachter, CFA Managing Director & Principal Andrew Junkin, CFA, CIMA, CAIA Managing Director & Principal September 2009 1
Overview • US consumers still retrenching • US production and employment will not recover until consumers start to spend again • Equity, Fixed Income, Commodites markets continue to rebound from lows • More losses ahead for Private Equities and Real Estate as prices catch up to reality • Fixed Income has had several outperforming months in a row as prices begin to reflect economic value more than illiquidity • CalPERS’ underweight to Global Equities helped during the stock market collapse but has led the fund to under‐participate in the market rally over the last few months
Perspective – Fear versus Reality
Post WWII Real GDP Growth Gross domestic product 20 15 10 5 0 ‐5 ‐10 ‐15
Pre‐1983 Average Growth Rate = 3.5% Pre‐1983 Standard Deviation = 4.9%
‐20
Post‐1983 Average Growth Rate = 3.0% Post‐1983 Standard Deviation = 2.7%
Data sources: Bureau of Economic Analysis
2007‐II
2004‐II
2001‐II
1998‐II
1995‐II
1992‐II
1989‐II
1986‐II
1983‐II
1980‐II
1977‐II
1974‐II
1971‐II
1968‐II
1965‐II
1962‐II
1959‐II
1956‐II
1953‐II
1950‐II
1947‐II
‐25
Consumer Weakness
Data sources: Bureau of Economic Analysis, Bureau of Labor Statistics, Federal Reserve Bank of St. Louis
The U.S. is a Consumer Driven Economy
Data sources: JP Morgan, BEA
1978 1978 1979 1980 1981 1981 1982 1983 1984 1984 1985 1986 1987 1987 1988 1989 1990 1990 1991 1992 1993 1993 1994 1995 1996 1996 1997 1998 1999 1999 2000 2001 2002 2002 2003 2004 2005 2005 2006 2007 2008 2008
The U.S. is a Consumer Driven Economy Consumer Confidence
120
100
80
60
40
20
0
Data sources: University of Michigan
Debt Burden Slowing Consumer Activity Consumer Debt Service Ratio (Ratio of Debt Payments to Personal Disposable Income) 16 15 14 13 12 11 10 9
80q1 80q4 81q3 82q2 83q1 83q4 84q3 85q2 86q1 86q4 87q3 88q2 89q1 89q4 90q3 91q2 92q1 92q4 93q3 94q2 95q1 95q4 96q3 97q2 98q1 98q4 99q3 00q2 01q1 01q4 02q3 03q2 04q1 04q4 05q3 06q2 07q1 07q4 08q3
8
Data sources: Bureau of Economic Analysis
Inventories Compression – How Long Can It Last? Change in Private Inventories 150
100
Billions of $
50
0
‐50
‐100
‐150
Higher Inflation Seems Likely… Gross Federal Debt as a % of GDP 140 120
2009 Estimate 100 80 60 40 20
1940 1942 1944 1946 1948 1950 1952 1954 1956 1958 1960 1962 1964 1966 1968 1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008
0
Data sources: Bureau of Economic Analysis, Whitehouse Office of Management and Budget
Data sources: Bureau of Economic Analysis 2009‐I
2007‐I
2005‐I
2003‐I
2001‐I
1999‐I
10
1997‐I
1995‐I
1993‐I
1991‐I
1989‐I
1987‐I
1985‐I
1983‐I
1981‐I
1979‐I
1977‐I
1975‐I
1973‐I
6
1971‐I
1969‐I
1967‐I
1965‐I
1963‐I
1961‐I
1959‐I
1957‐I
1955‐I
1953‐I
1951‐I
1949‐I
1947‐I
Or Does it? Personal Savings as a % of Disposable Income
14
12
May Estimate = 6.9%
8
4
52 Year Average = 7.0%
2
0
‐2
‐4
‐6
‐8
‐10
1960‐I 1961‐II 1962‐III 1963‐IV 1965‐I 1966‐II 1967‐III 1968‐IV 1970‐I 1971‐II 1972‐III 1973‐IV 1975‐I 1976‐II 1977‐III 1978‐IV 1980‐I 1981‐II 1982‐III 1983‐IV 1985‐I 1986‐II 1987‐III 1988‐IV 1990‐I 1991‐II 1992‐III 1993‐IV 1995‐I 1996‐II 1997‐III 1998‐IV 2000‐I 2001‐II 2002‐III 2003‐IV 2005‐I 2006‐II 2007‐III 2008‐IV
1960‐I 1961‐II 1962‐III 1963‐IV 1965‐I 1966‐II 1967‐III 1968‐IV 1970‐I 1971‐II 1972‐III 1973‐IV 1975‐I 1976‐II 1977‐III 1978‐IV 1980‐I 1981‐II 1982‐III 1983‐IV 1985‐I 1986‐II 1987‐III 1988‐IV 1990‐I 1991‐II 1992‐III 1993‐IV 1995‐I 1996‐II 1997‐III 1998‐IV 2000‐I 2001‐II 2002‐III 2003‐IV 2005‐I 2006‐II 2007‐III 2008‐IV
Velocity of Money is Slowing Growth Velocity of Money
2.5
2
1.5
1
0.5
0
Y/Y Change in Velocity of Money
8.00% 6.00% 4.00% 2.00% 0.00% ‐2.00% ‐4.00% ‐6.00% ‐8.00% ‐10.00% ‐12.00%
Data sources: Federal Reserve, Wilshire Associates
Total Fund Performance
Total Fund – Universe Comparison
CalPERS Total Fund – Asset Allocation 1998
1999
2000
2001
2002
2003
2004
69 26 4 1
70 24 5 1
64 29 6 1
63 27 9 1
57 5 28 9 1
63 5 24 7 1
63 5 24 6 1
% Equity % AIM % Fixed Income % ILAC % Real Estate % Cash
% Equity % AIM % Fixed Income % ILAC % Real Estate % Cash
2005
2006
2007
2Q08
3Q08
1Q09
2Q09
62 5 25
63 6 23
56 8 27
52 10 25
50 12 24
38 14 26
50 11 25
5 3
8 1
1 8 1
2 10 1
2 10 1
3 12 8
3 10 1
Asset Allocation vs Active Management 6%
Total Cumulative Impacts Impact of Active Management
4% 2% 0% ‐2% ‐4% ‐6% ‐8% ‐10%
Impact of Asset Allocation
Impact of Asset Allocation versus Targets Cumulative Impact of Asset Allocation 2.5% 2.0% 1.5% 1.0% 0.5% 0.0% ‐0.5% ‐1.0% ‐1.5%
AIM Cash Fixed Income Global Equity ILAC Real Estate
Impact of Active Management Cumulative Impact of Active Management 2%
1%
0%
‐1%
‐2%
AIM Cash Fixed Income
‐3%
Global Equity ILAC Real Estate
‐4%
AIM – Performance
AIM against the Custom Young Fund– Rolling Excess Return
AIM – Universe Comparison
Domestic Capital Markets: Fixed Income
Data sources: JP Morgan
Domestic Capital Markets: Fixed Income
Data sources: Wilshire Compass, Barclays Capital, U.S. Treasury
Total Fixed Income – Performance
Total Fixed Income Fixed Income Policy Index Value Added U.S. Fixed Income Policy Index Value Added
Policy Index Value Added
Market Value
Qtr
1 Year
3 Year
5 Year
10 Year
45.4
6.9%
0.5%
4.9%
4.8%
6.3%
2.6% 4.3%
5.9% -5.4%
6.9% -2.0%
5.7% -0.9%
6.6% -0.3%
6.8%
0.4%
4.7%
4.7%
2.4% 4.4%
6.1% -5.7%
6.8% -2.1%
8.1%
1.7%
5.6% 2.5%
3.4% -1.7%
35
41.2
36
Non-U.S. Fixed Income 37
5-year Sharpe
4.3
38
VaR
39
PAR
Ratio
40
5-year Info Ratio
40
0.3 0.5
-0.3 0.0
6.3%
0.3
-0.3
5.6% -0.9%
6.6% -0.3%
0.5
0.0
6.9%
5.7%
6.0%
0.3
-0.2
7.6% -0.7%
6.1% -0.4%
6.5% -0.5%
0.3
0.0
$2.2 bil
0.1%
Total Fixed Income – Performance Attribution Fixed Income 7% 6% 5% 4% 3% 2% 1% 0% ‐1% ‐2%
Monthly Active Management Impact Cumulative Impact of Asset Allocation Difference from Target Weight
Total Fixed Income – Universe Comparison
Total Fixed Income – Excess Rolling Return
CalPERS Domestic Fixed Income – Peer Universe Comparison
Internal Fixed Income – Manager Universe – Value Added
CalPERS Domestic Fixed Income – Rolling 3 Year Excess Returns
Domestic Capital Markets: Equity
Data sources: Wilshire Compass, Wilshire Atlas
Global Equities – Performance
Global Equities – Performance Attribution Global Equities 5%
0%
‐5%
‐10%
‐15%
‐20%
Monthly Active Management Impact Cumulative Impact of Asset Allocation Difference from Target Weight
Domestic Equities – Universe Comparison
International Equities – Universe Comparison
RMARS – Distribution of Performance
RMARS – Universe Chart
RMARS – Rolling 3 Year Ranking Versus HFOF Universe
Corporate Governance – Performance
Real Assets
Data sources: Wilshire Compass, National Council of Real Estate Investment Fiduciaries
ILAC – Performance
Data source: US Census Bureau Jan‐09
May‐08
Sep‐07
Jan‐07
May‐06
Sep‐05
Jan‐05
May‐04
Sep‐03
Jan‐03
May‐02
Sep‐01
Jan‐01
May‐00
Sep‐99
Jan‐99
May‐98
Sep‐97
Jan‐97
May‐96
Sep‐95
Jan‐95
May‐94
Sep‐93
Jan‐93
Ratio of houses for sale to houses sold
No Snap Back in Housing Market Months Supply (all homes)
14
12
10
8
6 Months Supply (all homes)
4
2
0
Commercial RE Faces Significant Vacancy Rates
RE Debt Maturities are a Concern for Investors
Leading to a Rapid Repricing of RE
The REIT Selloff Appears to Have Been A Technical Phenomenon
Real Estate – Performance
Real Estate – Rolling Excess Return
Real Estate – Universe Comparison
CalPERS – Performance Review – June 30, 2009
Michael C. Schlachter, CFA Managing Director & Principal Andrew Junkin, CFA, CIMA, CAIA Managing Director & Principal September 2009 1
Overview • US consumers still retrenching • US production and employment will not recover until consumers start to spend again • Equity, Fixed Income, Commodites markets continue to rebound from lows • More losses ahead for Private Equities and Real Estate as prices catch up to reality • Fixed Income has had several outperforming months in a row as prices begin to reflect economic value more than illiquidity • CalPERS’ underweight to Global Equities helped during the stock market collapse but has led the fund to under‐participate in the market rally over the last few months
Perspective – Fear versus Reality
Post WWII Real GDP Growth Gross domestic product 20 15 10 5 0 ‐5 ‐10 ‐15
Pre‐1983 Average Growth Rate = 3.5% Pre‐1983 Standard Deviation = 4.9%
‐20
Post‐1983 Average Growth Rate = 3.0% Post‐1983 Standard Deviation = 2.7%
Data sources: Bureau of Economic Analysis
2007‐II
2004‐II
2001‐II
1998‐II
1995‐II
1992‐II
1989‐II
1986‐II
1983‐II
1980‐II
1977‐II
1974‐II
1971‐II
1968‐II
1965‐II
1962‐II
1959‐II
1956‐II
1953‐II
1950‐II
1947‐II
‐25
Consumer Weakness
Data sources: Bureau of Economic Analysis, Bureau of Labor Statistics, Federal Reserve Bank of St. Louis
The U.S. is a Consumer Driven Economy
Data sources: JP Morgan, BEA
1978 1978 1979 1980 1981 1981 1982 1983 1984 1984 1985 1986 1987 1987 1988 1989 1990 1990 1991 1992 1993 1993 1994 1995 1996 1996 1997 1998 1999 1999 2000 2001 2002 2002 2003 2004 2005 2005 2006 2007 2008 2008
The U.S. is a Consumer Driven Economy Consumer Confidence
120
100
80
60
40
20
0
Data sources: University of Michigan
Debt Burden Slowing Consumer Activity Consumer Debt Service Ratio (Ratio of Debt Payments to Personal Disposable Income) 16 15 14 13 12 11 10 9
80q1 80q4 81q3 82q2 83q1 83q4 84q3 85q2 86q1 86q4 87q3 88q2 89q1 89q4 90q3 91q2 92q1 92q4 93q3 94q2 95q1 95q4 96q3 97q2 98q1 98q4 99q3 00q2 01q1 01q4 02q3 03q2 04q1 04q4 05q3 06q2 07q1 07q4 08q3
8
Data sources: Bureau of Economic Analysis
Inventories Compression – How Long Can It Last? Change in Private Inventories 150
100
Billions of $
50
0
‐50
‐100
‐150
Higher Inflation Seems Likely… Gross Federal Debt as a % of GDP 140 120
2009 Estimate 100 80 60 40 20
1940 1942 1944 1946 1948 1950 1952 1954 1956 1958 1960 1962 1964 1966 1968 1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008
0
Data sources: Bureau of Economic Analysis, Whitehouse Office of Management and Budget
Data sources: Bureau of Economic Analysis 2009‐I
2007‐I
2005‐I
2003‐I
2001‐I
1999‐I
10
1997‐I
1995‐I
1993‐I
1991‐I
1989‐I
1987‐I
1985‐I
1983‐I
1981‐I
1979‐I
1977‐I
1975‐I
1973‐I
6
1971‐I
1969‐I
1967‐I
1965‐I
1963‐I
1961‐I
1959‐I
1957‐I
1955‐I
1953‐I
1951‐I
1949‐I
1947‐I
Or Does it? Personal Savings as a % of Disposable Income
14
12
May Estimate = 6.9%
8
4
52 Year Average = 7.0%
2
0
‐2
‐4
‐6
‐8
‐10
1960‐I 1961‐II 1962‐III 1963‐IV 1965‐I 1966‐II 1967‐III 1968‐IV 1970‐I 1971‐II 1972‐III 1973‐IV 1975‐I 1976‐II 1977‐III 1978‐IV 1980‐I 1981‐II 1982‐III 1983‐IV 1985‐I 1986‐II 1987‐III 1988‐IV 1990‐I 1991‐II 1992‐III 1993‐IV 1995‐I 1996‐II 1997‐III 1998‐IV 2000‐I 2001‐II 2002‐III 2003‐IV 2005‐I 2006‐II 2007‐III 2008‐IV
1960‐I 1961‐II 1962‐III 1963‐IV 1965‐I 1966‐II 1967‐III 1968‐IV 1970‐I 1971‐II 1972‐III 1973‐IV 1975‐I 1976‐II 1977‐III 1978‐IV 1980‐I 1981‐II 1982‐III 1983‐IV 1985‐I 1986‐II 1987‐III 1988‐IV 1990‐I 1991‐II 1992‐III 1993‐IV 1995‐I 1996‐II 1997‐III 1998‐IV 2000‐I 2001‐II 2002‐III 2003‐IV 2005‐I 2006‐II 2007‐III 2008‐IV
Velocity of Money is Slowing Growth Velocity of Money
2.5
2
1.5
1
0.5
0
Y/Y Change in Velocity of Money
8.00% 6.00% 4.00% 2.00% 0.00% ‐2.00% ‐4.00% ‐6.00% ‐8.00% ‐10.00% ‐12.00%
Data sources: Federal Reserve, Wilshire Associates
Total Fund Performance
Total Fund – Universe Comparison
CalPERS Total Fund – Asset Allocation 1998
1999
2000
2001
2002
2003
2004
69 26 4 1
70 24 5 1
64 29 6 1
63 27 9 1
57 5 28 9 1
63 5 24 7 1
63 5 24 6 1
% Equity % AIM % Fixed Income % ILAC % Real Estate % Cash
% Equity % AIM % Fixed Income % ILAC % Real Estate % Cash
2005
2006
2007
2Q08
3Q08
1Q09
2Q09
62 5 25
63 6 23
56 8 27
52 10 25
50 12 24
38 14 26
50 11 25
5 3
8 1
1 8 1
2 10 1
2 10 1
3 12 8
3 10 1
Asset Allocation vs Active Management 6%
Total Cumulative Impacts Impact of Active Management
4% 2% 0% ‐2% ‐4% ‐6% ‐8% ‐10%
Impact of Asset Allocation
Impact of Asset Allocation versus Targets Cumulative Impact of Asset Allocation 2.5% 2.0% 1.5% 1.0% 0.5% 0.0% ‐0.5% ‐1.0% ‐1.5%
AIM Cash Fixed Income Global Equity ILAC Real Estate
Impact of Active Management Cumulative Impact of Active Management 2%
1%
0%
‐1%
‐2%
AIM Cash Fixed Income
‐3%
Global Equity ILAC Real Estate
‐4%
AIM – Performance
AIM against the Custom Young Fund– Rolling Excess Return
AIM – Universe Comparison
Domestic Capital Markets: Fixed Income
Data sources: JP Morgan
Domestic Capital Markets: Fixed Income
Data sources: Wilshire Compass, Barclays Capital, U.S. Treasury
Total Fixed Income – Performance
Total Fixed Income Fixed Income Policy Index Value Added U.S. Fixed Income Policy Index Value Added
Policy Index Value Added
Market Value
Qtr
1 Year
3 Year
5 Year
10 Year
45.4
6.9%
0.5%
4.9%
4.8%
6.3%
2.6% 4.3%
5.9% -5.4%
6.9% -2.0%
5.7% -0.9%
6.6% -0.3%
6.8%
0.4%
4.7%
4.7%
2.4% 4.4%
6.1% -5.7%
6.8% -2.1%
8.1%
1.7%
5.6% 2.5%
3.4% -1.7%
35
41.2
36
Non-U.S. Fixed Income 37
5-year Sharpe
4.3
38
VaR
39
PAR
Ratio
40
5-year Info Ratio
40
0.3 0.5
-0.3 0.0
6.3%
0.3
-0.3
5.6% -0.9%
6.6% -0.3%
0.5
0.0
6.9%
5.7%
6.0%
0.3
-0.2
7.6% -0.7%
6.1% -0.4%
6.5% -0.5%
0.3
0.0
$2.2 bil
0.1%
Total Fixed Income – Performance Attribution Fixed Income 7% 6% 5% 4% 3% 2% 1% 0% ‐1% ‐2%
Monthly Active Management Impact Cumulative Impact of Asset Allocation Difference from Target Weight
Total Fixed Income – Universe Comparison
Total Fixed Income – Excess Rolling Return
CalPERS Domestic Fixed Income – Peer Universe Comparison
Internal Fixed Income – Manager Universe – Value Added
CalPERS Domestic Fixed Income – Rolling 3 Year Excess Returns
Domestic Capital Markets: Equity
Data sources: Wilshire Compass, Wilshire Atlas
Global Equities – Performance
Global Equities – Performance Attribution Global Equities 5%
0%
‐5%
‐10%
‐15%
‐20%
Monthly Active Management Impact Cumulative Impact of Asset Allocation Difference from Target Weight
Domestic Equities – Universe Comparison
International Equities – Universe Comparison
RMARS – Distribution of Performance
RMARS – Universe Chart
RMARS – Rolling 3 Year Ranking Versus HFOF Universe
Corporate Governance – Performance
Real Assets
Data sources: Wilshire Compass, National Council of Real Estate Investment Fiduciaries
ILAC – Performance
Data source: US Census Bureau Jan‐09
May‐08
Sep‐07
Jan‐07
May‐06
Sep‐05
Jan‐05
May‐04
Sep‐03
Jan‐03
May‐02
Sep‐01
Jan‐01
May‐00
Sep‐99
Jan‐99
May‐98
Sep‐97
Jan‐97
May‐96
Sep‐95
Jan‐95
May‐94
Sep‐93
Jan‐93
Ratio of houses for sale to houses sold
No Snap Back in Housing Market Months Supply (all homes)
14
12
10
8
6 Months Supply (all homes)
4
2
0
Commercial RE Faces Significant Vacancy Rates
RE Debt Maturities are a Concern for Investors
Leading to a Rapid Repricing of RE
The REIT Selloff Appears to Have Been A Technical Phenomenon
Real Estate – Performance
Real Estate – Rolling Excess Return
Real Estate – Universe Comparison
