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tv   Government Access Programming  SFGTV  April 19, 2019 4:00am-5:01am PDT

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allocation. with that, i will turn it over to david. >> this is now moving on to item number 8. can we call number eight? >> discussion item. >> very good. this is the first of two and this is tory cove in cambridge. >> commissioner, he has a comment before we move onto th the -- >> they need to call for public comment on the previous item -- >> is there any public comment on the last presentation? >> i would just like to say -- [ please stand by ]
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>> if you looked at the investment council data surrounding public pension plans , your system has
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consistently been in the top ten of all public pension plans, and that is a sample size of over 600. that has also helped you achieve , essentially, a top performing public pension plan of your size for the last several years, if you look at the multiple times that exist with that have been reported, your public pension plan is number 1, and in essence, that is because private credit, private equity and assets have been a key contributor to performance, so i think your team is qualified, and under bill and tania you have done a terrific job executing. i wanted to spend some time talking to you about a stress test analysis, and we will inundate you with data, i apologize for that, but i will share with you some of our takeaways. as it relates this to pacing, on
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slide three, we have a summary. we believe a billion-dollar target for your private equity portfolio, we believe $800 million for the private credit portfolio, a billion dollars for the asset portfolio. that will differ a little bit from cambridge, as it has been discussed, and i think it's because our perceptions are different, with the idea here is directionally we all believe that these are within normalized spans of where you should be investing. the second piece i wanted to spend more time with, would you should focus on is the outcome of our stress test, and tom will drill down on the details of the stress test, but you, like many of our clients during the period of the great financial financial crisis saw total assets decline. your private equity component of your portfolio declined to 15 to
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20% during that same timeframe. so the lower court aspects of private equity in general insulated you from further damage relative to your total asset decline, so private equity essentially did its job, and so the point is that you have a co- mingled set of assets all moving at different directions at different points in time, when there are periods of distress, you would have been far worse off had you -- if you had not had private equity exposure, so it is a key element in terms of your portfolio construction. unless there's any questions, i'd like to turn it over to my colleague, tom, that can give you the detail, and feel free to interject at any point in time to ask any questions. we're here to really help you understand the profile of your system.
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>> thank you, david. anna and the team engaged us in the last quarter of 2018 to give us this pacing analysis and work closely with the staff here to develop this presentation, and given where we are on the market cycle, the focus was what would occur in the downturn to private equity portfolios. this is something we do with all of our clients on an annual basis, and it reflects if we -- we do each year to reflect the most current information available. there are a lot of different assumptions that go into this model including capital calls, distribution rates, how long each fund, the life of the fund, return, the reach of the fund, et cetera, david went over the summary of our estimates from the model, but i will direct you to slide five first. this is the summary output of our pacing model, i will walk you through what the graph is
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showing. in the orange bars it is showing a target allocation to private equity, as you can see here, this is just the private equity portfolio not through private credit or real assets. the target is 18%. the program at right is around 18%, and what we are shown here is a projection over time of how much we expect to commit each year to maintain such an allocation around 18%. dark blue line going across the middle of the page is the focus area of the graph, that is basically the private equity as a percentage of the total pension, so what we are showing on the green bars at the bottom, starting in 2019, was a billion dollars of commitment, and we are showing a modest growth over time to maintain that 18% allocation. the next slide back on slide six
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, shows the second piece of the analysis, and what the output is. this shows the capital cost and distribution as well as the net cash flow over time, as anna mentioned in previous conversations, we are expecting a positive net cash flow for the portfolio in 2019, and for the foreseeable future. this is under our base case scenario, as i mentioned, there was heavy focus on scenario testing. the next two slides are aware we got a little bit creative and building a stress test scenario, so we have here at the base case shown in blue, which is the same stark blue line as the last couple of slides, and then the green we have a 2,000 to 2002 market cycle scenario which reflects bubble. we took the historical drop in
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total pension and historical drop in private equity portfolio for san francisco retirement system during that time and applied it to the next three years. we did the same thing for the g.s.t. in the yellow and the yellow line. for instance, in the g.s.t. case , back in 2,007 and 2,008, 2,009, san francisco's private equity asset value went up eight %, and then dropped down 50 % in 2008, and slightly went back up in 2009, for the pension assets that david mentioned, there was a drop of 28% in 2008. this just shows, if those same draft -- drastic scenarios were applied to the next three years, this is the outcome, and the
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denominator effect comes into play where you become over allocating. >> that is an important plate -- point. so what had happened to our clients during that timeframe was they were concerned about liquidity, they were fearful of the marketplace a lot of our clients commitment to private equity. it turns out that private equity is one of the asset classes that actually does best in distressed environments because the valuations sometimes create low intrinsic value, so the fact that managers are at a point in time where markets are dislocated and for our clients that did not participate in private equity in 2009 and 2010, they actually missed out on some of the best opportunities, the best vintage years that existed in the last couple decades. >> part of our message today is that when we see things like
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this, because of a large loss in the portfolio, is our private equity portfolio jumps to 23 or 24%, is to not raise those commitments, remain a steady pace and ride through the market and that's one of our messages, again, two and a's point, and to david's point just now, often times the best years are right after a suppressed market, and that we don't know what vintage years will be most fruitful. we recommend a steady stay. >> that is where you will see the second bullet point where we worked with jury cope to ask not to change the commitment pacing,
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and see under the gse, 2007, 2008 market cycle, what was the allocation to private equity if we continue the recommended pacing schedule, $1 billion incentive. >> david, please go on. >> moving on to slide eight, this is kind of a similar stress scenario, but this time we are looking at the net cash flow the impact it has there. as i mentioned, we applied the market cycle from the next three years, and return to our base case assumptions thereafter while continuing the pace around a billion dollars to the private equity portfolio. >> tom it will go through the private credit assumptions and the real assets assumptions. i would say in my summary of the
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next several slides, the analysis is similar, and so tom will go through very quickly so as not to create too much repetition in the discussion, but let me pause there and see if you all have any questions first before we move on beyond private equity. >> okay. moving on to the private credit portfolio, obviously it is a little bit younger in its life, they are currently around 2%, and with a significant ramp up, trying to get to a target of 10% this is the same summary graph output where we are showing a significant increase in commitment to $800 million, and then with incremental increases thereafter to reach the target of 10% around 2022. the next few slides, it is the same iteration of the private equity program where we show the net cash flow and the following
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two slides we show the stress test scenarios where again, the commitment stays the same as our base case assumption. lastly, moving on to the real assets, right now san francisco is slightly under its target of 17%, so we have modest increases up to a billion dollars in 2019, and then it scales over time with 100 million-dollar increases thereafter and expected to reach their target in the next five years. this is largely a brief way of the first private equity program that i walked you through, but there are scenarios for each of the asset classes, and at the
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end, there is a combined portfolio, which aggregates all three of the models and shows a total commitment amount of $2.8 billion to private markets in 2019 and with expecting to reach the target allocation in the next three or four years. >> if i could summarize, in the past, your private equity program, private credit, no assets, all did what it was supposed to do, it is generated outside returns, that there is portfolio value. those have provided insulation in down environments. we think perhaps it might have been a missed opportunity in a sense that capital pacing for the programs was inconsistent during some times of stress, but i think part of the education
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system and the discussion today is to simply suggest that consistent disciplined approach to have it invest in a more pronounced away then i think avoiding the asset class when the allocation might have been out of sync. >> can i go directly to page 20- 23? thank you. >> so this is one of the key pages. we have shown you the stress test, this is where we are achieving in eight years. the impact of what could take place if we had severe down markets, you see that in 2027, and a base case, i'm really in all three cases, we are at about
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the billion dollars in net positive cash flows. even regardless of a large negative market, we are still at around close to 900 million, and we have pretty good visibility that our net cash outflows for benefits in 2028 are going to be about $2 billion. so these cash flows alone, again , this is net cash flows, net of manager capital calls, this alone can pay for the plan benefits now looking out into the future. and what about the interim period between now and then? you see here that in the most severe market and the repeat of the gsc, we are looking at a couple of year periods where our net cash outflow, and this is cumulative, is about 1.3, one
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point for billion dollars. and again, and then we would have benefit payments of that time of say 600, 650, maybe 700, so we are all in for a total of 2.0 or 2.1, were you will recall from our early presentation that even in the two standard deviation correlation one, is that for 30 day assets, we still ahead 6.2 billion, and for assets that are available in one year, is still 10.5 million. so we have stress test this in every way possible, and we are very comfortable with the duration risk that we are taking with regards to private markets, both in the short term and the long term pay off of what we hope to achieve. any other comments? >> that was a great summary.
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>> thank you. >> thank you, thank you very much. >> this is one example. so these are all estimates based on manager's capital, when they return capital, what those returns are, and others, so we wanted to give you a second example of another outcome from cambridge. >> thank you. >> do we have any public comment on this part of the presentation so far? >> it seems like a very complicated process and you get 4.7% return on investment. any idiot can get a seven points or -- seven-point 4% return on investment just by investing. the s&p 500, more than likely will produce more then the seven-point 4% return in the next ten years, so you need to
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have simple investments, if you have simple investments in your investment portfolio, everything would be simple, he would get at least 10% return on your investments, just the s&p 500 in the last hundred years has produced a 10% return, a simple investment like 50% bonds, 50% stocks could produce an eight-point 4% return in the last 100 years, so i think what we need is to get rid of all the alternative investments and just ask the investment consultant to put together an investment portfolio, and use that as a benchmark, and i bet you a dollar to a dime, ten years from now, the investment portfolio will outperform your -- your portfolio. >> you have the floor. >> very good.
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as i indicated, this is the second example of cash flow and pacing schedule, and cambridge will walk us through. >> thank you, bill, good afternoon, commissioners. you have craig and myself. i believe you know us, and my other colleague here that have been very critical in running the analytics. i also would like to attest to anna that there was a lot of good collaboration. we started this process late last year and had good collaboration with anna, with the private investment team, and also with tori, so tweaking the model, tweaking the different scenarios that we were running as well. in terms of the outputs that we have shown here, the discussion probably has not been dissimilar from what you have heard from tori. we just have arrived at similar but somewhat slightly different numbers based off of our model
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assumption, but in terms of how we generate our model, we put in our assumptions for the overall pool growth, starting at 24.6 billion, which is when we ran this for the overall market value, and assumed a long-term pool growth rate for the plan, and then we have underlying assumptions for each fund at the asset class level, by vintage year, and we roll it all up in terms of what the contributions are for each fund, what the distribution rate is, and what the nava growth is for each fund , thereby yielding what our expectation is for the ultimate return multiple, as well as the ultimate net irr for the fund. we run these models annually,
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and we ran this model, the base case late last year, and have our target case for each sub- asset class for 2019 which you see here, 900 million for private equity, 750 million for private credit, and 750 million for real assets, we emphasize that the pacing targets are mainly guideposts, but ultimately, when we are making commitments or recommendations for commitments, we are still directed by opportunities available in the market, so in other words, when making commitments, we rely heavily heavily on bottom-up analysis managers, and the opportunities in the market. if there aren't any, if they're not attractive opportunities available, we would not recommend making commitments for the sake of filling this target pace, and then on the flipside, if we find more, we may flex up or flex down depending on the
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year and what's available. for the base case scenario, maybe i will go to private equity, for the base case scenario for private equity, you have seen this, we present our exposure models to you during our annual portfolio review, and that is expected to be in july for this year, but we project, or we recommend a 900 million pace for the private equity program, that is in the green bar on the top table, the allocation of your total pool for private equity is expected to be 19-point 1%, and so that is that green line on the top, so we go slightly above our 18% target allocation, and we are currently slightly above, and that is mainly because of a
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large increase in commitment starting five years ago, so there was some lumpiness prior to that, and then we had a big jump and having more normalized payments starting five years ago , and so that shouldst move out, and that is more of a temporary phenomenon as you see it coming down here, and then the cash flow results are on the bottom, and we anticipate the private equity program to hit cash flow positive at some point this year for the private equity program. >> looking up to 2024 and 2025 to the tune of 800 million, so is almost enough to pay plan benefits and just private equity net cat -- net cash distributions. >> for the private credit program, this is a younger program. this was more opportunistic up until late 2017 when the formal
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allocation of 10% was approved for private credit, and so you see that that green line growing over time, and and our commitment pacing growing over time but steadily from the 750 to 800 million mark, but it is growing gradually, we are expecting to hit our target of 10% in 2025 going into this model, and be cash flow positive about four years out. i will hand it to craig. >> sure. >> very quickly, on the last page, the structure of the graph is the same as the others. the black line is target allocation of 17% across all real assets. the green line is the allocation by calendar year, in the private program in terms of its maturity lines between the private equity
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mature program and the immature private credit program. you can see that the green line is approaching the black line, in 2018, an actual case of 14-point for against a target of 17. there was a commitments recommended of $750 million in 2019, growing to a little over a billion dollars in future years. we should approach and reach our target allocation in the next year or two, managing to within about a point of that allocation , and then on the bottom graph, we would expect a real asset allocation to turn cash for positive sometime in late 2021, so demonstrating the maturity level of the real asset program is approaching a steady-state pretty soon. >> great. should we move to the stress case? great. our stress scenario, we have assumed the stress scenario, so
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looking at what happened from 2008, and for a three year period from 2008 in terms of market decline, and we applied the hit to your market value, the actual hitch that happened in 2008, and then we also applied assumptions for the change and the decline in your private equity asset value, your private credit and asset value, and the real asset value of to what had happened in the time period, or we made assumptions for that, and in terms of actual numbers, if you could maybe highlight what those were. >> i think we need -- in terms of the nominators of the total assets, we had a 28% hit to
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total assets program in 2008 projected into 2019, followed by increases of ten-point 3%, and ten-point 7% subsequently, before returning to the 4% assumed total assets and net spending growth. in terms of the private equity, we showed a 26% reduction in net asset value reflecting the end to end return from the first quarter of 2008 to the first quarter of 2009. for private credits, and we had only made some slight commitments as a time and did not have a full-fledged targeting program. we used public markets to reflect what we think would be a appropriate estimate for what occurred. we used 60% direct lending, which we assumed there was a leverage index. fifteen% mezzanine debt assuming the cambridge associates private
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mezzanine debt, and 25% distress at using the distressed corporate credit index. for private real assets, we had a program at the time, but as craig can speak to, it was structurally different on the real estate side, so we assumed the 2008 to 2009 private real estate and private natural resources return reflected in 2019 and 2020. >> if i could just highlight, we did here with the stress scenario, we tweaked it a little differently and that we did adjust the commitment pacing and reduce it moderately for each program as you will see, 600 million for private equity and similarly for private credit and private assets where our base case is 750.
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we brought it down to just show what the program would look like , and this would obviously not allow the program to be as over target, potentially if we were to hit a gsc scenario, again, it is in a moderate decrease in commitment to. we ran it for maintaining the same pace as well and came up with very similar numbers to what tori cove had in terms of how much we would be over target for each one of the asset classes, i just wanted to show this. >> one point of this is that back in around 2001, 2002, i believe spires commitment pacing went to zero four a year or two, and it turned out that that
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wasn't necessarily a good thing to do, that doing a more steady state is a better discipline, and also the 600 million, perhaps a slight decline wouldn't necessarily be because of -- it could be because of what we are doing, but also, sometimes when markets are under distress, is g.p. his, excuse me , lps ask their gps to slow down their capital calls, so there's a lot of variables that go into this, but another point here is that even in the most stressed environment, we don't see private equity going to above 23 or 24%. is that right? >> about 25%. >> thank you. >> and just to reiterate that
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point, again, we are looking at these guideposts that are guided mainly by by what is attractive out in the market, if a gsc scenario were to occur, that 2008 period, the fundraising slowed down, and opportunities may not be available, or may not be as readily available too. >> this is the page, so it is not the stress test that was the big thing that we are talking about, so are we done there? we are? great. so this is the key page also that i want to show you, it is part of the net cash out focus. you saw that that worried about the negative 1.5 billion, and we
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think we will be in the negative here for a few more years in the aggregate, but you see how decided the positive these turn, as early as 2022 and 23, according to these models, is that we will have more than enough net positive cash flows to pay for plan benefits from our private market distributions alone, beginning in about 2024, maybe 2023, so this is what we are planning for, and this is what we are planning to achieve, with that, we want to perhaps turn it over to the board for any questions or comments. >> a simple one, it looks like our cambridge versus tori cove one is a little bit more conservative then the other, there are primary differences. it sounds like they're just assumptions around returns. >> yes, because we do roll up
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each funds and model it out that way, i assume it is more conservative of an assumption then the return expectations for the various asset classes. >> thank you for your presentation. >> thank you. >> one -- i want to understand something about the margin of error that was put in your projection. >> do you understand how you put that margin of error issue? particularly let's say, five years from now, i think i don't understand how sensitive the problem maybe, whether it is over and under and if that has effect on the total portfolio whoever can answer. >> the margin of error is put in there to show that over time our
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estimate. >> is the microphone on? >> take it. [laughter]. >> here you go. >> we put that margin of error in so it shows over time that the estimates get wider and wider, and any variable can adjust that. for instance, the public pension , as well as the main allocation that will change that if you go from 4% growth in the total pension asset and change it to 5%, the allocation to private equity moves quite a bit that is one element of it. >> i would say, these models are not necessarily meant to be precise, it is meant to be directional, so anything beyond the next six months space and all sorts of assumptions that may or may not take hold. the idea is to give you a sense now, when you are thinking five
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or ten years out, the confidence declines. we just don't have the ability to predict the future with great accuracy, but it is meant to be a directional exercise, assuming a normalized environment that is reflective of the current one. there are a couple of other things that are changing in the private equity industry, subscription at lines of credit and fund restructuring that will change the liquidity profile and other private market funds. we could go into that at a later session, i don't want to complicate the discussion today, but we think some of the liquidity scenarios related to private market funds can -- can change in your favor. and the last piece here is that we are in a current robust i.p.o. environment, and we think your system will be a beneficiary of several ideas that will be happening this year if those events were to occur, i
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think you're liquidity distribution profile can change in your favor much more rapidly than what we projected. >> okay. , thank you. this part of the question goes back to the first part, but it was captioned in the other two. in terms of the positive cash flow, is it contributions or contributions plus all realized earnings? >> it is not distribution, net of capital cost, so it is real life gains - capital costs. >> it is contributions - -- sorry. >> are you talking about pension obligations are capital calls? >> it will be both. i am the managing cash here. >> if we can pull up the last page from cambridge, or the last page -- tori cove, whichever one >> yes.
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>> i have tori cove here. this is just capital calls. >> yes, in the last page. yeah,. >> this is the last page. >> yeah, there we are. this is showing, this is only for the private markets, this is not including -- combined. >> what about contributions? >> that was in my previous page. >> which we know our 500 million today, we will reach 700 million in five years, it gets a little cloudy after five years, you can't predict exactly when people will retire, but our estimate, do not of numbers that she gave us that are in ten years would be a billion. >> okay. i will try to figure out how to put the two numbers together. >> they offset each other. we have a net outflow for benefits payments in ten years over a billion, and we have net
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inflow from net cash inflows from private markets of $1.1 billion here in eight or nine years, and about 1.44 billion cambridge and about the same time period. >> the footnote explains it differently to those two numbers it is just a question of how much, how much cash we have to generate to pay benefits, not just meets the capital. >> mr. martin, the assumed right of return they are using is based on a note jay curve or whatever commitment is actually earning money. correct? the next that is the next number i am trying to get at. >> again, there are a lot of assumptions here, but i think both start with how much your total portfolio is going to grow
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, and i bet you will use the assumed right -- rate. >> we planned for four and 5% and this is four. >> this whole issue has been framed well here. and private markets, if you stopped committing today the value of your private market portfolios would go to zero over ten years because it all gets paid off, so each of these firms comes up and says, what is that steady-state amounts that we have to commit each year to not go to zero, but to take this to the target% of the total portfolio, which in and of itself is growing, that is what all this has been about, and what that suggests, as bill said , is within five or ten years, you will be at a point where the money your private programs require will go
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positive, you actually get more back in distributions each year then the managers are calling for a new contributions, and that number will be about equal to the total net outflow cash needs of the funds that you get to a point of in your private program, you will generate about the amount of money that you will consume in excess of benefits paid over contributions , is that a fair statement. >> i see the cash flow issue. i'm asking about the right of return return, the rate of return is that the money we allocate is a working, it is not this illustrates how slow it is to get to it. it is different then the jay curve, it is justice issues again. that number, we do a lot with that number. >> that's right, in the rate of return is in your your asset allocation forecast where our assumption is you will be earning roughly 7% a year over the next six years, and a higher amount to the rest of the year.
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>> but that is the asset allocation. we have not invested that money yet. we are trying to do it. there is a difference. it is a loss that we are trying to deal with. >> that is a good point, there's a difference, but the good news is that we are at full allocation now for private equity, we are actually a little over, and real assets, we're almost at target, we are only had about 2%. the only place where there is a shortfall is private equity. >> we have an assumed rate of return at three-point 5% uncashed know that is not what we earned. we equity why it should be advertised the cash last month, how is that doing? i put all those numbers together to find out about the cash flow issue. >> we started it in me, which, you know, was closer to the top as equities.
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so as expected, since he equity rising approximately 70 hyphen 30, 70% equity, 30% bond, it is over 2018, starting in may, he didn't perform well, but up until now it was okay, and again , what we equity i is, only the portion of the cash that is is not deployed because our asset allocation has zero allocation to cash, so as a result, the cash that we do have , because we have regular roots, we equity eyes approximately 70 hyphen 30. >> sorry to mix it up, but there's a reason why i must put them together. okay. that concludes my couldn't -- my questions on this subject. anybody else? we have already done public comment. these are not action items. >> this is considered to be the best in the world, if we had a
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choice upon $25 billion into all your assets, reporting $25 billion into stocks, i guarantee you they would go for the s. m.p. 500. there's a lot of problems with that fund, even when he died, all the money he will leave to his wife. he wants to 95% of it into this fund and 10% in cash, so you should listen to him. i am a great believer in his comments. >> that takes us to item ten. [indiscernible] >> very good, board members, i stated we made 51 basis points on the month, and we made 5.8. public as to -- equity up over 14% for the quarter, quite a turnaround from last year's negative 9%, and the next best
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performing asset class has actually been absolute return. turning to the narrative, beginning on page 12, we have a few disclosures to reports of items previously approved by the board in closed session that have been subsequently closed by the manager and now we are reporting them out to the public the first is, a.c. bridge strategy, which is a small buyout strategy. we asked for, and the board approved $50 million, and we did get an allocation of 50 million. marshall is a long, short equity strategy, that we asked for in public equity, it is not 100 long, and we asked for an allocation of $500 million. we got $250 million, and we
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expect to get the remaining $250 million later this year. we asked for $25 million, we did get 20 million, they way -- they are incredibly capacity constrained. we do have additional disclosures, and i printed them out and left them of the printer upstairs, i will read them off my text here, one is our can, and i need to go back and find this. i'm working my way through this, so we asked for commitments, we were actually allocated $25 million, and i believe we have additional capital that we can call back that closed on march 13th , next is, my aip, so
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this was the industrial strategy that the board approved last month, an initial first investment in aip. the board approved this unanimously with two extensions, and i don't see the dollar amount here. i don't see the dollar amount here, maybe bo has it. we are allocated 75. very good. we asked for an allocation of 75 million, and we were awarded 75 million. these are the only two that i see. continuing on, i am thrilled to announce that tonya has been appointed as managing director
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of private markets, she has been the interim. [applause] very much deserved, tonya has served with distinction, class, and success for now, nearly approaching 11 years. we are thrilled with this announcement. you will see tonya has really quite a long list of academic and professional achievements, far too long for this news item,
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she has quite a stellar career and particularly during her career, we are especially grateful for her distinguished service for more then a decade
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she has a fantastic attention to detail. we had promised to commissioners back in january that we would have a calendar of reports, and please see that here on page 3, in addition, jay has updated the forward calendar, in between those two items, we think this represents a complete listing of all of our reports, and so this really covers, you will see our entire portfolio from public markets to private markets, to risk management, to esg, and more are included on this list, last to know is the next investment -- investment committee that is a week from today, it is a small subject,
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but it is a super important subject, it is a long-term plan for managing the trust, we're looking at this from a ten year point of view, and the reason why we're looking at this is because spurious is fast evolving, we are now 25 million-dollar organization, we were a $10 billion just 15 years ago, so we have gone from a good-sized plan to a large plan, we are going to become a very large plan, our liabilities will grow to $40 billion, they will grow to $60 billion, a very large plan, in 2038, so we are thinking about the landscape of what is required as a 40 and as a 60 billion dollar pension plan , what our asset allocation needs to look like, our
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philosophy towards manager selection needs to be, co- investments, and also resources and budgeting, so it is an important meeting, and i hope you will all be able to attend, it is a sole source subject because we want the focus of the meeting to be on our long-term plan. with that, i will turn it over to the board. >> questions on his report? >> no. >> i have one question, go ahead >> i just wanted to add, bill shows on his report that your fiscal year to date performance for the end of march is a four-point to 4%. it is largely that high because of the diversifying assets you have in your portfolio, so that very bad december quarter did not pull you down, so if you do the meth, to make you assumed rate for the year, you need to earn 3.0% in the last quarter, i'm not telling you you are going to do that, that is a big
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challenge, but most other public funds have to earn a six or 7% to get to their assumed rates because they didn't have the diversifying assets you have had in your portfolio. >> that implies we are still outperforming this fiscal year by about 3%. >> indeed. >> okay. >> again, just because there's so much discussion about this issue of having the diversifying assets, they are what is keeping you in the race, in your ability to make that seven-point 4% this year. >> regarding your item four on the marshall waste funds, thank you for putting that information in there and to include the fact that they refunded. since other details were deleted from your asset allocation summary report, which is fine, please make sure when the board has approved the hiring of a public security manager, please note the date, and when they were funded, or when the funding started. >> very good. >> we do not want another spring
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operation. part two, investment committee meeting give us advance notice -- [indiscernible] there are other funds who are bigger than us to have done better than us, and funds that are bigger than us but not done as well as us. there's a lot of issues with you want to recommend that we make additional improvements or changes, we can copy of the good things as well as the bad things , i hope you will make that part of your presentation. >> as far as evaluating some of our peers and what we could adopt, well, materials for the meeting go out tomorrow. [laughter] >> we haven't done that, we have talked to a number of our peers, and we have good insights to what they do, i would say that this is also a beginning
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conversation, this is our initial draft. we have given a lot of thought, i think, i think they have probably met formally seven or eight times, including meetings on the phone and by e-mail, probably 20 or 25 times regarding this subject, but we do want to share our thoughts on how we need to begin to prepare to manage the trust of $40 billion in liability, what we think we need to look like, and have a conversation and get feedback from the board, because your impact, your direction of, yeah, you can do that, no, you can't do that, it impacts our approach on how we did manage trust assets. we will present to you one way. we think it is the best way, it is not the only way, we think other ways have either introduced more risk, reduced return or both, but we need to
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direction from you so that we are managing the trust with an approach that will be effective, given resources and other considerations. >> you know what we need from you? >> we have talked about that extensively. >> one of the things we need from you, if a new idea whether it is innovative or not, a balanced explanation, don't just pick one side of the story. >> right. >> okay. because as a curve was used to explain something many minutes ago, that same tool can be used for which ideas to pursue, and which ones do at the most value for the effort and risk involved that is the direction i want to go in. how to get that back to you still depends on you educating the full board on the pros and cons of everything, especially if you are going to parent -- comparison to other funds, just like we get comparison numbers
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from mr. martin in our performance reports. some groups, we are very it -- fairly comparable to and some we are not. >> right. >> okay. >> thank you, that includes the investment calendar, i think. >> public comment. >> excuse me, public comment. >> one year of your investment committee meeting, i would like you to reevaluate hedge funds, hedge funds are a bad, high risk , long-term investment. i think they've only produced about three-point 5% for the last ten years, so for hedge funds to get a seven-point 4% return, you will need a gross return of more than 10%, and that is very unlikely to happen, so you should reevaluate your reasoning for investing in hedge funds, and divest from them, but not only that, they are bad
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investments, hedge funds are the poachers of the finance industry , and most of your board members are supposed to be prounion, what do hedge funds do just like poachers, they will take over the union company, kick out the union, sell off its valuable assets, bankrupt the company, kick the wages to the side wall, you have people from toys "r" us a few months ago telling you what you did to those employees, so get away from hedge funds. >> that takes us to item 11. >> presentation of preferred audited financial statement and required communications for the june 30, 2018 and june 302017.
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>> i will introduce you to our finance minister, and he has a representative to present the audited financial report. jim? >> good afternoon, with me is craig burns, and he is a representative managing the audit this year for the retirement system, and he will present the report to you. >> all right. before i get into my presentation, thank you to the board for the opportunity to present the results of our work back when we are about the audit being completed for the june 30, 2018 and 2017 financial statement, and with that, we have issued two reports, one is a financial statement with the required information, and the second report which is communications the retirement for it. i will start with the financial statement.