€¦ · 30/06/2020 · agenda investment advisory council (iac) tuesday, june 30, 2020 1:00 p.m.*...
TRANSCRIPT
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Agenda
Investment Advisory Council (IAC)
Tuesday, June 30, 2020 1:00 P.M.*
Hermitage Centre Hermitage Conference Room, First Floor
1801 Hermitage Blvd., Tallahassee, FL 32308
1:00 – 1:05 P.M. 1. Welcome/Call to Order/Approval of Minutes
Vinny Olmstead, Chair
(Action Required)
1:05 – 1:15 P.M. 2. Opening Remarks/Reports Ash Williams, Executive Director & CIO
1:15 – 2:00 P.M. 3. Florida PRIME Review
A. Florida PRIME Legal Compliance Review – Chapter 218, Pt. IV, Florida Statutes
Glenn Thomas, Lewis, Longman and Walker, P.A.
B. Florida PRIME Best Practices Review Kristen Doyle, Aon Katie Comstock, Aon
C. Florida PRIME Portfolio Review Amy Michaliszyn, Federated Investors Paige Wilhelm, Federated Investors
D. Review of Florida PRIME Investment Policy Statement Ash Williams, Executive Director & CIO
(Action Required)
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IAC Meeting – Agenda June 30, 2020 Page 2 2:00 – 2:45 P.M. 4. Private Equity Asset Class Review
John Bradley, SIO, Private Equity Wes Bradle, Senior Portfolio Manager Sheila Ryan, Cambridge Associates
2:45 – 3:30 P.M. 5. Defined Contribution Program Review Daniel Beard, Chief – Defined Contribution Programs Mini Watson, Director of Administration Walter Kelleher, Director of Educational Services Kristen Doyle, Aon Katie Comstock, Aon
3:30 – 4:20 P.M. 6. SIO Asset Class Updates
Tim Taylor, SIO, Global Equity Katy Wojciechowski, SIO, Fixed Income Steve Spook, SIO, Real Estate Trent Webster, SIO, Strategic Investments
4:20 – 4:35 P.M. 7. Review Changes to Florida Retirement System Pension Plan Investment Policy Statement
Ash Williams, Executive Director & CIO
(Action Required)
4:35 – 4:45 P.M. 8. Major Mandate Review Kristen Doyle, Aon Katie Comstock, Aon
4:45 – 5:00 P.M. 9. Audience Comments/2020 Scheduled Meetings/
Closing Remarks/Adjourn Vinny Olmstead, Chair *All agenda item times are subject to change.
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· · · ·STATE BOARD OF ADMINISTRATION OF FLORIDA
· · · · ·INVESTMENT ADVISORY COUNCIL MEETING
· · · · · · · ·TUESDAY, MARCH 31, 2020· · · · · · · · 1:05 P.M. - 4:30 P.M.
· · · · · · · ·1801 HERMITAGE BOULEVARD· · · · · · ·HERMITAGE ROOM, FIRST FLOOR· · · · · · · · ·TALLAHASSEE, FLORIDA
· · · · · · Stenographically Reported By:
· · · · · · · · · ·JO LANGSTON, RPR
Job No.: 109862
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Page 2· · · · · · · · · · ·APPEARANCES· · · ·(Participants appearing telephonically)
IAC MEMBERS:
BOBBY JONESCHUCK COBBGARY WENDTJOHN GOETZPETER COLLINSPETER JONESSEAN McGOULDTERE CANIDAVINNY OLMSTEAD
SBA EMPLOYEES:
ASH WILLIAMS, EXECUTIVE DIRECTOR AND CIOJOHN BENTONSTEVE SPOOKLYNNE GRAYMICHAEL FOGLIANOMICHAEL McCAULEYTIM TAYLORALISON ROMANOJOHN BRADLEYTRENT WEBSTERDANIEL BEARD
CONSULTANTS:
KRISTEN DOYLE - (Aon Hewitt)KATIE COMSTOCK - (Aon Hewitt)AARON CHASTAIN - (Aon Hewitt)NAYEF PERRY - (Hamilton Lane)KATIE MOORE- (Hamilton Lane)ANKUR DADHANIA - (Hamilton Lane)ROBERT COUSIN - (J.P. Morgan)TYLER JAYROE - (J.P. Morgan)PATRICK MILLER - (J.P. Morgan)RICHARD BROWN - (Townsend Group)SETH MARCUS - (Townsend Group)
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Page 3·1· · · ·INVESTMENT ADVISORY COUNCIL MEETING
·2· · · · · · · · · · · * * *
·3· · · · MR. WILLIAMS:· Welcome all.· So let's do a
·4· ·quick roll call, if we could.· I heard Bobby
·5· ·Jones.· Which other IAC members do we have?· I'm
·6· ·going to call roll here and see if that will
·7· ·help.· Ambassador Cobb, are you on the phone?
·8· ·Gary Wendt?
·9· · · · UNIDENTIFIED SPEAKER:· He will be
10· ·momentarily.
11· · · · MR. WILLIAMS:· Okay, great.· Thank you.
12· ·Gary Wendt?
13· · · · MR. WENDT:· Yes.
14· · · · MR. WILLIAMS:· Excellent.· Thank you.· John
15· ·Goetz?
16· · · · MR. GOETZ:· Yes.
17· · · · MR. WILLIAMS:· Thank you.· Peter Collins?
18· ·Peter Collins?· Not sure on that one.· Peter
19· ·Jones?
20· · · · MR. PETER JONES:· I'm here, Ash.
21· · · · MR. WILLIAMS:· Thank you, Mr. Jones.· Sean
22· ·McGould?
23· · · · MR. McGOULD:· Sean is here, Ash.
24· · · · MR. WILLIAMS:· Great.· Thank you, Sean.
25· ·Tere Canida?
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Page 4·1· · · · MS. CANIDA:· I'm here, Ash.
·2· · · · MR. WILLIAMS:· Thank you.· And Mr. Vinny
·3· ·Olmstead?
·4· · · · MR. OLMSTEAD:· I'm here.
·5· · · · MR. WILLIAMS:· Great.· So by way of
·6· ·housekeeping rules, I think it will be helpful if
·7· ·folks will mute their phones when not using them,
·8· ·which of course means -- and we all have this
·9· ·problem.· When you want to say something, you
10· ·have to remember to unmute it.· Otherwise, you'll
11· ·say something brilliant, and then when no one
12· ·responds and you're feeling disappointed and
13· ·lonely, you'll realize nobody heard it.
14· · · · So with that, Mr. Chairman, do you want to
15· ·open the meeting?
16· · · · MR. NEAL:· Ash, this is Pat Neal.· I just
17· ·should tell you I'm here and I'll be silent, but
18· ·I'm here listening.
19· · · · MR. WILLIAMS:· Excellent.· Welcome, Senator.
20· ·Good to have you with us.
21· · · · MR. CHRIS WILLIAMS:· And, Ash, this is Chris
22· ·Williams also.
23· · · · MR. WILLIAMS:· Terrific.· Thank you so much
24· ·for being with us.· And do we have any others on
25· ·the line who would like to be recognized?
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Page 5·1· · · · MR. BALLARD:· Ash, if we're checking in,
·2· ·this is David Ballard and Tommy Gregory are here.
·3· · · · MR. WILLIAMS:· Okay, tremendous.· Thank you.
·4· ·Go ahead.
·5· · · · JIM MOORE:· This is technical.· If you are
·6· ·watching the slides on the computer, we ask that
·7· ·you please mute your speakers because there will
·8· ·be a delay.· If you're watching the slides on the
·9· ·computer, please turn your speakers off because
10· ·it will cause a delay in the phone.· Thank you.
11· · · · MR. BOBBY JONES:· Ash, this is Bobby Jones.
12· · · · MR. WILLIAMS:· Yes, sir.
13· · · · MR. BOBBY JONES:· My name is Bobby Jones,
14· ·and I serve as chair of the Investment Advisory
15· ·Council for the State Board of Administration. I
16· ·want to thank all of you in attendance.· And
17· ·obviously this has been an unprecedented time.
18· ·Usually we are all together in the Hermitage Room
19· ·in Tallahassee, but this is different, obviously,
20· ·for the safety of our staff and attendees.
21· · · · I have asked the executive director to lead
22· ·the call as much as possible.· I've asked the
23· ·executive director to address the current
24· ·environment as much as possible versus the
25· ·original agenda.
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Page 6·1· · · · Normally, we would be looking at audited
·2· ·historic financial information, which is not
·3· ·relevant to today's unprecedented situation.
·4· ·Before approval of the minutes and election of
·5· ·officers, I do want to say thank you to all of
·6· ·those essential government workers, teachers,
·7· ·transportation, first responders and so many,
·8· ·many others now called essential that so many of
·9· ·us will never take for granted, and I also want
10· ·to thank our SBA staff.
11· · · · I want to cite the transparency of the State
12· ·Board of Administration, including our website.
13· ·Again, the State of Florida Retirement System or
14· ·Florida State Board of Administration, all the
15· ·minutes, transcripts, roles, including that of
16· ·the Investment Advisory Council, are clearly on
17· ·our website.
18· · · · I would also want to comment that in
19· ·February of 2020, the SBA posted a look-back at
20· ·the 2007 and 2008 financial crisis.· Not that
21· ·anything is the same, but sometimes history can
22· ·help give perspective.
23· · · · I want everyone to stay safe.· Now what I
24· ·would like to do is request the approval of the
25· ·minutes of our December 17, 2019 meeting.
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Page 7·1· · · · MS. CANIDA:· This is Tere Canida.· I make a
·2· ·motion.
·3· · · · MR. BOBBY JONES:· Do I have a second?
·4· · · · MR. WENDT:· Second from Wendt.
·5· · · · MR. BOBBY JONES:· All in favor?
·6· · · · (Ayes)
·7· · · · MR. BOBBY JONES:· I would also like to
·8· ·request that we defer the election of officers
·9· ·until the end of the meeting, if there is no
10· ·objection.· My goal is mostly to assure
11· ·continuity.· And also turn the meeting over to
12· ·our executive director and staff.· Is there any
13· ·objection?
14· · · · MR. COLLINS:· No objection.
15· · · · MR. BOBBY JONES:· Without objection -- I'm
16· ·sorry?
17· · · · MR. COLLINS:· Hey, Peter Jones.· It's Peter
18· ·Collins.
19· · · · MR. BOBBY JONES:· Is there any objection to
20· ·deferring the election of officers to the end of
21· ·the meeting so we can move to the executive
22· ·director report next?
23· · · · MR. COLLINS:· No objection.
24· · · · MR. BOBBY JONES:· Without hearing objection,
25· ·I would now like to turn it over to the executive
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Page 8·1· ·director and again thank everyone.
·2· · · · MR. WILLIAMS:· Thank you, Mr. Chairman and
·3· ·members of the Investment Advisory Council, for
·4· ·joining us in this virtual meeting today.· As the
·5· ·chairman just pointed out, we're all trying to be
·6· ·responsible.· We're honoring social isolation but
·7· ·at the same time getting the job done that we
·8· ·have to do to serve our many beneficiaries who
·9· ·have given their lives to public service.
10· · · · The SBA has adopted numerous safety
11· ·provisions, most of them adopted very early in
12· ·the onset of the COVID-19 pandemic, and we are
13· ·now operating remotely.· We suspended travel on a
14· ·self-imposed basis several weeks ago.· We
15· ·likewise advised all of our investment partners
16· ·who commonly visit the building from their
17· ·headquarters all over the world that that would
18· ·no longer be appropriate and suggested that,
19· ·absent some very, very extraordinary and
20· ·compelling circumstances, that we conduct those
21· ·meetings by teleconference, and we've been
22· ·following that.
23· · · · Likewise, over the past probably five-plus
24· ·years, we've put a lot of time and effort into
25· ·building the technical infrastructure to securely
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Page 9·1· ·operate remotely in the event our headquarters
·2· ·building in Tallahassee is unavailable as a
·3· ·consequence of any kind of natural disaster or
·4· ·other event.· That has served us well in recent
·5· ·hurricane seasons, and it's serving us really
·6· ·well now, as all we had to do was scale up
·7· ·practices we already had in place to operate
·8· ·remotely.
·9· · · · So we've added a number of licenses for the
10· ·secure remote access we use, and the SBA is
11· ·operating, I'm going to say, well over 90 percent
12· ·remotely at this time.· And that does not mean we
13· ·have in any way had diminution of service levels.
14· ·We're maintaining full operations, daily
15· ·liquidity, transactional capability and
16· ·transparency, with Florida PRIME as an example,
17· ·and it's working well.
18· · · · As the chairman said, events have absolutely
19· ·eclipsed the normal approach we would take to an
20· ·IAC meeting.· So I thought what the group's
21· ·preference would be, as Chairman Jones suggested,
22· ·would be to go directly into the changes wrought
23· ·by the pandemic and, in some sectors, changes
24· ·that have been exacerbated by the collapse in
25· ·energy prices, courtesy of the competition
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Page 10·1· ·between Saudi Arabia and Russia.
·2· · · · We also have focused presentations today on
·3· ·the Florida Growth Fund and the real estate asset
·4· ·class.· We'll certainly get both of those worked
·5· ·in, and we'll hear from the asset class senior
·6· ·investment officers and other SBA staff as needed
·7· ·to go through that discussion.
·8· · · · Given the role that the IAC and the SBA
·9· ·staff play and the trustees' fulfillment of their
10· ·fiduciary duty, I believe it's also important
11· ·today for us to hear from our consultants so that
12· ·we have the benefit not only of our own
13· ·commentary but the important perspective they
14· ·bring on what the SBA is doing relative to their
15· ·broad knowledge of other institutional clients
16· ·and also relative to best practice.
17· · · · If anyone has questions or comments about
18· ·fourth quarter reports or investment performance,
19· ·we'll be happy to address them.· And if that
20· ·approach is acceptable to the chair and the IAC
21· ·membership, I'm happy to go ahead and frame up on
22· ·a total portfolio level where we are
23· ·environmentally and give you the outline that I
24· ·think you would all agree is the logical way for
25· ·us to go through this at the total fund level
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Page 11·1· ·first and then drill down into the individual
·2· ·asset classes.· Does that sound appropriate and
·3· ·acceptable to you?
·4· · · · MR. BOBBY JONES:· This is Bobby Jones. I
·5· ·certainly would think that would be the most
·6· ·appropriate, efficient way to go forward.
·7· · · · MR. COLLINS:· And, Ash, I agree.· Ash, Peter
·8· ·Collins.· I missed the roll call, but I'm here.
·9· · · · MR. WILLIAMS:· Okay.· We've got you checked
10· ·off.· I heard you a minute ago.
11· · · · MR. WENDT:· This is Gary Wendt.· The pages
12· ·you are going to speak to are in the book?
13· · · · MR. WILLIAMS:· Got it.· All right.
14· · · · MR. WENDT:· Are the pages you're going to
15· ·speak to in the book?
16· · · · MR. WILLIAMS:· Not at the outset.· We will
17· ·identify pages when we come to pages.
18· · · · MR. WENDT:· Is there anything that we will
19· ·have visually to what you're talking about?
20· · · · MR. WILLIAMS:· Not at the outset, no, I
21· ·don't believe so.· I think this is primarily
22· ·going to be discussion.
23· · · · MR. WENDT:· Thank you.
24· · · · MR. WILLIAMS:· Yes.· Thank you.· So first of
25· ·all, by way of background, I think SBA's
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Page 12·1· ·portfolio and governance are largely designed to
·2· ·cope with dislocations in a prudent and rational
·3· ·manner.· If you think about it, we have a number
·4· ·of things going for us that equip us perfectly to
·5· ·deal with this sort of situation.
·6· · · · Much as the military trains very thoroughly
·7· ·for operations in different sorts of theaters and
·8· ·masters the muscle memory and the intellectual
·9· ·discipline of how to cope with different sorts of
10· ·challenges, how to deal with changes, how to
11· ·adapt and how to keep progressing as the
12· ·battlefield evolves, we have detailed, thoroughly
13· ·documented investment policy that outlines all
14· ·the key elements to provide us advantage in
15· ·adverse market conditions.
16· · · · What does that mean?· Well, several things
17· ·that I'm sure those of you who have been on the
18· ·IAC for a while are very familiar with.· Number
19· ·one, we're long-term oriented and we're
20· ·diversified across and within asset classes.
21· ·Normally, correlations across those asset classes
22· ·and within the diversification intraclass serves
23· ·us well.· In times of extreme duress in global
24· ·markets, correlations tend to go toward one on a
25· ·temporary basis, but that usually unwinds.
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Page 13·1· ·Structurally, we think it's the right way to be
·2· ·positioned.
·3· · · · Secondly, we're liquid.· We're very, very
·4· ·attentive to maintaining our liquidity, which
·5· ·preserves our ability to meet our liabilities.
·6· ·So, for example, our benefit payments for March
·7· ·were already reserved for in cash.· We've
·8· ·likewise reserved in advance for other known
·9· ·disbursements, such as the Lawton Chiles
10· ·Endowment payout that will come in June.
11· · · · We maintain enough liquidity so that we are
12· ·confident that we can not only meet liabilities
13· ·but also undertake rebalancings when they're
14· ·indicated.· That's both a source of risk control
15· ·and a source of return enhancement.· We want to
16· ·be able to meet capital calls as they come in
17· ·because, by definition, when events have caused
18· ·asset prices to hit levels or relative values to
19· ·hit levels or relative risks to hit levels that
20· ·it creates an opportunity window for various
21· ·committed capital structure partners, they're
22· ·going to call capital.· And that's exactly the
23· ·time you do not want to be unable to fund a
24· ·capital call.· So we're very careful about
25· ·protecting that liquidity.
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Page 14·1· · · · Likewise, to the extent there are
·2· ·extraordinary transient opportunities that come
·3· ·out of the forced selling and other duresses
·4· ·associated with a major dislocation, we want to
·5· ·be able to take advantage of them.· Collectively,
·6· ·maintaining one's discipline on liquidity and
·7· ·ensuring that you have liquidity when others
·8· ·don't is the difference between being prey and
·9· ·being a predator in a tough environment.
10· · · · Thirdly, we're not levered.· We don't rely
11· ·on fund level leverage, total fund level
12· ·leverage.· As a consequence, we don't have any
13· ·pressures because of underlying loan providers or
14· ·collateral requirements or covenants in debt.
15· · · · And if you look at where some of the most
16· ·violent challenges have occurred in private
17· ·investment funds in the past couple of weeks,
18· ·probably the number one area has been REITs that
19· ·run levered portfolios of real estate related
20· ·credit.· And today's news had reference to some
21· ·serious issues that have come out of there, where
22· ·some providers are running into walls where they
23· ·can't meet margin calls.
24· · · · I would also say, fourthly, we've got a
25· ·very, very experienced team here.· The senior
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Page 15·1· ·team at the State Board and many of our mid and
·2· ·even some of the junior level people on our team
·3· ·went through the global financial crisis, the
·4· ·dot-com collapse, 9/11, the Asian contagion, and
·5· ·there are a few of us around that even remember
·6· ·1987 and went through that in a fiduciary
·7· ·capacity.· So I think that experience is useful
·8· ·because I think once people have seen that kind
·9· ·of action once in their lives, they're less
10· ·likely to freeze up when they see it a second
11· ·time.
12· · · · Lastly, I would say the relationships we
13· ·maintain with SBA's trustees and with all of you
14· ·on the Investment Advisory Council and the
15· ·constant communication we have among ourselves is
16· ·very, very useful.· And as an extension of that
17· ·concept, we are fortunate, because of our size
18· ·and the nature of our partnerships in the private
19· ·sector, that we have close relationships with the
20· ·most senior levels of not only the largest but I
21· ·would argue the smartest and best resourced
22· ·financial institutions in the world, and we have
23· ·the benefit of their insights in very nearly
24· ·realtime.
25· · · · So with that background -- and let me throw
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Page 16·1· ·in one other thing.· If you contrast where this
·2· ·organization is today versus where it was in,
·3· ·say, the fall of 2008, first of all, we're fully
·4· ·staffed and stable.· We have a great team, as all
·5· ·of y'all know.· That was not the case in early
·6· ·'08.· There were significant gaps in the staffing
·7· ·of the organization.
·8· · · · Secondly, I think -- and I will knock wood
·9· ·when saying this.· I think we have earned a high
10· ·degree of credibility in the industry with the
11· ·investment-related media, with the various
12· ·constituencies we have here in Florida, including
13· ·first and foremost our trustees, secondly the
14· ·legislature, thirdly our beneficiaries, and
15· ·fourthly the business community.
16· · · · And if you think about one of the other
17· ·things that was a major headwind for us coming
18· ·into the worst of the great financial -- the
19· ·global financial crisis, it was issues that had
20· ·been encountered in Florida PRIME back in the
21· ·fourth quarter of '07.
22· · · · And to show you what a strong contrast there
23· ·is today versus that period, week before last, I
24· ·believe it was, we did a call for Florida PRIME
25· ·participants.· Florida PRIME has close to
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Page 17·1· ·$17 billion in assets currently and over 900
·2· ·accounts spread across, I want to say, about 170
·3· ·governmental entities across Florida.
·4· · · · So we did a call with that group to outline
·5· ·what we're doing in terms of the portfolio, a
·6· ·high degree of transparency, full disclosure of
·7· ·all positions.· And we basically had no issues
·8· ·whatsoever or any compromises in our liquidity or
·9· ·service provided.
10· · · · So when we did a call, we had 110 different
11· ·governmental entities on the call representing I
12· ·don't know how many accounts.· And when we walked
13· ·them through everything and had Federated, who is
14· ·a third-party contract asset manager for Florida
15· ·PRIME, they had the senior PM who manages PRIME's
16· ·portfolio on the call.· She did her walk-through,
17· ·and then we opened it up to questions.· We didn't
18· ·have a single question from the participants.
19· ·And money flows have been very orderly.· There's
20· ·not been any sort of panic activity on the part
21· ·of any of our local government clients.· So we're
22· ·very happy with that.
23· · · · So here's the outline I would suggest we
24· ·follow as we go around the asset classes.· Let's
25· ·first talk about where we are now and get a
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Page 18·1· ·little perspective on what we're seeing, then
·2· ·talk about any unusual challenges either in
·3· ·market function or valuations of subcomponents of
·4· ·the various asset classes, then morph that into
·5· ·opportunities and how you see things unfolding as
·6· ·we go forward through this crisis.
·7· · · · So first of all, at the total portfolio
·8· ·level -- well, let me stop there.· Does that
·9· ·approach sound okay as a general outline to the
10· ·IAC?
11· · · · MR. WENDT:· Outline good.· Gary Wendt would
12· ·like to know are there any pages you're referring
13· ·to in the book.
14· · · · MR. WILLIAMS:· Not at this point, no.
15· · · · MR. WENDT:· Thank you.
16· · · · MR. WILLIAMS:· Yes, sir.· So at a total fund
17· ·level, through the close yesterday, March 30,
18· ·fiscal year to date, the total fund is down
19· ·5.83 percent.· That's 202 basis points ahead of
20· ·benchmark.· And in fairness, I have to note,
21· ·there's a tailwind in that relative performance
22· ·in the form of delayed reporting of private
23· ·market asset classes.
24· · · · So things like real estate and some of the
25· ·private equity assets and certain of the other
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Page 19·1· ·assets held in strategic investments are not
·2· ·shown on current marks.· That problem is going to
·3· ·be there whether markets are rising or falling,
·4· ·and we treat it the same both ways, so we're not
·5· ·changing it up for our own benefit.
·6· · · · The fund, including distributions, is down
·7· ·$13.8 billion from the beginning of the fiscal
·8· ·year.· So that is the combined impact of
·9· ·distributions, which average around 600 million a
10· ·month, and the investment market performance.
11· · · · Let's put that in perspective for just a
12· ·minute in terms of what we're seeing.· So SBA
13· ·uses a total fund risk model provided by
14· ·BlackRock.· It's a model called Aladdin, and it's
15· ·one in use by many of the leading investment
16· ·institutions around the world.
17· · · · John Benton, who you all know, has worked
18· ·with the Aladdin model to develop perspective on
19· ·just how extreme the changes are that we have
20· ·seen, the actual experience that we have had so
21· ·far through the financial upheaval that we've
22· ·seen as a consequence of the pandemic.
23· · · · And this is in the category of fairly
24· ·amazing detail.· In looking at the model, the
25· ·Aladdin model, given the speed, volatility and
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Page 20·1· ·magnitude of this downturn, calls it an 11
·2· ·standard deviation move in terms of market
·3· ·factors, 11 standard deviations.· I've never
·4· ·heard of anything with a probability that obscure
·5· ·being modelable.
·6· · · · And when you look at the actual math on
·7· ·this, the number of zeros in front of the
·8· ·one-five percent at the end of it is so many that
·9· ·you're going to need a nap before you can count
10· ·them all.· It's effectively a zero probability
11· ·event because it's never happened.
12· · · · And what you really have is a simultaneous
13· ·demand shock, where a forced shutdown of
14· ·economies all over the world simultaneously or
15· ·near simultaneously combined with a supply shock
16· ·that results from interruption in supply chains,
17· ·supply shock from the other direction, surplus of
18· ·petroleum and energy products, has really sent a
19· ·whale of a curve to the financial markets around
20· ·the world.
21· · · · The other thing is, the speed with which
22· ·this has occurred is a new record.· The MSCI All
23· ·Country World Index declined 33.9 percent between
24· ·the 23rd of February and the 23rd of March. A
25· ·decline of that magnitude in that period of time
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Page 21·1· ·is pretty much unprecedented.· And it just tells
·2· ·you how extreme this situation has been.
·3· · · · And if you look at other declines that are
·4· ·in that magnitude, which is north of 30 percent,
·5· ·there are really only a few in the past several
·6· ·decades.· You'd see, for example, 9/11 was a
·7· ·41.6 percent event.· The March, October
·8· ·'02 collapse was 31, and the '07, '08, which is
·9· ·of course the great financial crisis, 52.3.· So
10· ·the scale of this thing has been huge, and it has
11· ·reached just about everywhere in the world.
12· · · · Let me stop there and see if there are any
13· ·questions or other areas you'd like me to touch
14· ·on.· All right.· Well -- did someone say
15· ·something?
16· · · · MR. BOBBY JONES:· Ash, this is Bobby. I
17· ·think you're going exactly on the information
18· ·that is right to start to convey.· Thank you.
19· · · · MR. WILLIAMS:· All right.· So then why don't
20· ·we now -- let me just add one more background
21· ·piece.· One of the key things that one addresses
22· ·in these environments is rebalancing.· And we all
23· ·know that human beings are wired to respond to
24· ·fear and greed, and they tend to respond to fear
25· ·and greed counter to their own interests.· They
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Page 22·1· ·get fear of missing out when an asset is
·2· ·appreciating and they rush toward it at an
·3· ·already elevated price.· And then when they
·4· ·encounter a shock and a decline in asset value,
·5· ·they get fearful, they feel guilty, and they tend
·6· ·to sell at the wrong time.
·7· · · · The very nature of policy-driven
·8· ·institutional investment is to have written
·9· ·investment policy that compels you, compels you
10· ·to do the right thing at the right times.· So our
11· ·standard policy is, if we get 300 basis points,
12· ·or 3 percent, below our target allocation for an
13· ·asset class, we will rebalance into that
14· ·underweight asset class by selling off assets in
15· ·whatever asset classes become overweight as a
16· ·response to market conditions.
17· · · · We first started brushing rebalancing levels
18· ·in declines in global equities, I'm going to say,
19· ·week before last.· John, is that right?
20· · · · MR. BENTON:· Correct.
21· · · · MR. WILLIAMS:· Mr. Benton is nodding yes.
22· ·And we took the decision, given the speed with
23· ·which the markets were collapsing, not to do an
24· ·immediate rebalance but to widen that guardrail,
25· ·as we call it, to 5 percent below policy target,
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Page 23·1· ·with the view that if we rebalanced immediately
·2· ·and the markets continued down, we would just be
·3· ·incinerating capital because we rebalanced too
·4· ·fast.
·5· · · · So we took a little bit of a pause, and sure
·6· ·enough, the following week was particularly bad,
·7· ·and we made the decision to go ahead and
·8· ·rebalance back when we got toward the end of that
·9· ·week.· And this would have been week before last.
10· ·We made the decision to go ahead and do a
11· ·rebalance back to about a 4 percent sub-target
12· ·level, which in terms of money, that's about a
13· ·$670 million level.
14· · · · And, further, we took the decision to do a
15· ·good part of that rebalancing into active
16· ·managers.· So when you've got ex-U.S. or U.S.
17· ·small cap, for example, we did a lot of work
18· ·through active managers, with a view that there
19· ·are some industries that are inherently facing
20· ·challenges going forward.· There are others for
21· ·whom, in its own perverse way, the changes in
22· ·lifestyle wrought by the pandemic have been
23· ·somewhat tailwinds.· I'm hesitant to use that
24· ·phrase in these bad circumstances.· But there's
25· ·been an element of that in some business models.
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Page 24·1· · · · And so we wanted to be able, in our
·2· ·rebalancing, to differentiate among industries,
·3· ·among countries, among individual companies, so
·4· ·that we might have a more intelligent allocation
·5· ·of our capital into places where it's going to
·6· ·be, one, safer, two, more likely to grow.
·7· · · · So with that, John Benton, unless you think
·8· ·there's something else we ought to touch on at a
·9· ·total fund level, I'm inclined to start moving to
10· ·the asset classes, maybe start out with global
11· ·equity, as the largest class, and go around.· And
12· ·global equity is where the rebalancing took
13· ·place.· So Tim Taylor can give us more color and
14· ·specificity on that.
15· · · · And then once we get through the lap around
16· ·the asset classes, maybe we save real estate for
17· ·last because that's a focus area and then maybe
18· ·get a little on-high word from Aon in terms of
19· ·what they're seeing and then go ahead and do the
20· ·Florida Growth Fund review so that that's covered
21· ·as well.· Does that sound acceptable?
22· · · · MR. BOBBY JONES:· Ash, this is -- Executive
23· ·Director, this is Bobby Jones, and I think that
24· ·is a great course to go forward.
25· · · · MR. WILLIAMS:· All right.· Very good.· Well,
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Page 25·1· ·with that, Tim Taylor, if you're on, why don't
·2· ·you tell us about global equities.
·3· · · · MR. TAYLOR:· Yes, sir.· I am on and good
·4· ·afternoon to everyone.· I hope everyone is
·5· ·staying safe.· Coming into 2020, we all know the
·6· ·equity markets were exceptionally strong for an
·7· ·extended period of time.· Global equity's
·8· ·benchmark from inception in 2010 had returned
·9· ·almost 10.5 percent on an annualized basis for a
10· ·decade.
11· · · · 2019 was essentially an exclamation point on
12· ·the entire decade.· Markets last year surged 26
13· ·percent, and every sector was up 20 percent or
14· ·more, except energy, and energy was up
15· ·12 percent.· So far in 2020, equity returns are
16· ·down a notable 22 percent.· Volatility has
17· ·significantly increased -- we expected it would
18· ·at some point, right -- with daily market swings
19· ·of 5 to 10 percent either way becoming more
20· ·common.
21· · · · There are some consistent tilts in global
22· ·equity that have benefited our active performance
23· ·over time, particularly during periods when
24· ·markets are negatively impacted by concerns about
25· ·poor future economic growth and even in periods
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Page 26·1· ·of crisis, like the TMT bubble.· I joined the SBA
·2· ·in March of 1999.· That was one of my first
·3· ·experiences.· The global financial crisis and
·4· ·perhaps even now.
·5· · · · In general, global equity normally has a
·6· ·bias towards higher quality stocks, as defined by
·7· ·consistent and relatively predictable
·8· ·profitability, combined with profiles that are
·9· ·not as negatively impacted by challenging
10· ·economic environments.
11· · · · We normally are biased against companies
12· ·with higher levels of leverage, and we carry an
13· ·underweight to financials and to the cyclically
14· ·dependent energy sector.· So we're pretty
15· ·well-positioned at all times, I think,
16· ·particularly when events such as this occur.
17· · · · We are currently -- global equity as an
18· ·asset class is currently ahead of its benchmark
19· ·year to date -- and this is through last
20· ·evening's close -- we estimate by 40 or 50 basis
21· ·points.· And so we are modestly protecting
22· ·capital during this challenging period.
23· · · · Absolute equity valuations are arguably
24· ·good, particularly when viewed on a mid- to
25· ·long-term basis.· We've seen a significant
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Page 27·1· ·sell-off.· We've taken the opportunity, as Ash
·2· ·mentioned, to add selectively to the asset class,
·3· ·with an emphasis on active managers that may
·4· ·strategically capitalize on opportunities in the
·5· ·present environment.· And, Ash, those are
·6· ·comments I have right now.
·7· · · · MR. WILLIAMS:· Thank you, Tim.· Questions,
·8· ·comments?
·9· · · · MR. COLLINS:· Yeah.· Mr. Chairman, this is
10· ·Peter Collins.· Tim, how much rebalancing has
11· ·there been in terms of total dollar volume in
12· ·equities?· How much have you guys put back into
13· ·the market on an opportunistic basis so far and
14· ·over what period of time?· Has it just been the
15· ·last week?· Has it been the last two weeks?· Did
16· ·you start three weeks ago?· Just give us some
17· ·feedback on that.
18· · · · MR. TAYLOR:· Sure.· And if my numbers and
19· ·dates are incorrect, John Benton, please or, Ash,
20· ·please correct me.· We've rebalanced and added
21· ·back to global equity approximately 1.3 billion.
22· ·And it's been over the last two weeks, I would
23· ·say.
24· · · · MR. COLLINS:· Thanks.
25· · · · MR. GOETZ:· Mr. Chairman, this is John
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Page 28·1· ·Goetz.· Could I follow up with Tim on another
·2· ·question?
·3· · · · MR. BOBBY JONES:· Of course.
·4· · · · MR. GOETZ:· Tim, the 1.3 billion, can you
·5· ·break that down into where -- you mentioned
·6· ·active, which makes sense.· Can you break that
·7· ·down a little bit more in terms of where you put
·8· ·the 1.3 billion?
·9· · · · MR. TAYLOR:· I would say that where we've
10· ·been active are U.S. small cap -- actually, we've
11· ·been -- we put money to work active everywhere.
12· ·There has been some passive.· It's gone into U.S.
13· ·large cap.· You could argue that maybe, you know,
14· ·we've got good valuations now, so any beta is
15· ·going to be good mid-, long-term.
16· · · · But we put active to work really everywhere.
17· ·U.S. small cap was involved, developed standard
18· ·or non-U.S. large cap.· We put some into
19· ·emerging.· We put a little into emerging market
20· ·small cap as well.· For example, emerging market
21· ·small cap, at the time we were putting money in,
22· ·was off 40 to 45 percent year to date, so a
23· ·really significant sell-off.
24· · · · So, Mr. Goetz, most of what we've put to
25· ·work has been active, and it's been active
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Page 29·1· ·everywhere.· Probably it's a little biased to
·2· ·where we're already most active, the more
·3· ·inefficient areas.· But a little bit of it has
·4· ·been some U.S. large cap beta.· But we've really
·5· ·been, I think, thoughtful, talking to the team
·6· ·about which managers at this point in time are
·7· ·seeing really good opportunities.
·8· · · · And, you know, we've heard a couple of times
·9· ·now that you don't get an opportunity to purchase
10· ·excellent companies at excellent prices.· And,
11· ·yeah, the short-term is going to be a little bit
12· ·rocky, but you don't get an opportunity like this
13· ·very often.· So hopefully we're taking advantage
14· ·of this opportunity.
15· · · · MR. GOETZ:· Thank you.
16· · · · MR. TAYLOR:· You're welcome.· Thank you.
17· · · · MR. WILLIAMS:· All right.· Do we want to
18· ·move on --
19· · · · MR. COBB:· Mr. Chairman, this is Chuck Cobb.
20· ·Tim, I'd like to ask a follow-up on both of these
21· ·questions in terms of a percentage.· What were
22· ·we, in our equity, global equity percentage at
23· ·the low and what are we now after this investment
24· ·and the market return?· What is our market
25· ·percentage of our total portfolio in global
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Page 30·1· ·equity now after the investment and the
·2· ·rebalancing?
·3· · · · MR. TAYLOR:· I'll try to pull up some
·4· ·numbers.· But if I can, maybe John Benton, if you
·5· ·have that available, chime in.
·6· · · · MR. BENTON:· Yeah.· Ambassador Cobb, this is
·7· ·John Benton.· After the rebalancing, we'll be at
·8· ·about 51 percent of the total fund, and our
·9· ·target is 53 percent.· So we're just a couple of
10· ·percentage points --
11· · · · MR. COBB:· I don't hear John, if he's
12· ·talking.
13· · · · MR. BENTON:· Ambassador Cobb, can you hear
14· ·me?
15· · · · MR. COBB:· I can hear you now.
16· · · · MR. BENTON:· Okay.· After the rebalance,
17· ·we'll be approximately about 51, at 51 percent of
18· ·the total fund, and our target is 53.· So we're
19· ·only 2 percent below our long-term policy weight.
20· · · · MR. COBB:· And where were we at the low?
21· · · · MR. BENTON:· We were probably around
22· ·48 percent at the low, and that was around
23· ·March 19th.· And we had --
24· · · · MR. COBB:· Thank you.· That answers my
25· ·question.
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Page 31·1· · · · MR. BENTON:· Thank you.
·2· · · · MR. COBB:· Thank you.· That answers my
·3· ·question.· 48 to 51.· Thank you.
·4· · · · MR. WILLIAMS:· Thank you, Ambassador.· Other
·5· ·questions?
·6· · · · MR. COLLINS:· Ash, Peter Collins.· Just one
·7· ·more.· So as we're below our overall target still
·8· ·and the market's come back -- I'm assuming that
·9· ·51 percent is as of yesterday -- are we still
10· ·looking to add?· You know, going back to the
11· ·comment it's difficult to buy excellent companies
12· ·at good prices, I mean, we're still down
13· ·significantly in the equity markets from our
14· ·peak.· Are we still looking to add, or are you
15· ·guys just taking a breather?
16· · · · MR. WILLIAMS:· No, we're not really taking a
17· ·breather.· We've got the powder there to get the
18· ·job done, and we have the plans in place to move
19· ·the money.· And it's a question of largely the
20· ·absorption and implementation through our
21· ·partners and through our internal portfolio.
22· · · · MR. COLLINS:· Okay.· Thanks.
23· · · · MR. GOETZ:· Tim, this is John Goetz.· Can I
24· ·ask one more question, please?
25· · · · MR. TAYLOR:· Yes, sir.
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Page 32·1· · · · MR. GOETZ:· With respect to the deviations
·2· ·that Ash mentioned earlier, the truly dramatic
·3· ·significance of this 11 standard deviation move,
·4· ·in looking at spreads between different portions
·5· ·of the equity market, I know there are some big
·6· ·dislocations at a record level as well,
·7· ·particularly on valuation, 4 standard deviation
·8· ·type events.
·9· · · · By the way, the anti-leverage that you've
10· ·espoused, you know, that's fantastic.· You
11· ·mentioned, you know, the focus on growth.· I'm
12· ·just wondering if you have a way of looking at
13· ·the degree of deviation in valuation and consider
14· ·some incremental moves just from that
15· ·perspective.
16· · · · You mentioned being underweight in
17· ·financials and energy, but now energy is
18· ·massively dislocated.· I'm just wondering how you
19· ·might think about that going forward over the
20· ·coming weeks.
21· · · · MR. TAYLOR:· Thank you for that question.
22· ·One of the interesting things that we've observed
23· ·is it has been a notable sell-off, a significant
24· ·sell-off.· It hasn't been entirely
25· ·indiscriminate, from what I can tell.· And what
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Page 33·1· ·is sort of interesting is what was outperforming,
·2· ·growth, which has outperformed, as we know, value
·3· ·for a long time, even during the sell-off, it's
·4· ·growth that is continuing to beat value.· Value
·5· ·is actually underperforming in the sell-off.
·6· · · · And the spreads you mentioned were at
·7· ·historically large levels even before.· So it's
·8· ·perhaps not surprising.· You think about, you
·9· ·know, some value stocks, perhaps they really need
10· ·some economic good news in a recovery to start
11· ·coming back.· And with so much uncertainty in the
12· ·market, people are perhaps stepping away even a
13· ·little bit more from that.
14· · · · So, Mr. Goetz, we've seen that spread
15· ·continue to widen, the spread we're talking
16· ·about, growth to value.· Some are arguing that it
17· ·could be a long time before value recovers.· And
18· ·I'm one to believe in an element of mean
19· ·reversion.· And, boy, this has been out of favor
20· ·for a long time, and sometime it's going to be --
21· ·value will be in favor.
22· · · · And we do have some managers that will
23· ·benefit and will do well if value -- when value
24· ·starts coming back.· There is a good bit of
25· ·concern that it may be a while before value comes
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Page 34·1· ·back into favor unless we get some really
·2· ·positive news on economic growth, positive
·3· ·economic growth and some certainty of getting
·4· ·back to business as normal.
·5· · · · So I don't know if I'm answering your
·6· ·question entirely, but we have elements in our
·7· ·portfolio that have been challenged for a while.
·8· ·They've continued.· And some of our managers who
·9· ·have underperformed, and our value managers, are
10· ·continuing to underperform, even in this
11· ·environment.· And so that's been a little bit
12· ·surprising but understandable.· So it's something
13· ·we're certainly thinking about.· And we don't
14· ·want to be too underexposed if indeed value were
15· ·to start -- at some point investors are going to
16· ·favor those stocks.
17· · · · I remember in 2009, I think it was, in
18· ·March 2009, coming out of the global financial
19· ·crisis, what did really well when people
20· ·understood or came to the conclusion that the
21· ·world wasn't going to end were the worst quality
22· ·companies, the dash to trash, the trash rally.
23· ·Companies who had no earnings, highly levered,
24· ·all of the things that don't define quality,
25· ·those stocks did really well and they raced and
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Page 35·1· ·we underperformed, but it was fairly short-lived.
·2· ·And then what came back into favor were investors
·3· ·starting to think more about fundamentals again
·4· ·and say, well, these things are important to us.
·5· · · · So I hope that's responsive to your
·6· ·question.· We're certainly -- we're continuing to
·7· ·see the spreads continue to widen.· And that's
·8· ·something we'll keep an eye on.
·9· · · · MR. GOETZ:· Thank you.
10· · · · MR. TAYLOR:· Thank you.
11· · · · MR. WILLIAMS:· Are we ready to move on to
12· ·fixed income?
13· · · · MS. ROMANO:· Ash, it's Alison Romano. I
14· ·think Katy is unable today to cover the fixed
15· ·income space, so I'll go ahead and do that.
16· ·Hopefully everyone can hear me clearly.
17· · · · MR. WILLIAMS:· Thank you, Alison.
18· · · · MS. ROMANO:· It's certainly been a
19· ·challenging time in the fixed income markets, but
20· ·one way that I would characterize it in this
21· ·crisis versus the 2008 crisis is what we've seen
22· ·more is a liquidity issue as opposed to a
23· ·liquidity and solvency issue.
24· · · · So as various players in the market were
25· ·forced to delever, whether CTAs or systematic
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Page 36·1· ·managers or disparity strategies, et cetera, we
·2· ·saw fixed income markets start to seize up, which
·3· ·created a lot of challenges.· We even saw seizing
·4· ·up in the money market space and also (inaudible)
·5· ·Treasuries.· This presented some challenges in
·6· ·the fact that we were reaching quarter end, when
·7· ·banks are trying to meet capital ratios.
·8· · · · So the Fed, as you all know, stepped in.
·9· ·They stepped in dramatically with an alphabet
10· ·soup of programs to really support liquidity in
11· ·all aspects of the market.· So there certainly
12· ·are numerous dislocations, but things have
13· ·started to improve.· The perspective is the Fed
14· ·is throwing everything it can at this so that the
15· ·machine essentially can be running again.
16· · · · We continue though, however, to see wider
17· ·spreads maybe sort of one data point BPs
18· ·(inaudible).· Bid-ask spreads roughly for
19· ·investment grade precrisis, call it below 5 BPs.
20· ·At the height of the crisis, it was above 30 BPs,
21· ·and now we're back down to call it 8.
22· · · · So the Fed has taken action.· It has helped
23· ·the markets, but we are still seeing the wider
24· ·basis spread.· And it is probably also important
25· ·to note that what they have been throwing at the
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Page 37·1· ·system is much more than what occurred during the
·2· ·global financial crisis.
·3· · · · The good news is that the fixed income team
·4· ·has been able to provide the liquidity that they
·5· ·need.· And maybe to provide a good example of how
·6· ·all the asset classes coordinate in this time of
·7· ·stretched markets, Katy and her team, along with
·8· ·Tim and his team, John Benton and I, we're
·9· ·talking multiple times a day to understand where
10· ·there was liquidity on the fixed income side,
11· ·what the opportunity was on the equity side, how
12· ·we could raise liquidity from fixed income
13· ·without pushing on a market that was challenged
14· ·and opportunistically moving into equity.· We
15· ·were, as others have said, able to successfully
16· ·do that.
17· · · · Just like equities, in terms of looking
18· ·forward, we think it is a good time for active
19· ·management.· There absolutely will be winners and
20· ·losers, and we look to active managers to be able
21· ·to do that.· Likewise, from an internal
22· ·perspective, the team is going to be active and
23· ·be opportunistic, but they're also keeping in
24· ·mind that they may be tapped for future liquidity
25· ·if the equity markets were to go down.
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Page 38·1· · · · There has been sharper pricing in the
·2· ·corporate credits.· In some cases maybe it's not
·3· ·enough.· In other cases it's already priced in.
·4· ·So, again, this is where active management can
·5· ·pay off.
·6· · · · As you all know, the fixed income team also
·7· ·is a very low-risk asset class.· They manage
·8· ·tightly to their risk parameters.· In doing so,
·9· ·they were able to weather this challenge very
10· ·well, but they also have some dry powder such
11· ·that they can put money to work where they see
12· ·that opportunity.· Does anybody have any
13· ·questions?
14· · · · MS. CANIDA:· This is Tere Canida.· Where
15· ·have you seen the greatest dislocations in the
16· ·fixed income market?
17· · · · MS. ROMANO:· There was definitely
18· ·dislocation in mortgage-backeds, some pressure
19· ·related to REITs, even on the CP side and on the
20· ·repo market as well.· In terms of lots of risk
21· ·appetite on the -- we really haven't seen a
22· ·return on the high yield side.· We've seen some
23· ·recovery in some of the other markets.· High
24· ·yields are -- I think there's only been one
25· ·issuance, Yum Brands, over the last few weeks.
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Page 39·1· ·And EM debt also continues to be quite
·2· ·challenged.
·3· · · · MS. CANIDA:· Okay.· Thank you.· And a
·4· ·follow-up to that.· Where are you guys taking
·5· ·advantage of that dislocation?· I mean, have you
·6· ·increased your risk yet, or are you kind of
·7· ·staying where you were prior to the crisis?
·8· · · · MS. ROMANO:· We have a risk budget, but we
·9· ·haven't necessarily been actively increasing
10· ·risk.· In some cases, just given where the market
11· ·is at and the volatility of the market, risk
12· ·overall has increased.· We would expect to see
13· ·that.· I can't speak to the individual decisions
14· ·that our external active managers are making in
15· ·terms of where specifically they're finding those
16· ·pockets of opportunity.
17· · · · MS. CANIDA:· Okay.· Thank you.
18· · · · MR. WILLIAMS:· Thanks, Alison.· So normally
19· ·the next asset class by size would be real
20· ·estate, but as we said at the outset, since
21· ·that's a deep dive focus today, why don't we hold
22· ·that one and go to private equity, please.· John
23· ·Bradley, are you with us?
24· · · · MR. BRADLEY:· I am.· I am.· Thanks, Ash, and
25· ·good afternoon, everyone.· My thoughts today are
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Page 40·1· ·to cover a few things with my PE update, first
·2· ·our positioning on what the portfolio looked like
·3· ·headed into this crisis.· With that, I can touch
·4· ·on some bright spots and some hot spots and
·5· ·challenges in the portfolio.· And then I'll also
·6· ·touch on our current focus today, so how are we
·7· ·positioning ourselves when we do come out of
·8· ·this.· I'm also happy to go through any of the
·9· ·prepared PE slides in your book if there are any
10· ·questions.
11· · · · So, with that, I'll start with our current
12· ·positioning.· Coming into this month or, let's
13· ·say, pre-coronavirus, our asset class had a
14· ·sizable overweight to growth and technology.
15· ·Investments in technology currently account for
16· ·44 percent of the asset class by market value.
17· ·This is a 7 percent overweight relative to our PE
18· ·benchmark and a 19 percent overweight relative to
19· ·our public market benchmark.
20· · · · And while still early, we expect the
21· ·majority of investments in this segment of our
22· ·portfolio to fare better on a relative basis in
23· ·this current environment and when the recovery
24· ·begins.· We have long, long been investing behind
25· ·very powerful secular themes in technology,
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Page 41·1· ·things like cloud computing, AI and big data,
·2· ·SaaS, e-commerce, fintech.· And the broader trend
·3· ·is companies using technology to lower cost and
·4· ·increase productivity.· We believe these things
·5· ·are resilient, and their adoption, innovation,
·6· ·and disruption will only increase as the market
·7· ·and economy recover.
·8· · · · I don't remember who to attribute this to,
·9· ·so I apologize in advance, but one of our GPs
10· ·said, as a result of this global pandemic, we
11· ·will undoubtedly see a much more sophisticated
12· ·and flexible use of technology by governments,
13· ·consumers and businesses alike.· I think that is
14· ·spot-on, and we will continue to invest behind
15· ·these themes.· So this is a bright spot in our
16· ·portfolio.
17· · · · And I'd also say, as we work through our
18· ·calls with our partners, there are bright spots
19· ·in every fund we are investors in.· So some of
20· ·these include things like mission critical,
21· ·recurring revenue tech companies, online
22· ·retailers, whose sales have doubled.· And so I
23· ·think the term that's being coined today is
24· ·retail therapy for the quarantine.· There are
25· ·certain areas in health care that are benefiting,
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Page 42·1· ·grocery and food businesses that are benefiting,
·2· ·all examples of things that are working today.
·3· · · · But there are absolutely challenges in the
·4· ·portfolio.· Almost 9 percent of our portfolio is
·5· ·invested in the energy sector.· This matches the
·6· ·weighting of our private equity benchmark, but
·7· ·it's over 3 percent more than our public market
·8· ·benchmark.
·9· · · · Energy exposure in our portfolio will
10· ·undoubtedly be a challenge.· Oil demand
11· ·contraction due to the coronavirus, coupled with
12· ·the Saudi-Russia-OPEC spat, has caused the price
13· ·of oil to collapse, with no real relief in sight.
14· ·And I would say a world where oil trades in the
15· ·20s and 30s is an extremely difficult one for our
16· ·energy managers to operate.
17· · · · I can report today that the majority of our
18· ·energy managers do hedge their production, with
19· ·most being hedged through the end of this year.
20· ·However, many of our oil and gas GPs do not see
21· ·the price increasing materially by the time their
22· ·hedges expire and thus will spend the majority of
23· ·their time this year trying to lessen the impact
24· ·come year end.
25· · · · Other challenges are obvious.· So any
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Page 43·1· ·companies doing business in the travel,
·2· ·hospitality sector, brick and mortar retail, live
·3· ·events, live events ticketing businesses and
·4· ·restaurants, these are all areas that we have
·5· ·exposure and where the impact is instant and
·6· ·material.
·7· · · · Our largest sector underweights today are
·8· ·financials, manufacturing and consumer retail.
·9· ·So I do like how our portfolio is positioned, but
10· ·it's much, much too early to draw any conclusions
11· ·or make any projections.
12· · · · Our current focus today, so both mine and
13· ·our private equity team, is twofold.· First is
14· ·continuous monitoring of our portfolio.· This
15· ·involves calls and videoconferencing with every
16· ·GP.· Our discussions revolve around business
17· ·continuity plans, the immediate status and health
18· ·of our portfolio companies and liquidity needs of
19· ·portfolio companies.
20· · · · I would let the group know that the response
21· ·from our GPs has been universal.· All are
22· ·focusing on what we think are the right areas.
23· ·First and foremost is liquidity, and so
24· ·maximizing available cash at our companies.· GPs
25· ·are tightening cash management.· They are drawing
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Page 44·1· ·down all revolvers and universally eliminating
·2· ·all nonessential spend.· Second, operations, so
·3· ·that's securing distribution and supply chains,
·4· ·daily calls between businesses, prioritizing
·5· ·resources and implementing crisis management
·6· ·agendas.
·7· · · · And then finally, (inaudible) playing
·8· ·offense, and so while still early, and the time
·9· ·is absolutely not now, our GPs are beginning to
10· ·line up targets for M&A and add-ons in order to
11· ·strengthen portfolio companies.
12· · · · The second focus of our team today is on our
13· ·forward calendar, so managing what is a full
14· ·pipeline of new opportunities.· I remind our team
15· ·daily that funds raised during the peak of the
16· ·GFC in 2008 and 2009 were some of the strongest
17· ·returners over the last 20 years.· And so we are
18· ·very mindful that the commitments we make today
19· ·will provide the foundation for our
20· ·outperformance in the future.
21· · · · And so we are in the process of also closing
22· ·on a few new co-investment vehicles, ones focused
23· ·on traditional co-investments in companies
24· ·alongside our GPs, and then the second, to
25· ·co-invest in secondary transactions, so possibly
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Page 45·1· ·buying from distressed sellers should the
·2· ·opportunity arise.· These vehicles will be ready
·3· ·to be put to work once markets and economies
·4· ·begin to recover.· But what's important is that
·5· ·we are getting them in place and ready today.
·6· · · · And then, lastly, one of my slides in the
·7· ·book shows our commitment activity for 2019, for
·8· ·the last calendar year.· What I think is notable
·9· ·is that last year we committed $515 million to
10· ·five distressed funds.· It was our second highest
11· ·year of distressed fund commitment since the
12· ·inception of our asset class, dating back to
13· ·1999.
14· · · · And so while we had no idea the world would
15· ·experience a pandemic, we were acutely aware that
16· ·we were late in the cycle and starting to plan
17· ·for an eventual downturn.· As we sit here today,
18· ·20 percent of our dry powder, so that would be
19· ·our committed but not yet invested capital, sits
20· ·in distressed strategies.
21· · · · So, to sum it up, I think we are positioned
22· ·to continue outperforming our benchmark over the
23· ·short-term and then accelerate that
24· ·outperformance once the world comes out of their
25· ·homes and economies start to recover, which will
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Page 46·1· ·definitely happen.· That's all I have.
·2· · · · MR. WENDT:· Question from Wendt.· Have you
·3· ·spoken enough to your partners, to your GPs, to
·4· ·know whether they think most of their or many of
·5· ·their companies will be aided by this government
·6· ·program that is designed for small business?
·7· · · · MR. BRADLEY:· I think that's still in
·8· ·discussion.· I think there are thoughts that that
·9· ·will happen.· I think there are -- for those of
10· ·you who are unaware, there is some language in
11· ·the legislation that says for companies that
12· ·might be PE-backed or backed by financial
13· ·sponsors, that all those companies' employees are
14· ·aggregated across the entire portfolio, and so a
15· ·company with 50 employees might get added to
16· ·every other company in the GP's portfolio.
17· · · · We've had talks with our GPs who have been
18· ·in discussions with their legislators that say
19· ·that wasn't the intent, wasn't to exclude those
20· ·companies.· And so the hope is that that will get
21· ·worked out and those companies will be -- that
22· ·aid will be available.
23· · · · MR. WENDT:· I have spoken to some both
24· ·lawyers and people in the business who believe
25· ·that it was done intentionally, that it was done
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Page 47·1· ·to not permit private equity companies who have
·2· ·multiple owners, multiple properties, to be able
·3· ·to use the funds.· You're the first person I've
·4· ·heard say that they think they'll change it.
·5· · · · MS. CANIDA:· This is Tere Canida.· I have a
·6· ·question.· When you talk to your distressed fund
·7· ·partners, what are they telling you?· Are they
·8· ·beginning to take advantage of opportunities, and
·9· ·are you beginning to get calls on your
10· ·investments?
11· · · · MR. BRADLEY:· So on the capital calls, those
12· ·have, for the most part, started to decrease.· So
13· ·they are still coming in for deals that were
14· ·closed but not yet funded.· But for the most
15· ·part, all new deals or activity has dried up.· On
16· ·the distressed side, our GPs are starting to
17· ·position themselves to capitalize on any distress
18· ·that might occur.
19· · · · I think the feedback we're getting is that
20· ·it's still too early.· They're still in the
21· ·process of just trying to figure out what revenue
22· ·and EBITDA will be or what it could be before
23· ·there can be any kind of price discovery in the
24· ·market today.
25· · · · MS. CANIDA:· Okay.· Thank you.
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Page 48·1· · · · MR. WILLIAMS:· Tere, this is Ash.· I would
·2· ·add to that.· I spoke with the CEO of one of the
·3· ·very, very large fixed income firms last evening,
·4· ·and this is one of the things we talked about.
·5· ·And his sense was that being early in distressed
·6· ·is usually a mistake, and it's better to wait
·7· ·until things are a little more defined and the
·8· ·opportunity set is more exposed and then to go
·9· ·in.
10· · · · And you don't really give anything up by
11· ·doing that, but you avoid a lot of potential
12· ·mistakes.· And I think we saw a good example of
13· ·that being played out with leveraged loans back
14· ·in the onset of the great financial crisis.· If
15· ·you remember the number of firms that were --
16· ·funds that were formed to go after that
17· ·opportunity set, many of them jumped in with
18· ·loans priced in the upper eighties, thinking they
19· ·were getting great deals, only to see those same
20· ·loans go substantially south from there, and it
21· ·created a lot of misery over the ensuing couple
22· ·of years.
23· · · · MS. CANIDA:· I do remember that well.
24· · · · MR. WILLIAMS:· Yeah.· So I think we're
25· ·mindful of that, too.· Other questions on fixed
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Page 49·1· ·income?· Or private equity, sorry.· All right.
·2· ·Mr. Chairman, is it time to move on to strategic
·3· ·investments?
·4· · · · MR. BOBBY JONES:· Yes, sir.
·5· · · · MR. WILLIAMS:· Mr. Webster?
·6· · · · MR. WEBSTER:· Hi, everyone.· My name is
·7· ·Trent Webster.· I'm the senior investment officer
·8· ·for strategic investments, and I'm going to do a
·9· ·bit of a spiel here that most members of the IAC
10· ·have heard, but we've got a few new members on
11· ·here, so please bear with me.
12· · · · So strategic investments you can think of as
13· ·the alternative asset class.· So we're set up
14· ·like a typical pension plan, where we've got
15· ·allocations to stocks, bonds, private equity and
16· ·real estate equity.· And one day some very smart
17· ·people at the board said, well, what if we have
18· ·opportunities that don't fit nice and neatly into
19· ·those other asset classes?· So they created this
20· ·thing called strategic investments.
21· · · · And so whereas the other four asset classes
22· ·are your purebreds, we're kind of like your mutt.
23· ·We can do a little bit of everything.· But if you
24· ·were to boil it down, what we do is primarily
25· ·private credit.· We do some real assets.· We do
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Page 50·1· ·hedge funds.· We do some eclectic equity.· And
·2· ·then we do some other things that are outside
·3· ·most other normal asset allocations, such as
·4· ·insurance and the like.
·5· · · · So we have four objectives in policy.· The
·6· ·first one is to generate the real return targets
·7· ·of the FRS for the total fund, and that's
·8· ·currently 4 percent.· We're here to dampen the
·9· ·volatility, improve the risk-adjusted returns of
10· ·the FRS.· We're also here to outperform the FRS
11· ·during periods of significant market declines.
12· · · · And I'm pretty sure that most members of the
13· ·IAC, the question will be popping up about that
14· ·one here in a minute, so I'll address that here
15· ·in a bit.· And finally it's to increase portfolio
16· ·flexibility by investing in new strategies and
17· ·opportunistically across our mandate.
18· · · · So I asked everyone on our staff to reach
19· ·out on a weekly basis, at least at the beginning
20· ·of March, to get the most up-to-date performance
21· ·from our hedge funds as well as taking calls from
22· ·a whole bunch of other of our private market
23· ·funds.
24· · · · And just as a thumbnail sketch, or thumbnail
25· ·estimate, my apologies, is on March 20th, which I
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Page 51·1· ·believe was the day before -- that was a Friday.
·2· ·I think it bottomed on the 23rd.· But the market,
·3· ·the stock market, the S&P 500 and the MSCI ACWI
·4· ·was down 25 percent.· And on a thumbnail
·5· ·estimate, just in making estimates on a mark to
·6· ·market basis, using comps and information that we
·7· ·had garnered from our managers, we think we were
·8· ·down 10 percent, whereas the stock market was
·9· ·down 25.
10· · · · And long-time members of the IAC might
11· ·remember that in the past, as I have said, is
12· ·that we estimate that if the stock market were to
13· ·have a big, giant decline, we would probably fall
14· ·by somewhere between 25 and 40 percent.· And it
15· ·appears that from an estimated mark to market
16· ·basis, that's probably where we were at.
17· · · · Now, we don't mark to market, so there will
18· ·be a bit of a lag there.· Our performance may
19· ·actually be better than it actually looks,
20· ·because the private markets tend to be -- they
21· ·tend to be -- there tends to be a lag in the
22· ·valuation.
23· · · · So the next question that should be popping
24· ·up is, okay, so you've got part of the portfolio
25· ·are in economically sensitive strategies, such as
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Page 52·1· ·credit and equity, and then you've got this thing
·2· ·called diversifying strategies, which is meant to
·3· ·diversify the asset class.· And our hedge funds,
·4· ·which include both economically sensitive and
·5· ·these diversifying strategies, as of March 20th,
·6· ·we estimate were down by about 5 percent versus
·7· ·25 percent for the S&P 500.· And those strategies
·8· ·that were specifically designed to diversify from
·9· ·equity risk were down 2 percent.
10· · · · So it appears that that part of the
11· ·portfolio is working well.· We'll see how that
12· ·shakes out at the end of the quarter.· But it
13· ·appears that the portfolio has held up fairly
14· ·well through this crisis.
15· · · · So the last objective about being
16· ·opportunistic, again, long-time members of the
17· ·IAC will know that I would come in quarter after
18· ·quarter after quarter saying we're building up
19· ·our diversifying strategies.· And so over the
20· ·last six years, we've gone from about 0 percent
21· ·to about 26, 27 percent at the end of the fourth
22· ·quarter.
23· · · · And we had also been saying for years that
24· ·we had been cautious on credit.· Just straight
25· ·vanilla credit, we probably had about 10 percent
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Page 53·1· ·of our entire book in it, and we had flagged all
·2· ·sorts of problems in covenant-like loans, with
·3· ·adjusted EBITDA, and all the things that made
·4· ·credit markets, in our mind, pretty risky.
·5· · · · So the types of credits that we were adding
·6· ·tended to be special opportunities or
·7· ·asset-backed lending, or within our own funds
·8· ·that we add, we were telling our managers we want
·9· ·to get more conservative with our investments.
10· · · · And so as we grew the diversifying
11· ·strategies and reduced our economically sensitive
12· ·strategies, we were waiting for an event
13· ·something like this.· Like John had said, John
14· ·Bradley said, we had no idea it would be this big
15· ·or this would be the thing that triggered it.
16· · · · But as we look out three to five years --
17· ·and that's what we do.· In our asset class, we're
18· ·like a battleship.· We can't turn on a dime.· We
19· ·don't know what's going to happen in three
20· ·months.· But when we look out three to five
21· ·years, we're actually quite bullish on risk
22· ·assets, even though the next quarter or two or
23· ·three or four could get really choppy.
24· · · · And the reason for that is we kind of look
25· ·forward.· We will get through this.· We will get
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Page 54·1· ·a vaccination.· We will learn how to deal with
·2· ·social isolating, and you will have an incredible
·3· ·amount of pent-up consumer demand, and you will
·4· ·have 0 percent interest rates, or close to it
·5· ·across the curve, and massive fiscal stimulus.
·6· ·So we think that's very good for risk assets.
·7· · · · Not necessarily -- the S&P could go to 2000
·8· ·or 1500, don't know.· But as we look out over
·9· ·three to five years, we think that the markets
10· ·are going to be significantly higher.· And my
11· ·staff has joked with me that I had been waiting
12· ·for the great bear market of 2015, the great bear
13· ·market of 2016, the great bear market of 2017,
14· ·et cetera, et cetera, et cetera.· We finally got
15· ·it