lashantz - pi next generation fi v 2016
TRANSCRIPT
ERS of Texas Case StudyLeighton Shantz
ERS of Texas• $25 Billion Public DB Pension Plan• Predominantly Internally Managed• Over 70 Investment Professionals• Eliminated a Core+Plus+Plus Style Fixed Income Mandate in 2013
• Return Seeking Mandate• Risk Reducing Mandate
05/01/2023 2
Historical S&P 500 Drawdowns
1/3/2
8
1/3/3
0
1/3/3
2
1/3/3
4
1/3/3
6
1/3/3
8
1/3/4
0
1/3/4
2
1/3/4
4
1/3/46
1/3/4
8
1/3/5
0
1/3/5
2
1/3/5
4
1/3/5
6
1/3/5
8
1/3/6
0
1/3/6
2
1/3/6
4
1/3/6
6
1/3/6
8
1/3/7
0
1/3/72
1/3/74
1/3/7
6
1/3/7
8
1/3/8
0
1/3/8
2
1/3/8
4
1/3/86
1/3/8
8
1/3/9
0
1/3/9
2
1/3/9
4
1/3/96
1/3/9
8
1/3/0
0
1/3/0
2
1/3/0
4
1/3/0
6
1/3/0
8
1/3/1
0
1/3/1
2
1/3/1
4
1/3/1
60%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
6/1/3214%
4/28/4223%
6/13/4943%
9/14/5371%
10/22/5778%
10/25/6086%
6/26/6272%
10/7/6678%
5/26/7064%
10/3/7452%
8/12/8273%
12/4/8766%
10/11/9080%
8/31/9881%
10/9/0251%
3/9/0943%
10/3/1170%
8/25/1588%
05/01/2023 3Bloomberg, Barclays
Rolling 52-Week Asset Class Return Dispersion
05/01/2023 4
S&P 500 R2000 MSCI World xUS Dow US REIT MSCI EM Barclays US Aggregate
Barclays MBS Barclays IG Corporate
Barclays Liquid HY
JP Morgan Core EMD
0
1000
2000
3000
4000
5000
6000
7000
8000
9000
10000
-100%
-50%
0%
50%
100%
150%
1399 1399 735 1308 839 1361 1361 1360 684 891
#Rolling 52-Wk Periods 4th Quartile
Num
ber o
f Rol
ling
52-W
eek
Perio
ds
Annu
al P
erce
nt T
otal
Ret
urn
Bloomberg, Barclays, Dow Jones, MSCI, JP Morgan, Russell, and S&P
05/01/2023 Bloomberg, Barclays 5
Credit & Rate Return Relationship
-6% -4% -2% 0% 2% 4% 6% 8% 10% 12%-10%
-5%
0%
5%
10%
15%
f(x) = 0.968892677959397 x + 0.000293635648458656R² = 0.907109184334018
U.S. Aggregate Bond Index
U.S. Treasury Monthly Return (%)
U.S
. Agg
rega
te M
onth
ly R
etur
n (%
)
-6% -4% -2% 0% 2% 4% 6% 8% 10% 12%-10%
-5%
0%
5%
10%
15%
f(x) = 1.09826010769749 x − 9.1929803609469E-05R² = 0.711362096315361
U.S. IG Corporate Bond Index
U.S. Treasury Monthly Return (%)
U.S
. Cor
pora
te M
onth
ly R
etur
n (%
)
05/01/2023 Bloomberg, Barclays, J.P Morgan 6
Credit & Rate Return Relationship
-6% -4% -2% 0% 2% 4% 6%-20%
-15%
-10%
-5%
0%
5%
10%
15%
f(x) = 0.106152586366512 x + 0.00678698920060323R² = 0.00361530962123968
U.S. High Yield Bond Index
U.S. Treasury Monthly Return (%)
U.S
. Hig
h Yi
eld
Mon
thly
Ret
urn
(%)
-6% -4% -2% 0% 2% 4% 6%-20%
-15%
-10%
-5%
0%
5%
10%
15%
f(x) = 0.304562725297601 x + 0.00643139497046515R² = 0.0124704853595965
Core EM Bond Index
U.S. Treasury Monthly Return (%)
Core
EM
D M
onth
ly R
etur
n (%
)
Barclays Aggregate Risk/Return Through Time
Jan-89
Jul-89Jan
-90Jul-9
0Jan
-91Jul-9
1Jan
-92Jul-9
2Jan
-93Jul-9
3Jan
-94Jul-9
4Jan
-95Jul-9
5Jan
-96Jul-9
6Jan
-97Jul-9
7Jan
-98Jul-9
8Jan
-99Jul-9
9Jan
-00Jul-0
0Jan
-01Jul-0
1Jan
-02Jul-0
2Jan
-03Jul-0
3Jan
-04Jul-0
4Jan
-05Jul-0
5Jan
-06Jul-0
6Jan
-07Jul-0
7Jan
-08Jul-0
8Jan
-09Jul-0
9Jan
-10Jul-1
0Jan
-11Jul-1
1Jan
-12Jul-1
2Jan
-13Jul-1
3Jan
-14Jul-1
4Jan
-15Jul-1
50.0
0.5
1.0
1.5
2.0
2.5
2.19
1.18
1.76
1.51
0.87
1.22
0.33
0.46
Yield-to-Worst/Modified Duration of Barclays Aggregate Index
Perc
ent Y
ield
per
Yea
r of M
odifi
ed D
urati
on
05/01/2023 7Bloomberg, Barclays
Historical Scenario Analysis
Russia Invades Georgia (2008)
Lehman Default (2008)
Equity Rebound (2009)
Greece Crisis (2010) Oil Price Drop (May 2010)
Debt Ceiling & Downgrade (2011)
Libya Oil Shock (Feb 2011)
Japan Earthquake (Mar 2011)
Equity Decrease 10%-20%
-10%
0%
10%
20%
30%
40%
50%
-16.3% -15.7%
41.4%
-3.6%
-8.5%
-16.7%
-1.7% -1.9%
-10.6%-10.0%
-13.9%
11.9%
-1.0% -2.6%-2.8%
0.3%
-0.4% -0.9%
3.1%
-1.1% -1.9%
0.7% 1.2% 1.6% 0.5% 0.2% 0.2%
S&P 500 Credit Benchmark Rates Benchmark
05/01/2023 8Bloomberg, Barclays, and S&P
Transition Concerns
Jul-01
Nov-01
Mar-02Jul-0
2
Nov-02
Mar-03Jul-0
3
Nov-03
Mar-04Jul-0
4
Nov-04
Mar-05Jul-0
5
Nov-05
Mar-06Jul-0
6
Nov-06
Mar-07Jul-0
7
Nov-07
Mar-08Jul-0
8
Nov-08
Mar-09Jul-0
9
Nov-09
Mar-10Jul-1
0
Nov-10
Mar-11Jul-1
1
Nov-11
Mar-12Jul-1
2
Nov-12
Mar-13Jul-1
3
Nov-13
Mar-14Jul-1
4
Nov-14
Mar-15Jul-1
5
Nov-15
$0
$1,000,000
$2,000,000
$3,000,000
$4,000,000
$5,000,000
$6,000,000
$0
$50,000
$100,000
$150,000
$200,000
$250,000
$300,000$5,599,768
$2,279,474
$1,809,973
$24,437
$232,755
$65,507$54,610
$55,979
$30,380 $20,895
$11,117
Barclays Credit Market Value vs. Primary DealersPositions
Barclays IG & HY Credit Market Value FRB Primary Dealer Net Corp. Bonds > 1-Year FRB Primary Dealer Net. Total Corporate Bonds
IG &
HY
Mar
ket V
alue
in M
illio
ns ($
)
Fede
ral R
eser
ve B
oard
Prim
ary
Deal
er C
orpo
rate
s in
Mill
ions
($)
05/01/2023 9Bloomberg, Barclays, Federal Reserve
Transition Concerns Viewed Differently
Jul-01Oct-
01Jan-02
Apr-02Jul-0
2Oct-
02Jan-03
Apr-03Jul-0
3Oct-
03Jan-04
Apr-04Jul-0
4Oct-
04Jan-05
Apr-05Jul-0
5
Oct-05Jan-06
Apr-06Jul-0
6Oct-
06Jan-07
Apr-07Jul-0
7Oct-
07Jan-08
Apr-08Jul-0
8
Oct-08Jan-09
Apr-09Jul-0
9Oct-
09Jan-10
Apr-10Jul-1
0
Oct-10Jan-11
Apr-11Jul-1
1Oct-
11Jan-12
Apr-12Jul-1
2Oct-
12Jan-13
Apr-13Jul-1
3Oct-
13Jan-14
Apr-14Jul-1
4
Oct-14Jan-15
Apr-15Jul-1
5Oct-
150
100
200
300
400
500
600
700
800
900
1000
504
254257625574
27 27
U.S . Cor por at e s M ul tipl e of F e d Pr i mar y D e al e r s ’ B al anc e S he e t s
Mkt
Val
ue/D
eale
r Pos
iton
Mul
tiple
Dodd-Frank Imple-mented
Pre-Dodd-Frank Median
05/01/2023 10Bloomberg, Barclays. Federal Reserve
The Plan• Deliver as many individual bonds in bespoke delivery baskets
as possible to create ETFs• Did not allow ETFs that limit maturities to three years or
less• Optimize mix for liquidity, not tracking
• Liquidate remaining holdings with credit concerns or that mature after three years if possible
05/01/2023 11
05/01/2023 12
• $1.4 Billion Individual IG Corporate Bonds Sold to AP as an ETF Bespoke Delivery Basket
• AP Delivers $1.4 Billion Individual IG Corporate Bonds to ETF Provider Marked index’s Bid Side Quote
• ETF Provider Creates ETF Shares with Delivery Basket
• Delivers Shares Crated at NAV to AP
• AP Delivers $1.3 Billion in ETF Shares Marked at NAV back to ERS
ERS AP
ETFAP
Investment Grade ETF Transition
1-Apr
7-Apr
13-Apr
19-Apr
25-Apr1-M
ay7-M
ay
13-May
19-May
25-May
31-May
6-Jun12-Ju
n18-Ju
n24-Ju
n30-Ju
n6-Ju
l12-Ju
l18-Ju
l24-Ju
l30-Ju
l5-A
ug
11-Aug
17-Aug
23-Aug
29-Aug
4-Sep10-Se
p16-Se
p22-Se
p28-Se
p4-O
ct
10-Oct
16-Oct
22-Oct
28-Oct3-N
ov9-N
ov
15-Nov
21-Nov
27-Nov3-D
ec9-D
ec
15-Dec
21-Dec
27-Dec$0
$200,000,000
$400,000,000
$600,000,000
$800,000,000
$1,000,000,000
$1,200,000,000
$1,400,000,000
$90
$95
$100
$105
$110
$115
$120
$125
Long IG Corporate ETF Intermediate IG Corporate ETF Long ETF PriceIntermediate ETF Price Barclays Agg Corp Sector
ERS
Hold
ings
ETF
Price
Transaction Window23-Aug to 25-Nov
05/01/2023 13Bloomberg, Barclays, Bank of New York
05/01/2023 14
Rates AUM
Aug-13
Oct-13
Dec-13
Feb-14
Apr-14
Jun-14
Aug-14
Oct-14
Dec-14
Feb-15
Apr-15
Jun-15
Aug-15
Oct-15
Dec-15
0
1,000,000
2,000,000
3,000,000
4,000,000
5,000,000
6,000,000
1,162,4781,000,258
420,715
70,987
Investment Grade Corporates Investment Grade ETFsCMBS ABS
Asse
ts U
nder
Man
agem
ent (
$000
)
Aug-13
Oct-13
Dec-13
Feb-14
Apr-14
Jun-1
4
Aug-14
Oct-14
Dec-14
Feb-15
Apr-15
Jun-1
5
Aug-15
Oct-15
Dec-15
0
1,000,000
2,000,000
3,000,000
4,000,000
5,000,000
6,000,000
Treasuries Government AgencyAgency MBS Cash
Asse
ts U
nder
Man
agem
ent (
$Mill
ions
)
Rates Performance
Sep-13
Oct-13
Nov-13
Dec-13
Jan-1
4
Feb-14
Mar-14
Apr-14
May-14
Jun-1
4Ju
l-14
Aug-14
Sep-14
Oct-14
Nov-14
Dec-14
Jan-1
5
Feb-15
Mar-15
Apr-15
May-15
Jun-1
5Ju
l-15
Aug-15
Sep-15
Oct-15
Nov-15
Dec-15
Jan-1
60
200
400
600
800
1000
1200
1400
76114 101
31
124 146106
151223 220
188254 225
297356 335
491414
469 459 465418
461 467543 517
485 466
575
74112 106
27
113 13392
129198 185 158
223186
260313 285
455
361417 406 411
368412 417
497462
427 407
520
Rates Benchmark
Cum
ulat
ive
Retu
rn in
Bas
is P
oint
s (b
ps)
05/01/2023 15
Greenfielding Internal High Yield• Critical mass asset base• Huge cost advantage for high fee asset class• Key investing discipline to add to a broader team• Long term allocation• Challenges:
• Anchoring the team• Building the infrastructure• Building the team• Getting invested• Performing
05/01/2023 16
Our Approach• Top-down influenced, bottom-up process• Credit cycles are real and drivers of return
• Manage overall risk taking along with the credit cycle• Run hotter when valuations are cheap, cooler when they aren’t
• Bottom up process looks for improving risk and value• As risks get better, bonds perform• Examples include paying down debt, fundamental improvements and M&A• Relative value comparisons between opportunities
• Performance goal is to beat our benchmark over short-term and long-term time frames within risk budget
• Capacity for additional AUM 05/01/2023 17
Credit AUM
Aug-13
Sep-13
Oct-13
Nov-13
Dec-13
Jan-14
Feb-14
Mar-14
Apr-14
May-14
Jun-14Jul-1
4
Aug-14
Sep-14
Oct-14
Nov-14
Dec-14
Jan-15
Feb-15
Mar-15
Apr-15
May-15
Jun-15Jul-1
5
Aug-15
Sep-15
Oct-15
Nov-15
Dec-15
Jan-16
0
200,000
400,000
600,000
800,000
1,000,000
1,200,000
1,400,000
1,600,000
1,800,000
Internal High Yield High Yld ETFs EMD ETFs FCM CLO BCA GOF LLSD
Asse
ts U
nder
Man
agem
ent (
$000
)
Transferred FCM as-sets
05/01/2023 18
ERS Internal High Yield Performance
Sep-13
Oct-13
Nov-13
Dec-13
Jan-1
4
Feb-14
Mar-14
Apr-14
May-14
Jun-1
4Ju
l-14
Aug-14
Sep-14
Oct-14
Nov-14
Dec-14
Jan-1
5
Feb-15
Mar-15
Apr-15
May-15
Jun-1
5Ju
l-15
Aug-15
Sep-15
Oct-15
Nov-15
Dec-15
Jan-1
6
-500
0
500
1000
1500
2000
254
681731
828945
1203 12481312
14451536
1400
1579
1333
14731394
12381320
16081535
16921754
1604 1579
1390
1161
1534
1336
1037
701
99
352404
460534
746 772840
9391031
884
1057
825
954875
717788
1048987
1120 1154
988924
733
457
744
507
242
-36
IHY Benchmark
Cum
ulat
ive
Retu
rn in
Bas
is P
oint
s (b
ps)
05/01/2023 19