The URL can be used to link to this page

Home My Public Portal About2018 3rd Quarter Report Investment advice and consulting services provided by Aon Hewitt Investment Consulting, Inc., an Aon Company. Nothing in this document should be construed as legal or investment advice. Please consult with your independent professional for any such advice. To protect the confidential and proprietary information included in this material, it may not be disclosed or provided to any third parties without the approval of Aon. The Metropolitan St. Louis Sewer District Employees’ Pension Plan Third Quarter 2018 December 4, 2018 Proprietary & Confidential Investment advice and consulting services provided by Aon Hewitt Investment Consulting, Inc., an Aon Company. 2 (This page left blank intentionally) Proprietary & Confidential Investment advice and consulting services provided by Aon Hewitt Investment Consulting, Inc., an Aon Company. 3 Table of Contents Section 1 Market Environment Third Quarter 2018 Markets Review Medium-Term Views Section 2 Quarterly Pension Update Third Quarter 2018 Performance Fund Fee Comparison Proprietary & Confidential Investment advice and consulting services provided by Aon Hewitt Investment Consulting, Inc., an Aon Company. 4 (This page left blank intentionally) Proprietary & Confidential Investment advice and consulting services provided by Aon Hewitt Investment Consulting, Inc., an Aon Company. 5 Market Environment – Third Quarter 2018 Proprietary & Confidential Investment advice and consulting services provided by Aon Hewitt Investment Consulting, Inc., an Aon Company. 6 (This page left blank intentionally) Proprietary & Confidential Investment advice and consulting services provided by Aon Hewitt Investment Consulting, Inc., an Aon Company. 7 Major Capital Markets Performance Summary As of September 30, 2018 Quarter Year-to- Date 1 year 3 years 5 years 10 years MSCI All Country World IMI Index 3.9% 3.7% 9.6% 13.5% 8.7% 8.5% DJ U.S. Total Stock Market Index 7.1 10.6 17.6 17.0 13.4 12.0 MSCI EAFE Index 1.4 -1.4 2.7 9.2 4.4 5.4 MSCI EAFE Index (Local Currency) 2.4 1.4 5.1 9.4 7.9 6.7 MSCI Emerging Markets Index -1.1 -7.7 -0.8 12.4 3.6 5.4 MSCI Emerging Markets Index (Local Currency) 0.0 -2.9 2.7 12.2 7.3 7.7 Blmbg. Barclays U.S. Aggregate Index 0.0 -1.6 -1.2 1.3 2.2 3.8 Blmbg. Barclays Corporate High Yield Index 2.4 2.6 3.0 8.1 5.5 9.5 NCREIF ODCE Index 1.9 5.8 7.7 7.8 9.7 4.6 Proprietary & Confidential Investment advice and consulting services provided by Aon Hewitt Investment Consulting, Inc., an Aon Company. 8 Global Equity Markets 3.9% 0.4% 6.9% -2.0% 3.0% 0.6% 8.5% 1.5% -0.7%-1.5% 9.6% 1.8% 17.0% 3.0% 9.7% 1.6% 16.2% -1.2% 4.1% -1.2% -10% 0% 10% 20% ACWI IMI 45.2% ACWI ex-U.S. IMI 54.8% USA IMI 5.5% UK IMI 8.0% Japan IMI 3.0% Canada IMI 0.2% Israel IMI 13.9% Europe ex-UK IMI 3.7% Pacific ex-Japan IMI 10.8% Emerging Markets IMI GLOBAL MSCI IMI INDEX RETURNS AS OF 09/30/2018 Third Quarter 2018 One-Year Source: MSCI USA 54.8% UK 5.5% Canada 3.0% Pacific ex-Japan 3.7%Japan 8.0% Europe ex-UK 13.9% Israel 0.2% Latin America 1.2% Asia 8.1% Eastern Europe, Middle East & Africa 1.5% Emerging Markets 10.8% MSCI ALL COUNTRY WORLD IMI INDEX GEOGRAPHIC ALLOCATION AS OF 09/30/2018 Source:MSCI UK 12.2% Canada 6.7% Pacific ex-Japan 8.1% Japan 17.7% Europe ex-UK 30.8% Israel 0.5%Latin America 2.7% Asia 17.9% Eastern Europe, Middle East & Africa 3.3% Emerging Markets 23.9% MSCI ALL COUNTRY WORLD EX-U.S. IMI INDEX GEOGRAPHIC ALLOCATION AS OF 09/30/2018 Source:MSCI Proprietary & Confidential Investment advice and consulting services provided by Aon Hewitt Investment Consulting, Inc., an Aon Company. 9 U.S. Equity Markets The Russell 3000 Index returned 7.1% during the third quarter and 17.6% over the one-year period. All sectors generated positive returns over the quarter. In particular, Healthcare (13.6%) and Producer Durables (9.3%) were the strongest performing sectors in Q3 2018. The Technology sector continued to perform strongly (9.1%) over the quarter supported by very strong earnings for mega-cap technology stocks, such as Amazon, Apple and Microsoft. Performance was positive across the market capitalization spectrum over the quarter. In general, large cap stocks outperformed both medium and small cap stocks over the quarter. Small cap stocks were led lower by poor performance of Financial and Healthcare stocks. Growth stocks outperformed their Value counterparts in Q3 2018. Over the last 12 months, Value stocks continued to lag their Growth stock equivalents significantly. The underperformance of Value stocks can be partly attributed to the lower exposure to Technology stocks, which have performed strongly over the last year. 7.1%6.9% 9.6% 3.3% 7.6% 1.6% 5.5% 17.6% 9.8% 27.9% 8.8% 21.1% 9.3% 21.1% 0.0% 5.0% 10.0% 15.0% 20.0% 25.0% 30.0% Russell 3000 30.6% Large Value 36.1% Large Growth 15.2% Medium Value 10.5% Medium Growth 3.7% Small Value 3.9% Small Growth RUSSELL STYLE RETURNS AS OF 09/30/2018 Third Quarter 2018 One-Year Source: Russell Indexes 7.1% 9.1% 13.6% 6.6%5.2% 0.7% 0.9% 9.3% 4.3%4.6% 17.6% 30.7% 20.2% 27.4% 0.2% 15.2% 4.1% 13.2%11.9% 3.6% 0.0% 5.0% 10.0% 15.0% 20.0% 25.0% 30.0% 35.0% Russell 3000 21.3% Technology 14.2% Healthcare 14.4% Cons. Disc 5.4% Cons. Staples 5.7% Energy 3.4% Materials & Processing 10.7% Producer Durables 20.3% Financial Services 4.6% Utilities RUSSELL GICS SECTOR RETURNS AS OF 09/30/2018 Third Quarter 2018 One-Year Source: Russell Indexes Proprietary & Confidential Investment advice and consulting services provided by Aon Hewitt Investment Consulting, Inc., an Aon Company. 10 U.S. Fixed Income Markets The Bloomberg Barclays U.S. Aggregate Bond Index remained flat in the third quarter. Investment grade corporate bonds was the best performer over the quarter at 1.0% whilst government bonds was the worst performer at -0.6%. Performance was positive across all credit qualities, with the exception of AAA bonds which fell 0.3%, as spreads tightened over the quarter. High yield bonds returned the most at 2.4%. In investment grade bonds, Baa bonds were the major outperformer with a return of 1.4%. Short maturity bonds outperformed intermediate and long maturity bonds over the quarter. Short maturity bonds returned 0.3% while long maturity bonds fell 0.5% in Q3 2018. 0.0% -0.6% 1.0% -0.1% 0.5%0.5% -1.2% -1.6% -1.2%-0.9% 0.5% -0.6% -2.0% -1.5% -1.0% -0.5% 0.0% 0.5% 1.0% 1.5% Barclays Agg. Bond 41.5% Gov't 26.4% Corp. 29.5% MBS 0.5% ABS 2.0% CMBS BLOOMBERG BARCLAYS AGGREGATE RETURNS BY SECTOR AS OF 09/30/2018 Third Quarter 2018 One-Year Source: FactSet 0.3%0.1%0.1% -0.1% -0.5% 0.2% -1.0%-1.2% -1.6% -2.7%-3.0% -2.5% -2.0% -1.5% -1.0% -0.5% 0.0% 0.5% 1.0% 1-3 Yr.3-5 Yr.5-7 Yr.7-10 Yr.>10 Yr. BLOOMBERG BARCLAYS AGGREGATE RETURNS BY MATURITY AS OF 09/30/2018 Third Quarter 2018 One-Year Source: FactSet -0.3% 0.3%0.7% 1.4% 2.4% -1.3% -0.6% -1.6% -0.8% 3.0% -2.0% -1.0% 0.0% 1.0% 2.0% 3.0% 4.0% Aaa Aa A Baa High Yield BLOOMBERG BARCLAYS U.S. AGGREGATE RETURNS BY QUALITY AND HIGH YIELD RETURNS AS OF 09/30/2018 Third Quarter 2018 One-Year Source: FactSet Proprietary & Confidential Investment advice and consulting services provided by Aon Hewitt Investment Consulting, Inc., an Aon Company. 11 U.S. Fixed Income Markets (cont’d) 0.0% 0.5% 1.0% 1.5% 2.0% 2.5% 3.0% 3.5% 0 5 10 15 20 25 30 Maturity (Years) U.S. TREASURY YIELD CURVE 9/30/2017 6/30/2018 9/30/2018 Source:U.S. Department of Treasury -2.0% -1.0% 0.0% 1.0% 2.0% 3.0% 4.0% 5.0% Sep 08 Sep 10 Sep 12 Sep 14 Sep 16 Sep 18 U.S. 10-YEAR TREASURY AND TIPS YIELDS 10Y TIPS Yield 10Y Treasury Yield Source:U.S. Department of Treasury Spread (bps)09/30/2018 06/30/2018 09/30/2017 Quarterly Change (bps)1-Year Change (bps) U.S. Aggregate 39 44 38 -5 1 Long Gov't 2 1 2 1 0 Long Credit 153 174 149 -21 4 Long Gov't/Credit 90 101 90 -11 0 MBS 28 28 22 0 6 CMBS 60 70 71 -10 -11 ABS 38 47 44 -9 -6 Corporate 106 123 101 -17 5 High Yield 316 363 347 -47 -31 Global Emerging Markets 273 288 235 -15 38 Source: FactSet Proprietary & Confidential Investment advice and consulting services provided by Aon Hewitt Investment Consulting, Inc., an Aon Company. 12 Currency & Commodities 90 95 100 105 110 115 120 125 130 Sep 12 Sep 13 Sep 14 Sep 15 Sep 16 Sep 17 Sep 18 TRADE WEIGHTED U.S. DOLLAR INDEX (1997 = 100) Source:Federal Reserve 60 80 100 120 140 160 180 Sep 12 Sep 13 Sep 14 Sep 15 Sep 16 Sep 17 Sep 18 U.S. DOLLAR RELATIVE TO EUR, GBP AND JPY REBASED TO 100 AT 09/28/2012 USDEUR USDGBP USDJPY Source: Factset Stronger Dollar Weaker Dollar -2.0% -5.3% 4.4% -6.9% -6.0% -5.4% -12.5% -3.0% 2.9% 2.6% -7.9% 28.1% -2.4% -8.8% -12.7% -18.8% -10.7% 0.8% -30.0%-20.0%-10.0%0.0%10.0%20.0%30.0%40.0% Bloomberg Commodity Index Ex-Energy Energy Industrial Metals Prec. Metals Agric. Softs Grains Livestock COMMODITY RETURNS AS OF 09/30/2018 Third Quarter 2018 One-Year Source:Bloomberg Note: Softs and Grains are part of the wider Agriculture sector Proprietary & Confidential Investment advice and consulting services provided by Aon Hewitt Investment Consulting, Inc., an Aon Company. 13 High Level Views Recent volatility is a characteristic of the transition environment we have been moving through this year. The transition wil l eventually move towards a more risk-off phase when the only performing asset will be US treasury (and other high quality sovereign) bonds, though this is not necessarily imminent. Though equities should still be outperforming bonds through this transition, we have less conviction to this call. Earnings are strong, but largely discounted, higher bond yields are setting a higher discount rate to the valuation of corporate profits and trade/politics are also pushing volatility up. EM equities are now offering cheap relative valuations which ought to be reflected in higher returns, though not necessarily near-term. We continue to believe that portfolios should be de-risked on equity market strength constraining equity beta close to the benchmark. How this is implemented will depend on other assets available in portfolios. Near-term, the strong bounce that we have seen in the dollar may run further, but over the medium-term we believe that the risks are tilted towards a weaker dollar. We believe that over the medium-term EM currencies should recoup some of the losses seen, though not in the immediate future. US bond yields moved higher through September 2018 as the bond market view on the interest rate path converged with that of the Fed given three rate rises already seen this year. Yields are now closer to our views, taking us more neutral on duration. Near-term risks, though, are still skewed towards higher yields given late cycle pressures on wages and costs. Expected returns from bonds are better though still very low. Credit spreads have been well behaved. We see spreads not offering good compensation for the risks taken in credit markets, reflecting high leverage and resultant falls in market credit quality. Overweight credit positions need reining back. Credit weakness is normally a leading indicator to a deterioration in overall market conditions. The message on alternatives is that good manager and strategy selection keeps opportunities alive, notwithstanding the overcrowding in this space. With equities finding it hard going, non-directional approaches continue to be preferred (including option hedging strategies). Defensive real estate strategies look better given rising rates and late cycle risks. Credit Equities Alternatives Currency Interest Rates Proprietary & Confidential Investment advice and consulting services provided by Aon Hewitt Investment Consulting, Inc., an Aon Company. 14 Medium-Term Views: 1 to 3 Year Time Horizon October 2018 Medium-Term Views (10/23/2018) ------=++++++ Currency vs. USD High Level Asset Class Views Equity Regions Return Seeking Fixed Income High Grade Fixed Income Alternatives Developed Market Equity Styles Real Estate Commodities Direc. Hedge Funds Non-Direc. Hedge Funds Euro Yen Sterling EM US Large US Small EAFE Emerging US High Yield Bank Loans Local EMDUSD EMD US Treas. Inv. Credit TIPS Equities Return Seeking Bonds High Grade Bonds AlternativesUSD Global Value GlobalGrowth Global Low Vol. Global Quality Proprietary & Confidential Investment advice and consulting services provided by Aon Hewitt Investment Consulting, Inc., an Aon Company. 15 Quarterly Pension Update Proprietary & Confidential Investment advice and consulting services provided by Aon Hewitt Investment Consulting, Inc., an Aon Company. 16 (This page left blank intentionally) Proprietary & Confidential Investment advice and consulting services provided by Aon Hewitt Investment Consulting, Inc., an Aon Company. 17 Total Plan Performance As of 9/30/2018 1- Quarter Year-to- Date 1-Year 3-Year 5-Year 10-Year Since Inception Total Plan 2.1% 2.4% 5.3% 7.1% 5.1% 6.4% 7.3% Policy Benchmark 1.9 2.5 5.4 7.7 5.4 6.5 -- Proprietary & Confidential Investment advice and consulting services provided by Aon Hewitt Investment Consulting, Inc., an Aon Company. 18 Historical Market Values $278.5 million $- $50,000 $100,000 $150,000 $200,000 $250,000 $300,000 Market Value (in thousands) Total Plan Market Value History Ending 9/30/2018 Proprietary & Confidential Investment advice and consulting services provided by Aon Hewitt Investment Consulting, Inc., an Aon Company. 19 Risk-Return vs. Peers (<$1B) *All Public Plans < $1B contains 408 peer portfolios for the 3-Year period and 371 peer portfolios for the 5-Year period. Proprietary & Confidential Investment advice and consulting services provided by Aon Hewitt Investment Consulting, Inc., an Aon Company. 20 Risk Profile: Trailing 3-Yr and 5-Yr Risk Metrics Peer Comparison (<$1B) *All Public Plans < $1B contains 408 peer portfolios for the 3-Year period and 371 peer portfolios for the 5-Year period. Proprietary & Confidential Investment advice and consulting services provided by Aon Hewitt Investment Consulting, Inc., an Aon Company. 21 Asset Allocation vs. Policy Targets as of 9/30/2018 33.5% 15.6% 35.2% 5.9% 9.2% 0.6% 35.0% 18.0% 35.0% 0.0% 12.0% 0.0% -1.5% -2.4% 0.2% 5.9% -2.8% 0.6% -10.0% 0.0% 10.0% 20.0% 30.0% 40.0% 50.0% 60.0% Total Domestic Equity Total International Equity Total Fixed Income Hedge Funds Real Estate Cash Asset Allocation Policy Target Difference Proprietary & Confidential Investment advice and consulting services provided by Aon Hewitt Investment Consulting, Inc., an Aon Company. 22 Trailing Period Performance as of 9/30/2018 Market Value ($) % of Total Fund 1- Quarter Year-to- Date 1-Year 3-Years 5-Years 10-Years Since Inception Inception Period Total Plan $278,472,371 100.0% 2.1% 2.4% 5.3% 7.1% 5.1% 6.4% 7.3% 25y 9m Policy Benchmark 1.9 2.5 5.4 7.7 5.4 6.5 -- Total Domestic Equity 93,164,513 33.5 6.9 10.6 17.7 15.5 12.5 -- 13.2 5y 1m Russell 3000 Index 7.1 10.6 17.6 17.1 13.5 12.0 14.0 Total Large-Cap Equity 68,522,424 24.6 7.4 10.4 17.6 15.3 12.8 10.9 9.4 15y 4m Russell 1000 Index 7.4 10.5 17.8 17.1 13.7 12.1 9.9 BlackRock Russell 1000 Index 68,522,424 24.6 7.4 10.4 17.6 17.0 13.6 12.1 16.1 1y 7m Russell 1000 Index 7.4 10.5 17.8 17.1 13.7 12.1 16.2 Total Small-Cap Equity 24,642,089 8.8 5.8 11.0 17.8 16.3 11.2 13.1 11.8 15y 4m Russell 2000 Index 3.6 11.5 15.2 17.1 11.1 11.1 10.6 Kennedy Mid Cap Value 11,825,145 4.2 1.8 1.5 8.4 14.2 10.7 12.3 10.4 10y 8m Russell Midcap Value Index 3.3 3.1 8.8 13.1 10.7 11.3 9.3 TimesSquare Small Cap Growth 12,816,944 4.6 9.3 21.2 27.7 18.3 11.4 13.8 11.2 16y 8m Russell 2000 Growth Index 5.5 15.8 21.1 18.0 12.1 12.7 9.2 Total International Equity 43,563,985 15.6 -0.7 -4.6 -0.5 7.8 3.5 -- 4.7 5y 1m MSCI AC World ex USA Index (Net) 0.7 -3.1 1.8 10.0 4.1 5.2 5.4 Morgan Stanley Int’l Equity 29,936,521 10.8 0.4 -1.3 2.4 7.6 3.8 5.3 4.7 13y 6m MSCI EAFE Index (Net) 1.4 -1.4 2.7 9.2 4.4 5.4 4.9 Morgan Stanley EM Fund I 13,627,464 4.9 -2.8 -11.8 -7.1 8.1 2.1 4.1 6.7 13y 6m MSCI EM Index (Net) -1.1 -7.7 -0.8 12.4 3.6 5.4 7.5 *Performance through 9/30/2018 has been calculated by MSD’s previous investment consultant. Proprietary & Confidential Investment advice and consulting services provided by Aon Hewitt Investment Consulting, Inc., an Aon Company. 23 Trailing Period Performance as of 9/30/2018 (cont’d) Market Value ($) % of Total Fund 1- Quarter Year-to- Date 1-Year 3-Years 5-Years 10-Years Since Inception Inception Period Total Fixed Income 97,900,417 35.2 0.0 -1.8 -1.6 2.6 1.8 4.7 4.1 15y 3m Blmbg. Barc. Interm. U.S. Gov/Credit 0.2 -0.8 -1.0 0.9 1.5 3.2 3.2 Income Research 36,903,682 13.3 0.2 -0.8 -0.9 0.9 1.5 4.1 4.4 17y 3m Blmbg. Barc. Interm. U.S. Gov/Cred 0.2 -0.8 -1.0 0.9 1.5 3.2 3.9 Prudential Core Plus Bond 38,721,286 13.9 0.2 -1.5 -0.4 3.3 3.6 6.0 2.7 3y 4m Blmbg. Barc. U.S. Aggregate 0.0 -1.6 -1.2 1.3 2.2 3.8 1.2 Brandywine Global Opp. FI 22,275,449 8.0 -0.9 -4.0 -4.4 4.3 2.0 5.5 5.0 13y 9m FTSE World Gov’t Bond Index -1.6 -2.5 -1.5 1.7 0.2 2.2 2.4 Hedge Funds 16,547,582 5.9 -0.1 2.0 3.7 2.3 -- -- 1.7 3y 7m HFRI FOF Composite Index 0.2 1.0 3.1 3.3 3.2 2.6 1.9 Entrust Capital Diversified Fund 16,547,582 5.9 -0.1 0.1 0.8 -0.4 -0.1 3.6 -2.1 3y 2m HFRI FOF Composite Index 0.2 1.0 3.1 3.3 3.2 2.6 1.9 UBS Trumbull Property Fund 25,555,186 9.2 1.2 4.5 6.7 6.2 7.9 4.6 5.8 12y 4m NCREIF Property Index 1.7 5.3 7.2 7.8 9.6 6.4 7.4 Cash Account 1,740,687 0.6 0.5 1.3 1.7 1.1 0.8 0.3 1.3 15y 4m ICE BofAML 3 Month U.S. T-Bill 0.5 1.3 1.6 0.8 0.5 0.3 1.3 *Performance through 9/30/2018 has been calculated by MSD’s previous investment consultant. Proprietary & Confidential Investment advice and consulting services provided by Aon Hewitt Investment Consulting, Inc., an Aon Company. 24 Fund Fee Comparison 9/30/2018 Asset Market Values Fund Expense Ratio Institutional Peer Comparison Fund Name % $ % $ Universe Median % Universe Median $ eVestment Alliance Universe BlackRock Russell 1000 Index Fund 24.6% $68,522,424 0.04% $23,983 0.04% $25,451 US Passive Large Cap Kennedy Mid Cap Value Fund 4.2 11,825,145 0.75 88,689 0.73 86,324 US Mid Cap Value TimesSquare Small Cap Growth Fund 4.6 12,816,944 0.99 126,888 0.85 108,944 US Small Cap Growth Morgan Stanley Int’l Equity Fund 10.8 29,936,521 0.91 272,422 0.75 224,524 All EAFE Equity Morgan Stanley Emerging Markets Fund 4.9 13,627,464 1.04 141,726 0.90 122,647 Emerging Mkts Equity Income Research Fund 13.3 36,903,682 0.34 125,473 0.29 108,075 US Core Fixed Income Prudential Core Plus Bond Fund 13.9 38,721,286 0.30 116,164 0.30 116,164 US Core Plus Fixed Income Brandywine Global Opp. FI Fund 8.0 22,275,449 0.45 100,240 0.40 89,102 Global Agg Fixed Income Entrust Capital Diversified Fund* 5.9 16,547,582 1.58 261,452 1.15 190,297 HFRI FOF Composite Index Median Fee1 UBS Trumbull Property Fund 9.2 25,555,186 0.88 223,719 1.00 255,552 AHIC Buy-rated Core Private Real Estate2 Cash 0.6 1,740,687 0.20 3,481 0.20 3,481 US Taxable Money Market Funds Total Plan 100.0% $278,472,370 0.53% $1,484,235 0.48% $1,330,561 -- *The Entrust Capital Diversified Fund is in the process of being redeemed in full. 1HFRI FOF Composite Index median manager investment fee. Performance fees are not included. 2Median investment management fee for AHIC buy-rated core private real estate funds. Proprietary & Confidential Investment advice and consulting services provided by Aon Hewitt Investment Consulting, Inc., an Aon Company. 25 (This page left blank intentionally)