new mexico state investment council...new mexico state investment council executive summary...

New Mexico State Investment Council

Executive SummaryPerformance ReviewQuarter Ended December 31, 2013

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Capital Markets Update

DRAFT

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Current Market Themes

► Recent Events► By trimming its monthly bond purchases from $85 billion to $75 billion, the Federal

Reserve took a small but significant step in unwinding its monetary stimulus program. Markets responded favorably in general to the news.

► Domestic Equity► The fourth quarter capped off an impressive year for domestic equity markets, with

the S&P 500 returning 10.5% for the quarter and 32.4% for the year.► International Equity

► Developed international markets were positive, but trailed domestic markets for both the quarter and the calendar year.

► Emerging market indices were positive for the quarter, but declined by 2.6% for the year due to underperformance during the first half of 2013.

► Fixed Income► The US bond market had a challenging year, finishing the quarter -0.1% and ending

the year -2.0%. This marks the first negative year for bonds in over fourteen years.► While there are concerns around future interest rate hikes, the steep yield curve

suggests the market is already pricing in substantial rate increases during 2014.

Index

QTDReturn

YTDReturn

1-YearAnnualized

Return

3-YearAnnualized

Return

5-YearAnnualized

Return

10-YearAnnualized

Return Russell 1000 Index 28.43% 16.10% 1.50% 16.43% 10.23% 33.11% 33.11% 16.30% 18.59% 7.78% Russell 2000 Index 27.18% 26.86% -4.18% 16.34% 8.72% 38.82% 38.82% 15.67% 20.08% 9.07% Russell 3000 Index 28.34% 16.93% 1.03% 16.42% 10.10% 33.55% 33.55% 16.24% 18.71% 7.88% MSCI EAFE Index (Net) 31.78% 7.75% -12.14% 17.32% 5.71% 22.78% 22.78% 8.17% 12.44% 6.91% MSCI EAFE Index (Local) (Gross) 25.36% 5.26% -11.74% 17.89% 6.40% 27.46% 27.46% 9.87% 11.84% 6.47% MSCI EAFE Small Cap Index (Net) 46.78% 22.04% -15.94% 20.00% 5.91% 29.30% 29.30% 9.26% 18.50% 9.53% MSCI Emerging Markets Index (Net) 78.51% 18.88% -18.42% 18.23% 1.83% -2.60% -2.60% -2.06% 14.79% 11.17% MSCI AC World ex-US Index (Net) 41.46% 11.15% -13.71% 16.83% 4.77% 15.29% 15.29% 5.14% 12.82% 7.57% B US Aggregate Bond Index 5.93% 6.54% 7.84% 4.21% -0.14% -2.02% -2.02% 3.26% 4.44% 4.55% BofA ML 3 Mo US T-Bill 0.21% 0.13% 0.10% 0.11% 0.02% 0.07% 0.07% 0.10% 0.12% 1.68% NCREIF ODCE Index AWA (Gross) -29.76% 16.36% 15.99% 10.94% 3.17% 13.94% 13.94% 13.60% 3.68% 7.16% NCREIF Property Index -16.86% 13.11% 14.27% 10.54% 2.53% 10.99% 10.99% 11.92% 5.68% 8.63% HFRI FOF Conservative Index 9.65% 5.07% -3.55% 4.22% 2.65% 7.66% 7.66% 2.67% 4.51% 2.71% DJ-UBS Commodity Index 18.91% 16.83% -13.32% -1.06% -1.05% -9.52% -9.52% -8.11% 1.51% 0.87%

As of December 31, 2013 Calendar Year2009

Return

Calendar Year2010

Return

Calendar Year2011

Return

Calendar Year2012

Return

Performance Update as of December 31, 2013

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SIC Total Fund Performance vs. Benchmarks

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Performance as of December 31, 2013

The policy indexes are based on target allocations for the permanent funds. As of December 31, 2013, they consist of 30% Russell 1000 Index, 5% Russell 2500 Index, 5% MSCI EAFE Index (Net), 10% MSCI Emerging Markets Index (Net), 14% Barclays US Aggregate Bond Index, 6% Credit and Structured Finance Composite, 7% HFRI FOF Composite Index (Lagged 1 Month), 10% 80/20 Cambridge Private Equity Index (Lagged 1 Quarter), 8% NCREIF ODCE Index (Net) (Lagged 1 Quarter), and 5% Real Asset Custom Index.

*Severance Tax target allocation excludes economically targeted investments and the state private equity program.

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LGPF Outperformed the Policy Index in the Quarter?

An over allocation to fixed income and cash equivalents hindered the portfolio, but overall asset allocation helped performance due to an overweight to US equity and underweight to non-US equity, real return, and real estate.

Despite low asset class returns, fixed income managers added the most value to the portfolio in the fourth quarter. However, overall manager value add was negative.

Performance shown is gross of fees.

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LGPF Outperformed the Policy Index Over the Last Year?

An overweight to fixed income hindered the portfolio in 2013, but underweights to non-US equity and real return provided enough value to result in overall positive asset allocation.

While overall manager value add hindered relative performance, the fund benefited from asset allocation and the timing of transactions over the last year.


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STPF Outperformed the Policy Index in the Quarter?

Fixed income managers provided enough alpha to help the Plan slightly outperform the Policy Index during the fourth quarter.

An under allocation to US equity and fixed income relative to the Policy Index, hindered the portfolio.


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STPF Underperformed the Policy Index Over the Last Year?

Underperformance over the last year can be attributed to manager value add and, to a lesser extent, asset allocation. Private equity, US equity, non-US equity and real estate managers detracted from performance.

While an underweight to non-US equity and real return helped performance, an underweight to US equity and fixed income hurt the plan.


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SIC Total Fund Performance vs. Peers

QTD CYTD 1Year

3Years

5Years

7Years

10Years

FY2013

FY2012

FY2011

FY2010

FY2009

Land Grant Total Fund Composite 5.11 16.28 16.28 9.68 12.49 5.19 6.78 13.28 0.74 22.40 14.43 -22.15Severance Tax Total Fund Composite 5.23 15.61 15.61 9.34 11.83 4.35 6.10 12.15 0.19 22.63 12.18 -23.65

All Public Plans > $10B (Custom Peer Group) Median 4.83 14.65 14.65 9.65 12.12 5.43 7.27 12.45 1.10 21.06 12.92 -18.91Land Grant Total Fund Composite Rank 43 36 36 50 36 60 87 26 61 30 23 82Severance Tax Total Fund Composite Rank 38 43 43 62 58 96 96 58 80 23 67 88

Population 24 23 23 23 23 23 20 30 32 31 23 18

All Public Plans-Total Fund Median 5.52 16.92 16.92 9.70 12.49 5.67 7.00 12.44 1.05 21.35 12.68 -15.79Land Grant Total Fund Composite Rank 65 59 59 51 50 73 59 33 56 34 22 95Severance Tax Total Fund Composite Rank 60 68 68 63 74 93 90 57 70 32 59 97

Population 296 293 293 279 269 191 158 422 436 440 429 378

All Public Plans > $1B-Total Fund Median 4.97 15.21 15.21 9.74 12.55 5.62 7.28 12.43 1.10 21.77 13.49 -18.68Land Grant Total Fund Composite Rank 43 38 38 55 57 68 78 32 62 39 28 88Severance Tax Total Fund Composite Rank 38 48 48 63 73 94 94 56 78 35 71 92

Population 71 70 70 66 65 63 58 81 87 91 84 66

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Performance versus Peers as of December 31, 2013


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Asset Allocation versus Peers as of December 31, 2013Asset allocation as of December 31, 2013 compared to the All Public Plans >$10 Billion universe:

US equity allocations are higher than peers while international equities are noticeably lower.Both permanent funds’ fixed income allocations are largely in line with peers.Both permanent funds maintain an above average allocation to alternative investments. This segment includes absolute return, real asset, and private equity investments.

Parentheses contain percentile ranks. Allocations shown may not sum up to 100% exactly due to rounding.

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Asset Allocation versus Peers as of December 31, 2013Asset allocation as of December 31, 2013 compared to the All Public Plansuniverse:

US equity, international equity, and fixed income allocations are slightly lower than peers.Both permanent funds maintain an above median allocation to alternative investments. This segment includes absolute return, real asset, and private equity investments.

Parentheses contain percentile ranks. Allocations shown may not sum up to 100% exactly due to rounding.

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Risk / Return vs. Peers as of December 31, 2013

Performance shown is gross of fees. Parentheses contain percentile ranks.

All Public Plans > $10B –Total Fund UniverseAll Public Plans-Total Fund Universe

InfoRatio

-0.20 (39)

InfoRatio

0.00 (59)

InfoRatio

-0.20 (24)

InfoRatio

0.00 (80)

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Composite Performance as of December 31, 2013

Performance shown is gross of fees. Parentheses contain percentile ranks. Allocations shown may not sum up to 100% exactly due to rounding.

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Composite Performance as of December 31, 2013

Performance shown is gross of fees. Parentheses contain percentile ranks. Allocations shown may not sum up to 100% exactly due to rounding.

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Asset Class Performance

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US Equity

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NM SIC US Equity Structure Update

Recent Manager HiresThere were no US equity managers hired recently.

Recent Manager TerminationsThere were no US equity managers terminated recently.

Structural UpdatesLong-term target = 31%Current interim target = 35%Target as of 6/30/2012 = 40%

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NM SIC US Equity as of December 31, 2013

The US Equity Composite trailed the Russell 3000 Index over the last quarter but outperformed in 2013.

The US Small/Mid Cap Pool was the strongest performer in both absolute and relative terms over those time periods, but the US Large Cap Pool posted excellent absolute performance as well.

Seizert Capital contributed the most to performance over the trailing one year, returning 49.44% vs. 34.76% for its benchmark.

The US Large Cap Composite also provided historically strong absolute returns, but lagged the Russell 1000 index 32.57% to 33.11% in 2013.

Performance shown is gross of fees, except where otherwise noted.

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NM SIC US Equity as of December 31, 2013 – Continued

Performance shown is gross of fees. Calculation is based on quarterly periodicity. Parentheses contain percentile ranks.

All Public Plans – US Equity Segment

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Non-US Equity

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NM SIC Non-US Equity Structure Update

Recent Manager HiresLSV Int'l Large Cap ValueT. Rowe Price Int'l CoreSchroder Int'l AlphaMFS Int'l Large Cap GrowthTempleton Int'l Small Cap EquityBlackRock Emg Mkts Opp FundDuPont Capital Management

Recent Manager TerminationsSchroder Int'l Alpha


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The Non-US Equity Composite underperformed the Non-US Equity Custom Index over the last quarter and calendar year.

Developed Markets finished the trailing one year with a strong 22.22% return.Emerging Markets have hindered performance over the trailing one year, returning -3.55%.


NM SIC Non-US Equity as of December 31, 2013

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NM SIC Non-US Equity as of December 31, 2013 – Continued


All Public Plans – Int’l Equity Segment

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Allocation to "Other" consists of holdings domiciled in countries/regions that do not meet economic development, size, liquidity or market accessibility criteria as defined by the MSCI region standards.

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Fixed Income

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NM SIC Fixed Income Structure Update

Recent Manager HiresPIMCO UnconstrainedLoomis Sayles Unconstrained

Recent Manager TerminationsThere were no fixed income managers terminated recently.


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NM SIC Fixed Income as of December 31, 2013

Despite the current rising interest rate environment, the Fixed Income Composite outperformed its benchmark 1.74% to -1.41% over the trailing one year.

All three US Core Bond managers outperformed their benchmark over the trailing one year.The Credit & Structured Finance Pool had an outstanding return of 11.61% over the trailing one year.


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NM SIC US Core Bonds as of December 31, 2013 – Continued


All Public Plans – US Fixed Income Segment

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All Public Plans – US Fixed Income Segment

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Allocation to “Other” consists of interest rate derivatives, interest rate swaps, and preferred securities.

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Absolute Return

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NM SIC Absolute Return as of December 31, 2013

Performance shown is net of fees.

Absolute Return market values are lagged 1 month and provided by J.P. Morgan. Performance for Absolute Return is preliminary and shown as of the most current month end.

Performance for Mariner Matador, LLC prior to August 2008 consists of Mariner Select LP.

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