Investment Plan - OPERS

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2 0 1 0 I N V E S T M E N T P L A N FUND STRATEGIES Composition of Investment Portfolio The Public Equity and Public Fixed Income asset classes are managed identically for both the Health Care and Defined Benefit Funds; however, the allocations to all asset classes may vary as they reflect unique circumstances for each fund. The table below shows the Defined Benefit Fund’s projected June 30, 2010 allocation between internal and external asset management by asset class along with actual allocations of comparable peers as of June 30, 2009. Internal Management External Management Asset Class OPERS Peer Group* OPERS Peer Group* Public Equity U.S. Equity 83.2% 63.2% 16.8% 36.8% Non-U.S. Equity Public Fixed Income 0.0% 30.1% 100.0% 69.9% Core Fixed 98.7% 84.8% 1.3% 15.3% Long Bonds 100.0% NA 0.0% NA High Yield 0.0% 0.7% 100.0% 99.3% Liquidity Alternatives 100.0% NA 0.0% NA Private Equity 0.0% 1.7% 100.0% 98.3% Real Estate 0.0% 13.8% 100.0% 86.2% Opportunistic/Hedge Funds 33.7% 0.0% 66.3% 100.0% Infrastructure 0.0% NA 100.0% NA Weighted Averages 53.3% 52.5% 46.7% 47.5% *Peer group defined previously in the Investment Program section. The table shows that OPERS is similar to its peer group overall but differs in the much higher use of internal management for U.S. Equity and Public Fixed Income. The amount shown as OPERS internally managed Opportunistic/Hedge Funds represents the opportunistic distressed fixed income assets. Internal assets under management have declined for both OPERS and peers from the prior year (see 2009 Annual Investment Plan). OPERS is somewhat dissimilar from its peer group in exclusively using external asset management in the Non-U.S. Equity asset class. As noted in the Report from the CIO, during 2010 Staff will further explore managing passive Non-U.S. Equity assets internally. OPERS’ use of internal asset management provides many advantages including: Flexibility: Rebalancing decisions are executed efficiently and cost-effectively. Control over the assets enables OPERS to reposition its portfolios as opportunities arise and market conditions change. Cost control: Asset management is a high-margin business, and over the long term, external asset management fees can create a material drag on net returns. External asset management fees typically range from a multiple of six to 20 times the cost of managing assets internally. Where internally managed portfolios can provide very cost-effective exposure to asset beta, or competitive alpha to externally managed assets, there is a major benefit to OPERS from internal management. 29
2 0 1 0 I N V E S T M E N T P L A N FUND STRATEGIES Market insight: Internal asset management provides important information across asset classes to help in decision-making processes such as: External manager hiring and oversight—improves Staff’s ability to assess external manager strengths and weaknesses. Across markets—frequently, Staff can leverage information garnered from one asset class to support decision-making in another asset class. More effective payment of pension and health care benefits, operating expenses and funding of external managers – cash to pay benefits, operating expenses or fund external managers can be raised immediately from internally managed assets whereas raising cash from external managers can take weeks or longer. The table below shows the Defined Benefit Fund’s projected June 30, 2010 allocation between active and passive asset management by asset class along with actual allocations of comparable peers as of June 30, 2009. The share of active management for OPERS will necessarily rise to reflect the new larger allocations to alternatives and liquid market strategies that cannot be effectively indexed, such as high yield. Public Equity Asset Class *Peer group defined previously in the Investment Program section. Active Management Passive Management OPERS Peer Group* OPERS Peer Group* U.S. Equity 31.9% 40.9% 68.1% 59.1% Non-U.S. Equity 82.5% 84.3% 17.5% 15.7% Public Fixed Income Core Fixed 100.0% 81.8% 0.0% 18.2% Long Bonds 100.0% NA 0.0% NA High Yield 100.0% 83.3% 0.0% 16.7% Liquidity 100.0% NA 0.0% NA Alternatives Private Equity 100.0% 100.0% 0.0% 0.0% Real Estate 100.0% 99.7% 0.0% 0.3% Opportunistic/Hedge Funds 100.0% 75.0% 0.0% 25.0% Infrastructure 100.0% NA 0.0% NA Weighted Averages 71.2% 70.3% 28.8% 29.7% 30
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