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 Active Return and Risk The table below details the expected excess performance, or active return, and the tracking error (volatility of active returns) for each asset class, as well as the overall fund. Tracking error is a standard measure of risk used in public market asset classes; we have extended it to alternatives as well. Where markets are more efficient, such as U.S. equity and public fixed income, the outperformance goals are modest. Average Policy Allocation in Percent Public Equity 51.0% Schedule of Expected Performance and Volatility The table shows an anticipated active management contribution of 39 basis points to the fund’s return. The 45 basis points of estimated tracking error indicates a 68% probability that the active return will be in a range of -6 basis points to +84 basis points. This confidence interval is arrived at by subtracting the tracking error from, and adding the tracking error to, the expected active return. The target contribution to fund performance of 39 basis points for 2010 is slightly higher than the 34 basis points projected for 2009 primarily due to a higher performance objective for the Non-U.S. Equity asset class. The figures shown in the table above are aggregated from the component portfolios in each of the asset classes. The tracking error that results at the fund level is lower than would be suggested by a simple weighted average due to the diversifying effects of the active return interaction among the managers and the asset classes. 41 Active Return Performance Objectives (bps) Active Return Performance Contribution (bps) Target Tracking Error (bps) Target Information Ratio U.S. Equity 27.2% 20 5.4 32 0.63 Non-U.S. Equity 23.8% 75 17.9 115 0.65 Public Fixed Income 41.3% Core Fixed 11.5% 23 2.6 75 0.31 TIPS 19.8% 15 3.0 50 0.30 Short Bonds 4.8% 25 1.2 75 0.33 High Yield 1.2% 82 1.0 325 0.25 Emerging Mkt Debt 3.2% 156 5.1 385 0.41 Liquidity 0.6% 0 0.0 30 0.00 Alternatives 7.6% REIT 6.0% 50 3.0 200 0.25 Opportunistic/Hedge Funds 1.4% 0 0.0 300 0.00 Commodities 0.1% 0 0.0 300 0.00 Total Health Care Fund 100.0% NA 39.3 45 0.87
2 0 1 0 I N V E S T M E N T P L A N FUND STRATEGIES The return estimates below were derived from the asset class return expectations developed by internal Staff. The single-point estimate return of 6.52% is comprised of an expected return of 6.12% from the policy mix and an additional contribution of 0.39% from active management. 2010 Total Return Assumptions Sources of Return Pessimistic Base Optimistic Policy -6.04% 6.12% 20.68% Tactical -0.30% 0.00% 0.30% Active -0.06% 0.39% 0.84% Total Return -6.39% 6.52% 21.83% Sources of Risk 2010 Total Risk and Risk for Return Assumptions Due to rounding, the total return may not appear to sum correctly from the sources of return. Variability risk is measured by standard deviation for policy and total risk and by tracking error for active risk. The information ratio compares the active return of an asset to its most relevant benchmark index and is a measure of risk-adjusted return. The Sharpe Ratio compares the excess return of an asset against the return of the risk free asset. As stated in the Report from the CIO, fund investments are measured and monitored within a specific framework, which identifies return and risk from three sources: Policy: The return and risk inherent in the policy asset mix (allocation) adopted by the Board. The mix has expected return and variability characteristics that arise directly from the underlying asset classes. The expected return of the <strong>OPERS</strong> Health Care Fund policy mix is 6.12% for 2010 with an estimated risk, or variability, of 8.70%. As such, approximately two-thirds of the time, actual annual policy returns are expected to be within a range of –2.58% to +14.82%. Tactical: The return and risk introduced by deviations from the policy asset mix. The table above does not show any excess expected return from tactical asset allocation activities. Active: The return and risk introduced by active management (security selection). In summary, the total expected return of the Health Care Fund in 2010 is 6.52%, which is the sum of the expected policy return of 6.12% and active return of 0.39%. The estimated risk anticipated to achieve this return is the combination of the policy, tactical and active risk, which is 8.70%. 42 Variability Risk Information Ratio Sharpe Ratio Policy 8.50% 0.60 Tactical 0.30% Active 0.45% 0.87 Total Risk 8.70% 0.63
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Investment Plan - OPERS

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