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HomeMy WebLinkAbout04.a. HighMark Capital Management Liquid Alternatives Proposal Central Contra Costa Sanitary District
Liquid Alternatives Proposal
March 2017
Table of Contents
■ Defining Alternative Investments
■ Proposed Liquid Alternatives Portfolio
• Impact on Return and Risk
■ Impact on Expenses
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CAPITAL MANAGEMENT
Defining Alternative Investments
Alternative investments offer exposure to opportunities not generally found through
traditional equity and fixed income markets.
What are Alternative Investments?
A group of non-traditional asset classes and investment strategies that
cannot be clearly defined as long-only publicly-traded stocks or bonds.
Why Invest in Alternative Investments?
it Add value to a total portfolio solution by improving risk-adjusted return* by
reducing portfolio volatility or enhancing returns.
How to Invest in Alternatives?
Alternatives can be accessed through mutual funds and limited
partnerships (LPs).
Risk-adjusted
return: A concept that contextualizes an investment's return by measuring how much risk is involved in
producing said return, which is generally expressed as a ratio,
3 CAPITAL MANAGEMENT
Defining Ainvestments
Alternative Asset Classes Diversifying Alternative Strategies
Tactical use of alternative assets, such as precious metals specific investments in strategies expected to add value over
and commodities, can add value when certain market the long-term will comprise a fairly stable weighting in the
conditions exist, portfolio over time.
Given that it's an investment in a certain asset, managers are selection of investment managers is important since they are
not expected to add value through their investment process. expected to add value through their investment decisions by
Passive strategies are more commonly used. employing specific investment strategies.
Commodities Global Macro Discretionary
• Investments in goads and real assets, such as energy, industrial • Seek to profit from changes in global economies and financial
and precious metals, agriculture, and livestock markets brought about by political, fiscal and monetary policies
• Offer enhanced risk 1 return profile given that prices respond
differently than traditional asset classes to capital market and
economic conditions ManagedFutures
• Trend following: buys asset classes when their prices are rising
Precious Metalsand sells them when prices are falling
• Investments in gold, silver, platinum, and palladium can act as
hedges against inflation and benefit from fiat currency concerns Market Neutral
• Have some limited industrial uses • Buy stacks expected to outperform based on fundamentals and
short stacks in same sector expected to underperform
Relative Value Fixed Income
• Invest across the fixed income and credit spectrum based on
relative risk/reward opportunities
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4 CAPITAL MANAGEMENT
Liquid Alternatives Fund Summaries
11
Eaton Vance Global Macro Abs Return Adv EGRIX Global Macro The team persues a discretionary,top-down approach focusing on macroeconomic and political analysis on
Discretionary countries worldwide.Based on the team's macroeconomic outlook,the fund invests in sovereign credit,currency,
interest rates and broad equity investments within emerging markets.The management team expresses
investment views over the medium to long term,typically between one and five years.Their approach employs
both long and short strategies to maximize risk-adjusted return in both up and down markets.The fund is not
benchmark constrained.
Western Asset Macro Opportunities LAOSX Global Macro The strategy focuses on top-down relative value opportunities in global interest rates and global credit
Discretionary (predominantly U.S.,Europe and Asia).Duration is actively managed,with historical duration ranging from-4 to+10,
years.Returns will be primarily driven by the investment team's ability to identify long term macro themes and
position the fund accordingly.The fund will typically have a net long credit bias.
AQR Managed Futures AQMlX Global Macro The fund implements a proprietary systernatic trend following strategy.The strategy is designed to capitalize on
Managed Futures price momentum signals that dictate long and short positions across global equity,fixed income,interest rate,
commodity,and currency markets through the use of short and long-term trend-following models.The Fund may
be directionally exposed over the short-term while targeting correlations close to zero over longer time horizons.
Natixis.ASG Managed Futures Strategy Y ASFYX Global Macro The fund implements a proprietary systematic trend following strategy.The strategy is designed to capitalize on
Managed Futures price momentum signals that dictate long and short positions across global equity,fixed income,interest rate,
commodity,and currency markets through the use of short and long-term trend-following models.The Fund may
be directionally exposed over the short-term while targeting correlations close to zero over longer time horizons.
AQR Equity Market Neutral I QMNIX Long/Short Equity The strategy uses valuation,momentum,quality,stability,investor sentiment and management signaling as
Market Neutral measures to establish long and short positions that are attractive on either a relative or absolute basis.The Fund
will invest in the top 2..000 global stocks based an market capitalization and targets neutrality at market,country
and industry levels over the long-term(3+years).
Black Rock Strategic Income Apps Inst BSII'X Relative Value The strategy employs a fundamental approach that blends top-down and bottom-tip processes to construct an
Fixed Income unconstrained fixed income portfolio.The strategy can invest in a broad universe of fixed income securities and
derivatives including all sectors of the Barclays Aggregate Index,high yield,floating rate,emerging market debt,
non-US denominated debt,asset backed securities,and convertibles.Duration can range from-2 to+7 years
(typically 1-4 years).
AQR Style Premia Alternative I QSPIX Multi-strategy The strategy's approach provides efficient,diversified exposure tofourfunclamental investment styles—value,
Risk Premia momentum,carry,and defensive—in a transparent and liquid vehicle.The Fund provides exposures to the four
styles by constructing diversified,long/short portfolios across global stocks/industries,equity market indices,
sovereign fixed income(bonds,interest rates and yield curve strategies),currencies and commodities.
One should not assume that investments in the securities identified and discussed were or will be profitable.
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CAPITAL MANAGEMENT
Proposed LiquidAlternatives Portfolio
The following is aproposed 12% allocation to Liquid Alternatives. Clue to its expected
risk and return profile the allocation is most appropriately sourced from Fixed Ineom
Portfolio %of Expected Correlation
Manager/Fund Ticker Strategy Allocation Liquid Alts to Equities/Bonds
Eaton Vance Global Macro Abs Return Adv EGRIX Global Macro 2.5% 21% Low/Moderate
Discretionary
Western Asset Macro Opportunities LAOSX Global Macro 2.5% 21% Moderate/ Moderate
Discretionary
AQR Managed Futures AQMIX Global Macro 2.0% 17% Low Low
Managed Futures
Natixis ASG Managed Futures Strategy Y ASFYX Global Macro 2.0% 17% Low Low
Managed Futures
AQR Equity Market Neutral I QMNIX Long/Short Equity 1.0% 8% Low Low
Market Neutral
BlackRock Strategic Income Opps I nsl BSIIX Relative Value 1.0% 8% Low/Moderate
Fixed Income
AQR Style Premia Alternative I QSPIX Multi-strategy 1.0% 8% Low/Low
Risk Premia
The above information is for illustrative purposes only,and is not intended to provide investment recommendations as to which securities to buy or sell,or when to buy or sell securities.The
Sample Portfolio is hypothetical and does not reflect actual investment decisions or recommendations,and does not represent actual trading or actual portfolio performance.A client's portfolio
construction and performance will vary depending on the client's investment needs,objectives and restrictions and market conditions.Asset allocation ranges and performance for each
investment objective may also vary depending on the prevailing market conditions.The percentages in the illustration above are rounded to the nearest decimal point.
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6 ---------------------- ....,----------------------------............................111----------------------------- IGHMARK
CAPITAL MANAGFMFNT
Proposed Portfolio with Liquid Alternatives
Allocation
Fund Name Ticker Category Current Proposed
EQUITY ALLOCATION
Columbia Contrarian Core Z SMGIX US Large Core 5.0% 5.0%
Vanguard Growth&Income Adm VGIAX US Large Core 11.5% 11.5%
Dodge&Cox Stock DODGX US Large Value 4.3% 4.3%
T.Rowe Price Growth Stock I PRUFX US Large Growth 2.1% 2.1%
Harbor Capital Appreciation Instl HACAX US Large Growth 2.1% 2.1%
iShares Russell Mid-Cap IWR US Mid Core 3.6% 3.6%
Undiscovered Managers Behavioral Val L UBVLX US Small Value 3.8% 3.8%
T.Rowe Price New Horizons I PRJIX US Small Growth 3.8% 3.81°
Nuveen Real Estate Securities I FARCX REITs 1.5% 1.5%
JUS Equity 37.5% 3
Nationwide Bailard Intl Ecls R6 NWHIVIX International Core 4.0% 4.0%
Dodge&Cox International Stock DODFX International Value 2.6% 2.6%
MF5 International Growth I MQGIX International Growtl 2.6% 2.6%
Hartford Schroders Emerging Mkts Eq I SEIVINX Emerging Markets 3.3% 3.3%
International Equity 12.5% 12.5%
Total Equity 50.00/0 5 0.OP/0 The information in this slide is for
illustrativepurposes only,and is not
......- intended to provide investment
FIXED INCOME ALLOCATION recommendations as to which securities
Nationwide High Mark Bond R6 NWJIX Intermediate Term E 15.6% 8.7% to buy or sell,or when to buy or sell
PI MCO Total Return Instl PTTRX Intermediate Term E 10.0% 8.7% securities.The Sample Portfolio is
Prudential Total Return Bond Q PTRQX Intermediate Term E 12.5% 8.7% hypothetical and does not reflect actual
Vanguard Short-Term Investment-Grade Adm VFSUX Short Term Bond 6.3% 6.0% investment decisions or
Eaton Vance Floating-Rate&Hi Inc Inst EIFHX Bank Loans 2.5% 3.0% recommendations,and does not
[Total Bonds 46.9% 35 represent actual trading or actual
portfolio performance.A client's
LIQUID ALTERNATIVES ALLOCATION portfolio construction and performance
Eaton Vance GlbI Macro Abs Ret Advtg I EGRIX Global Macro 0.0% 2.5% will vary depending on the client's
Western Asset Macro Opportunities IS LAOSX Global Macro 0.01° 2.5% investment needs,objectives and
AQR Managed Futures Strategy I AQMIX Managed Future 0.0% 2.0% restrictions and market conditions.Asset
allocation ranges and performance for
Natixis ASG Managed Futures Strategy Y ASFYX Managed Future 0.0% 2.0%
each investment objective may also vary
AQR Equity Market Neutral I QMNIX Market Neutral 0.0% 1.0%
depending on the prevailing market
BlackRock Strategic Income Opps Instl BSIIX Relative Value FI 0.0% 1.0% conditions.The percentages in the
AQR Style Premia Alternative I QSPIX Multi-Strategy 0.0% 1.0% illustration above are rounded to the
Total Liquid Alternatives 0.0%. 12.00/.1 nearest decimal point.
FI RST AMERN GOVT OBLIG FD CL Z FGZXX Cash 3.1% 3.1%
JTotal Portfolio 100.00/0 1
0 t
HIGHMhRK
CAPITAL MANAGEMENT
Impact on Return and Risk
Liquid Alternatives Performance Expectations
Total Return: Cash +4%
Standard Deviation: 4-6%
Correlation to Equities.- +/- 0.3
Annualized Performance through February 28, 2017
Portfolios rebalanced annually at year-end
Return Return Return Return Return Return Std Dev Std Dev Sharpe Sharpe
Portfolio 1 Year 2 Year 3 Year 2016 2015 2014 1 Year 3 Year 1 Year 3 Year
AQR Managed Futures Strategy I AQA1 it -10.71 -4-35 2.90 -8.43 2.00 9.69 9.70 10.22 -1.16 0.311
AQR Market Neutral* QAIVIX 4.22 10.56 11-03 5.85 17-60 10.25 3.73 5.84 1.03 1.80
AQR Style Premia Alternative I Q siol X 2.74 8.38 8.36 -0.47 8.76 11.30 4.65 6.98 0.53 1.16
BlackRock Strategic Income Opps Instl wlix 6.23 1.62 2.45 3.61 -0-30 3.89 1.09 1.63 5.25 1.40
Eaton Vance GI bl Macro Abs Ret Advtg I EOtIX 8.05 3.69 6.02 5.86 4.21 6.28 3.27 3.88 2.27 1.49
Natlxis ASG Managed Futures Strategy Y A-5FYX -10.25 -6.41 5.97 -5.47 -1.22 22-21 9.44 11-29 -1.14 0.55
Western Asset Macro Opportunities IS LAos x 13.82 3.82 5.09 6.57 1.57 8.11 7.76 6.03 1.66 0.831
Liquid Alts proposed portfolio 1.81 1.46 5.75 1.02 3.50 10.51 3.82 4.05 0.39 1.36
Current portfolio (no liquid alts) 13.37 3.93 4.94 6.63 0.42 6.28 4.64 5.37 2.66 0.90
'Proposed portfolio (with liquid alts) 13.16 3.90 5.29 6.30 0.82 6.82 4.59 5.36 2.65 0.96
*AQR Market Neutral-utilized private fund performance of identical strategy from 11112014 through 1013112014 prior to mutual fund inception on 111112014
Source.,Momingstar Direct
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8 .............. ... ... HIGHMARK
CAPITAL M.ANAGFkPFNT
Impact on Return and Risk
Liquid Alternatives tend to have low correlations to both equities and each other,
resulting in strong risk-adjusted returns that offer significant diversification benefits.
Correlation Matric 3/1/2014 to 2/28/2017
1 EGRIX LAOSX AQMIX ASFYX QMNIX BS11X QSPIX Alts Port Current S&P S00
EGRIX 1.00
LAOSX 0.58 1.00
AQMIX (0-03) (0-14) 1.00
ASFYX 0.04 (0-03) 0.80 1.00
QMNIX (0.15) (0.35) 0.28 0.23 1.00
BS11X 0.52 0.65 0.05 0.24 (0.28) 1.00
QSPIX (0.23) (0.13) 0.22 0.13 0.64 (0.1,1)
Alts Port 0.34 0.31 0.82 0.86 0.30 0.42 0.29
Current 0.47 0.71 (0-16) 0.11 (0.29) 0.69 (0-17) 0.25 1.00
[5&P 500 0.41 0.61 (0.27) 0.02 (0.27) 0.56 (0.14) 0.12 0.93 1.00
Source:Morningstar Direct
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CAPITAL MANAGEMENT
Impact o n Expenses
Allocation Expense Ratio
Fund Name Ticker Category Current Proposed Exp Ratio Current Proposed
EQUITY ALLOCATION
Columbia Contrarian Core Z SMGIX US Large Core 5.0% 5.0% 0.82%
Vanguard Growth&Income Adm VGIAX US Large Core 11.5% 11.5% 0.23%
Dodge&Cox Stock DODGX US Large Value 4.3% 4.3% 0.52%
T.Rowe Price Growth Stock I PRUFX US Large Growth 2.1% 2.1% 0.52%
Harbor Capital Appreciation Instl HACAX US Large Growth 2.1% 2.1% 0.64%
iShares Russell Mid-Cap IWR US Mid Core 3.6% 3.6% 0.20%
Undiscovered Managers Behavioral Val L UBVLX US Small Value 3.8% 3.8% 0.89%
T.Rowe Price New Horizons I PRJIX US Small Growth 3.8% 3.8% 0-65%
Nuveen Real Estate Securities I FARCX REITs 1.5% 1.5% 1.05%
Nationwide Bailard Intl Eqs R6 NWHMX International Core 4.0% 4.0% 0.86%
Dodge&Cox International Stock DODFX International Value 2.6% 2.6% 0.64%
MFS International Growth I MQGIX International Growtl 2.6% 2.6% 0.95%
Hartford Schroders Emerging Mkts Eq I SEMNX Emergi rig Markets 3.3% 3.3% 1.24%
FrEquity Allocation 50.0% 50.0% 0.62% 0.62%
ees for Equity Allocation 0.31% 0.31%
FIXED INCOME ALLOCATION
wNationwide High Mark Bond R6 NWJIX Intermediate Term E 15.6% 8.7% 0.50%
PI MCO Total Return Instl PTTRX Intermediate Term E 10.0% 8.7% 0.46%
Prudential Total Return Bond Q PTRQX Intermediate Term E 12.5% 8.7% 0.44%
Vanguard Short-Term Investment-Grade Adm VFSUX Short Term Bond 6.3% 6.0% 0.10%
Eaton Vance Floating-Rate&Hi Inc Inst EIFHX Bank Loans 2.5% 3.0% 0.82%
Fixed Income Allocation 46.9% 35.0% 0.44% 0.43%
Fees for Fixed Income Allocation 0.21% 0,15%
LIQUID ALTERNATIVES ALLOCATION
-----------
Eaton Vance GI b I Macro Abs Ret Advtg I EGRIX Global Macro 0.0% 2.5% 1.23%
Western Asset Macro Opportunities IS LAOSX Global Macro 0.0% 2.5% 1.23%
AQR Managed Futures Strategy I AQMIX Managed Future 0.0% 2.0% 1.20%
Natixis ASG Managed Futures Strategy Y ASFYX Managed Future 0.0% 2.0% 1.494%
AQR Equity Market Neutral I QMNIX Market Neutral 0.0% 1.0% 1.28%
BlackRock Strategic Income Opps Instl BSIIX Relative Value FI 0.0% 1.0% 0.60%
AQR Style Premia Alternative I QSPIX Multi-Strategy 0.0% 1.0% 1.49%
Liquid Alternatives Allocation 0.00/0 12.0% 0.00% 1.24%
Fees for Liquid Alternatives Allocation 0.00% 0.15%
FIRST AMERN GOVT 0 BLI G FD CL Z FGZXX Cash 3.1% 3.1% 0.18%
IFees for Cash 0.01%
ITotal Portfolio Fees 0.52%
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10 - -------- _1._-,.-_.-...... ................. ........................................ -------------------- ................................ U.G2% H I G HMARK
CAPITAL. MANAGEMFINT
Disclosures
HighMarkCapital Management, Inc. (HighMark). anSEC-registered investment adviser, isosubsidiary ofMUFG Union Bank, N.A. (MUB). HighMarhmanages i'nmtitutiono]separate
account portfolios for o wide variety of for-profit and nonprofit orgonizotiona, public agonoiea, public and private retirement p|ane, and personal trusts ofall sizes. It may also serve as
sub-adviser for mutual funds, common trust funds and collective investment funds. MUB. a subsidiary of MUFG Americas Holdings Corporation, provides certain services to
HighMark and is compensated for these services. Past performance does not gU2rantee future results. Individual account management and construction will vary depending on each
client's investment needs and objectives. Investments employing HighMark strategies are NOT insured by the FDIC or by any other federal government agency,are NOT
deposits of or guaranteed by the Bank or any Bank affiliate,and MAY lose value, including possible loss of principal.
Each strategy represented as o Sample Portfolio is e hypothetical portfolio only and does not reflect actual investment decisions or recommendations. It is solely for illustrative
purposes and is subject to change at any time. It is not intended to represent a specific investment, It does not reflect the liquidity constraints ofactual investing or the impact that
material economic and market factors may have onaninvestment adviser'odecision-moking. Inve�o�cannot invest inthe Sample po�o|ioand actual investment results may differ
matehaUy.Anaccount could incur losses aoweUasga�ns. The Sample Portfolio does not reflect the deduction ofadvisory fees, brokerage, commissions,orany other actual client
expensea,which would reduce investor returns.Advisory fees are described in Form ADV, Pert 2A and are available upon request.
While alternative investments can be used for diversification,seeking to enhance returns and manage risk in a portfolio.they tend to have a higherdegree ofrisk than traditional
asset classes and can involve significant loss. For example, commodity prices are highly volatile, and investors may experience significant losses In a short period oftime.
Investments such as futures are subject to a high degree of fluctuation and should be considered speculative.And short positions could lose significant value ifsecurities prices rise.
Before investing carefully consider your financial position and risk tolerance to determine if the proposed trading style is appropriate.
The unmanaged S&P 500 Index is generally representative of the performance of large companies in the U S stock market. The Barclays U.S. Aggregate Bond Index is composed of
U.S. securities in Treasury, Government-Related, Corporate. and Securitized sectors. The U.S. Corporate High-Yield Index measures the market ofUSD-denominated, non-
investment grade, fixed-rate, taxable corporate bonds. Securities are classified as high yield if the middle rating of Moody's, Fitch
on'inveatmentgnade' fixed'nate. taxab|eoorponetebomds. Seouritieaaneolaao)fiedoahighyie|difthemidd|enatingofMoody's. Fitoh and S&P iaBa1/BB+/BB+orbelow, excluding
emerging market debt.
The Russell 2000 Index measures the performance of the small-cap segment of the U.S. equity universe.The Index is a subset of the Russell 30000 Index representing
approximately 8%of the total market capitalization of that index. It includes approximately 2,000 of the smallest securities based on a combination oftheirmarket cap and current
index membership,
MSCI Emerging Markets Index is a free float-adjusted market capitalization index that is designed to measure equity marketperformance ofemerging markets.The MSCI Emerging
Markets Index consists ofthe following 21 emerging market country ind/oes: Brazil, Chi/e, Ch|na, Co|ombia, Czech Repub|io, Egypt, Hungary. India, Indonesia, Konaa, Malaysia..
Mexioo, Mom000, Paru, Phi|ippines, Po|end, Ruaa(o, South Africa, Taiwan. Thailand, and Turkey,
Index returns do not reflect the deduction of advisory fees, custody fees,transaction costs, or other investment expenses. The index returns assume the reinvestment of dividends
and other earnings.An investor cannot invest directly in an unmanaged index.
HighMamCapital Management, Inc. 2O17. All rights reserved.
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