tv Government Access Programming SFGTV April 26, 2019 5:00am-6:01am PDT
>> the usual rules for public participation will be applied today. i will limit testimony to three minutes on any particular topic. please make sure your cell phones are off our own silence. that takes us to the first -- we have to vote to go into closed session because we have a couple of items. motion is in order. we need to vote to invoke attorney-client privilege to discuss existing litigation with legal council, so we need that as a motion. >> i move it. >> do we need a second? >> thank you. all those in favor of going int
all those in favor say aye? >> aye. >> we will go back into public session. a quick review of our rules. the same rules. public comment is allowed and limited to 20 minutes on any one item or in general. next item is item four, general public comment. does anyone wish to speak? >> my name is richard and i am a retiree. i just wanted to say a few things but generally i haven't been around for a while, but in the secret session clearly there is something to hide, i guess. someone's intellectual property, we can't know what they're getting, what we are getting, it was interesting to read some of the recent comments, and i gather that you said if you had
invested in index funds instead of this group of hedge funds or whatever they are that 88% funded, perhaps you could rethink this and get out of these entangling secrets of alliances that mostly i use to -- i know that the p.c. these days is backing the privatization where the public's sphere has to be turned into something for private ownership of the prophet would be much less accessible. we know how the public sphere is less six -- accessible to us each day. there's also the idea to invest in some of the local building projects. giving -- given a lot of our
recent failures, the new transbay terminal, i would guess , not really knowing, that probably a lot of our public construction projects are mobbed up. he would know more about that than i do, but i certainly hope you wouldn't be investing in some of those companies. i see no reason why the subway has to take so long unless there is just a lot of stuff going on. we know that that particular budget has been fudged a lot, and certainly it is not something that other cities would put up with that kind of delay on such an important project, presumably, i guess that is about it. i really urge you to get away from the secrecy of the hedge fund and come back to normal, prudent and public stewardship.
>> my name is john stenson. i am a 44 year member of our pension fund. i understand that you have reduced the rate on our pension fund asset from seven-point 5% and seven-point 4%. based on this, i cast low liquidity. the rates for retention should be at least 10% not seven-point 4%. you should be able to get a 7.4% from a low cost, moderate risk index fund, or a 60-40 balance fund. they need only to invest in three assets. stocks, bonds, real estate his, you only need of localized investment in these three asset classes. those of you who don't know what it is, it is somebody that
believes in the investment philosophy of the late jack bogle who started the mutual fund. let me give you the past ten year returns of an investment in stocks, bonds, and real estate. ten year annual returns, 15.7%. vanguard 60-40, balanced fund, ten year return, 11.07%. vanguard of real estate index, ten year return, 18.17%. average return of these three funds is 15%, the management for these funds are less than half of 1%. asked misconduct poker, if you
average seven-point 4% return on your at high risk," cost, hi liquidity pension fund assets, and what you will pay in a management and performance fees in the next ten years, it should be enough to buy a san francisco office building for you all to do business in. thank you. >> first of all, i would like to welcome you to the board, hopefully you serve for the same dedication and confidence as wendy jordan who proceeded you, and also my concern about hedge funds. i don't believe they perform as well as the other securities do, and i think that there are other good investments that can be made that was pointed out by the previous speaker, so it is
basically what hedge funds are doing, as they're having a growing incidence in the economy they take overseers, they take over hospitals, they take over so many corporations when they are not doing well. they are basically -- it is like a herd phenomenon where elephants are attacked by hyenas , they start nipping at the heels of the stragglers behind. in the economy, some of the stragglers can recover, but basically the hedge fund manager takes over, sometimes they will run the corporation into the ground, they will lay off employees, and then they will proceed to sell it on the market as a part -- -- on a profit. i don't think we should be investing in this kind of immorality, and also, we will have lousy returns to show for it. these are my concerns. thank you.
>> if there is no further public comment, and before we move on -- go ahead, mr. sanchez. >> and president of protect our benefit. i will start off welcoming scott , our new trustee. we want to work with you, we expect good things from you, that is great. we also would like to go on record of thinking commissioner peskin and jordan for her years of service. you came in at one of the most difficult times. when i think about the retirement system, where they are today, top-tier, writing at the top two or three in the nation and the public pension fund, i know it has been a collaborative effort. staff does not give enough credit, managers don't get enough credit, bill, you don't get enough credit, but i know we have a very cohesive retirement system. it is something that the city should be very proud of, and welcome aboard.
thank you. >> i can't let that go. retired employees of the city and county and vice president with retirees. i just want to say ditto on what my colleagues said. welcome to scott, commissioner, we worked together for many years on the health services system, and it was very successful, so i'm looking forward to you having successful term here as well. i just wanted to say in advance to everybody, happy holidays for easter, and many easterners to celebrate everything you can. keep up the good work so we can get that supplemental by the end of july. thank you very much and we worked forward to working with you this next term.
>> that concludes item four, public comment. i was going to take this moment before we start voting to introduce our newest commissioner trustee. would you like to do it now or wait? >> okay. item five, minutes of the march 13th meeting. are there any additions, corrections, or deletions? i motion -- a motion to accept is in order. >> we adopt the minutes of the march 14th meeting. >> is there a second? motioned by bridges and seconded by two. all those in favor -- correction , is there public comment? no public comment. all those in favor say aye. >> aye. >> opposed? >> no. item six, consent calendar. i can't hear you.
[indiscernible] >> he may not -- you may not abstain without aboard -- -- a vote of the board. >> but we can vote to that? >> motion to recuse is in order. is a second. >> a motion to abstain. >> thank you. >> we vote to allow him to abstain. >> all those in favor? opposed? >> it is unanimous. a motion to adopt the minutes is still in order. all those. >> opposed? six, consent calendar. >> to any members wish items to be set aside for separate consideration?
if not, are there any items that you wish to ask questions of staff or whoever? if not, a motion to accept it. the consent calendar is in order before public comment. motion made, seconded. any public comments? all those in favor say aye. >> aye. >> opposed? none. that takes us to the investment calendar, item number 7. mr. coker, you have the floor. >> very good, thank you, questionnaire. board members, you may recall that last month we began a series on risk management. this is a three part series. the first was last month, and that was on asset allocation optimization of risk and return.
the second part is today, and there's three parts to that. one is and will be presenting a comprehensive analysis of our liquidity profile profile, as well as our cash flow forecasting and in addition to that, we will have two more parts to the risk management today, and that is we have a two series of casing schedules, one prepared by cambridge, another prepared by tori cove. these are our to offer private market consultants. there are some mild differences, but we look it -- we look at as much data as we can, if we have talked sets of data, we want to evaluate those. and then the third part of the risk management series will be next month, and that is a sweeping view of all the risk exposures throughout our portfolio, both by asset class and for the plant as a whole. with that, i'm going to ask anna
to walk through today charge of materials on liquidity. >> before you start, i want to bring something to your attention. sometimes when you look at us and the microphone is over here, your voice will be missed, since we're on television, plus a couple of board members need to hear your explanation on this topic, make sure you pick up on it because the volume will not necessarily pick you up. >> thank you. >> okay. , good afternoon. we will proceed with a second wrist a management presentation. the first one was last month hit we refuse -- we reviewed the risk asset allocation. the big part of any comprehensive risk management framework is the liquidity management, and we will dive in and talk about what we propose
for the san francisco retirement system. we propose an annual process that evaluates three core pillars, and brings it all together in one picture. i will start on the right with the forecast of pension obligation. this is where i would like to acknowledge the work with our actuary, janet, who is doing an amazing job in making sure to work hi ron and we also worked with an apc so that we have good estimates of what to expect in terms of our pension obligations i will have a few slides on that , but we've collected a lot more details, and there's also been a presentation on the trust , and their scenarios these
are why we are here and why our biggest obligation here is to make sure we continue paying the benefits that are promised. so that is the first pillar, in the first input of the liquidity profile. the second is on the left-hand side, and we will spend a lot of time today analysing and understanding how we estimate and this is the cash flow forecast for our private investments. we have considerable allocation to private investment, and the asset allocation that we reviewed last month, we have 45% of total plan assets dedicated to private investments. these are draw down vehicles. they draw capital and opportunistically distribute it, and it's hard for us to estimate
what the calls are, and what the liquidity profile is, but it doesn't mean we wouldn't be able to do it, and we will walk through the models and if few basic case scenarios and stress test that we performed with cambridge, with our best leaders in this private investments to understand that is the second pillar, and the third pillar of the annual liquidity management framework is understanding what is the liquidity profile of the assets we have what type of rebalancing can we do to best meet our obligations, and i will
give you an example, we talked about bill talked about last time, about origins of the compounding, and understanding that we are net payers, and we will talk about it have a billion outflows of the funds to you for, 2018. we had to work internally, and i will describe how it works, with how the system works to make sure that we can meet this, and what is the profile of each asset that we hold is the framework, and it is very important to make sure that we also run it in base case and a stress test, and understand what are the stress tests. moving on, i will skip page 3, moving on to page 4.
a lot of credit here to janet and chiron where we are looking on this page, in red, on the bottom, these are benefits plate payments plus implement of colours and in us -- administrative expenses. this is the cash out. actual, and then projection for the next five years on the top of the page, you see in green, the contributions we receive from both members contributions and employer contributions you can see that they are net outflows this year, it is over half a billion dollars in five years, close to $700 million
ouija project and think about it and it will be $1.1 billion. the further you go, the larger area it is, but it is important to understand that they grow, and important that the net outflow gross, right now we are about 2% net outflows. and this will be increasing. in five years it will be closer to 2.5, and potentially they will be closer to three and four , we will be -- it is an aging funds and it is important for us to plan for that. what other notes that i would like to make on this slide is this net outflow is not gradual.
>> or risk or other things if you scholarship one vintage year or will feel that the managers that that perform in a particular markets are not there yet or feel uncomfortable, that can impair all the hard work that our investment team is doing day after day and month after month. improving, now hundreds recommendations that we bring in front of you. >> we've attempted to show even in the most severe stress is we have plenty of liquidity. we have one and a half billion
net outflows for private markets and $500 million for benefit payments but that 1.5 is anchored in that point in time. those numbers turn positive years in the next two presentations. that is partially offset by rising net-cash outflows for benefit payment that's we know is 500 and good visibility, it will be 700 million in five years and a billion in 10 years. as we're going to show you in the second and third presentation today, is that if we meet our return objectives for the private markets, the cash inflows from private markets net of capital being called by managers, should
equalize our net benefit payments even when they climb in 2028. >> let me walk you briefly through the two sets of graphs on this page. what we attempted to do here is look at the data that we have for private equity portfolio. this is our private equity portfolio parted in 1987. over the course of 32 years, this generated $4.5 million of health. so $4.5 billion of wealth, how do we define wealth or what cambridge calls value creation. the total value, which is a market value of the private
investment, plus the distributions we received from our managers minus we we paid or called by our managers. so, that wase that was valued. so, on the graph on the left, we will see the percentage of the funds and we invested in 500 funds, you will see if we -- the distributions were equal, if we equal percentage of wealth, or depreciation, from each fund, then we would be looking at the orange line that is 25% of managers, distribution of wealth. that's not what we see. we see that 25% of managers
generated over 65% of wasn't. that is the data from our portfolio. on the right, similar analysis and you will see that if we assume -- that each vintage equally adds to the wealth accumulation then 25% of vintages would have generated 25% of returns. that's not what we see. the analysis here as 28 years of vintages and i didn't include the younger vintages, but you will see that 25% of vintages or years that investment in january that's 60% of wealth. so, as a result, the conclusion is that if one or two vintage years can drive the performance of the entire private equity portfolio and that's why it's so important for us to understand
what is our commitment? and talk about it now and what does it do? what's the right commitment to private investments where there's market dislocation and it has a result on the over all allocation. with that, i will turn it over to david. >> this is now moving on to item number 8. can we call number eight? >> discussion item. >> very good. this is the first of two and this is tory cove in cambridge.
>> if you looked at the investment council data surrounding public pension plans , your system has consistently been in the top ten of all public pension plans, and that is a sample size of over 600. that has also helped you achieve , essentially, a top performing public pension plan of your size for the last several years, if you look at the multiple times that exist with that have been reported, your public pension plan is number 1, and in essence, that is because private credit, private equity and assets have been a key contributor to performance, so i think your team is qualified, and under
bill and tania you have done a terrific job executing. i wanted to spend some time talking to you about a stress test analysis, and we will inundate you with data, i apologize for that, but i will share with you some of our takeaways. as it relates this to pacing, on slide three, we have a summary. we believe a billion-dollar target for your private equity portfolio, we believe $800 million for the private credit portfolio, a billion dollars for the asset portfolio. that will differ a little bit from cambridge, as it has been discussed, and i think it's because our perceptions are different, with the idea here is directionally we all believe that these are within normalized spans of where you should be investing. the second piece i wanted to spend more time with, would you
should focus on is the outcome of our stress test, and tom will drill down on the details of the stress test, but you, like many of our clients during the period of the great financial financial crisis saw total assets decline. your private equity component of your portfolio declined to 15 to 20% during that same timeframe. so the lower court aspects of private equity in general insulated you from further damage relative to your total asset decline, so private equity essentially did its job, and so the point is that you have a co- mingled set of assets all moving at different directions at different points in time, when there are periods of distress, you would have been far worse off had you -- if you had not had private equity exposure, so
it is a key element in terms of your portfolio construction. unless there's any questions, i'd like to turn it over to my colleague, tom, that can give you the detail, and feel free to interject at any point in time to ask any questions. we're here to really help you understand the profile of your system. >> thank you, david. anna and the team engaged us in the last quarter of 2018 to give us this pacing analysis and work closely with the staff here to develop this presentation, and given where we are on the market cycle, the focus was what would occur in the downturn to private equity portfolios. this is something we do with all of our clients on an annual basis, and it reflects if we -- we do each year to reflect the most current information available. there are a lot of different assumptions that go into this model including capital calls,
distribution rates, how long each fund, the life of the fund, return, the reach of the fund, et cetera, david went over the summary of our estimates from the model, but i will direct you to slide five first. this is the summary output of our pacing model, i will walk you through what the graph is showing. in the orange bars it is showing a target allocation to private equity, as you can see here, this is just the private equity portfolio not through private credit or real assets. the target is 18%. the program at right is around 18%, and what we are shown here is a projection over time of how much we expect to commit each year to maintain such an allocation around 18%. dark blue line going across the middle of the page is the focus area of the graph, that is
basically the private equity as a percentage of the total pension, so what we are showing on the green bars at the bottom, starting in 2019, was a billion dollars of commitment, and we are showing a modest growth over time to maintain that 18% allocation. the next slide back on slide six , shows the second piece of the analysis, and what the output is. this shows the capital cost and distribution as well as the net cash flow over time, as anna mentioned in previous conversations, we are expecting a positive net cash flow for the portfolio in 2019, and for the foreseeable future. this is under our base case scenario, as i mentioned, there was heavy focus on scenario testing. the next two slides are aware we got a little bit creative and building a stress test scenario,
so we have here at the base case shown in blue, which is the same stark blue line as the last couple of slides, and then the green we have a 2,000 to 2002 market cycle scenario which reflects the.com bubble. we took the historical drop in total pension and historical drop in private equity portfolio for san francisco retirement system during that time and applied it to the next three years. we did the same thing for the g.s.t. in the yellow and the yellow line. for instance, in the g.s.t. case , back in 2,007 and 2,008, 2,009, san francisco's private equity asset value went up eight %, and then dropped down 50 % in 2008, and slightly went
back up in 2009, for the pension assets that david mentioned, there was a drop of 28% in 2008. this just shows, if those same draft -- drastic scenarios were applied to the next three years, this is the outcome, and the denominator effect comes into play where you become over allocating. >> that is an important plate -- point. so what had happened to our clients during that timeframe was they were concerned about liquidity, they were fearful of the marketplace a lot of our clients commitment to private equity. it turns out that private equity is one of the asset classes that actually does best in distressed environments because the valuations sometimes create low intrinsic value, so the fact that managers are at a point in
time where markets are dislocated and for our clients that did not participate in private equity in 2009 and 2010, they actually missed out on some of the best opportunities, the best vintage years that existed in the last couple decades. >> part of our message today is that when we see things like this, because of a large loss in the portfolio, is our private equity portfolio jumps to 23 or 24%, is to not raise those commitments, remain a steady pace and ride through the market and that's one of our messages, again, two and a's point, and to david's point just now, often times the best years are right after a suppressed market, and
that we don't know what vintage years will be most fruitful. we recommend a steady stay. >> that is where you will see the second bullet point where we worked with jury cope to ask not to change the commitment pacing, and see under the gse, 2007, 2008 market cycle, what was the allocation to private equity if we continue the recommended pacing schedule, $1 billion incentive. >> david, please go on. >> moving on to slide eight, this is kind of a similar stress scenario, but this time we are looking at the net cash flow the impact it has there. as i mentioned, we applied the market cycle from the next three years, and return to our base
case assumptions thereafter while continuing the pace around a billion dollars to the private equity portfolio. >> tom it will go through the private credit assumptions and the real assets assumptions. i would say in my summary of the next several slides, the analysis is similar, and so tom will go through very quickly so as not to create too much repetition in the discussion, but let me pause there and see if you all have any questions first before we move on beyond private equity. >> okay. moving on to the private credit portfolio, obviously it is a little bit younger in its life, they are currently around 2%, and with a significant ramp up, trying to get to a target of 10% this is the same summary graph
output where we are showing a significant increase in commitment to $800 million, and then with incremental increases thereafter to reach the target of 10% around 2022. the next few slides, it is the same iteration of the private equity program where we show the net cash flow and the following two slides we show the stress test scenarios where again, the commitment stays the same as our base case assumption. lastly, moving on to the real assets, right now san francisco is slightly under its target of 17%, so we have modest increases up to a billion dollars in 2019, and then it scales over time
with 100 million-dollar increases thereafter and expected to reach their target in the next five years. this is largely a brief way of the first private equity program that i walked you through, but there are scenarios for each of the asset classes, and at the end, there is a combined portfolio, which aggregates all three of the models and shows a total commitment amount of $2.8 billion to private markets in 2019 and with expecting to reach the target allocation in the next three or four years. >> if i could summarize, in the past, your private equity program, private credit, no assets, all did what it was supposed