the early and new now after the figures were just updated a couple weeks ago. so we are in the process right now of updating our outreach materials based on the newly adopted figures and we will be issuing letters to pred.d.a. households in early april and we will have an informational table set up at the april on island board meeting, and tentatively planning to have a drop in session later in april where people can come in and ask questions as well on a saturday, and then the option would be available to households beginning may 1st and ending february of next year. if we've made an election at the end of february based on continued interest to extend the

window further, we went update the outreach materials and reissue them to residents, so that is our timing update, but i will take any questions that you have. >> commissioner dunlop? >> thank you, very much, madam chair. i wasn't here last weekend, so my apologies. was there a discussion last week regarding the meeting that was on the island a week before? because this kind of feeds right into that and some of the concerns of the people on the island. >> yeah, there was some discussion and supervisor haney attended last week chop chop meeting and wait in with his thoughts.

i will be meeting with him to brief him further on the transitional housing programs that are parts of the d.d.a. for both what one treasure island households and households of the villages. we'll be going over that this week. >> and moneywise, we haven't, it was promised, it's available -- >> if people choose to take the in lieu payment, then those funds are available in our budget, and their replacement housing as part of the projects that we are working on with mercy and catholic charities, in particular will be our first opportunity for replacement housing. also, at the april board meeting , naturally mentioned earlier that we will have updates on both the shares and

catholic charities buildings, but also a presentation on the first market right mac building that will be constructed. which will be the first -- which will include inclusionary affordable units that will be for sale so there will also be future information on the pre marketing opportunities and when that window will be for pre d.d.a. households for people to purchase either a market right or affordable units within the development. >> and the affordable, that is 5% of the units on why b.i.a.? >> yes. it is 5% of the figure overall. in this particular building, we'll include all of the affordable units, so this building will be more than 10% affordable.

>> i see. there was a lot of concern from people who do fit into the market right mac currently bubble fit into market right down the road just because prices have gone so high. has that been discussed, will that be discussed, there's a lot of people who are very concerned on the island. >> for the pred.d.a. households that are offered replacement housing, their rent will be tied to their current rent, so they will not see a big change in their rent for their households. >> and purchasing a certain amount of people might have been able to afford it five years ago

, we really have no idea right now is that kind of true. >> and we don't have control over the market cycle. >> we just don't have any figures from t.i. c.d. on the purchase pricing. >> maybe we can talk later about last week's meeting. i'm so sorry i missed it. >> i have some questions. from the last meeting, and i know commissioner dunlop, yes, you were absent, staff provided the outreach and it was quite impressive. we had indicated all along that it is very important and you are doing a great job out there and you need to demonstrate that because sometimes, especially when we have a new supervisor and nailed this matter now, is nearing conclusion, which

started this outreach years ago and listed a consultant to help us, and every meeting we have had a tighter regular meeting and also in the infrastructure transportation, we will be asking for updates on this. that was very informative, and i'm sure that the supervisor has one. in fact, i would think that knowledge should also be available to tenants. sometimes you can have 200 households, all it takes is one or three people. they will show up and say no, they didn't hear anything. we know it is unfair, but at least you can produce and say, this is what we have. we have all these opportunities, and we are still engaging with them. so that's going to be very important. secondly, a lot of misconception that's why when we engage the public, give the history for

treasure islands. no one on treasure island has been evicted. in fact, the truth and mercy generosity of san francisco, they set aside some of the tenants, they called them pre-d.d.a., about 200 of them, and given them generously with the benefits that we are talking about here. nobody should be entitled for anything but the city of san francisco is very important. when we go out there and we talk and we talk about a supervisor and we keep keep them up-to-date because they do not know, because the residents are doing this, and we do not explain it, even to the press and everyone. what happened is we keep passing misinformation down the line, that is not what is happening here. other things that i need to do here is that -- we need to define what we mean by caregivers, and we see all the

documents and we know it is very important when we communicate that people know the composition and the household. san francisco has a policy that is set aside and we are bound by as a sitting agency for public housing tenants. there is a lot of policy in there. we need to define that because we are still bound by that. although, these issues that i have, are we making available to the pre-d.d.a. households about housing opportunities in san francisco? they're also san francisco residents. as you see now, they have their names and everything should be in there. why? to develop. again, we have all the restrictions. if i'm looking for it, and san francisco is developing everywhere, they should also be

aware of that because there maybe a percentage that are not going to be waiting for many years more before we complete the funding and get things done. i want to make sure it is great to be treasure island and housing is in there so we let them build. there's all this opportunity in san francisco, don't put your eggs in one basket. i think we can own that. at the end of the day, they have all of these options and to utilize, to stay on the island or move out of the island based on their needs. again, i wanted to put that out there. so basically that is what we are doing here. so make available the outreach so that everybody has access to that. i think it will be very helpful

for all of us here. the staff did a great job in updating that log, and we need to continue to update that. i noticed that the outreach was to june, it precludes all of these other discussions somewhere. today we talked about that, we talked about that last week for the city. there should be another log attached to that so people can see the breadth and scope of how much time we have devoted to this particular issue than any other issue. believe me, it will happen at some points. down the line and a few months, you will read about it, and even the media are inquiring about this particular process. we better be getting all of the information to them so they understand before any misinformation is published. we will say it right here. no other comment from the

commissioners, let me ask the public. do you have any other further comments on this matter? next item on the agenda, please. >> item number 8 is discussion of future agenda items by directors. >> okay. , a couple of things. commissioners, please jump in this laundry list. we need to have a presentation on the m.t.c., an update on the bicycle bridge that is westbound that it talked about. it would be great to bring them back to the questions. i think it maybe time for an update. t.i. m.m.a., i think they need to come back. and we have a new supervisor now , and we need to re-energize the discussion all along because

2021 is the first housing on the island and we still have no results. timma issues a lot of information out there, and it maybe possible if we educate the supervisor that they should be going to the legislature. t.i. d.a. is only do compliance here, this matter was mandated by the state, again, based on the reality for treasure island, not being accessible from the bridge, and that we are going to have to buy a fairy. and the city and county of san francisco would not buy that unless there was a toll, and unless they wanted to revert back to cancel the toll and purchase a fairy. i think let's talk about that right now and we need to jump on this discussion. and issues regarding water transportation in general, i

think for 2019, tida would like to be involved in the overall discussion so we might be ringing this back for further discussions. anything as you would like to put on the agenda for consideration? okay. >> two quick things. to matt and the pole -- timma and the pole got a lot of things excited. perhaps that can be a citywide cause because it is a citywide benefits. just looking towards the future, secondly, the issue about the testing, and so if we could have some information as soon as it's available, we don't know about

treasure island, but certainly there has been some conversation about the company over hunters point. we do have some information, and certainly not before. >> thank you so much. thank you for joining us for your time. thank you to all of our guests and the staff today. this concludes the, is that correct, meeting. see you next time. thank you. [♪]

>> president stansbury: if everyone could please join us and rise for the pledge of allegiance. i pledge allegiance to the flag of the united states of america, to the republic for which it stands, one nation, under god, indivisible, with liberty and justice for all. roll call, please. >> clerk: [ roll call ].

quorum, mr. president. >> president stansbury: thank you very much. we're going to be, i guess, calling no. 3, please. >> clerk: item no. 3, action item. closed session. >> president stansbury: before we go into closed session, we'll be calling for public comment. are there any members of the public present that would like to address the commission? seeing none, i will close public comment. we'll be going into closed session and anyone that should not be here, we ask that you please leave the room. >> president stansbury: all right, why don't we go ahead and call this meeting back to order. we are coming out of closed session. is there a motion not to disclose? >> so moved. >> president stansbury: there is a motion by commissioner

driscoll. do we have a second? second by commissioner chu. any discussion? can we take this item without objection? great, item passes. thank you very much. next item, item no. 4, please. >> clerk: item 4, general public comment. >> my name's john stenson. i'm a 44-year member of our pension fund, and one of the reasons that the vast majority of pension funds are underfunded is because they are overdiversified in high-risk, alternative investments. if you want better returns, i recommend you sell all of your alternative investments and just invest in stocks, bonds, and real estate. a combination of stocks, bonds, and real estate has provided average returns for the past 100 years of 7.5% to 11%.

i would like to give you the returns for the past ten years of a simple investment, 60-40, 60% stocks, 40% bonds from three large investment companies. this one, vanguard, ten-year performance, stocks and bonds balanced. annual returns, 11.2%. t. rowe price, ten-year returns, 11.4%. fidelity balance funds ten-year returns, 12.33%. and i'd also like to point out vanguard, the management fee is less than one-quarter of a percent. ask mr. coker how much in the last ten years our pension fund is paid in management performance and consultant fees. and also ask him to project what he expects those funds are going

to charge in management and performance fees in the next ten years. so i recommend that you just stick with three investments, stocks, bonds, and real estate, and you'll outperform any investments you see on the board today in the next ten years. >> herbert reiner. one thing i noticed reading an article in a past issue of the "financial times" is john tolson, who made a heap of cash during the recession, has now been whittled down in his fortune. it went from $8.9 billion from over $30 billion, and basically what's happening is, with that remaining amount of money he has, he owes money to investors and people who have a stake in it, so he was sort of a hero of the recession, and now he's quite the reverse, so this is what can happen. also a lot of hedge funds went

belly-up, and that's not good. i mean, that should be a warning to this board. we need to have stable, reliable investments with good returns that can withstand financial storms, and usually the best of the stocks do that. so, you know, those are my comments for today. thank you. >> president stansbury: thank you. are there any other members of the public that would like to address the commission under general public comment? seeing none, we will close general public comment. item no. 5, please. >> clerk: item no. 5, action item, approval of the minutes of the february 13, 2019 meeting. >> president stansbury: are there any members of the public that would like to address the commission regarding the minutes? seeing none, we'll close public comment. is there a motion on the floor? >> i'll make a motion. >> second. >> president stansbury: a motion by commissioner casciato, seconded by commissioner bridges. any discussion? can we take this item without objection? item passes.

thank you very much. item no. 6, please. >> clerk: item no. 6, action item, consent calendar. >> president stansbury: any members of the public that would like to address the commission regarding the consent calendar? seeing none, we will close public comment. is there a motion on the floor? >> i move to approve. >> president stansbury: motion by commissioner casciato, seconded by commissioner chu. any discussion? can we take this item without objection? item passes, thank you very much. item no. 7. >> clerk: discussion item, report on investment performance for the retirement fund for the quarter ended december 31, 2018. >> very good, members, allen martin has an update for performance of the various quarters and calendar year end in december. allen, if you make comment, kirk will guide the monitor. >> given the lateness of the day, i'll try to keep this to

six pages. this is a report for 12-31. since that time, the s&p is up 9.6%, so it's recovered a lot of the loss we experienced in the fourth quarter. the numbers here end 12-31, so they include that fourth-quarter loss. that top line is your net of fee time-weighted rate of return for various periods. you can see for the three and ten-year periods, despite a very low return in 2018, you were well above your assumed rate, and for the five-year 6.98 versus 7.4. versus a 60/40 index, and this is 60% of a global equity index and 40% of a line index, line three, every period your portfolio outperformed that. for the year, for example, you were up 1.41%. i will tell you, i have scoured every data piece i can find, and

i've only found one public fund in the country that outperformed that, and it's not in the universe, so this was one of the, if not the top performing public fund in the country for the one-year period. for the five-year period, the difference between that 6.98% per year that you earned and what you would have earned had you been in a 60/40 portfolio of 2.96%, if you express that in dollars, so if you started with $12 billion and you compounded at your rate versus the lower rate, that's over $5 billion of asset that is this plan has because of the diversified portfolio. >> president stansbury: wait a second, allen, make sure i understand that. you're saying over the last five years, had we been in a 60/40 portfolio instead of invested the way we did -- >> exactly right. >> president stansbury: we would have lost how much money? >> instead of $24 billion, we would have had $19 billion.

>> president stansbury: $5 billion less? >> that is absolutely correct. >> president stansbury: thank you. >> if we look at how you did versus the median public fund, the median public fund results are on the bottom line there, so last year the median public fund lost 4% of its assets. you made 1.4%, and then if we now look at the tables down below, you also outperformed your policy index, so your policy index is what you would have earned had you simply put the money according to your policy and earned index results. the difference has been your manager selection, picking managers that outperformed an index, or the tactical position of the portfolio. if you look at the risk figures in that table to the lower right, over the three-year period, your 5.4% volatility put you in the lower 30% of funds.

so you run a fund that is relatively consistent in its return, the measure of risk adjusted performance is simply to take the return, divided by that sharp -- divided by the standard deviation, that's called the sharp ratio, and you see your sharp ratio of 1.3 would put you in the top 4% of funds in the country, so sortino ratio, named after a professor at san francisco state, measures for downside risk, top 6%. it's also interesting if you compare the three-year number to the five-year number, the five-year number you ranked in the bottom 40% with respect to risk. so the actions this board took a couple of years ago in pulling back on public equity and putting more money in absolute return and credit has also reduced the volatility of the fund. it's made you more resilient to the down draft that we just saw.

if you just read the words to the bottom left, the fund gained $398 billion in investment gains for the year, and you're ending the year at $24.1 billion. you'll see in a minute that's a little less than where you were last year, because you paid out more over the year than you took in. if you turn to the next page, page 27, this is the compliance page. the percentage column is the percentage you have of your portfolio in each asset class. next to it is the board's policy, and the policy ranges. so you can see that all your allocations are close to your long-term policy, except private credit, which is a build-up strategy. you just approved $125 million or so new assets today. that's a strategy that will grow over time, and absolute return is still a little bit below its target. all the allocations are within policy ranges, again, except

private credit, which is in an early part of its growth stage. again, fund operating in accordance to compliance. if you turn to the next page, this is what -- when people say what is de-risking, de-risking is taking assets out of asset classes that are very volatile and bounce around and moving them to asset classes that have less volatility, and that picture you can see since 2014 to 2018, your equity allocation has come down. that red is absolute return, which you've added. the little blue sliver is the private credit. that's not up to target yet, essentially you've taken them to reallocate them to asset classes that have more resilience. one of the reasons you did

decision if you took that average payout of $480 million, and divided it by the size of your portfolio, it's about 2%. so you do not have a serious

concern about liquidity. that enables you to take advantage of private markets, which are less liquid, but earn higher returns over time. the next few pages are risk return charts. i'm just going to talk about two of them. if you turn to page 30, each of the dots on that page in the upper left are one of 63 large, meaning greater than $1 billion public funds in this country, and they are plotted with return along the vertical axis and risk along the horizontal axis. that top fund in the upper left, that is you. the two funds below it are new mexico teachers and san bernardino, the next plan employee that is arizona public safety, and the state of arizona is the one with negative is 1% return. everything else on this page did significantly worse, and you can see there were plans that were

down 8%, down 7%, down 6% in that market. those are the plans that were undiversified and had all their money in equities, which just didn't do well at the end of last year. and then if you trace that across the pages, one of the things you'll notice is the green square, which is you, virtually always above the big black diamond, which is your policy. and the consequence of that means not only have you outperformed your policy in a one, three, and five-year basis, not for ten, but you've done it with less risk. so the actions of staff with respect to implementing the board actions, have not only added return to the portfolio, but they've done it while reducing risk, which is hard to do. so, again, you will never see results like this in the whole rest of your life on the board, so please enjoy them now, because you'll never have it again. with that, if we go to page 36,

a lot of data, when you look at periods ending, is heavily influenced by what happened in the most recent period. last year was a very bad year for equity, and those that withstood that downdraft, kind colored results for one, three, and five, but this page, page 37, i'm sorry, you see the result for each fiscal year. so these are separate years, and you see how you did in each and every fiscal year relative to your 7.4%. the interesting thing is san francisco in the years that were really good, 2014, for example, you're way up there in the top 3%, but in years that were less well, you also did well. top 16%, top 16%. that's very difficult to do. and so you've generally, because of the alpha in your portfolio, done good in very good markets and very bad markets, and you

see the pattern, which results in the five-year numbers to the far right, where you're in the top 1% of all public funds. if we flip to the next page, and then we'll look at a little attribution, page 38 graphs quarter by quarter how your portfolio did versus your policy, and you see it's not always a positive, but if you start in about the fourth quarter of 2015, you can see that line gradually going upwards. you're getting more and more consistent outperformance versus policy through that period. much of which has to do with the performance of your private market portfolios. there are several attribution pages that break down that outperformance, but in the interest of time, let's go to the five-year chart on page 43. so for five years, you outperformed your policy by 88

basis points. we're now going to break it down to where did that come from, why did you do better than your policy. negative 20 basis points was allocation effect, meaning you were overweight u.s. equity and that helped you in this five-year period. you were underweight absolute return. that helped you. cash, you were overweight, that hurt you. so when you added those all up, negative 20% by tactical allocation. you want that number to be small. if your cio rebalanced the portfolio at the end of each month, the policy, which would be expensive, that number would be zero. so that number happens because your overweight equity relative to equity targets, the market moves you and you choose to either keep it or not keep it, but that number in this case is small and negative. if we looked at the one-year number, it was small and positive. that leaves the manager selection effect, which is probably the more controllable effect, over 1% a year coming

from managers outperforming their policies. and you see that in real assets, private equity, fixed income and private credit, global equity, all of which were big contributors. i will say in private markets, the benchmarks are not investable, so your target for private equity, for example, is public markets plus three. there are times when that's really hard to beat. there are times when it's easier to beat, but over a cycle you can see that your private equity portfolio has added quite a bit, as has real assets and fixed income. the remaining charts in this package look at the detailed risk return by asset class. i was just going to give you a summary, and then if you want to look at asset classes, your total fund results were outstanding. managers selection and tactical positioning have a contributed significantly to a policy which led to de-risking at the most opportune time you could have picked it.

you know, that's luck. if the markets hadn't crashed, we wouldn't have looked as good, but you built a portfolio that was designed to withstand a downdraft, and we hadn't had one for seven years, but when we finally had one, your portfolio was much better positioned than it was previously, and looking forward, the markets we see going forward are sort of 6%, 7% equity markets, not very attractive, so we think your portfolio currently is better positioned for the future than it has been really for the last seven years when you had a roaring bull market. manager selection has contributed over 1% per year. that's important. that extra 1% or 2% is the difference between making your assumed rate and not making it, so added value through manager selection.

u.s. equity marks improve over this period. if you went through the absolution, you know you've made several changes to that portfolio. the five major results are in the top quartile to the top half of your peer group before and after risk adjustment. your five-year public equity, private equity results are in the top 16% of your peer group, and your real assets are in the top 1% of your peer group, so your private markets, which you've been doing for a long time have been doing very well. there's no significant change in the six managers that are under review for performance, but you've actually, depending upon what happens today, will have terminated three of the nine underperforming managers i'll stop there. i'll be happy to go into individual manager results.

>> president stansbury: questions from the board? >> i've never seen consistency like this, where you've had an up and down market. that's the tricky part, is you changed strategies right before the bad things happened and your new structure is much more resilient to those downturns than your old one was. >> i, for one, hope next year you come back and tell us you've never seen that again. >> president stansbury: i see commissioner driscoll has a question. >> commissioner driscoll: asset return number on the five-year chart shouldn't be there, because we weren't doing it then. negative numbers, assume we're doing something wrong. >> i will say, joe, for the absolute, one year you underperformed for absolute returns. your benchmark for absolute

return is a high pefbenchmark. >> commissioner driscoll: two, thank you for the feel-good talk. >> wasn't intended to be feel good. >> commissioner driscoll: more smiles up here maybe than usual. my point being, our objective really is not to be, number one, amongst our peers. first objective is the assumed rate of return, which you talked on. we didn't hit that. >> for the year you didn't. >> commissioner driscoll: that's the point. thanks for making us feel good, but we have to figure out how to do better, which staff is knock their lights out day in and day out, sector, manager select. just want to let you know, thank you, but we have more to do. >> joe, i do -- that is absolutely right. our primary goal is to generate a sufficient return to amortize the liabilities, that's 7.4%. you didn't make that in the year, but in the five and ten years you have, and nobody made it for the year. the good news is by the fact that you're up for the six months, if we get the kind of

recovery in the market, you still have a shot at 7% this year. nobody else does, but you're right, the markets have to help us. >> commissioner driscoll: reason i'm doing this, is we need that honest fact, so when we go to the mayor's office, who controls our office to prove to them, this is what we do with the money you approve for us. they are watching numbers as well as you do, but that's why we need support from them, to do better, which means more personnel. our key people are our personnel. i'm not just poking on the investment staff, but they are the ones in the issue of making money for us. so the service side has been stepping up, as well. thank you, allen. >> president stansbury: other questions from the board? allen, just very briefly, looks like we're going to wrap this up. can you just highlight for us again the changes that we made that have affected our returns? >> i think the easiest page to look at, brian, is that page -- number 28.

so you can see there, that red is absolute return. zero in 2018, target is 15%, you're close to being there. the very blue sliver is private debt, target 10%. you're only at 3% now, but again, it's done extraordinarily well. so those were the two significant changes with respect to asset allocation, both of which were de-risking, and both of which held up in that down market. the result of those two going up, this has to total 100, so you see the equity market exposure's going down rather dramatically here. so it's that combination of funding things that were less risky by drawing down the riskiest asset class you have. >> president stansbury: you're saying that by us investing in what people call hedge funds,

absolute return, has positively impacted our investment returns? >> absolutely, over this period. >> president stansbury: had we not done that, we would have earned less money. >> correct. >> president stansbury: thank you. anything else from the board? seeing nothing, why don't we open up to public comment. are there any members of the public that would like to address the commission regarding this item? >> i hope you made note of the fact that your investment consultant cherry picked the returns of a 60/40 return. you note he only gave you one of five years. did you ask him what ten years was? i gave you what the ten years was. >> ten years is on there. >> the vanguard was 11.2%, with one-quarter of a percent management fee. look at that portfolio there. ask him what the management fee is going to be on that, and there's a good possibility in the next 18 months we're going to have a global recession. if we have a global recession, the best investment would be 40%

stocks, 40% bonds, and 20% cash. why do you think berkshire hathaway, $110 billion in cash? no, because you note the stock market is in a recession, usually drops more than 35%. global recession probably even more. anyhow, 40-40-20 with allocation in the global recession. >> president stansbury: thank you very much. are there any other members of the public that would like to address the commission regarding this item? seeing none, we'll close public comment. thank you very much for the report. next item, please. >> clerk: 8, discussion item, risk management: strategic asset allocation review. >> very good, board members, while anna makes her way to the table, we have reconstituted the risk package that had been planned for the ics to do this

over the next three board meetings. the first will be today on strategic asset allocation, the second will be on liquidity and pacing and cash flow. that's going to be a very interesting tables for the board to see. there's a very interesting graph in terms of the cash flow impact expected over the long term in the private market. third will be risk exposures for plan as a whole, as well as by asset classes. it looks like i have the first page. >> introduce a little bit -- >> go ahead. >> good afternoon, commissioners. as bill mentioned, we will start, this is one of the three risk management and asset allocation reviews. we'll start today with an asset

allocation review, move on with liquidity framework and proceed, this will be in april, and in may we'll review the risk of the total plan, exposures, and each asset class. i'd also like to acknowledge the slides we're sharing here, every asset class contributed to risk management, and the risk management is part of the investment process, and as a result, i can easily say what you're saying has been reviewed and every staff member contributed to one, at least one slide or one number here. it's a good way to start. you'll see on page 2 two tables. the first one is very familiar. it's the actual asset that we

allocate to and we have capital receptions around and as well as the global macro groupings for those, that we expect growth from public equity and private equity. we expect diversification and allen talked about those, from real assets and absolute returns and we expect income and capital innovations. and i'd like to spend a little bit of time, and it comes from bill and it's important to spend some time to see how we think in terms of where the risks and returns are for each asset class that we allocate to. it's worth remembering that the asset allocation decision is one of the most important investment decisions there is. multiple research shows that over 90% of volatility of the returns comes from asset

allocation decisions, and asset allocation decisions starts by outlining our expectations for each of the asset class, and that's why i would say we start with bill's view and our cio view and our investment staff view of expectations of each asset class. for example, we talked about the public equity and private equity. we expect very high returns. we also know that it comes with low diversification and high beta. we know that we do expect higher and we're fortunate to deliver higher private equity. in absolute return, we don't expect that long high returns, but in absolute returns or hedge fund allocation, but we expect low data, and we look for that, we monitor for that.

we also expect high diversification. so this is the very core slide for the asset allocation. >> president stansbury: sure, just a couple quick things here. the top part of the matrix, we think about asset allocation across growth assets, diversifying in income generating. now, each of these do have different traits. for example, in real assets, we pursue our real assets program much more for return seeking than we do for, say, inflation protection. so that would be more like a growth asset. comparatively, absolute return is very, very different than real assets. the beta for real assets is moderate, but the beta for absolute return is really quite low. and then even on income generating, the traits here are

very different. one is ill liquid, private credit, the other is liquid, and one has a pretty good return and pretty good yield in private credit and public bonds currently have low of both. the bottom part of the matrix helps to explain what the contributions of each asset class are in a total portfolio context. for example, if we only had public equity, we'd probably have good returns, but we'd have a ton of volatility and a periodic catastrophic loss. if we had only private equity, we'd have really good returns, but we couldn't really pay benefits, because that's locked-up capital for a long period of time. and so you see each contribution for each asset class.

each asset class has a very important trait in putting together total portfolio management and historic management. okay, we can go on. >> and move on, one minute on page 3, this is the outline of our target policy portfolio, but also the allowable ranges that we monitor and the benchmarks for each asset classes. one distinction between the previous slide and this slide is the allocation to fixed income. here we broke down the fixed income into treasury and liquid credit. we have specified 6% allocation, 6% of total plan. $1.5 billion in u.s. intermediate treasuries, managed accounts in short-term u.s.

bonds and notes. this is at the core of our liquidity management, our tailored management. it is one of the constraining parts, as we will talk about the efficiency, which defines the highest possible return for the level of risk, but this is one of the core of the stressed management or stressed risk management. we also have zero allocation to cash. we always have cash needs. we have a program to address that. >> president stansbury: anna, can i just comment on that, the treasury at 6% or $1.5 billion, you've heard us talk about our net cash outflow every year is about $500 million for benefit payments. so what that means is that we have three years, really, of dedicated cash available in treasuries to pay planned

benefits to ride out market volatility. >> so far we have not touched it. that's why we say this is our protection. there's no if there. there's questions about the risk and protections, this is at the core of our risk management, 6% of the total plan, $1.5 billion intermediate treasury, so we don't take a lot of duration risk or interest rate risk there either. >> this is new. and it's part of our asset allocation as of, what, i guess it was october 2016. so, no, this is new. the other parts of our portfolio were either pursuing, like, high beta and also high access returns, private equity, public

equity. other parts of our portfolio were pursuing low beta, but very good alpha returns, absolute return. private credit we're pursuing pretty good returns, but it's ill liquid, okay, so one part of our portfolio that we do not pursue alpha is in treasuries. we want that money to be very liquid and to be able to it's really to be paid planned benefits and a provider of capital in case there's a market accident. >> that's the recent change, and we reduced all credit risks. over the last year, yes. moving on, page 4, this is the review of target versus target allocation versus where we are now, and what we've done here, we actually worked with every

asset class and defined what is the right risk return characteristics, for example, for real assets. we looked into, okay, what's the allocation to real estate core versus opportunistic, what is the natural resources, how it's distributed, so that the expectations on the risk is commensurate to our holdings and our -- what we have in our portfolio, not general benchmarks that we talked about. and we have a way to estimate it. this is called active risk. versus the policy, and it's estimated at 70.66, so we're very close and i would estimate it's much closer now. moving on, page 5. that's one of the core slides that compares the allocation of capital versus allocation of

risk. so on the left you have the same policy allocation of capital, and on the right upper hand side you have the contributions of risk if we allocate that capital. as expected, we see that the contributions of risk, to risk, from growth equity, public equity, and private equity, from growth assets is higher than their capital allocation. so public equity, while we have target allocation 31, it will be 44% of risk. and private equity also 18% allocation in capital, 24% contribution to risk. worthwhile noting, while there is the absolute return, we have 15% allocation of capital. it's 8% contribution to risk.

so diversifying, and treasury actually contributes negatively, because they are fully diversified. >> president stansbury: these two on the top of page 5, to me, are two of the most important tables. they distinguish between an asset allocation in dollars for policy, versus total risk management, how that allocation impacts risk. so the right side of the chart, in my view, is considerably more important and impactful than the left side of the chart. >> and we always look at the interplay. the other things that i like to highlight on page 5 is on the bottom right, the black bar, 12%, we'll talk about this number later on. so we expect the annual

volatility of the plan to be 12%. that's considerable amount of risk. you could think about it, this is the risk that is exercised, effectively by adopting the strategic asset allocation, the policy that we present on the upper left side. we set the risk appetite at 12% annualized level. quickly on page 6, risk comes from growth assets over 67% of growth assets. i'll skip page 7. it's similar analysis, but with the current allocation. i'll talk about, quickly, pages 8 and 9. what we've done here, we are trying to see what are the core

risk factors. we always are looking into largest contribution of risk from different angles, so that we understand the strategic tilts and we also monitor the unexpected tilts in our portfolio. and we have strategic allocation to global equity. we want to make sure that with our risk appetite, we participate in global growth and consider -- so considerable part of risk is taken by equity growth. we also like to monitor exposure to rates and credit and currency and understand where it's coming from. so on page 9, we ran a four-factor analysis on the existing returns, monthly returns of the fund, and we found very considerables, the

93% of the volatility of returns are explained by these four factors. so we looked at it, historically we look at the current snapshot, as well. and a lot of the currency comes from unhedged exposures in equity, as well. so these are two related. moving on, to dissect a little bit the returns, what we're looking at on page 10 is the histogram of actual returns, annual returns of fiscal years. so there's 32 data points from 1986 to 2018, fiscal year returns. the ones that we experienced. the histogram, the gray bars, the histogram, the green line shows the expected normal

distributions. if we set the median, the expected average, the expected return of 7%, and we use the 12% standard deviation, this is your bell curve. then about one-sixth of the time, one of the six years, you should expect to underperform, let the performance of the fund to be -5%. so we do expect the tail. we see that we did experience enough of tail, left tail events, but within the normal distribution. >> can i comment on this real quick? so if you see here, only one time have we lost more than 10%. of course, that was the gfc, more than 20. yeah, that's on the next -- yeah. only four times in 33 years have

we lost money at all. and, indeed, if we were to show this another way, 21 of these 33 years we've actually made double-digit returns. if we could go back to the previous chart for a second, you'll see here that compared to a normal distribution, again, the green bell-shaped curve is returns if returns had been normally distributed, you would have expected us to have lost money almost seven times in 33 years, but we've lost money only four of these 33 years. that's good. >> which loss, versus zero or the assumed rate? >> versus zero. >> but assuming 7% average.