Loading...
G.11 #2 PARS Council Item_Grand TerraceCity of grand terrace PARS 115 Trust –OPEB Prefunding Program &Pension Rate Stabilization Program (PRSP) Investment Selection October 25,2022 Contacts Rachael Sanders,CEBS Senior Manager,Consulting (800)540-6369 x121 rsanders@pars.org City of grand terrace ▎2 Anthony Armas,CEBS Client Services Coordinator (800)540-6369 x148 aarmas@pars.org Keith Stribling,CFA Senior Portfolio Manager (949)553-2591 keith.stribling@highmarkcapital.com Pars 115 Trust Team Trust Administrator &Consultant 38 2,000+ Years of Experience Plans under (1984-2022)Administration 1,000+ Public Agency Clients $6.1B Assets under Administration 500 K+ Plan Participants Investment Manager •Investment sub-advisor to trustee U.S.Bank •Investment policy assistance •Uses open architecture •Active and passive platform options •Customized portfolios (with minimum asset level) 102 Years of Experience (1919-2021) $17.6B Assets under Management & Advisement Trustee •5th largest commercial bank and one of the nation’s largest trustees for Section 115 trusts •Safeguard plan assets •Oversight protection as plan fiduciary •Custodian of assets City of grand terrace ▎3 159 Years of Experience (1863-2022) $5.0T Assets under Administration 490+ 115 Trust Clients •Serves as record-keeper,consultant, and central point of contact •Sub-trust accounting •Coordinates all agency services •Monitors plan compliance (IRS/GASB/State Government Code) •Processes contributions/disbursements •Hands-on,dedicated support teams Subaccounts OPEB and pension assets are individually sub-accounted, and can be divided by dept., bargaining group,or cost center Financial Stability Assets in the PARS Section 115 Combination Trust can be used to address unfunded liabilities. Flexible Investing Allows separate investment strategies for OPEB and pension subaccounts. Economies-of-Scale OPEB and pension assets aggregate and reach lower fees on tiered schedule sooner – saving money! Anytime Access Trust funds are available anytime;OPEB for OPEB and pension for pension. No Set Up Cost or Minimums No set-up costs,no minimum annual contribution amounts, and no fees until assets are added. Prefund OPEB GASB 75 OPEB Reimburse agency;or Pay benefits provider Prefund Pension (PRSP)GASB 68 Pension Reimburse agency;or Pay retirement system Retiree Medical Benefits Assets can be used to: Pension Rate Stabilization Program Assets can be used to: prefund either or both General Fund City of grand terrace ▎4 PARS IRS-Approved Section 115 Trust OPEBActuarial Results Data from 2021 ACFR Measurement Date:June 30,2021 Pay-as-you-Go Discount Rate:1.92%Percent Change Prefunding Discount Rate:4.92% Total OPEB Liability (TOL) Actuarial Accrued Liability (AAL)$1,964,307 30-36%▼? Fiduciary Net Position Actuarial Value of Assets $0 --$0 Net OPEB Liability (NOL) Unfunded Actuarial Accrued Liability (UAAL) $1,964,307 30-36%▼? Service Cost for FY 2020-21 $147,070 --? Annual Benefit Payments (Pay-as-you-Go) for FY 2020-21 $62,881 --$62,881 Rule of thumb:For every one percent increase in the discount rate,the unfunded liability is lowered by 10-12%. City of grand terrace ▎5 Combined Miscellaneous Groups Valuation as of June 30,2020 Actuarial Liability $18.2 M Assets $12.6 M Unfunded Liability $5.6 M Funded Ratio 69.8% Employer Contribution Amount $667.7 K (FY 22-23) Employer Contribution Amount –Projected*$635.3 K (FY 27-28) City of grand terrace ▎6 Pension Funding Status As of June 30,2020,City of Grand Terrace’s CalPERS pension plan is funded as follows*: *Data through 2027-28 from Agency’s latest CalPERS actuarial valuation. HighMARK CAPITAL MANAGEMENT City of grand terrace ▎7 Company Profile LONGEVITY Managing assets for clients since 1919* STABILITY Investment boutique structure headquartered in San Francisco backed by global strength within MUFG Union Bank,N.A.and Mitsubishi UFJ Financial Group. TALENT 38 investment professionals 20 professionals hold the Chartered Financial Analyst ® (CFA)designation 24 years average industry experience ▪Los Angeles ▪Beverly Hills ▪Santa Barbara ▪Portland ▪Tacoma ▪Seattle ▪San Diego ▪La Jolla ▪Irvine LOCATIONS ▪San Francisco*** ASSETS UNDER MANAGEMENT AND ADVISEMENT** $17.6 billion as of 6/30/2022 Client Base Asset Class Equity $7.5 billion Fixed Income $6.0 billion Liquidity $2.7 billion Cash &Cash Equivalents $1.4 billion *Includes predecessor organizations.HighMark Capital Management,Inc.registered with the SEC as an investment adviser on August 7,1998. **Assets under management (“AUM”)include assets for which HighMark provides continuous and regular supervisory and management services.Assets under advisement (“AUA”)include assets for which HighMark provides certain investment advisory services (including,but not limited to,investment research and strategies)for client assets of its parent company,MUFG Union Bank,N.A. ***San Francisco denotes HighMark’s main office.Please refer to HighMark’s ADV for additional locations. AUM $8.8 billion AUA $8.8 billion 8 Establish:Determine your Strategic Asset Allocation Strategy Each Investment Objective reflects the associated PARS Diversified Portfolio as of 6/30/2022.A client’s portfolio construction may vary depending on the client's investment needs,objectives,and restrictions as well as the prevailing market conditions at the time of investment. Expected Standard Deviation (Volatility) Capital Appreciation Balanced Moderate Moderately ConservativeEx p e c t e d Re t u r n Efficient frontier of portfolios with varying ranges of equities and fixed income Conservative Equity Fixed Income Cash Conservative 5-20%60-95%0-20% Moderately Conservative 20-40%50-80%0-20% Moderate 40-60%40-60%0-20% Balanced 50-70%30-50%0-20% Capital Appreciation 65-85%10-30%0-20% 9 Construct Your Plan’s Portfolio:PARS Diversified Portfolios –Tactical Allocation Each Investment Objective reflects the associated PARS Diversified Portfolio as of 6/30/2022.A client’s portfolio construction may vary depending on the client's investment needs,objectives,and restrictions as well as the prevailing market conditions at the time of investment. 10 Conservative Moderately Conservative Moderate Balanced Capital Appreciation Equity 5-20%20-40%40-60%50-70%65-85% Current Tactical 14.25%28.50%47.50%57.00%71.25% Large Cap Blend 4.16%8.17%13.98%17.04%21.48% Large Cap Value 1.82%3.77%6.42%7.70%9.43% Large Cap Growth 1.59%3.30%5.63%6.76%8.25% Mid Cap Blend 1.38%2.75%4.52%5.50%6.87% Real Estate 0.50%1.05%1.77%2.00%2.00% Small Cap Value 1.23%2.26%3.73%4.44%5.17% Small Cap Growth 1.17%2.14%3.53%4.19%4.86% International 1.46%3.16%4.81%5.62%8.36% Emerging Markets 0.94%1.89%3.12%3.75%4.83% Fixed Income 60-95%50-80%40-60%30-50%10-30% Current Tactical 81.01%66.04%46.50%36.00%20.25% Short Term Bond 18.00%13.50%10.70%7.50%3.31% High Yield 1.11%1.03%1.01%0.88%0.80% Intermediate Term Bond 61.90%51.52%34.78%27.63%16.14% Cash 0-20%0-20%0-20%0-20%0-20% Current Tactical 4.74%5.46%6.00%7.00%8.50% TOTAL 100.00%100.00%100.00%100.00%100.00% PARS Investment Objectives As of April 2022 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.Each Sample Portfolio is a hypothetical portfolio only and does not reflect actual investment decisions or recommendations and does not represent actual trading or actual portfolio performance.An actual client’s portfolio construction and performance may vary depending on the client’s investment needs,objectives,restrictions,and market conditions.Asset allocation ranges and performance for each investment objective may also vary depending on the prevailing market conditions.Past performance is no indication of future results.For institutional investor use only.Data as of April 2022. *Expected Returns are based on 30-year returns for various asset classes.Please see disclosure page for additional details on Expected Return and Expected Standard Deviation. Source:Factset Equities Fixed Income Cash Conservative Moderately Conservative Moderate Balanced Capital Appreciation Equity 15.00%30.00%50.00%60.00%75.00% Large Cap Core 7.50%15.50%26.50%32.00%39.50% Mid Cap Core 1.50%3.00%5.00%6.00%7.50% Small Cap Core 2.50%4.50%7.50%9.00%10.50% Real Estate 0.50%1.00%1.75%2.00%2.00% International 2.00%4.00%6.00%7.00%10.25% Emerging Markets 1.00%2.00%3.25%4.00%5.25% Fixed Income 80.00%65.00%45.00%35.00%20.00% Short Term Bond 25.75%14.00%10.00%6.75%3.00% Intermediate Term Bond 52.25%49.25%33.50%27.00%16.00% High Yield 2.00%1.75%1.50%1.25%1.00% Cash 5.00%5.00%5.00%5.00%5.00% Expected Return 4.66%5.30%5.95%6.24%6.60% Expected Standard Deviation 3.46%5.28%8.47%10.20%12.86% 1 Disclosures 2 Each strategy represented as a Sample Portfolio is a 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 of actual investing or the impact that material economic and market factors may have on an investment adviser’s decision-making.Investors cannot invest in the Sample Portfolio and actual investment results may differ materially. An account could incur losses as well as gains.The Sample Portfolio does not reflect the deduction of advisory fees,brokerage,commissions,or any other actual client expenses,which would reduce investor returns.The sample portfolio does not always reflect the potential impact of active management,excluding those investments that are only available from an active manager.Advisory fees are described in Form ADV,Part 2A and are available upon request. A Sample Portfolio’s expected return (comprised of capital appreciation and income/dividends)is calculated the following way: 1.The expected return of each asset class in a given Sample Portfolio is determined through a combination of historical rates of returns,valuation projections,and economic expectations.Expected rates of return are provided by HighMark proprietary research which incorporates Wilshire Associates Incorporated assumptions.Expected rates of return are developed and annually reviewed by HighMark’s Asset Allocation Committee. 2.With 30-year forecasts for U.S.Treasuries,Wilshire’s ten year forecast for U.S.Treasuries is used as the assumed return for the first ten years of the 30-year period.Over the following twenty years (years 11-30),Wilshire’s ULT forecast is used as the assumed return for U.S Treasuries.The resulting combination of the assumed return on U.S. Government bonds over the two periods becomes HighMark’s 30-year forecast subject to rounding.All other taxable fixed income asset classes are derived from the expected return on U.S.Treasuries plus a credit or term premium consistent with those of the ten year forecasts. 3.With 30-year forecasts for global equity,Wilshire’s ten year forecast for global equity is used as the assumed return for the first ten years of the 30-year period.Over the following twenty years (years 11-30),Wilshire’s ULT forecast is used as the assumed return for global equities.The return on cash over this period is derived from the 10 and 30-year cash assumptions.The resulting combination of the assumed global equity returns over the two periods becomes HighMark’s 30-year forecast subject to rounding. 4.Returns reflect the reinvestment of dividends,interests,and other distributions. 5.An expected return for the Sample Portfolio is then calculated by weighting the returns for each asset class according to the exposure as determined by HighMark’s current strategic allocation. Expected returns generated are before taxes and any fees.The standard deviation for an asset class represents its possible divergence of the actual return for an asset class from its expected return.It is a statistical measure of the potential magnitude of volatility of an asset class from its expected return.The range of returns may be higher or lower than those predicted by expected standard deviation. In certain sub asset classes where Wilshire does not provide a discrete 10-year return forecast,HighMark supplements Wilshire’s 10-year expected returns with its proprietary methodology which is based on various market and economic factors some of which are described below. To obtain a full copy of the methodology please contact IMTProduct@unionbank.com. •US Equities –Expected returns at sub asset class level are determined by starting with Wilshire Broad Market 10 year forecast and interpolating into sub asset class returns by referencing Wilshire 5000 index data. •Municipal Bonds –HighMark determines expected returns by assuming there will be historical return discounts for municipal bonds relative to U.S.Treasuries. •Alternative Investments -Expected total return forecasts for alternative investments begin with the forecast for the return on cash over the respective time-horizon and adjusting for estimating the Sharpe ratio (excess return /standard deviation)of each alternative strategy based on the observed long-term performance of a representative strategy specific hedge fund peer group index. HighMark Capital Management,Inc.(HighMark),an SEC-registered investment adviser,is a wholly owned subsidiary of MUFG Union Bank,N.A.(MUB).HighMark manages institutional separate account portfolios for a wide variety of for-profit and nonprofit organizations,public agencies,and public and private retirement plans.MUB,a subsidiary of MUFG Americas Holdings Corporation,provides certain services to HighMark and is compensated for these services.Past performance does not guarantee 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 Bank deposits,are NOT guaranteed by the Bank or any Bank affiliate,and MAY lose value, including possible loss of principal. ©HighMark Capital Management,Inc.2022.All rights reserved Construct Your Plan’s Portfolio:PARS Diversified Portfolios –Active v.Passive Each Investment Objective reflects the associated PARS Diversified Portfolio as of 6/30/2022.A client’s portfolio construction may vary depending on the client's investment needs,objectives,and restrictions as well as the prevailing market conditions at the time of investment.Specific securities identified above do not represent all of the securities purchased,sold or recommended for advisory clients,and you should not assume that investments in the securities identified in this presentation were or will be profitable. HighMark Plus (Active) 13 Index Plus (Passive) Equity Ticker Fund Name Ticker Fund Name IVV iShares Core S&P 500 ETFCOFYX VGIAX Columbia Contrarian Core I3 Vanguard Growth &Income Adm IVE iShares S&P 500 Value ETFDODGXDodge&Cox Stock IVE iShares S&P 500 Value ETF HNACX Harbor Capital Appreciation Ret IVW iShares S&P 500 Growth ETF IWR VNQ IWN IWO iShares Russell Mid-Cap ETF Vanguard Real Estate ETF iShares Russell 2000 Value ETF iShares Russell 2000 Growth ETF PRUFX IWR VNQ UBVFX VBK DFALX T.Rowe Price Growth Stock I iShares Russell Mid-Cap ETF Vanguard Real Estate ETF Undiscovered Managers Behavioral Val R6 Vanguard Small-Cap Growth ETF DFA Large Cap International Portfolio Large Cap Blend Large Cap Blend Large Cap Value Large Cap Value Large Cap Growth Large Cap Growth Mid Cap Blend Real Estate Small Cap Value Small Cap Growth International International International Emerging Markets DODFX Dodge &Cox International Stock MGRDX MFS International Growth R6 HHHFX Hartford Schroders Emerging Mkts Eq F IEFA iShares Core MSCI EAFE ETF VWO Vanguard FTSE Emerging Markets ETF Fixed Income Ticker Fund Name Ticker Fund Name VFSUX Vanguard Short-Term Investment-Grade Adm VWEAX Vanguard High-Yield Corp Adm AGG iShares Core U.S. Aggregate Bond Short Term Bond High Yield Bond Intermediate Term Bond Intermediate Term Bond Intermediate Term Bond VFSUX PHIYX PTTRX PTRQX DBLFX Vanguard Short-Term Investment-Grade Adm PIMCO High Yield Instl PIMCO Total Return Instl PGIM Total Return Bond Q DoubleLine Core Fixed Income I Cash Characteristics Fund Manager Dependency Higher dependency on portfolio manager skill Opportunity to Outperform Index Opportunity to outperform index Costs Higher expense ratios due to portfolio manager skill Tracks index, thus little-to-no dependency on portfolio manager skill. Typically performs below index after fees. Lower expense ratio due to little dependency on portfolio manager skill or opportunity for outperformance. Strategy Equity (%)1 Year 3 Years 5 Years 10 Years Capital Appreciation 65-85%-14.04%5.30%6.42%8.03% Balanced 50-70%-13.63%4.28%5.51%6.90% Moderate 40-60%-12.97%3.51%4.77%6.01% Moderately Conservative 20-40%-11.85%1.82%3.24%4.32% Conservative 5-20%-10.88%0.60%2.15%3.05% HighMark Capital Management ACTIVE PORTFOLIO RETURNS As of June 30,2022 Equity (%)1 Year 3 Years 5 Years 10 Years LAIF*0%0.39%1.00%1.37%0.88% LAIF AVERAGE APPORTIONMENT RATES City of grand terrace ▎14 Past performance does not guarantee future results. *Apportionment rates illustrated reflect the average of the LAIF apportionment rates (released quarterly)over each time period; LAIF apportionment rates data source:https://www.treasurer.ca.gov/pmia-laif/historical/quarterly.asp Strategy Allocation*(%) Capital Appreciation (65-85%Equity)6.36% Balanced (50-70%Equity)26.82% Moderate (40-60%Equity)40.00% Mod.Conservative (20-40%Equity)15.45% Conservative (5-20% Equity)1.82% Other (Custom)9.55% TOTAL 100.00% OPEBStrategy Allocation –Clients HIGHMARK CAPITAL MANAGEMENT Active Platform:58%/Passive Platform:42% Capital Appreciation 6.36% Balanced 26.82% Moderate 40.00% Moderately Conservative 15.45% Conservative 1.82% Other 9.55% As of June 30,2022 City of grand terrace ▎15 *Allocations are based on agencies who have funded Strategy Allocation*(%) Capital Appreciation (65-85%Equity)5.83% Balanced (50-70%Equity)10.00% Moderate (40-60%Equity)37.50% Mod.Conservative (20-40%Equity)36.25% Conservative (5-20% Equity)4.17% Other (Custom)6.25% TOTAL 100.00% PRSP Strategy Allocation –Clients HIGHMARK CAPITAL MANAGEMENT Capital Appreciation 5.83% Balanced 10.00% Moderate 37.50% Moderately Conservative 36.25% Conservative 4.17% Other 6.25% Active Platform:54%/Passive Platform:46% As of June 30,2022 City of grand terrace ▎16 *Allocations are based on agencies who have funded