New Jersey Division of Investmentliberty.state.nj.us/.../Directorreportmarch2017.pdf · (1) Pension Fund return excludes Police and Fire Mortgage Program * Benchmark return not available

NEW JERSEY DIVISION OF

INVESTMENT

Director’s Report

March 29, 2017

State Investment Council Meeting

“The mission of the New Jersey Division of Investment is to achieve the best

possible return at an acceptable level of risk using the highest fiduciary

standards.”

Agenda Item 3a

2Source: Bloomberg

Calendar Year 2014 Equity Market Returns Calendar Year 2014 U.S. Treasury Yields

2

Fiscal Year 2016 Equity Market Returns Fiscal Year 2016 U.S. Treasury Yields

Capital Markets Update (through February 28, 2017)

2.29

1.47

1.00

0.58

1.26

3.00

1.93

2.39

February 28, 2017 MTD % CYTD% FYTD % 1 Yr % 3 Yrs % 5 Yrs % 10 Yrs %

Domestic S&P 500 3.97 5.94 14.22 24.97 10.63 14.00 7.62 1

Equity Russell 2000 1.93 2.33 21.42 36.08 6.92 12.89 7.21 2

International MSCI EAFE 1.43 4.37 10.30 15.75 (0.62) 5.16 1.03 3

Equity MSCI EMF 3.06 8.70 13.58 29.46 1.35 (0.37) 2.86 4

Barclays Agg 0.67 0.87 (1.68) 1.42 2.64 2.24 4.28 5

Barclays HY 1.46 2.93 10.55 21.83 4.72 6.84 7.49 6

Barclays US Tips 0.47 1.31 (0.17) 3.36 1.89 0.77 4.27 7

Commodity Bloomberg 0.17 0.26 (1.24) 15.53 (13.16) (9.93) (6.46) 8

Real Estate Bloomberg REIT 4.10 4.31 0.34 18.49 11.48 11.77 4.82 9

Hedge Funds HFRI Composite Index* 1.02 2.23 6.54 10.73 2.68 3.97 3.40 10

*Preliminary

Bond

(1) Pension Fund return excludes Police and Fire Mortgage Program

*Benchmark return not available for 20 and 25-Year period

Total Fund(1) Performance for Periods Ended February 28, 2017

**1.90

3.61

8.62

15.26

5.75

7.87

5.65

7.06

8.00

1.65

3.11

8.62

15.42

5.58

7.11

4.81

0.25 0.50

0.01 (0.16) 0.17

0.76 0.84

(2.00)

-

2.00

4.00

6.00

8.00

10.00

12.00

14.00

16.00

18.00

1 Month CYTD FYTD 1 Year 3 Year 5 Year 10 Year 20 Year 25 Year

Total Fund Benchmark* Difference

3

Asset Class Returns through February 28, 2017 4

0.82%

2.63%

2.00% 2.11%2.66%

0.55%

2.26%

3.43% 3.21% 3.16%

0.00%

1.00%

2.00%

3.00%

4.00%

YTD FYTD 1 Year 3 Year 5 Year

Risk Mitigation

Portfolio Benchmark

0.61%

-1.40%

0.03%

0.50% 0.59%0.31%

-0.91%

0.27%

1.80%

0.40%

-2.00%

-1.00%

0.00%

1.00%

2.00%


Liquidity

Portfolio Benchmark

2.09%

4.64%

10.39%

5.02% 6.09%

1.73%5.31%

12.43%

3.84% 4.48%

0.00%

5.00%

10.00%

15.00%


Income

Portfolio Benchmark

1.53%3.53%

11.28%

7.57% 7.61%

0%

5.46%7.16%

4.27%

5.94%

0.00%

5.00%

10.00%

15.00%


Real Return

Portfolio Benchmark

5.06%

12.61%

21.16%

6.79%

9.84%

4.79%

12.36%

21.12%

6.95% 9.25%

0.00%

5.00%

10.00%

15.00%

20.00%

25.00%


Global Growth

Portfolio Benchmark

1 Current assets are based on preliminary values and do not include receivables of $308 million primarily related to Real Estate secondary sale2 Unaudited and based on preliminary market values3 Total Fund Performance excludes Police & Fire Mortgage Program

5

Asset Class Mkt Value Actual (%) Target (%) Difference NJ Bench NJ Bench NJ Bench NJ Bench Long Term CMA

RISK MITIGATION

Absolute Return HFs 3,091 4.32% 5.00% -0.68% 0.82% 0.55% 2.63% 2.26% 2.00% 3.43% 2.11% 3.21% 5.39%Risk Mitigation Hedging 191 0.27% 0.00% 0.27%

TOTAL RISK MITIGATION 3,282 4.58% 5.00% -0.42% 0.82% 0.55% 2.63% 2.26% 2.00% 3.43% 2.11% 3.21%

LIQUIDITY

Cash Eqv 2,945 4.11% 5.50% -1.39% 0.21% 0.09% 0.77% 0.27% 1.29% 0.39% 1.04% 0.16% 1.00%Short Term 606 0.85% 0.00% 0.85% 0.26% 0.09% 0.75% 0.27% 1.57% 0.39% 0.58% 0.16%TIPS 454 0.63% 0.00% 0.63% 1.58% 0.72% -1.02% -2.73% 1.97% 0.88% 0.80% 2.10%US Treasuries 1,306 1.82% 3.00% -1.18% 0.94% 0.72% -5.30% -3.42% -3.43% -1.24% 0.78% 2.46% 1.73%

TOTAL LIQUIDITY 5,311 7.41% 8.50% -1.09% 0.61% 0.31% -1.40% -0.91% 0.03% 0.27% 0.50% 1.80%

INCOME

Investment Grade Credit 6,397 8.93% 10.00% -1.07% 1.14% 1.15% -0.84% -0.89% 4.14% 5.15% 3.53% 3.16% 3.54%Public High Yield 1,592 2.22% 2.50% -0.28% 3.10% 2.93% 10.30% 10.55% 19.42% 21.83% 5.06% 4.73% 6.49%Global Diversified Credit 3,218 4.49% 5.00% -0.51% 3.22% 2.93% 11.06% 10.55% 17.96% 21.83% 9.37% 4.73% 6.80%Credit-Oriented HFs 2,073 2.89% 1.00% 1.89% 3.19% 3.81% 9.20% 11.83% 14.94% 18.87% 4.27% 2.68% 6.38%Debt-Related PE 705 0.98% 2.00% -1.02% 0.84% 0.37% 5.09% 13.49% 8.40% 15.51% 7.18% 7.37% 9.29%Debt Related Real Estate 438 0.61% 1.00% -0.39% 0.50% -3.35% -2.18% 1.02% -0.15% 1.59% 3.83% 6.41% 6.00%

TOTAL INCOME 14,422 20.13% 21.50% -1.37% 2.09% 1.73% 4.64% 5.31% 10.39% 12.43% 5.02% 3.84%

REAL RETURN

Commodities 263 0.37% 0.00% 0.37% 3.28% 0.35% -0.32% -0.97% 13.65% 15.96% 4.28%Private Real Assets 1,755 2.45% 2.50% -0.05% -0.31% 0.00% 6.46% 11.40% 9.04% -0.78% 9.56%Equity Related Real Estate 3,869 5.40% 6.25% -0.85% 2.24% 0.00% 2.69% 3.77% 11.70% 9.08% 12.64% 11.42% 8.09%

TOTAL REAL RETURN 5,887 8.22% 8.75% -0.53% 1.53% 0.00% 3.53% 5.46% 11.28% 7.16% 7.57% 4.27%

GLOBAL GROWTH

US Equity 21,759 30.38% 30.00% 0.38% 6.28% 5.66% 16.59% 14.61% 27.62% 25.77% 9.36% 10.51% 6.80%Non-US Dev Market Eq 7,846 10.95% 11.50% -0.55% 4.57% 4.26% 9.52% 10.34% 16.06% 16.55% -0.39% -0.53% 7.28%Emerging Market Eq 4,370 6.10% 6.50% -0.40% 8.67% 8.84% 13.06% 13.54% 29.66% 29.38% 0.76% 1.60% 8.60%Buyouts/Venture Cap 6,820 9.52% 8.25% 1.27% 0.26% 0.00% 4.26% 6.58% 8.99% 7.35% 15.38% 10.31% 10.08%Equity-Oriented HFs 1,470 2.05% 0.00% 2.05% 2.49% 2.50% 11.03% 9.06% 8.79% 14.61% 1.82% 4.70% 7.79%

TOTAL GLOBAL GROWTH 42,265 59.00% 56.25% 2.75% 5.06% 4.79% 12.61% 12.36% 21.16% 21.12% 6.79% 6.95%

OTHER

OPPORTUNISTIC PE 288 0.40% 2.58% 5.60% 6.42%OTHER 178 0.25%

TOTAL FUND(3) 71,633 100.00% 3.61% 3.11% 8.62% 8.62% 15.26% 15.42% 5.75% 5.58%

S&P 500

Russell 2000

MSCI EAFE

MSCI EMF

Barclays Agg

Barclays HY

Bloomberg Commodities

Bloomberg REIT

HFRI 2.23%

PERFORMANCE (for periods ending February 28, 2017)(2)

5.94%

2.33%

10.73%6.54%

18.49%0.34%

15.53%-1.24%

4.37%

8.70%

0.87%

2.93%

0.26%

4.31%

ASSET ALLOCATION (1)

14.22% 24.97% 10.63%

21.42% 36.08% 6.92%

Trailing Three YearsTrailing Twelve MonthsFYTDCalendar YTDAs of February 28, 2017

2.68%

-13.16%

11.48%

10.30% 15.75% -0.62%

13.58% 29.46% 1.35%

-1.68% 1.42% 2.64%

10.55% 21.83% 4.72%

-0.17%

2.58%2.70%

-0.13%

-1.13%

-0.22%-0.12%

-0.27%

-0.53%

0.04%

-0.03%

-0.32%

-0.10% -0.07%

0.08% 0.08% 0.11%

-0.05%

-1.09%

-1.50%

-1.00%

-0.50%

0.00%

0.50%

1.00%

1.50%

2.00%

2.50%

3.00%

Absolu

te R

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UID

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Ca

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US

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INC

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Hig

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Fix

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Glo

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Private

Real A

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Equity R

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The increased cash position resulted primarily from $1 billion in hedge fund redemptions, as well

as net sales within global equities as valuations expanded.

Pension Fund Update: Change in Sector Allocation from December 31, 2016 – February 28, 2017

Allocation to Liquidity moved

more in line with Policy

Benchmark (7.4% vs 8.5%).

Pension contributions and

further HF redemptions

are expected to further increase

the allocation to cash.

Modest Underweight to Real

Return (8.2% vs 8.75%);

Within Real Return, pacing

analysis suggests Equity Related

Real Estate (5.4% vs 6.25%) will

move more in line with targeted

allocation over time.

Overweight allocation to Global

Growth (59.0% vs 56.25%) reflects

strong equity market returns

somewhat offset by net sales in an

environment increasingly

characterized by higher valuations.

Allocation to Income is modestly

below target (20.1% vs 21.5%);

Within Income, allocation to IG

Credit (8.9% vs 10%) tempered by

tighter spreads.

Over the past two months, the

U.S. equity portfolio realized

strong returns (+6.3%). The Fund

took advantage of higher

valuations and maintained a

largely unchanged allocation via

net sales of $550 million.

Net sales of public equities and

redemptions from hedge fund strategies

increased the overall allocation to cash in

the midst of a move to higher financial

market valuations.

The allocation to Credit-Oriented

HF declined by 0.5% following

redemptions of $130 million.

Allocation to

Absolute Return

HF is modestly

below target

(4.6% vs 5.0%).

Risk Mitigation Liquidity Income Real Return Global Growth

The Emerging

Market Equity

portfolio was the

best performing

asset class over

the past two

months, up

+8.7%. Net sales

of $150 million

kept the allocation

at 6%.

The allocation

to Equity-

Oriented HF

declined by

1.1% following

redemptions of

$900 million.

6

Hedge Fund Redemption Update

The chart below shows the progress to date towards the target allocation of 6% to

hedge fund strategies. The allocation has been reduced from 11.2% in September

2016 to 9% as of the end of February 2017. Based on projected cash flows, the

allocation is expected to be 8.6% by the end the fiscal year and 7.4% by the end of

the calendar year.

* Jun-17 and Dec-17 projections are based on expected cash flows and do not take into account future performance for hedge funds or the Total Fund

7

0.00%

2.00%

4.00%

6.00%

8.00%

10.00%

12.00%

Aug-16 Sep-16 Oct-16 Nov-16 Dec-16 Jan-17 Feb-17 Jun-17 (Projected) Dec-17(Projected)

New Jersey Hedge Fund Allocation

Absolute Return Hedge Funds Credit-Oriented Hedge Funds Equity-Oriented Hedge Funds

Pension Fund Attribution vs. Benchmark

Fiscal Year through February 28th, 2017

Allocation Effect indicates the effect of asset allocation overweights or underweights vs. the target allocations

Performance by Asset ClassFiscal Year to Date through February 28th, 2017

Contribution

to Pension Fund

Excess Return By

Asset Class

Basis Points

8

The Total Pension Fund is in line with the Policy

Benchmark return

Allocation Effect, -2

Other, 6

Global Growth, 23

Real Return, -17

Income, -15

Liquidity , 0

Risk Mitigation, 5

-20 -15 -10 -5 0 5 10 15 20 25 30 35 40

8.62

12.36

5.46

5.31

(0.91)

2.26

8.62

12.61

3.53

4.64

(1.40)

2.63

(4.00) (2.00) - 2.00 4.00 6.00 8.00 10.00 12.00 14.00

Total Pension Fund Policy Benchmark

Policy Benchmark

Risk Mitigation

Global Growth

Real Return

Income

Liquidity

Total Pension Fund

9

Since the U.S. elections, equities have outperformed fixed income, U.S. equities have outperformed non-U.S. equities,

small caps have outperformed large caps, and developed markets have outperformed emerging markets. While returns

have remained favorable during the first quarter of 2017, global equities have outperformed U.S. equities, large caps

have outperformed small caps, and emerging markets have outperformed developed markets.

Nov 7, 2016 –

Dec 31, 2016

Global Equity Markets Have Performed Well Since the U.S. Elections

Dec 31, 2016 –

Mar 23, 2017

Nov 7, 2016 –

Mar 23, 2017

U.S. Elections

thru YE 16YTD thru

Mar 23

Total Returns since

U.S. Elections

Total Returns (%) in US$

Source: Bloomberg

Global Equities (ACWI) 3.32 6.46 10.00

U.S. Large Cap (S&P 500) 5.42 5.29 11.00

U.S. Small Cap (Russell 2000) 14.13 -0.01 14.13

Non-U.S. Developed Mkts (EAFE) 2.44 6.96 9.56

Emerging Markets (MSCI EM) -3.31 12.49 8.77

U.S. Fixed Income (U.S. Aggregate) -2.26 0.64 -1.63

Commodities (Bloomberg Commodities Index) 4.40 -3.34 0.91

U.S. Dollar (Bloomberg Trade-Weighted) 5.65 -3.70 1.74

10

Financial Market Returns Have Been Supported By More Favorable Economic Data and Sentiment

Source: Bloomberg

50

52

54

56

58

60

62

Mar-14 Sep-14 Mar-15 Sep-15 Mar-16 Sep-16

Com

posite P

urc

hasin

g M

grs

Index

US Europe

-100

-80

-60

-40

-20

0

20

40

60

80

Feb-13 Feb-14 Feb-15 Feb-16 Feb-17

Citi E

conom

ic S

urp

rise I

ndex

US Europe

PMI Suggests Further Economic Expansion

U.S. and European PMI have both remained

in expansionary territory over the past two

years, with European expansion appearing

to accelerate more recently

Economic Data Has Surprised to the Upside

U.S. and European economic data have been beating estimates

Better than expected economic data and more favorable trends in measures of

consumer and business sentiment have led to strong global equity market returns

60

70

80

90

100

110

120

80

90

100

110

120

130

Feb-07 Feb-08 Feb-09 Feb-10 Feb-11 Feb-12 Feb-13 Feb-14 Feb-15 Feb-16 Feb-17

Eu

rop

ean

Co

mm

issio

n E

co

no

mic

Sen

tiM

en

t In

dic

ato

r

Co

nfe

ren

ce B

oard

Lead

ing

Eco

no

mic

In

dex (

U.S

.)

US (LHS) Europe (RHS)

Leading Economic Indicators Have Improved

In the US, the Conf Board’s LEI measure is at its highest

level of the past decade, while the EU’s SentiMent

Indicator reached its highest level since 2011.

Stronger than expected economic data and improving

consumer and business sentiment have buoyed year-

to-date global equity returns of 7%. The Economic

Surprise Index and PMI Surveys suggest the near-

term economic momentum in Europe is somewhat

stronger relative to the U.S., albeit from a lower base.

In the meantime, the Conference Board’s Leading

Economic Indicators (LEI) Index reached its highest

level in more than a decade in the U.S. in February.

11

U.S. equities have meaningfully outperformed the global equity market over the past decade.

Valuations for U.S. equities are now higher versus non-U.S. equities on an historical basis.

Global Equity Returns and Valuations

Source: Bloomberg

U.S. Equities Have Outperformed Non-U.S. Equities

-1

0

1

2

3

4

5

6

-1

0

1

2

3

4


S&

P 5

00 F

orw

ard

P/E

min

us M

SC

I E

M F

orw

ard

P/E

S&

P 5

00 F

orw

ard

P/E

min

us E

AF

E F

orw

ard

P/E

S&P 500 vs EAFE (LHS) Avg S&P 500 vs EAFE S&P 500 vs MSCI EM (RHS) Avg S&P 500 vs MSCI EM

-60.0

-40.0

-20.0

0.0

20.0

40.0

60.0

80.0

100.0

120.0


Cum

ula

tive T

ota

l R

etu

rn (

%)

S&P 500 EAFE MSCI EM

11

12

13

14

15

16

17

18

19

20

Feb-02 Feb-03 Feb-04 Feb-05 Feb-06 Feb-07 Feb-08 Feb-09 Feb-10 Feb-11 Feb-12 Feb-13 Feb-14 Feb-15 Feb-16 Feb-17

12M

Forw

ard

P/E

Multip

le

S&P 500 12M Forward P/E 15 yr average

U.S. Equity Valuations Are Higher vs Non-U.S. Equities

Over the past decade, U.S. equities (+108%) have

significantly outperformed non-U.S. Developed Markets

(11%) and Emerging Markets (+33%)

The S&P 500 recently traded at its highest forward looking multiple since 2002

U.S. Equity Valuations Appear High in Historical Context

The P/E for the S&P 500 is 18.3x vs 15.3x

for the EAFE and 12.5x for the MSCI EM

While recent strong returns for the S&P 500 have been

driven by multiple expansion, investors may also be

anticipating reflationary policies that would accelerate

earnings growth. Notwithstanding favorable 2017

year-to-date returns for non-U.S. equities, valuations

remain lower relative to U.S. equities. More favorable

economic data and sentiment may be somewhat

tempered by heightened geopolitical risk ahead of key

elections and the formal process to begin Brexit.

Higher U.S. valuations

Lower U.S. valuations

NJ Global Equity Allocation as of February 28, 2017

12

1.57% 1.27%2.18% 1.49%2.09% 3.15%3.94% 5.91%

5.22%7.79%

10.64%

14.93%

10.72%

11.77%

63.65%

53.68%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

NJ Global Equity Allocation MSCI ACWI

Africa/Middle East South America & Mexico Canada

UK Japan Europe ex-UK

Asia ex Japan USSource: MSCI and State Street

0%

2%

4%

6%

8%

10%

12%

Equity - US Equity - Global US High Yield US Bank Loans Real Estate Commodities Private Equity Infrastructure

Ao

n H

ew

itt

5 Y

ea

r S

ce

na

rio

Re

turn

s (

An

nu

aliz

ed

)

Base Case High Inflation

13

Implied Probabilities for Targeted Fed Funds RateDecember 13, 2017 Meeting

The Fed is expected to maintain a gradual approach towards more normalized monetary policy, provided inflation remains

in line with longer-term objectives. Higher than expected inflation could prove detrimental to financial market returns.

The Outlook for U.S. Monetary Policy and Inflation

Source: Aon Hewitt and Bloomberg

Aon Hewitt’s projected returns suggest a less favorable financial market environment if

inflation unexpectedly accelerates and remains high (above 4%).

0.00

0.50

1.00

1.50

2.00

2.50

3.00

Aug-98 Aug-00 Aug-02 Aug-04 Aug-06 Aug-08 Aug-10 Aug-12 Aug-14 Aug-16

10yr

Bre

akeven I

nflation R

ate

(%

)

10yr Breakeven Inflation Average

The market appears to be

pricing in a move to more

normalized rates of inflation that

are consistent with a “base

case” outlook

Breakeven Inflation Rates Have Risen

Following the Fed’s March 15th decision to tighten

monetary policy, markets have consolidated around the

Fed’s own expectations for an additional one or two

rate increases for the rest of the year. Tighter monetary

policy coincides with more normalized market

expectations for inflation that is also in line with the

Fed’s own targeted inflation rate. While this “base

case” outlook for inflation is expected to be a

constructive backdrop for financial markets, if inflation

further accelerates and remains elevated financial

market returns would likely be adversely impacted.

0%

5%

10%

15%

20%

25%

30%

35%

40%

3/22/20172/16/20171/13/201712/12/201611/8/201610/5/2016

Fe

d F

und

Ma

rket

Imp

lied P

roba

bili

ty

1-1.25% 1.25-1.50% 1.50-1.75%

The market’s

expectations for a

higher Fed Funds

rate has increased

Select Asset Class Five Year Scenario Returns

Noteworthy DevelopmentsNJDOI Staff Departure: Meghna Desai, Portfolio Manager, Alternative

Investments has resigned from her position effective March 17, 2017. Meghna

directly managed a number of the Division’s most important relationships and was

responsible for conceptualizing and structuring a number of innovative

transactions in the last several years. Upon the departure of Jason MacDonald,

Head of Alternative Investments, Meghna took on additional responsibilities in

managing the portfolio and the team. This marks the third significant departure

from the alternative investment team in the last 8 months following the

resignations of Jason MacDonald and Lou Kish. Samantha Rosenstock is now

the interim head of Alternative Investments.

Police and Fire Pension Bill: Senate Bill 3040, introduced in February, would

transfer investment authority over PFRS assets from the Division to the PFRS

Board of Trustees, among other changes. The bill was approved by the Senate

and by the Assembly.

14

15

The Fund’s net returns ranked above the median peer universe of gross returns for the

three, five and ten year periods ended December 31, 2016.

The Fund’s risk-adjusted returns ranked in the top quartile for the five and ten year periods.

NJ Pension Fund Performance Comparison versus Peers

Source: Aon Hewitt, BNY Mellon and State Street

Note: While the peer comparison is presented using a universe of gross returns, the NJ Fund’s returns are presented on a net of all fees basis

Periods Ending December 31, 2016

EQT Infrastructure III, L.P.

A proposed investment in this Fund was presented to the Council at its November 2016 meeting. At

that meeting, Staff noted that it would be working with representatives of the Division of Law and

outside counsel to negotiate legal documents governing the investment. After extensive negotiations,

the Division and the Fund were unable to reach agreement on the terms of the legal documents, and

the Division did not participate in the Fund’s February closing. The Division continues to seek attractive

investment opportunities in this asset class.

Purpose of Notification: The Division is notifying the SIC of this modification under its Modification Procedures.

Alternative Investment Notifications

16

Performance Appendix

17

U.S. Equity Portfolio – As of February 28th 2017

The 16.59% return for the US equities portfolio outpaced the S&P 1500benchmark by 198 basis points during the Fiscal 2017 year-to-date time period. USequity markets continued to rally as President Trump took office on optimism foreconomic and earnings reflation predicated on corporate tax reform, deregulation,and increased infrastructure spending. Improving economic data led tospeculation that the Federal Reserve would raise interest rates during the MarchFOMC meeting. Therefore, financials continued their outperformance, increasing23.39% since the election, and 36.07% fiscal year-to-date. Telecom services, realestate and utilities were the laggards on higher interest rate expectations. Stockselection for the fund was strongest among financials and information technologysecurities, while consumer staples lagged the benchmark.

Portfolio Return:

+16.59% Benchmark Return:

+14.61% Excess Return:

+1.98%Portfolio Sector Attribution FYTD% - Breakdown of Excess Return:

Source: State Street, Factset

%

18

12.18

8.66

5.77

14.5713.02

9.75

24.19

3.69 3.46 2.38 2.34

12.11

8.796.41

15.0413.40

10.84

21.09

3.293.53

2.213.29

0

5

10

15

20

25

30

Con.Disc.

Staples Energy Fin. HC. Indus. Tech. Mat. RE Tel. Utils.

Sector Ending Weights %

US Equity Portfolio S&P 1500

12.88

0.39 3.31

42.09

5.91

23.26

28.66

21.72

2.93

-3.77

1.53

11.76

1.63

3.62

36.07

5.96

18.39

25.51

16.88

-0.54-3.91

0.94

-10

0

10

20

30

40

50

Con.Disc.

Staples Energy Fin. HC. Indus. Tech. Mat. RealEst.

Tel. Utils.

Sector Performance %

US Equity Portfolio S&P 1500

0.00 0.020.13

-0.21

0.02 0.00

0.18

0.00 0.02

-0.05

0.120.14

-0.10 -0.01

0.63

-0.01

0.500.62

0.14 0.140.00 0.02

-0.40

-0.20

--

0.20

0.40

0.60

0.80

Con. Disc. Staples Energy Fin. HC. Indus. Tech. Mat. Real Est. Tel. Utils.

Allocation Effect Selection Effect

6.28

16.59

27.62

9.36

13.49

5.66

14.61

25.77

10.51

14.02

0

5

10

15

20

25

CYTD FYTD 1Yr 3Yr 5Yr

Returns %

US EquityPortfolio

S&P 1500Benchmark

-0.02 -0.02

0.08

-0.22

-0.03

-0.22

0.02 0.01 0.02 0.03 0.040.01

-0.07

0.04

-0.00 -0.03

0.00

-0.01 -0.01

-0.09-0.06 -0.03

0.05 0.05

-0.30

-0.20

-0.10

--

0.10

Con. Disc. Staples Energy Fin. Funds HC. Indus. Tech. Mat. Real Estate Tel. Utils.


Non-US Developed Markets Equity Portfolio – As of February 28th 2017 In USD

Portfolio Sector Attribution FYTD% - Breakdown of Excess Return: Portfolio Return:



-0.82%


%

Top 3 best and 3 worst

contributors to return from

investment decisions regarding

Country Allocation

Top 3 best and 3 worst contributors to return from investment decisions regarding Stock Selection

0.02 0.02 0.02

-0.03 -0.03 -0.04

-0.06

-0.05

-0.04

-0.03

-0.02

-0.01

0.00

0.01

0.02

0.03

UnitedKingdom

Israel France Mexico Switzerland UnitedStates

Allo

cati

on

Eff

ect

%

ETFs

0.080.05 0.04

-0.08

-0.20

-0.27-0.30

-0.25

-0.20

-0.15

-0.10

-0.05

0.00

0.05

0.10

Canada Norway Finland Australia France Japan

Sele

ctio

n E

ffe

ct %

For the fiscal year through February 28th, the Non-US Developed Markets Equity Portfolioreturned 9.52% versus the Benchmark return of 10.34%. Over this time period, themarkets experienced a recovery from the Brexit-related sell-off, the surprise USpresidential election outcome, and rising European political risk following the unexpectedresignation of the Italian PM. In addition, the Federal Reserve raised interest rates for asecond time in a decade. But the optimism for renewed global growth stemming from theproposed fiscal policies of the new US Administration spurred a strong rally in marketsand a move toward a risk-on sentiment. Portfolio performance benefitted from stockselection in Canada and Norway, which offset the negative impact of both Frenchselection and Japanese selection effect, which was the worst among countries (primarilyfrom Healthcare exposure). From a Sector perspective, positioning was the dominantimpact on return - the underweight allocation to Telecom along with good stock selection,and the underweight in Energy added the most to performance. Detracting the most wasthe overweight allocation to Health Care and the underweight to Financials.

19

4.57

9.52

16.06

(0.39)

5.104.26

10.34

16.55

(0.53)

4.89

(5.00)

0.00

5.00

10.00

15.00

20.00


Ret

urn

%

Non-USDevelopedMarkets EquityPortfolio

EAFE + Canadaex ProhibitedBenchmark

0.34

0.260.19

-0.23 -0.26-0.33

-0.35

-0.25

-0.15

-0.05

0.05

0.15

0.25

0.35

0.45

Malaysia Brazil Panama UnitedStates

China Turkey

Allo

cati

on

Eff

ect

%

ETFs

0.050.18

-0.06 -0.03

-0.31

0.18

-0.01

-0.30 -0.22

0.16

-0.05-0.16

0.38

-0.27

0.22

--

0.23

0.44 0.38

0.04 0.00

-0.09-0.40

-0.20

--

0.20

0.40

0.60

Con. Disc. Staples Energy Fin. Funds HC. Indus. Tech. Mat. Real Estate Tel.


Emerging Markets Equity Portfolio – As of February 28th 2017 In USD

Portfolio Sector Attribution FYTD% - Breakdown of Excess Return: Portfolio Return:



0.48%


%

Top 3 best and 3 worst contributorsto return from investment decisions regarding Country Allocation

0.47 0.44

0.24

-0.09 -0.11

-0.51-0.60

-0.40

-0.20

0.00

0.20

0.40

0.60

Korea SouthAfrica

China Poland Taiwan Brazil

Sele

ctio

n E

ffe

ct %

Top 3 best and 3 worst contributorsto return from investment decisions regarding Stock Selection

20

For the fiscal year through February 28th, the Emerging Markets Equity portfolio returned13.06% versus the Custom Benchmark return of 13.54%. Emerging Markets equitiesoutperformed Developed Markets equities over the time period (13.6% vs. 10.3%) primarilyas a risk-on sentiment took hold led by strengthening commodity prices as concernsregarding China’s economic and currency stability eased and global growth prospectsbegan to improve. Despite a few major events - a failed coup in Turkey, two impeachments(the presidents of Korea and Brazil), and the surprise outcome of the US presidentialelections (possible trade wars/protectionism) – the EM markets proved resilient. Theportfolio benefitted from strong stock selection overall - especially in Korea and South Africa- but despite an overweight position in top performer Brazil, poor stock selection (the worstdetractor from portfolio return) offset the positive allocation effect. Regarding sectors, theunderweight in Staples and stock selection had the largest positive impact followed by stockselection in Industrials. An overweight position in underperforming Turkey and anunderweight allocation to China were among the largest detractors from return in addition tocertain Fund positions and the underweight position and stock selection in Energy.

8.67

13.06

29.66

0.76

(0.62)

8.84

13.54

29.38

1.60 0.17

(10.00)

0.00

10.00

20.00

30.00

40.00


Re

turn

%

EmergingMarkets EquityPortfolio

EM Benchmarkex Prohibited

Domestic Fixed Income Portfolio – As of February 28, 2017

For F17 year-to-date performance, the US Fixed Income portfolioreturned 0.37% versus the benchmark return of 0.45%. Relativereturns were adversely impacted by under allocating to higherrisk asset classes and higher beta securities within IG Credit andHigh Yield. Through February 28th, the Barclays High Yield Index,Custom IG Credit and US Government Benchmarks returned10.55%, -0.89% and -3.08%, respectively. The portfolio’sdefensive positioning to these sectors led to underperformanceas credit spreads tightened. This was partially offset by a shortduration profile as interest rates have risen since the start of thefiscal year. Fiscal-year-to-date, TIPS have outperformed nominalTreasuries by approximately 325 basis points. The Portfolio’soverweight allocation to TIPS has helped temper relativeunderperformance versus the composite index.

Source: State Street and FactSet

Portfolio Sector Attribution – Weights and Performance

21

0.90

1.46

0.37

0.95

1.37

0.45

0.00

0.20

0.40

0.60

0.80

1.00

1.20

1.40

1.60

MTD CYTD FYTD

Fixed Income Portfolio

Fixed Income PolicyBenchmark

Returns %

New Jersey Division of Investmentliberty.state.nj.us/.../Directorreportmarch2017.pdf · (1) Pension Fund return excludes Police and Fire Mortgage Program * Benchmark return not available

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