Note the Board's assumed return and standard deviation characteristics for each asset class at the bottom of the table. When considering these numbers one must remember they are derived from capital market assumptions which are based on historic data and attempt to project outcomes over extended time horizons.

The basis for portfolio diversification was set forth in Harry Markowitz’s 1959 paper on the subject. His work points to a sophisticated investment decision approach that permits an investor to classify, estimate, and control both the kind and the amount of expected risk and return. In essence his quantitative approach allows one to measure the risk reduction achieved by a multiple asset class portfolio versus a portfolio constricted to a single or limited asset classes. As grandmother used to say, "Don't put all of your eggs in one basket."

The following graph allows you to trace SamCERA's journey towards diversification.

Evaluating the effectiveness of the diversification strategy for a portfolio with an infinite time horizon generates continuing challenges. A time-horizon mismatch exists between the long-term capital market pricing assumptions and the ups and downs of a market cycle (typically a 3-5 year evaluation period). Different benchmarks are required for each asset class to measure its relative performance over time.

Measuring the Portfolio – Benchmarks:

The modern methods of performance measurement, evaluation and attribution analysis allows one to determine to what extent and why a particular portfolio beat or was beaten by a market index. A well-constructed market index measures a defined strata of the asset class it represents. The best index is one that can be used simultaneously as a benchmark for active management, passive management (index fund) and as a proxy for an asset class in asset allocation.

SamCERA utilizes broad-based indexes as benchmarks when measuring performance for all active and passive portfolios over three and five year rolling periods. During shorter time horizons, a style specific benchmark may be employed. These benchmarks allow SamCERA to analyze the characteristic of a particular portfolio against the broad market and against the investment manager’s mandate. A brief review of the benchmarked indexes follows:

Equities

The Russell Indices – A group of market capitalization weighted indexes. The Russell 1000 Index, which is highly correlated to the S&P 500 Index, measures the composite returns of the 1,000 largest market capitalization domestic stocks. The Russell 2000 Index which measures the composite returns of the 2,000 next largest market capitalization domestic stocks which are not included in the R1000. (The Russell 3000 Index equals the R1000 plus the R2000.) The Russell 2000 is a popular measure of the stock price performance of small capitalized companies.   

Morgan Stanley Capital International (MSCI) World ex-US Index – A broad-based measure of the composite returns of all relatively liquid stocks worldwide. It does not include U.S. stocks. This index is tracked on a hedged or unhedged basis. Unhedged means that the total return of the index (in $ terms) is fully exposed to currency fluctuations. A Hedged Portfolio attempts to minimize currency risk through reducing exposure currency fluctuations.

Fixed Income

Lehman Aggregate Bond Index - Measures the total return of all major sectors of the domestic, taxable bond market (approx. 5400 fixed income securities). The index contains all the investment grade issues in the Lehman Brothers Government/Corporate and the Lehman Brothers Mortgage-Backed Securities Indexes.

Real Estate

NCREIF (National Council of Real Estate Investment Fiduciaries National Property index) - Composed of 2,231 investment grade, non-agricultural properties, including wholly-owned and joint venture investment of existing properties. All properties have been acquired on behalf of tax-exempt institutions and are held in a fiduciary environment.

Cash & Equivalents

91 Day T-Bill  - Composed of 91 day term treasury bills issued by the U.S. Government. Typically used as a benchmark for short-term investments.

Measuring the Portfolio - Performance:

Measurement of a pension plan’s investment return should be viewed relative to its long-term obligations. This measurement has an infinite time horizon and its benchmark is established via the Asset / Liability Modeling Study. The individual pieces of the portfolio, as represented by asset classes, can be measured over shorter time horizons against the well-constructed broad-based market indexes mentioned above.

SamCERA's Investment Plan defines the parameters and guidelines for the management of the Retirement Fund's investments, while SamCERA’s monthly performance reports monitor the Fund's investment performance.