Kerrie Vanden BoschMERS Chief Executive Officer

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An Investment

Update from

MERS

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An Investment Update from MERS

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MERS Investment Portfolio

Insights and Updates in the

Wake of COVID-19

Jeb Burns, Chief Investment Officer

Michael Schrauben, Director of Asset Allocation

Michael Charette, Managing Director of Investments

Agenda

• MERS Portfolio Characteristics

• Managing Through a Crisis

• Current Market Environment

• Liquidity Considerations

• Portfolio Rebalancing

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MERS Portfolio Characteristics

• Disciplined investment process

• Globally diversified

• Valuation focused investors

• May lag in periods of extended bull markets

• Focus on risk-adjusted returns

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Managing Through a Crisis

Discipline• Critical to follow the model; eliminate emotion• Rebalancing when an asset’s return provides adequate

compensation for the risk; you will never know the bottomPatience

• Volatility tends to persist and opportunities will continue to present themselves

• Rebalancing is a processCommunication

• Team communicationo Weekly PRC and daily portfolio positioning meetings/calls

• Discussions with brokers and custodial bank• Conversations and webinars with managers and research

providers• Engagement with industry peers

Focus on the long-term• What opportunities will emerge?• What lessons can we learn?

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Market Environment

• The last two months have seen unprecedented volatility (upside and downside)

– Dramatic risk off then dramatic risk on

• Unprecedented economic decline

– Materially worse than 2008/2009

• Unprecedented policy response

– Both in the US and abroad

• How long to flatten the curve and reopen the economy?

– What does a return to “normal” look like?

• What is the shape of the recovery?

– L-shaped, U-shaped, or V-shaped

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Liquidity Considerations

It’s important to proactively manage liquidity before and during a crisis to

ensure the following:

1. Monthly pension obligations are paid

2. Don’t forget #1

3. Contractual private market capital calls are met

4. Adequate liquidity to rebalance the portfolio and take advantage of

market opportunities

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$0$100$200$300$400$500$600$700$800$900

$1,000

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

Mill

ions

Benefit Payments, Refunds & Transfers Out of Plan

$182,272,000

$934,695,000

MERS’ Pre-Crisis Liquidity

• MERS was well positioned heading into crisis

• 25% of portfolio was in cash and core fixed income

$309,135,948

$688,369,078

$667,614,202

$379,541,187

$585,034,165 $2,629,694,581

$0

$500,000,000

$1,000,000,000

$1,500,000,000

$2,000,000,000

$2,500,000,000

$3,000,000,000

Cash MERS Short MERS U.S.Treasury

C.S. McKee Janus Total

MERS Liquidity Waterfall as of January 31, 2020

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Market Volatility

• S&P 500 was down over 30% from all time high

• VIX volatility reached 2008 levels

2,237

83

0

10

20

30

40

50

60

70

80

90

2,000

2,200

2,400

2,600

2,800

3,000

3,200

3,400

VIX

Vo

lati

lity

Ind

ex L

evel

S&

P 5

00

S&P 500 vs. VIX YTD

S&P 500 VIX Volatility Index

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Liquidity Management

• Pay monthly pension obligations

– Monthly pension obligation shortfall analysis

o Roughly $25M but assumed to be $40M

– Segregated cash ($300M)

– Aggressively raised cash from internal fixed income portfolios

• Contractual private market capital calls

– Private markets team conducted an analysis to forecast capital calls/distributions for 2020

– Roughly $200M in estimated net contributions

• Adequate liquidity to rebalance the portfolio

– Efficient and liquid instruments − ETFs

– Best use of available liquidity

– Portfolio stress tests (OMEGA)

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Crisis Rebalancing

• Attractiveness of higher risk assets increased dramatically

during crisis

– Valuations on equities, EM debt and credit (HY and IG) cheapened

substantially

– Asset allocation model required “safe” assets (cash and U.S. Treasuries) to

be sold to fund increased allocation to risky assets

0.0%

20.0%

40.0%

60.0%

80.0%

100.0%

Asset Allocation - Optimal Weights During Crisis

MERS-VBA Model Risky Assets MERS-VBA Model Safe Assets MERS Private Investment Allocation

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Performance Summary

• From peak to trough (February 19 to March 23) the

portfolio outperformed the benchmark by over 500 bps

• The portfolio returned 14.14% in 2019 and is

outperforming the benchmark for both the seven and

ten-year time periods

January February March Q1

MERS' Portfolio (net) -0.76% -3.96% -8.17% -12.47%

Policy Benchmark -0.04% -4.87% -9.68% -14.11%

Excess -0.72% 0.91% 1.51% 1.64%

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Current Liquidity

• MERS still has over $1B (12% of fund) in liquidity

available for rebalancing and pension payments

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Portfolio Diversification

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Market Rebounds

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Smoothing is a buffer against extreme fluctuations in the market

Effect of Smoothing

14.14%

4.77%7.75%

-30%

-25%

-20%

-15%

-10%

-5%

0%

5%

10%

15%

20%

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

Actual Return Smoothed Rate Assumption (Target)

*Investment rate of return is gross of fees

Rat

e of

Ret

urn

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Conclusion

• MERS carefully balances risk and liquidity to ensure

that monthly pension obligations are paid

• MERS had prepared for market volatility and thus

outperformed our market benchmarks

• Our governance model allows MERS to respond to

market changes quickly within a prudent structure

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Have a question for our

investment team?

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An Investment Update from MERS

[Enter a question for presenters]

• Asset smoothing helps avoid dramatic

spikes and dips in annual contribution

requirements due to short term

fluctuations in asset markets

• MERS is here to partner with you to

help you proactively explore plan

design and funding options

• Other resources

– 2019 Annual Actuarial Valuations will be available mid-year

– Employer COVID-19 Updates on mersofmich.com

• Employers with questions about the impact of volatility

on plan costs should contact their Regional Manager

Employer Resources

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Smoothing video available

on mersofmich.com

Contacting MERS of Michigan

MUNICIPAL EMPLOYEES’

RETIREMENT SYSTEM

1134 Municipal Way

Lansing, MI 48917

800.767.MERS (6377)

www.mersofmich.com

This presentation contains a summary description of MERS benefits, policies or procedures. MERS

has made every effort to ensure that the information provided is accurate and up to date. Where the

publication conflicts with the relevant Plan Document, the Plan Document controls.

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