Out of those 21 episodes, 16 happened during nonrecessionary periods and guess what the Recovery Time was . Only 89 days. The markets took only three months to recover to their previous peak. On the other hand, the other five times when these losses happened during a recessionary period, they happened to be much larger than 10 . And the Recovery Time was sometimes many years. And these are the events that youre really trying to protect the plan against because these are the events which can lead to some optimizization of the plan levels for selling contributions. There is no one strategy as my colleague mike will momentarily talk about that can persevere and manage through these protected pers of losses that one can see during recession. The answer in our view is Asset Allocation. Just like there is really no debate about a diversified portfolio is better than pa concentrated level. Diversify your diversify, thats the name of the game. Some of these strategies worked very well in a sharp selloff in the market. U. S. Treasuries would be one example. There were others that worked well in a protracted selloff because it is very difficult, if not impossible to forecast what will be the onset of the selloff and what would be the nature of the selloff. In our view, the best approach is to put together a portfolio of these strategies. But ultimately, in our minds, this is an Asset Allocation problem and something that can be solved by considering a full strategy. Let me pass it on to mike who will walk through one of the Different Levels that are available to investors like yourselves and when do these sfwhork what are the optimal conditions when they perform and what are times when they dont work . Thank you. I was going to review briefly page three. Youve seen an earlier version of this, i think. Probably from us previously. And then i know there was since theres been a good amount of talk about scheduling, i might address the previous issues that came up on scheduling but then i think wed like to throw it open and answer whatever questions you have. Let me just run over this sort of we have the new addition, by the way, the thing we have not probably discussed with you before. There are the two at the bottom of this chart on page three. So, potentially if we have time we can discuss those two. Just briefly, Long Duration treasuries. Historically a positive expected return. Investment that has been good hedge of equity risk. But its certainly not always a hedge of equity risk. This months was another case where it wasnt, right . This wasnt really a big selloff. But definitely equities and bonds went down at the same time. Not perfect, but if you balance it against the sketching, which is the second line of the table. So, it involves buying out of money options essentially to protect your portfolio. By almost definition if you own an out of the money put, which is protection against your Equity Assets f. That falls, it is going to form. That is its contractual obligation. But you pay a price essentially, right . And that is the negative expected return on buying and Holding Options as you discussed. These two at the top are used in portfolios for similar types of purposes, to protect against these sharper equity moves down where typically, historically, treasures have been quite responsive as we saw in 87, 09 and several times before, but it is not a guarantee. Weve seen investors put in the sort of bucket of strategis that can hedge against sharp drawdowns. Trend falling, managed volatility Equity Strategies are all strategis that require a little bit of time to work, which will tend to work better in an extended drawdown and which historically has been positive return and quite nice positive expected returns. So, you include those in the portfolio because they have the potential for equitylike returns but will be uncore lated with equities or potentially negatively core lated with equities. But these strategis are also not perfect. The trend fall we were just talk about. So, the answers to the questions that got asked, how long does it take a trend follower to recognize a trend . It varies. I would say at a minimum, most of them are two weeks before they really start to establish significant positions. That is how our trend follower works. Slower ones could be a month or longer. So this most recent selloff was a little too quick and none of the trend followers came in and found it on the wrong way around, unfortunately. The selloff at the beginning of 2016 was extended enough that most of the trend followers caught it and did quite well, actually. That is the most recent example when they were up 10 when the equity market was down 10 . But it was a slower selloff. I think the diversifying the diversifiers theme comes out because some work well in some circumstance and some work well in others. And in particular for the sketching which ill touch on in a second. But that sort of thing you can easily have the option where the market sold off and if you didnt do anything with it, the option went up in value and proceeded to come back to zero. Simply buying and holding those kinds of things can be problematic. If i could add about the treasury, too. In addition to the sharpness of the selloff, it is the reason. So, in 0809, there was a fear of deflation and the past week or two, there was a fear of inflation. So treasury behaves differently in those two types of selloffs. That is exactly right. The research we suggests is that treasuris are more effective as risk mitigants are [inaudible]. And i thought we would take some questions. Maybe the best thing to do if we could would be skip to page lets look at page nine for a minute and then page 10 beliefly. So page nine n particular the one i want to focus on is these are sort of fiveyear periods where you buy options. These are back tests. But what they are is purchases of one year out of the money options. What i want to make a point on this in particular, this is already addressed previously, only really works in sharper selloffs. If you look at this, the tech bubble was a sharp enough selloff and the financial crisis was a sharp enough selloff that if youd owned hedges going into those crises, they would have helped you. But if you look at more mild selloffs such as the sort of russian default in the end of the 1990s, in those scenarios, the selloff wasnt as strong and it would have ended up being a drag on the portfolio. You have a fiveyear period where you had a decent selloff but didnt do much for you. So, those on their own are probably good at hedging deep selloffs but more moderate things. Theyre certainly not suited for. And unless theyre implemented directly, are probably going to be a drag on the portfolio. If you flip to page 10, this was the question around what are the historical costs of hedging a portfolio. This is a historical cost chart of hedging a portfolio 81 to the s p 500 and so to the nikkei. So, a u. S. Centric portfolio which isstomy what you have, having done some quick work on it. You can see how the cost of these hedges vary pretty dramatically over time. And during times like the financial crisis, if i take the green line in the middle, which is hedging a portfolio. Thats the floor you are looking to put on the portfolio. You are looking to essentially stop the losses over a oneyear period at that level. If you purchased those hedges in the middle of the financial crisis, they might have cost 8 of your portfolio value. I guess that it really only affects you have to have them ongoing into the crisis. Because if you try to buy them in the crisis, theyre definitely too expensive and you can see how expensive they got. So if you need these and buying them at the time you need them, theyre very expensive. The time to buy them is before you need them. And then they expire worthless and you lose money if the time if that time passes and the decline didnt occur. And then you are forced with a decision do we buy them again . So it can be a conundrum. It is definitely a challenge from the point of view of do i write another check, do i not. If we could flip to page 10 . Page 11, sorry. This will give you a sense in our estimation of the longterm negative cost of options. This is a simple this chart has two thing on it. The green line is sorry, the yellow shrine is the s p 500 and the green line is the s p 500 where every year we passively go out and buy a hedge and the hedge is a spend of 1 . At the beginning of every year and i might have discussed this previously. But your hedging strategy is 99 of the portfolio and equity is 1 and oneyear hedge and then reroll it every time. Your 7. 3 return didnt go to 6. 3 . But of the 1 you invested in hedges, it had a negative 30 return. Right . On average, buy and hold hedging. This ratio would probably be you know, people would be in broad agreement about it. , it has a negative return. If you happen to buy the put before the selloff, it is hugely beneficial, right . In the way you happen to go short equities. Over the longterm, theres been a substantial drag on portfolio returns and when you buy closer to the money options like 5 or 10 of the money options, you find the drag to be even greater. Because theyre more expensive. Can you explain again what is the scenario here . What are you hedging at . Sure. The way this works every year were going to spend 1 on hedges. 1 pktz of the account value. I have a portfolio that is essentially all s p except for hedges t. Strike price of that hedge is going to move around because the cost of the options are moving around. The reason we focus on 1 is because in our experience, most of the investors that hedge, they tend to have a budget around 1 , 1. 5 . That is what they typically spend. They will allocate something for a hedge, but not too much. The point is to illustrate the 1 spend over this is 60year period at 30 of the premium you spent. And didnt any p. C. Model this as to what the impact would be on our returns if we did a systemic hedge at 5 of how the money puts and wouldnt it reduce our returns with simply 1. 5 . Yeah. The assumption we used is hedging 100 protection for the Global Equity portfolio in. This case, there would be 0 downside. That makes perfect sense because those options are a lot more expensive. In some sense, they ought to look like cash, right . You eliminated all the downsides sneer this scenario here . No. No. Our scenario is amounting the level of protection for 1 . It will be at least some of the money. And the reason we did think way is because i misunderstand. Its 1 of assets spent for full coverage, whatever you can buy for full coverage. It covers the entire no. No. Whatever you can buy for 1 at that point of the contract. So, you may end up covering 50 . You can end up covering 20. At what percent loss . It varies. He was saying it is at least 20 . I think maybe im not expressing myself clearly. I just want to make sure i get this. Youre saying you are going to set aside 1 of Equity Assets and just to be clear, right . Youre certainly not hedging all your risk. The hedges you buy will be of a face amount equal to the rest of the portfolio. 99 . But the protection itself will be deep out of the money. With a 20 deductable and 30 deductible and potentially even more, maybe as much as 40 . That will change correct. Were all saying the same thing in different ways. Thank you for helping me get there. When you threat amount of premium amounts spent over time, it is tough to get a sense of the cost. If you know youre only spending 1 a year, then you can see what that 1 spend gave back to your portfolio and gave back negative 30 basis points. What the bottom line is, if youre implementing a hedging programme, it is something that needs to be a longterm decision for all the reasons that we mentioned. Because there could be a period of five, six years where these hedges dont pay off and dont come to fruition. And that is good because having some hedging in the portfolio, maybe it allows you to keep some risk on. I also want to be balanced about the benefits of having some hedging in the portfolio. There are some clients we work with globally. They have decided to have Downside Protection if built into part of the risk mitt investigation portfolios because one of their goals is not tonight provide Downside Protection but for the Risk Mitigation to provide positive returns and the markets are going to a sharp selloff. If that is one of the considerations, then maybe it should be larger. But if you take a step back, the selloffs here are on the cost of the hedge versus the reliabilities of the hedge. So assets like treasury, strategies, they dont have quoteunquote a cost associated with them because they have a positive expected return. But what youre not getting is reliabilities of protection. There isnt a contractual linkage between the performance of those assets and a selloff in the equity markets. They will pay off if the correlation pattern holds. If the stock market continues to be negative and equities selloff, having some treasury in the the portfolio will help. But it is not a guarantee. Those are the tradeoffs. What is the cost of the protection or the expected return on your hedge . What is the reliabilities of that hedge . And then finally what is the execution . Because for all of these things, hedging, manage futures, depending on which one you pick, your performance and your experience could be very different. For example, there are managers who have designed trend following strategies primarily for the purpose of diversification. So, if the only trend in the market is equity markets going up. So they will limit the exposure to trends that move the equity markets. You can design a trendfollowing strategy which cannot take very long positions in equitis so that ensures that in a scenario like what we just saw a week ar so ago, it doesnt get hurt. Because it is not allowed to have that much equity to begin with. The tradeoff is in a period like 2014 through 2017, when we had a one name moving the equity market, were not going to be making as much returns as a normal trend follower. So, really what it boils down to, is at the plan level, what are the objectives. What is this risk mitt investigation designed to do. What type of slippage or basis against the equity markets you are willing to accept. And what type of execution risk that [inaudible] because of the managers you are picking. Those are the three dimensions and thats why for most of the client, globally, this is a multipronged approach. They know the best way to deal with the many things that i mentioned to you is having multiple strategies and multiple mercks who are implementing those strategies. So, the key is putting those together. Precisely. That is the Asset Allocation decision. You at a policy level say, look, it is very important for me, for the Risk Mitigation portfolio to get a high return because the markets are down and i would like to take that task and deploy it back to the markets where arguably markets are distressed and relatively cheap, then you should consider some form of risk. If that is not one of the goals maybe it should not be part of the opportunities. Then it becomes manager selection and strategy within the asset classes. There is diversification in geography and sector and style and all those diversifiers that help as well. So the board knows and we talked about this before is this is something that i asked to be put on the agenda because we need to have bigger, more global discussions about risk than we probably have in the past. One of the things i said before is you cant just diversify away all your risk. I understand that diversification is an important component. But if you make bad choices about what youre diversifying in, then you end up with our experience in 0809. We need to be smarter about our Asset Allocation process which you all have been work on. The data clearly says it doesnt make stones do a blanket hedge across the board. But if you start modeling out 5 hedge or 10 hedge or 15 hedge and there is all different kinds of strategies, does that push you sort of up and to the left on the riskrisk riskreturn profile . If there any point it can take you off and shift the curve . Putting together these diversifying strategies, ideasly you are coming up with something that is giving you potentially not much of a dimunition in return. We worked on a strategy for a large investor that combined an alternative risk premium strategy to generate returns with a certain amount of which was like a trend follower, designed to do well in selloffs inspect a certain amount of long options to protect against the things that the trend follower essentially could not. And i think those kind of things can make sense. But you really want to tune it to what your portfolio is and what your risks are. Right . And i think that it is clear that if you try to hedge away all the risk, you kind of hedged away most of the return, too. Right . And somewhere in the middle there has to be a balance. But by having multiple different ways of diversification, each of which potentially address difference risks, youre hopefully a little bit more certain that your risk portfolio will do well when things selloff. But it is exactly to the point that shes made. It is all a question of what does it do to returns and what does it do to your longterm objectives, right . And it is a a very tough balancing act. Commissioner, i think that we have done a lot that addresses your interest in performing our performance and down markets, especially relative to 2008. For example, weve gone from about 57 in long only equity to about 45. I think were on our way to 31. 31 is getting to a really low number. I dont think that would be another public plan in the country that is as low as 31. Weve also reduced our core bonds exposure from 20 to and were reducing it down to 0. Because of the Bleak Outlook for returns. We replaced that with a series of longshort global macro relative value strategis in absolute return by going from 0 to 15 and were about half way there right now. Were around 7 or something. Weve implemented a real Assets Programme to increase inflation protection. Within bonds, weve also set aside a 6 allocation for treasuries along the lines for some of the reasons that youve seen here. Our Downside Protection is much better than it wass in 2008. In 2008, our bond portfolio looked a lot like an equity portfolio. It had a ton of credit risk. When credit blew up, it did poorly. Can i just can i for times sake can i stop there and open it up to the board for questions . This is kind of a natural place. Just one more minute . Ok. In the longterm, diversific