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Not for inspection by, distribution or quotation to, the general public.

IM0517-34449-0518 NCPERS

Going Beyond Style Box Investing

NCPERS

Presented by

Erin Doyle Orekhov, Client Portfolio Manager

May 22, 2017

2

For financial professional or qualified institutional investor use only. Not for inspection by, distribution or quotation to, the general public.

Session Description

Going Beyond Style Box Investing

While the advent of the style box in the 1990s has provided a useful framework for constructing a diversified

equity portfolio, investing strictly within the style box framework may create portfolio gaps that can lead to

unintended consequences. This presentation aims to help plan sponsors think about 1) how they can go

beyond the confines of style boxes to help participants achieve a secure retirement; 2) how outcome-

oriented approaches can help balance between maximizing total return and minimizing volatility; and 3)

what they should look for when evaluating outcome-oriented strategies.

3


Table of Contents

How we got here

Why we need to think outside the box

Thinking outside the box

Thinking outside the box: a case study

Key takeaways

4


How We Got Here

5


History of The Style Box Approach

Large

Medium

Small

Value Blend Growth

Morningstar Style Box TM

6


A Strong Case for Diversification

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Emerging Market Equity Intermediate Bond

Commodities Short Term Bond Emerging Market Equity

TIPS Global Bonds High Yield Bond

Developed International

TIPS Senior Debt U.S. Small Cap REITs

REITs Global Bonds High Yield Bond U.S. Mid Cap U.S. Mid Cap TIPS Emerging Market Equity

Emerging Market Equity Intermediate Bond Senior Debt REITs REITs Intermediate BondDeveloped

InternationalU.S. Small Cap

Developed International

Short Term Bond U.S. Small CapDeveloped

InternationalEmerging Market Equity Global Bonds U.S. Mid Cap U.S. Small Cap High Yield Bond

U.S. Small Cap U.S. Mid Cap Commodities U.S. Small Cap Commodities High Yield Bond U.S. Small Cap U.S. Mid Cap REITs U.S. Mid Cap

U.S. Large Cap Calendar Year Returns

15.8% 5.5% -37.0% 26.5% 15.1% 2.1% 16.0% 32.4% 13.7% 1.4% 12.0%

U.S. Mid Cap High Yield Bond U.S. Mid Cap Commodities High Yield Bond Short Term Bond High Yield BondDeveloped

InternationalU.S. Mid Cap REITs Commodities

High Yield Bond Senior DebtDeveloped

InternationalTIPS Senior Debt Senior Debt Senior Debt High Yield Bond Intermediate Bond Short Term Bond Emerging Market Equity

Senior Debt U.S. Small Cap REITs Global BondsDeveloped

InternationalU.S. Mid Cap TIPS REITs U.S. Small Cap Intermediate Bond Senior Debt

Global Bonds REITs Emerging Market Equity Intermediate Bond Intermediate Bond U.S. Small Cap Global Bonds Senior Debt TIPS Senior Debt REITs

Intermediate Bond Short Term Bond TIPS REITs Intermediate Bond Short Term Bond High Yield BondDeveloped

InternationalTIPS

Short Term Bond Global BondsDeveloped

InternationalShort Term Bond Intermediate Bond Senior Debt TIPS Intermediate Bond

Commodities Short Term Bond Commodities Commodities Global Bonds Short Term Bond U.S. Mid Cap Global Bonds

TIPS Emerging Market Equity Emerging Market Equity Global Bonds Global Bonds Short Term Bond

TIPS Emerging Market Equity U.S. Small CapDeveloped

International

CommoditiesDeveloped

InternationalHigh Yield Bond

Commodities Emerging Market Equity

Commodities

Source: Morningstar Direct.

7


Why We Need to Think Outside the Box

8


A Slightly Different Perspective on the Style Box

Large

Medium

Small

Value Blend Growth


9


Challenges Facing Plan Sponsors in Today’s World

Fiduciary Responsibility

The Search for Yield

Volatility

Interest Rate Risk

10


Volatility: why do we care?

Compounded returns for high volatility stocks are dramatically lower

For illustrative purposes only. Data shown above represents performance for the Russell 1000 Index from 1/1/97 – 12/31/15. Past performance is no assurance of future results.

Source: Voya IM and FactSet.

4%

6%

8%

10%

12%

10% 15% 20% 25% 30%

Re

turn

Risk

Compounded Returns

Average Returns

Q1

(Lowest

Vol)

Q5

(Highest

Vol)

Volatility Drag

11


Fees

Active vs. Passive Management

For illustrative purposes only. Source: Voya Investment Management and Zephyr Style Advisor.Category median represents the 50th percentile breakpoint for the Morningstar Large Cape Growth category at the end of each rolling 3-year period as calculated by Zephyr Style Advisor. Rolling 36-month data from December 1961-December 2015 completed monthly. Performance is no guarantee of future results.

12


Thinking Outside the Box

13


How to Identify and Fill the Gaps: A New Paradigm

Large

Medium

Small

Value Blend Growth

V

O

L

A

T

I

L

I

T

Y

FEE PRESSURE

ETFs SMART BETA


14


Building Blocks for Delivering Cost-Effective, Custom Solutions

Partnership between plan

sponsor and manager

Collaboration

Willingness to consider a solution that

does not fit in a style box and hire a

manager based on back-tested results

Thinking “outside the box”

Deeper due diligence and analysis on

how a manager will fit into the overall

portfolio

Analytics

15


Back-testing: De-Mystifying the Black Box

Look for managers that:

• Use multiple factors

• Test the efficacy of

factors over a range of

market environments

• Look for factors that

have low correlation to

one another

Look for managers that:

• Provide transparency around methodology and results

• Avoid “look ahead” bias, survivorship bias, and data mining

• Use multiple factors, test the efficacy of factors over a range of market

environments, and look for factors that have low correlation to one another

16


Assessing Multiple Factors Over a Range of Market Environments

2009 2010 2011 2012 2013 2014 2015 2016 2017

Earnings

momentum0% 0% 0% 15% 17% 11% 5% 0% 0%

Earnings

growth2% 0% 7% 0% 0% 0% 0% 0% 0%

Price

Momentum 2% 0% 1% 0% 0% 0% 0% 0% 0%

Cash to

EV1% 0% 0% 0% 0% 0% 0% 0% 0%

Tangible

Book Yield12% 25% 25% 16% 1% 6% 0% 7% 1%

Dividend

Yield17% 5% 4% 10% 21% 12% 9% 11% 10%

For illustrative purposes only.

17


Thinking Outside the Box: A Case Study

18


Case Study: Building a Portfolio to Meet a Style Box Gap - Volatility

Plan Sponsor Objectives

Generate income

Low volatility and strong downside capture (lower risk)

Maximize total return

“Off the Shelf” Solutions

Large Cap Value (Style Box Solution)

Low/Min Vol ETF (Passive Solution)

Unintended Consequences:

No explicit beta target

Overexposed to sectors that are

interest-rate sensitive

Custom Solution

Sector-neutral

Low beta

Robust alpha source

Above-benchmark

dividend yield

19


Case Study: Pitfalls of “Off the Shelf” Solutions

27.5%

-27.3%

24.1%

-24.1%

-40

-30

-20

-10

0

10

20

30

40

Defensive Cyclical

Activ

e S

ecto

r W

eig

hts

(%

)

S&P Low Vol vs. S&P 500 MSCI Min Vol vs. MSCI USA

Sector crowding

For illustrative purposes only. Source: Voya IM and FactSet. Data as of 1/1/98 -12/31/15. Past performance is no assurance of future results. Interest rate sensitivity

measures the sensitivity of returns to the change in 10-year bond yields.

20



Correlation to interest rates

DiversifiedEnergy Materials

Banks

TechDiscretionaryIndustrials

InsuranceHealth Care

StaplesTelecom

Real Estate

Utilities-0.15

-0.10

-0.05

0.00

0.05

0.10

0.15

0.40 0.60 0.80 1.00 1.20 1.40 1.60

Inte

rest

Ra

te S

en

siti

vity

Equity Market Beta (β)

Cyclical

Defensive



21



Managing downside protection

4.3%

-2.5%-3.0%

-3.2%

-6.0%

-2.0%

2.0%

6.0%

10-YR Yield Russell 1000 Index S&P Low Vol ETF S&P High Div Low Vol ETF



22


Case Study: A Different Framework for Evaluating an Outcome-Oriented

Mandate, Focused on Desired Outcomes

Higher Income

0

1

2

3

4

Dec

-99

Dec

-01

Dec

-03

Dec

-05

Dec

-07

Dec

-09

Dec

-11

Dec

-13

Dec

-15

Div

iden

d Y

ield

(%

)

Rolling 3-Year Average Dividend Yield

Voya High-Dividend Low Volatility R1000

Performance data from 01/01/97 – 12/31/15 is based on a simulated portfolio vs. Russell 1000 Index, rebalanced quarterly.

Source: FactSet and Voya Investment Management. Past performance is no assurance of future results.

Sample low volatility strategy

23


Lower Risk

-30%

-25%

-20%

-15%

-10%

-5%

0%

Dec-9

9

Dec-0

1

Dec-0

3

Dec-0

5

Dec-0

7

Dec-0

9

Dec-1

1

Dec-1

3

Dec-1

5

Risk Reduction versus the Russell 1000 Index3 Year Rolling Standard Deviation (January 1, 1997 - December 31, 2015)





24


Maximize Total Return

-20

-15

-10

-5

0

5

10

15

20

25

30

35

-20 -10 0 10 20 30 40

Manager

Retu

rns

Index Returns

Voya High-Dividend Low Volatility Equity vs. Russell 1000 Index3 Year Rolling Returns (January 1, 1997 - December 31, 2015)

Manager Outperformancevs. the Benchmark

93%



Sample low volatility strategy vs. Russell 100 Index



25


Key Takeaways

26


Why You Need to Think Outside of the Style Box

Unintended risks of pure style box approach

Changing market structure

Benefits of custom solutions

Last but not least…

1

2

3

4

27


The #1 reason we all need to think outside the box

28


Appendix

29


This information is proprietary and cannot be reproduced or distributed. Certain information may be received from sources Voya

Investment Management (“Voya IM”) considers reliable; Voya IM does not represent that such information is accurate or complete.

Certain statements contained herein may constitute “projections,” “forecasts” and other “forward-looking statements” which do not

reflect actual results and are based primarily upon applying retroactively a hypothetical set of assumptions to certain historical

financial data. Actual results, performance or events may differ materially from those in such statements. Any opinions, projections,

forecasts and forward-looking statements presented herein are valid only as of the date of this document and are subject to change.

Nothing contained herein should be construed as (i) an offer to buy any security or (ii) a recommendation as to the advisability of

investing in, purchasing or selling any security. Voya IM assumes no obligation to update any forward-looking information.

Past performance is no guarantee of future results.

©2017 Voya Investments Distributor, LLC • 230 Park Ave, New York, NY 10169. All rights reserved.

Disclosure

30


Backtested Performance Information

Backtested performance is NOT an indicator of future actual results. The results reflect the performance of a strategy

not historically offered to investors and do not represent returns that any investor actually attained. Backtested results

are calculated by retroactive application of a model constructed on the basis of historical data and based on

assumptions integral to the model which may or may not be testable and subject to losses.

General assumptions include that the firm would have been able to purchase the securities recommended by the

model and the markets were sufficiently liquid to permit all trading. Changes in these assumptions may have a

material impact on the backtested returns presented. Certain assumptions have been made for modeling purposes

and are unlikely to be realized. No representations and warranties are made as to the reasonableness of the

assumptions. This information is provided for illustrative purposes only.

Backtested performance is developed with the benefit of hindsight and has inherent limitations. Specifically,

backtested results do not reflect actual trading or the effect of material economic and market factors on the decision

making process. Since trades have not actually been executed, results may have under- or over-compensated for the

impact, if any, of certain market factors may have had on a decision-making process. Further, backtesting allows the

security selection methodology to be adjusted until past returns are maximized. Actual performance may differ

significantly from backtested performance.

Backtested results are adjusted to reflect the reinvestment of dividends and other income and except where otherwise

indicated, are presented gross-of fees and do not include the effect of backtested transaction costs, management

fees, performance fees or expenses, if applicable. No cash balance or cash flow is included in the calculation.

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