MINUTES Meeting of the Investment Committee of the Board

Transcription

MINUTES
Meeting of the Investment Committee
of the Board of Trustees of the
State Universities Retirement System
10:00 a.m., Wednesday, October 22, 2015
Northern Trust
50 S. LaSalle
Global Conference Center-1st Floor
Chicago, Illinois 60603
The following Trustees were present: Mr. Craig McCrohon, Chair; Mr. Aaron Ammons, Mr.
Dennis Cullen, Dr. John Engstrom, Dr. Fred Giertz, Mr. Francis Idehen Jr. (by conference call), Mr.
Paul R.T. Johnson Jr., Ms. Dorinda Miller, Dr. Steven Rock, Mr. Antonio Vasquez.
Others present: Mr. W. Bryan Lewis, Executive Director; Mr. Daniel Allen, Chief Investment
Officer; Ms. Bianca Truitt Green, General Counsel; Mr. Albert Lee, Associate General Counsel;
Ms. Allison Kushner, Compliance and Governance Officer; Mr. Douglas Wesley, Deputy Chief
Investment Officer; Mr. Joseph Duncan, Senior Investment Officer; Mr. Alex Ramos, Mr. Shane
Willoughby and Mr. Brian Deloriea, Investment Officers; Ms. Kristen Houch, Legislative Liaison;
Ms. Lori Kern and Ms. Monique Cullotta, Executive Assistants; Ms. Mary Pat Burns of Burke,
Burns & Pinelli; Mr. Douglas Moseley of NEPC, Ms. Patti Somerville-Koulouris of the Northern
Trust Company; Mr. Mondrell Moore of Herndon Capital, Ms. Renaye Manley of SEIU; Ms.
Angela Myers of Loop Capital and Mr. Barry Burr of Pensions and Investment.
Investment Committee roll call attendance was taken. Trustee Cullen, present; Trustee Giertz,
present; Trustee Idehen, present; Trustee Johnson, present; Trustee McCrohon, present; Trustee
Rock, present; Trustee Vasquez, present.
APPROVAL OF MINUTES
Trustee Craig McCrohon presented the Minutes from the Investment Committee meeting of
September 10, 2015. Trustee Dennis Cullen made the following motion:

That the Minutes from the September 10, 2015 Investment Committee Meeting be approved
as presented.
Trustee McCrohon seconded and the motion carried with all Trustees present voting in favor.
CHAIRPERSON’S REPORT
Trustee McCrohon introduced and welcomed Brian DeLoriea as a new member of the Investment
Staff, serving as an Investment Officer.
Trustee McCrohon noted that SURS has expended in excess of $1 billion in investment
management fees and carried interest over the past 20 to 25 years. He commented that a portion of
the amount was the result of strong investment performance. Trustee McCrohon asked that staff
continue ongoing monitoring of the issue with a potential consideration of a third party fee review
at some point.
Trustee McCrohon noted the SURS Internal Audit team reviews the Investment program, but also
suggested that a review of cash flows by resources outside of the SURS Investment organization be
considered.
Copies of the staff memorandums, entitled “Report from the September 10, 2015 Investment
Committee Meeting” and “Investment Contracts Approved,” are incorporated as a part of these
Minutes as Exhibit 1 and Exhibit 2.
CHIEF INVESTMENT OFFICER REPORT
Mr. Dan Allen reported investment performance of -5.3% for the 1st quarter of Fiscal Year 2016, for
the period ending September 30, 2015, net of fees.
Also, Mr. Allen noted the receipt of an invitation for SURS to participate at the upcoming Senate
Committee on Pensions Investments hearings, scheduled for November 18th and 19th in Chicago. In
addition, a questionnaire was provided seeking responses from SURS in advance of the hearings.
Mr. Bryan Lewis encouraged trustee attendance at the upcoming event.
Mr. Lewis again provided comment regarding discussion of fees. He also noted that should the
Board move forward with utilizing a hedge fund of funds structure, an increase in fees will occur.
CONSIDERATION OF CANDIDATES FOR HEDGE FUND OF FUNDS SEARCH
Mr. Dan Allen reviewed the search process and noted that staff and NEPC recommend two firms be
hired to manage the approximate 3% allocation. It was noted that one of the four finalists, GCM
Grosvenor, decided to withdraw from consideration. A reason was given by letter and included in
the appendix of the agenda.
Mr. Douglas Moseley also provided a summary of the search and assessment process, noting that
the list of finalist firms with a comparative overview was provided in the agenda materials. In
addition, a list of all respondents was provided in the NEPC materials.
Representatives from the following finalist candidate firms then gave presentations to the
Investment Committee:
 Prisma Capital Partners LP (KKR Prisma) – Mr. Girish Reddy, Mr. Eric Wolfe, and Mr. Ari
Barkan
 Pacific Alternative Asset Management Company (PAAMCO U.S.) – Mr. Mayer Cherem,
Mr. Von Hughes, and Mr. Andrew Ross
 Pluscios Management LLC – Ms. Kelly Chesney and Ms. Connie Teska
After the presentations, Mr. Allen reviewed the allocation choices and discussion followed in
regards to the process, candidates, and the potential for fee discounts.
Trustee Paul R. T. Johnson Jr. made the following motion:

That in the aggregate 3% of the portfolio be allocated to Prisma Capital Partners LP (KKR
Prisma) and Pacific Alternative Asset Management Company (PAAMCO U.S.) with the
exception of an equal allocation to each vendor subject to staff having discretion as to the
allocated amount based on fee considerations.
Trustee Steven Rock seconded and the motion carried with all Trustees present voting in favor.
Copy of the staff memorandums, entitled “Hedge Fund-of-Funds Manager Search Update” and a
copy of NEPC presentation entitled “Multi-Strategy Fund of Hedge Funds: Manager Search Finals”
are incorporated as part of these Minutes as Exhibit 3 and Exhibit 4.
INVESTMENT MANAGER REVIEW
Mr. Douglas Wesley provided a summary of benchmarks utilized in the non-U.S. equity and global
equity asset classes. In addition, a review of the respective portfolio structures and performance
was presented. Following the asset class review, recommendations were presented regarding
Herndon Capital Management and Calamos Advisors.
Trustee Johnson made the following motion:

That Herndon Capital Management be terminated as a non-U.S. equity manager, with the
assets reallocated in approximately equal amounts to the following non-U.S. equity
managers in the Manager Diversity Program
a. Ativo Capital Management
b. Strategic Global Advisors
Trustee Cullen seconded and the motion carried with all Trustees present voting in favor.
Trustee McCrohon made the following motion:

That Calamos Advisors LLC be terminated as a global equity manager, with the assets
retained in the SURS cash account (with Policy overlay in place).
Trustee Johnson seconded and the motion carried with all Trustees present voting in favor.
Copies of the staff presentation, entitled, “Non-U.S. & Global Equity Asset Class Review, Quarter
Ending June 30, 2015”, staff memorandum, entitled “Herndon Capital Management, Non-U.S.
Equity Manager Termination Memo” and staff memorandum, entitled “Calamos Advisors LLC,
Global Equity Manager Termination Memo” are incorporated as a part of these Minutes as Exhibit
5, Exhibit 6 and Exhibit 7.
(Educational Topic) COMMODITIES AND STATUS OF SEARCH
Mr. Douglas Moseley of NEPC led a commodities educational discussion, which provided
information on commodities markets and strategies, the current market, and inflation. A discussion
on inflation and the role of commodities and other asset classes in various inflationary environments
ensued. Following that, a discussion on the merits of long-only vs. long/short commodities (and
managed futures managers that would invest in financial futures, as well) was held. Throughout the
educational presentation, several options were discussed, including maintaining SURS’ current
passive commodities exposure, inviting managers that submitted RFP responses to present at the
December Investment Committee meeting, and broadening the outreach to managers that didn’t
respond (including non-commodities discretionary futures managers). Rather than the potential
benefits of inflation protection, some Trustees recalled that the intent of commodities exposure was
to broadly de-risk the overall SURS portfolio, providing returns uncorrelated with equities and fixed
income.
Discussions ultimately led to bringing four finalists (two managers each for long-only and
long/short products) to the December Investment Committee meeting. These products would allow
for both commodities market beta (long-only) and alpha opportunities (primarily long/short) in the
portfolio. SURS staff will bring the finalists to the December meeting for additional commodities
education, with the Investment Committee open to hiring a recommended two for mandates.
Mr. Shane Willoughby interjected during the discussion with quantitative and qualitative
information on the managers that responded to the search.
The Educational Topic lasted for 60 minutes and concluded at approximately 4:30 p.m.
Copies of the NEPC’s presentation, entitled “Commodity Market Overview & Inflation Protection”,
staff memorandum, entitled “Commodities Manager Search Update” and “Commodities SemiFinalist Performance Information” are incorporated as a part of these Minutes as Exhibit 8,
Exhibit 9 and Exhibit 10.
STATUS AND DISCUSSION OF PORTFOLIO OVERLAY RFP
Mr. Bryan Lewis explained the rationale for conducting a search for an Equity Index Options
Overlay provider, indicating that the strategy will focus on selling options related to the US equity
market and will be designed to provide additional income to the portfolio. Mr. Doug Moseley also
commented on the strategy and answered questions from Trustees. Mr. Moseley also explained
risks involved in the strategy. Trustee Johnson also provided an example of how the Overlay
program would operate. Mr. Moseley indicated that the strategy would likely provide income to the
portfolio of two to four per cent. Trustee McCrohon requested information explaining the strategy
implementation risks of when the markets move significantly and requested information on what
other institutions are utilizing the strategy. Mr. Doug Wesley emphasized that implementation of
this strategy will not result in buying/selling to rebalance the portfolio, these transactions are cash
settled at the option expiration date. Mr. Moseley discussed different ways to implement the
strategy. Finally, Mr. Lewis closed the discussion explaining that when Trustees present ideas, staff
and consultant will study the concepts and, when appropriate, bring options to the Investment
Committee that may or may not be approved.
A copy of staff memorandum, entitled “Portfolio Overlay RFP” is incorporated as part of these
Minutes as Exhibit 11.
INFORMATIONAL ITEMS NOT REQUIRING COMMITTEE ACTION
The following items were provided for reference and are incorporated as a part of these Minutes:
1. Exhibit 12 - SURS Projected Funding Status through August 2015.
2. Exhibit 13 - Illinois Public Pension Funds Total Fund Performance for periods ending
June 30, 2015.
3. Exhibit 14 - Memorandum from GCM Grosvenor.
4. Exhibit 15 - Memorandum from Kwame Raoul regarding the Senate Committee on
Pensions Investments Hearings.
5. Exhibit 16 - Minority and Female Investment Hearing Questionnaire Senate Pensions &
Investment Committee.
6. Exhibit 17 - Staff Memorandum entitled “Annual Review of Minority-,Female-and
Persons with a Disability-Owned Broker/Dealer Usage by SURS
Investment Managers.
7. Exhibit 18 - Fiscal Year 2016-17 Summary Work Plan Investment Committee Schedule
8. Exhibit 19 - SURS Summary of Investment Projects.
9. Exhibit 20 - SURS Schedule of 2016 Meeting Dates.
PUBLIC COMMENT
Mr. Mondrell Moore of Herndon Capital addressed the Committee and acknowledged the recent
performance challenges. He respectfully asked the Board to consider extending the relationship,
given their net positive performance over time.
Since there was no further business before the Committee, Trustee Ammons moved that the meeting
be adjourned. The motion was seconded by Trustee Johnson and carried with all Trustees present
voting in favor.
Respectfully submitted,
Mr. W. Bryan Lewis
Secretary, Board of Trustees
WBL:lk
Exhibit 1
State Universities Retirement System of Illinois
Serving Illinois Community Colleges and Universities
1901 Fox Drive • Champaign, IL 61820-7333
(217) 378-8800 • (217) 378-9802 (FAX)
Investment Department
To:
From:
Date:
Subject:
Investment Committee
Daniel L. Allen
October 9, 2015
Report from the September 10, 2015 Investment Committee Meeting
Enclosed are the Minutes of the September 10, 2015 Investment Committee Meeting. The
purpose of this memorandum is to provide a status report on action items.
Twelve motions were approved during the Investment Committee Meeting. These included
the approval of Minutes from the June 11, 2015 Investment Committee Meeting. In addition,
closed session Minutes from the June 11, 2015 Investment Committee meeting were presented
and opened. The ten remaining motions were approved at the SURS Board of Trustees
meeting conducted the following day. None of the motions required further action by SURS
staff. Open motions requiring further action by SURS Staff are listed below.
Open Items
Review of the SURS Self-Managed Plan (SMP) Provider Role
1. That Fidelity Investments be retained as a recordkeeping service provider for the
SURS Self-Managed Plan and the proposed pricing structure offered by Fidelity
Investments for the Self-Managed Plan be accepted as presented.
Contract negotiations and document review are currently in progress.
2. That TIAA-CREF be retained as a recordkeeping service provider for the SURS
Self-Managed Plan and the proposed pricing structure offered by TIAA-CREF
for the Self-Managed Plan be accepted as presented.
3. That Fidelity Investments be retained as the lead administrator for the SURS
Self-Managed Plan and the proposed pricing structure offered by Fidelity
Investments for the Self-Managed Plan be accepted as presented.
4. That the proposed investment options available through Fidelity Investments be
approved, with mapping of assets from terminated options to approved options as
presented.
Exhibit 1
5. That the proposed investment options available through TIAA-CREF be
approved, with mapping of assets from terminated options to approved options as
presented.
Open Items From Prior Meetings
April 23, 2015 Investment Committee Meeting
Consideration of Non-Core Real Estate Direct Funds Search
6. That a commitment of $35 million be authorized, contingent on successful
contract negotiations, to Crow Holdings Capital.
Please advise if you have any questions during or prior to the October 22, 2015 Investment
Committee meeting.
Exhibit 2
(217) 378-8800 • (217) 378-9802 (FAX)
To:
W. Bryan Lewis
From: Daniel L. Allen
Date:
October 9, 2015
Subject: Investment Contracts Approved
No investment contract agreements were approved by the Executive Director following the September
10, 2015 Investment Committee meeting. As stated in the Investment Policy, notice is provided to the
Board of approved investment-related contract documents after execution.
Exhibit 3
(217) 378-8800 • (217) 378-9802 (FAX)
To:
From:
Investment Staff
Date:
October 8, 2015
Re:
Hedge Fund-of-Funds Manager Search Update
Background
At the June 12, 2014 Investment Committee meeting, the Board approved the asset/liability
study presented by NEPC. The new asset allocation includes a 5% allocation to hedged
strategies. At the December 11, 2014 Investment Committee meeting, the Board approved a
search to identify candidates to oversee and administer a multi-strategy hedge fund-of-funds
program, as a segment of the hedged strategies allocation.
Search Process
The search process has been conducted consistent with legislative requirements and SURS’
normal practice as defined in the Investment Policy:

Staff, with input from NEPC, developed a Request for Proposal (RFP) for the search process.
The minimum qualifications required to respond to the RFP included:







Proposing firm must be SEC-registered or exempt from registration with the nature of
the exemption provided.
Proposing firm must agree to serve as a “fiduciary” to the Fund within the meaning of
Illinois legislation and to act in accordance with all requirements and standards of
conduct applicable to fiduciaries.
Proposer and its proposed team have all authorizations, permits, licenses and
certifications required by federal and state laws and regulations to perform the
services specified in this RFP at the time Proposer submits a response to the RFP.
Proposer’s audited financial statements must be made available for review.
Proposer will comply with all legislation regarding investment in Iran and Sudan, and
applicable State fiduciary, ethics, and diversity laws, including any additional
disclosure requirements as outlined above.
The proposing firm must have an established track record of managing a diversified
multi-strategy fund of hedge fund (commingled fund) that was incepted no later than
January 1, 2008. Qualified Women, Minority, or Disabled Owned Businesses are
exempt and will be evaluated for further consideration at SURS’ discretion.
Minimum Firm Level AUM: $1 billion as of 12/31/2014. Qualified Women,
Minority, or Disabled Owned Businesses are exempt and will be evaluated for further
consideration at SURS’ discretion.
Must provide performance track record (in managing non-proprietary capital) of the
proposed fund for the RFP: Fund Inception no later than January 1, 2008. Qualified
Exhibit 3








Women, Minority, or Disabled Owned Businesses are exempt and will be evaluated
for further consideration at SURS’ discretion.
 Must have a core competency and demonstrated track record in constructing
diversified multi-strategy fund of hedge funds. A “diversified multi-strategy” fund of
hedge fund is described as a fund that does not historically display a dominant
(>50%) allocation and/or attribution related to any one single sub strategy either
individually or collectively with similar strategies.
SURS posted the RFP on its website and the state newspaper, as well as advertised nationally
in various trade publications, including the March 9, 2015 edition, and on the website, of
Pensions & Investments.
RFP responses were due no later than April 9, 2015.
Responses were submitted by a total of 40 firms, including eight firms owned by minorities,
females, or persons with a disability (MFDB), as defined by Illinois statute.
The initial list of respondents was narrowed to eight firms (two MFDB firms) using the
following criteria:
 Qualification on Search Criteria Established in RFP (e.g. firm assets, length of track
record, meet definition of “diversified” multi-strategy fund of funds)
 Completeness and Clarity of RFP Proposal
 Stability and General Experience of the Firm
 Staffing (Experience of Key Personnel and Depth of Resources)
 Sound Investment Philosophy with Consistent Process Implementation
 Relative Performance in Stylistic Peer Group
 Performance in Varying Market Conditions
SURS and NEPC conducted meetings with the eight semi-finalists on August 4-5, 2015, at
the SURS office in Champaign to interview key personnel. Doug Moseley and Kamal
Suppal of NEPC and Bryan Lewis, Dan Allen, Doug Wesley, Kim Pollitt, and Alex Ramos
of SURS staff attended the interviews.
NEPC and SURS staff identified finalist candidates.
 Reasons for exclusion for all firms eliminated in the search process can be found in
the search materials prepared by NEPC.
SURS staff conducted on-site due diligence meetings with the four finalists between
September 7 and October 6, 2015.
NEPC provided the Board of Trustees a report evaluating finalist candidates.
At each step of the process, the list of candidates was narrowed to identify the best candidates to
be interviewed by the Board of Trustees. As a result of the due diligence meetings, the following
firms have advanced in the process and have been invited to present to the Board at the October
22, 2015, Investment Committee meeting:




GCM Grosvenor Public Markets
Prisma Capital Partners LP (KKR Prisma)
Pacific Alternative Asset Management Company (PAAMCO U.S.)
Pluscios Management LLC
Exhibit 3
Opportunities for Minority-, Female-, and Persons with a Disability-Owned Firms
As mentioned previously, eight MFDB firms responded to the RFP. Two MFDB firms advanced
to the semi-finalist stage, and one MFDB firm, Pluscios Management, was selected as a finalist.
While Pluscios itself is a female-owned firm, the firm’s strategy does not specfically focus on
MFDB firms. An alternate way to gain MFDB exposure in a hedge fund-of-funds portfolio is
via a best-of-breed diversified multi-strategy fund with a defined (%) allocation to MFDB
managers. Each of the three other finalist candidates have the necessary capabilities and
experience in the diversity space to accomplish SURS’ diversity goals.
Structure/Recommendation
The asset/liability study approved at the June 2014 meeting established a 5% policy allocation to
hedged strategies. Staff is proposing two alternatives for consideration.
Alternative 1:
Previous discussions focused on implementing the 5% allocation in two phases. Phase I,
representing 3% of the 5% allocation, would be implemented with hedge fund-of-funds while
phase II would be implemented with direct allocations to hedged strategies, as shown below.
Phase
Phase I: Hedge fund-of-funds
Phase II: Direct allocations to hedged strategies
Allocation (%)
3%
2%
Approximate
Allocation ($)
$500 million
$325 million
Phase I could be implemented relatively quickly via two fund-of-funds providers. Phase II
implementation, which would involve multiple providers, would be more time-consuming both
in terms of search and monitoring.
Alternative 2:
Another option to consider is the implementation of the entire 5% allocation, approximately
$825 million, via hedge fund-of-funds. The use of fund-of-funds for the entire allocation would
allow the SURS portfolio to move to the policy target more quickly and efficiently. In addition,
SURS would be able to rely on the extensive staffs of the fund-of-funds providers for portfolio
management, risk management and operational due diligence that are so critical in a hedge fund
portfolio. Given the limited internal staff resources currently in place, with no resources
dedicated exclusively to the hedge fund portfolio, allocating the entire 5% to a well-resourced
fund-of-funds provider seems an attractive alternative. Once SURS gains additional experience
and/or additional dedicated staff resources in hedge funds, this implementation decision could be
revisited.
Given the broad sub-strategy diversification, depth of resources and expertise of the finalists,
staff and NEPC believe two firms would provide adequate diversification in a portfolio of this
size, whether it be a 3% or 5% allocation. As a result, staff and NEPC recommend
allocations be made to two of the following finalists presenting at the October 2015
Investment Committee meeting:



Prisma Capital Partners LP (KKR Prisma)
Pacific Alternative Asset Management Company (PAAMCO U.S.)
Exhibit 3
Any potential allocation to the fourth finalist, Pluscios Management, would be expected to be
small to avoid concentration risk due to the firm’s limited assets under management and would
not materially alter the overall hedge-fund-of-funds portfolio profile.
The allocations would be subject to negotiation of legal documents with the managers upon their
selection by the Board.
Funding Source
The U.S. equity portfolio will serve as the funding source for the hedge fund-of-funds allocation,
continuing implementation of the June 2014 asset/liability study.
Manager Profiles
Profiles of the presenting firms and additional information about manager combinations are
included in the materials provided by NEPC.
We look forward to concluding this portion of the hedge fund-of-funds search with manager
presentations to the Investment Committee on October 22, 2015.
Exhibit 4
Illinois SURS
Multi-Strategy Fund of Hedge Funds:
Manager Search Finals
October 22, 2015
Doug Moseley, Partner
Kamal Suppal, CFA, Senior Consultant, Hedge Funds
Will Forde, CAIA, Senior Analyst
Christian Pieri, Research Analyst, Hedge Funds
Exhibit 4
Table of Contents
Finalists: Comparative Overview
Tab 1
NEPC Recommendations
Tab 2
Appendix: Semi-Finalists’ Historical Performance
Tab 3
Appendix: Semi-Finalists’ Manager Profiles
Tab 4
Appendix: Shortlisting Semi-Finalists and Finalists
Tab 5
Disclaimers & Disclosures
Tab 6
2
Exhibit 4
Finalists: Comparative Overview
3
Exhibit 4
Shortlist of Finalists
Firm Name
Location
MFDB
(Yes/No)
1
Grosvenor Capital Management, LP (“GCM Grosvenor Public Markets”)
Chicago, IL
No
2
Pacific Alternative Asset Management Company, LLC (“PAAMCO”)
Irvine, CA
No
3
Pluscios Management LLC
Evanston, IL
Yes
Women Owned
4
Prisma Capital Partners, LP (“KKR Prisma”)
NY, NY
No
Please refer to the Appendix highlighting search process leading to shortlisting of the above finalists.
4
Exhibit 4
Finalists’ Comparative Overview: Organization
Grosvenor
PAAMCO
Pluscios
Prisma
$26.3 Billion
$8.9 Billion
$200 Million
$10.2 Billion
% AUM in Custom Hedge Fund Solutions
65%
88%
5%
64%
Institutional Clientele
94%
98%
76%
87%
41
43
4
19
Women 48%; Diverse 32%
66% Diverse
50% Women, 13% Disabled
Veteran, 13% Minority
56% Diverse
Manager Research, Banking,
Finance
Banking, Consulting, Academia
(PhDs)
Banking
Economists, Various Trading
Desks, Private Equity, Academia
(PhDs)
Business
Assets Under Management (12/31/14)
Team
Strategy Investment Professionals
Diversity of Staff
Backgrounds
Note: Diverse includes women, minority and disabled
5
Exhibit 4
Finalists’ Comparative Overview: Investment Management
Grosvenor
PAAMCO
Pluscios
Prisma
Stability of Returns
Return Seeking-Alpha
Generation: Manager skill and
structural
Return Seeking
Capture globally diverse
sources of alpha with downside
protection
Manager Selection: Women and Minority Focus
5% of AUM
23% of AUM
No specific focus: Best-of-breed
managers
12% of AUM
Geographic Focus
US Centric
Global
US Centric
Global
Overall Investing Philosophy
Research
Underlying Manager Style
Multi-Strategy and Sector Focus Emerging and Sector Specialists Emerging and Sector Specialists
Sector Specialists
Equity Long Short, Credit Long
Short and Relative Value
Short and Relative Value
Short, Event Driven and Relative
Value
Versatile: Event Driven, Equity
Long Short, Macro and Credit
Long Short
Commingled Funds and
Managed Accounts
100% Managed Accounts
Commingled Funds
Commingled Funds and
Managed Accounts
1.36% Management Fee / 17%
Incentive Fee
1.05% Management Fee /
14.52% Incentive Fee
Standard Commingled Fund
Fees
1.43% Management Fee /
17.7% Incentive Fee
Investment, Risk and
Operational Due Diligence
Top Down Thematic View
Construction, Investment Due
Diligence, Portfolio
Construction/Monitoring
(Based on regular, varied and
multiple touch points)
Portfolio Construction Style
Core (2/3) Tactical (1/3)
Active Bottom Up
Top Down and Bottom up
Active Top Down and Bottom Up
Investment Risk Management Focus
Drawdowns, Volatility and
Headline Risk
100% Position level
transparency helps identify
alpha decay, style drift, prevent
liquidity risk and drawdowns
Diversification
Manage beta (diversification)
and Drawdowns
Sub Strategy Focus Areas
Investment Vehicles/Structures
Underlying Manager Average Fees
Process
6
Exhibit 4
Finalists’ Comparative Overview: Client Experience
Grosvenor
Pluscios
Prisma
*Direct access to multifunctional team
*Knowledge sharing/staff
education
*Risk aggregation/modelingweb access to risk dashboard
education (PAAMCO University)
*Build out a direct hedge fund
portfolio in the future
*MFDB firm
*Focus on smaller alpha
generating managers
*Large management fee
discount
education
*Build out a direct hedge fund
portfolio in the future.
*Niche Co-investment
opportunities
* Joint manager onsites/due
diligence
First $25MM: 1.15%
Option 1:
First $300MM: 1.0%
>$25MM: 0.85%
Option 1:
$150-$250MM: 0.75%
ILSURs Relationship Value Proposition
management fee
Next $25MM: 1.0%
management fee
Proposed Fees
PAAMCO
management fee
3
management fee and 15%
incentive fee over a 7% hurdle
management fee
Next $50MM: 0.80%
Next $300MM: 0.85%
$250-$350MM 0.65%
management fee
management fee
management fee
Over $600MM: 0.70%
Over $100MM 0.60%
management fee
management fee
1
Option 2:
0.75% management fee and 5%
incentive fee
1
2
Annual management fee subject to 0.75% minimum. Grosvenor is also willing to negotiate a management plus incentive fee structure for SURS if desired.
2
An investment of $300MM or more would have a hurdle rate of three‐month LIBOR.
3
Pluscios is willing to charge no management fee and negotiate an incentive fee only structure.
7
Option 2:
$150-$250MM 0.65%
management fee and 7.5%
incentive fee over 2% hurdle
$250-350MM 0.55%
management fee and 7.5%
incentive fee over 2% hurdle
Exhibit 4
Finalists: Inter-Manager Correlation
Grosvenor
PAAMCO
Pluscios
Prisma
MSCI ACWI ‐ Net ‐ USD
S&P 500 (TR)
Grosvenor
1.00
PAAMCO
0.95
1.00
Pluscios
0.90
0.87
1.00
Prisma
0.94
0.89
0.87
1.00
0.76
0.74
0.77
0.70
1.00
S&P 500 (TR)
0.72
0.69
0.72
0.63
0.96
1.00
HFRI Fund of Funds Composite Index
0.95
0.91
0.91
0.95
0.82
0.76
1.00
Correlations are calculated based on average 36 month rolling net returns (as provided by managers) over a common time period: August 2006December 2014.
PAAMCO, Pluscios and Prisma have historically displayed lower correlations amongst
each other as well as against broad markets.
8
Exhibit 4
NEPC Recommendations
9
Exhibit 4
ILSURS Hedge Fund Portfolio Construction Alternatives
• Option 1: Build a portfolio with best-of-breed diversified multistrategy fund of hedge funds with a defined (%) allocation to MFDB
managers.
Pros
•
•
Investments with large firms with
strong internal resources and
infrastructure
Stronger ability to meet higher
degree of due diligence warranted
by small emerging managers
Cons
None
• Option 2: Build a portfolio with best-of-breed diversified multistrategy fund of hedge funds with a defined (%) allocation to MFDB
managers AND allocate separately to a women-owned diversified
multi-strategy fund of hedge fund (i.e. Pluscios).
Pros
•
•
Pluscios is a well diversified fund of
hedge fund with a long performance
track record
Pluscios has historically shown
lower correlations with other
finalists and thus helps diversify
any portfolio combination
Cons
•
•
•
10
Small AUM poses concentration risk
Concentrated investor base
Operational concerns:
• Small internal staff (8 total)
• Limited custom solutions experience
Exhibit 4
Hedge Fund Portfolio Options: Sub Strategy Diversification
Option 1:
Based on historical average allocations of the shortlisted fund of hedge funds
Potential
Manager
Combinations
Equity Linked
Credit Linked
Relative Value Credit
Event Driven
Tactical Trading
Multi‐Strategy
Grosvenor and PAAMCO
Grosvenor and Prisma
PAAMCO and Prisma
Grosvenor, PAAMCO, and Prisma
Area of Emphasis
Lesser Focus Area
Small/None
Based on the above, the Grosvenor & PAAMCO portfolio would be less than optimally diversified
(higher inter-correlation, less event driven, more multi-strategy, little macro) with potential for
higher volatility, beta and drawdowns and thus is the least preferred option. The other three options
are better diversified.
Option 2: Add Pluscios to any of the Above Portfolios
The above portfolio profiles would essentially remain the same since any potential
allocation to Pluscios is expected to be small (to avoid concentration risk) which should
not materially alter the portfolio profiles (sub strategy diversification) depicted above.
11
Exhibit 4
Recommended Hedge Fund Portfolio Options
Manager
Combinations
Recommended
Allocation*
Portfolio Profile
Grosvenor and Prisma
~50% Grosvenor
~50% Prisma
Stable Value: Attributes of stable
returns, lower volatility and drawdowns
PAAMCO and Prisma
~50% PAAMCO
~50% Prisma
Return-Oriented:
Grosvenor, PAAMCO, Prisma
~30-40% Grosvenor
~30-40% PAAMCO
~30-40% Prisma
Core-Satellite:
Attributes of
slightly higher volatility, higher up
capture with good downside protection.
Historically managers have shown lower
correlation to each other and markets.
Attributes similar
to Return-Oriented above
Exposure to a larger number of
managers may result in overdiversification and reduce alpha
Note: Allocations to the aforementioned managers would be proportionately reduced if Pluscios is also added to any of the combinations above.
*Recommendations are based on historical profiles of Finalists including manager research focus areas (including
MFDB focus), diversification across sub strategies, portfolio construction styles and performance across varying
market conditions.
Past performance is no indication of future results.
12
Exhibit 4
Appendix: Finalists’ Historical
Performance
13
Exhibit 4
Summary Comparison of Historical Performance (Time Period: Jan 2008 - August 2015)
2008
2009
2010
2011
2012
2013
2014
Standard Down Compound Compound Compound Up Capture 2015 Deviation Sharpe Ratio Beta ‐ S&P Capture Max ROR Last 3 ROR Last 5 ROR Last 7 Ratio ‐ S&P YTD
Last 7 (3.5 %)
500 (TR) Ratio ‐ S&P Drawdown
Years
Years
Years
500 (TR)
Years
500 (TR)
Grosvenor Institutional Partners, LP
‐20.6%
14.2%
6.8%
‐3.7%
8.6%
15.2%
3.3%
1.4%
7.6%
5.8%
3.7%
5.3%
‐0.12
0.23
11.5%
35.9%
‐20.6%
PAAMCO Diversified Emerging Manager Strategy
‐24.1%
19.4%
7.0%
‐4.8%
7.8%
17.0%
3.7%
‐0.1%
7.7%
5.6%
3.1%
7.1%
‐0.10
0.28
13.6%
43.7%
‐26.1%
Pluscios Diversified Core Portfolio*
‐16.7%
35.0%
10.6%
‐5.0%
9.3%
10.0%
2.3%
1.4%
5.4%
4.8%
6.6%
6.6%
0.28
0.28
18.6%
39.3%
‐17.0%
Prisma Spectrum Fund, LP
‐15.6%
18.0%
7.3%
‐2.6%
7.7%
10.5%
4.0%
1.8%
6.7%
5.3%
4.3%
5.3%
0.04
0.19
11.8%
30.3%
‐17.0%
‐42.2%
34.6%
12.7%
‐7.3%
16.1%
22.8%
4.2%
‐3.5%
9.4%
9.6%
4.6%
18.5%
1.4%
107.6%
89.3%
105.6%
‐52.3%
S&P 500 (TR)
‐37.0%
26.5%
15.1%
2.1%
16.0%
32.4%
13.7%
‐2.9%
14.3%
15.9%
8.7%
16.5%
24.1%
100.0%
100.0%
100.0%
‐48.5%
‐21.4%
11.5%
5.7%
‐5.7%
4.8%
9.0%
3.4%
0.8%
5.1%
3.5%
1.5%
5.4%
‐49.8%
25.1%
9.9%
45.1%
‐21.4%
Finalists
Benchmarks
*MFDB Firm
The above classifications are NEPC’s internal classification of fund of hedge funds based on a holistic understanding of the managers. Performance is based on data
provided by the managers.
14
Exhibit 4
NEPC’s FOHF Stylistic Groupings
• Low Vol FOHFs approach portfolio construction with a bias toward
managing portfolio volatility. Returns are essentially a result of the
risk (i.e. low volatility) assumed.
• Core FOHFs strive for stability of returns and adopt the “sleep well at
night” approach to seek more middling returns with lower volatility.
Core FOHFs aim to protect on the downside and participate modestly
on the upside.
• Enhanced Core FOHFs follow a dual philosophy of providing good
downside protection in adverse market environments and seeking
above-average returns in normal-to-up markets. In their pursuit of
this dual mandate they tend to “actively” capture diversified return
streams by diversifying across strategies, managers, styles,
geographies etc. In aggregate, they tend to capture higher returns
than “core” FOHFs in up markets but tend to lose less on the
downside than their “return-seeking” peers .
• Return-Seeking FOHFs strive for above-average returns. They are less
concerned about interim volatility and focus more on downside
protection as their risk-management tool. Return-seeking FOHFs aim
to generate superior returns in normal to up markets though tend to
lose more than their “core” and “enhanced core” peers in adverse
markets.
15
Exhibit 4
Appendix: Finalists’ Manager Profiles
16
Exhibit 4
Grosvenor Institutional Partners, LP
Firm Location
Firm
Inception
Firm AUM
Strategy
Inception
Strategy AUM
# of Strategy
Investment
Professionals
SMA Experience
Firm AUM in
SMAs
Chicago, IL
1971
$26.3 Billion
5/1/1971
$18.7 Billion
41
Yes
65%
Grosvenor’s overall investment philosophy centers on generating consistent returns with low
volatility and avoiding capital losses and headline risk. In enacting this philosophy, Grosvenor
consciously pursues proven fundamentally driven strategies that are relatively liquid and have
historically maintained a low correlation to traditional markets. Thus, Grosvenor has generally
avoided macro/CTAs and some leveraged strategies. However, in its bid to lower correlation in
an increasingly macro driven environment in recent times, Grosvenor has invested in
macro/CTA. Grosvenor uses a mix of sector specialists and multi-strategy managers, where the
latter has provided flexibility and proven accretive over time. In 2014, Grosvenor launched the
Spectrum Fund with a similar philosophy but comprising of emerging managers.
100.0%
80.0%
60.0%
40.0%
20.0%
-Historical Average Allocation
Historical Average Attribution
Equity Linked
Credit Linked
Tactical Trading
Multi-Strategy
Other/Cash
Event Driven
Note: Allocation/Attribution charts are for Grosvenor Institutional Partners, LP based on NEPC’s aggregation of data provided by manager for January 2005- Dec 2014. The
Grosvenor Spectrum Fund, whose allocations mirror Grosvenor Institutional Partners, LP, was also proposed.
17
Exhibit 4
PAAMCO Diversified Emerging Manager Strategy
Firm Location
Firm
Inception
Firm AUM
Irvine, CA
3/1/2000
$8.9 Billion
Strategy Inception
Strategy
AUM
# of Strategy
Investment
Professionals
SMA Experience
Firm AUM in
SMAs
$1.4
Billion
43
Yes
88%
8/1/04
(revised 4/1/12)
PAAMCO’s Diversified Emerging Manager Strategy was launched in August 2004 as a
multi-strategy fund with an emphasis on emerging managers. In April of 2012 the emerging
managers definition was expanded to include those with significant minority or women
ownership. Emerging Manager is defined as any investment fund on initial investment date that
does not exceed $750 million in AUM or has been in existence for less than 2 years, or any
investment manager whose AUM does not exceed $2 billion or has a significant minority or
women ownership. PAAMCO gains support from their research that shows emerging managers
are likely to produce stronger risk-adjusted returns than established managers. Their research
also shows that directional commodity futures managers cannot produce consistent alpha over
long periods of time and are thus avoided. PAAMCO focuses on generating alpha with an eye
toward extracting uncorrelated returns (alpha) notwithstanding inherent volatility.
100.0%
80.0%
60.0%
40.0%
20.0%
Equity Linked
Credit Linked
Tactical Trading
Multi-Strategy
Other/Cash
Event Driven
Note: Allocation/Attribution charts are for the PAAMCO MMS Composite based on NEPC’s aggregation of data provided by manager for Jan 2005 - Dec 2014.
18
Exhibit 4
Pluscios Diversified Core Portfolio
Firm Location
Firm
Inception
Firm AUM
Strategy
Inception
Strategy AUM
# of Strategy
Investment
Professionals
SMA Experience
Firm AUM in
SMAs
Evanston, IL
8/1/2006
$198 Million
8/1/2006
$188 Million
4
Only 1 SMA
5%
Pluscios is an Illinois based women-owned investment manager that specializes in hedge fund
portfolio management. Pluscios Diversified Core Strategy is a return-oriented portfolio that
seeks to provide long-term growth and capital preservation across market cycles by focusing on
both a top down macro view on global economic and regulatory trends and a fundamental,
bottom up manager selection to implement those views. The Pluscios team combines niche
global managers and tactical allocations to create portfolios comprising Core strategies
(absolute value, relative value, and catalyst driven comprising 90% of the portfolio) and
Opportunistic strategies (global macro and emerging markets up to 10% allocation).
100.0%
80.0%
60.0%
40.0%
20.0%
Equity Linked
Credit Linked
Tactical Trading
Multi-Strategy
Other/Cash
Event Driven
Note: Allocation/Attribution charts are for Pluscios Diversified Core Portfolio based on NEPC’s aggregation of data provided by manager for Sep 2006- Dec 2014.
19
Exhibit 4
Prisma Spectrum Fund L.P.
Firm Location
Firm
Inception
Firm AUM
Strategy
Inception
Strategy AUM
# of Strategy
Investment
Professionals
SMA Experience
Firm AUM in
SMAs
New York,
NY
6/1/2004
$10.2 Billion
6/1/2004
$7.8 Billion
19
Yes
64%
Prisma’s low-beta strategy attempts to deliver stable returns with a greater emphasis on low
correlation to traditional asset classes. Concurrent with a low beta strategy to mitigate capital
losses in market downturns, Prisma aims to capture alpha opportunities in up market cycles
and dislocations by adopting a more active asset allocation approach. Thus, Prisma believes in
fulfilling a dual purpose: win by losing less in down markets while aiming to capture
idiosyncratic gains (alpha) in up markets by exploiting market inefficiencies. A global approach
to capture diversified return streams manifests in generally niche managers who are sector
specialists as opposed to multi-strategy managers.
100.0%
80.0%
60.0%
40.0%
20.0%
--20.0%
Historical Average Allocation
Equity Linked
Credit Linked
Tactical Trading
Multi-Strategy
Other/Cash
Event Driven
Note: Allocation/Attribution charts are for Prisma Spectrum Fund LP based on NEPC’s aggregation of data provided by manager for Jan 2005 - Dec 2014.
20
Exhibit 4
Appendix: Shortlist of Semi-Finalists &
Finalists
21
Exhibit 4
Summary of Advertised Search Criteria
• Fund Strategy:
–
Diversified Multi-Strategy Fund of Hedge Funds (FOHF)
• Summary of Firm / Fund requirements:
1. Proposing firm must be SEC-registered or exempt from registration with the nature of the exemption
provided. The firm must submit its full Form ADV (Parts I and II).
2. Proposing firm must agree to serve as a “fiduciary” to the Fund within the meaning of Illinois legislation
and to act in accordance with all requirements and standards of conduct applicable to fiduciaries.
3. Proposer and its proposed team have all authorizations, permits, licenses and certifications required by
federal and state laws and regulations to perform the services specified in this RFP at the time Proposer
submits a response to the RFP. Proposer’s audited financial statements must be made available for review.
4. Proposer will comply with all legislation regarding investment in Iran and Sudan, and applicable State
fiduciary, ethics, and diversity laws, including any additional disclosure requirements as outlined above.
5. The proposing firm must have an established track record of managing a diversified multi-strategy fund of
hedge fund (commingled fund) that was incepted no later than January 1, 2008. Qualified Women,
Minority, or Disabled Owned Businesses are exempt and will be evaluated for further consideration at
SURS’ discretion.
6. Minimum Firm Level AUM: $1 billion as of 12/31/2014. Qualified Women, Minority, or Disabled Owned
Businesses are exempt and will be evaluated for further consideration at SURS’ discretion.
7. Must provide performance track record (in managing non-proprietary capital) of the Proposed fund for the
RFP: Fund Inception no later than January 1, 2008. Qualified Women, Minority, or Disabled Owned
Businesses are exempt and will be evaluated for further consideration at SURS’ discretion.
8. Must have a core competency and demonstrated track record in constructing diversified multi-strategy fund
of hedge funds. A “Diversified multi-strategy” fund of hedge fund is described as a fund that does not
historically display a dominant (>50%) allocation and/or attribution related to any one single sub strategy
either individually or collectively with similar strategies.
• In total, 40 firms responded to the Multi-Strategy FOHF RFP
–
Of the 40 respondents 8 identified themselves as minority or women owned.
22
Exhibit 4
Summary of Shortlisting Process
The respondents to the advertised search were shortlisted for semifinals based on a combination of the following criteria :
– Completeness of response
– Qualification on search criteria mentioned in the public search (e.g. firm assets, length
of track record, definition of “diversified” multi-strategy fund of fund, MFDB)
– Effectiveness of sub-strategy allocation vis-à-vis corresponding attribution
– Portfolio construction (sector specialists vs. multi-strategy managers)
– Relative performance in stylistic peer group
– Performance in varying market conditions
The finalists were further shortlisted based on:
– In-person interviews with Semi-Finalists conducted by ILSURS and NEPC
23
Exhibit 4
Respondents: Evaluation Summary
Pool A ‐ Finalists
SURS/NEPC Comments:
Have 5% of AUM invested with diverse firms; MFDB carve out; Qualifies for Finals
Prisma Capital Partners, LP (KKR Prisma)
Strong performance; Proposed customized sleeve for MFDB firms (12% of AUM) ; Manager with additional niche strategies; Qualifies for Finals
Pluscios Management LLC*
Female Owned Firm; Active portfolio management, IL‐based; Qualifies for Finals
Pacific Alternative Asset Management Company, LLC (“PAAMCO U.S.”)
Offer well established product with focus on small, emerging & MFDB firms (30% of AUM) ; Qualifies for Finals
Pool B ‐ Semi‐Finalists Eliminated
SURS/NEPC Comments:
Aetos Capital LLC
Limited experience with emerging firms; Qualifies for Semi‐Finals; Finalists offer better fit
Appomattox Advisory, Inc.*
Proforma portfolio designed with a tilt to MFDB firms (13 of 30 firms); High Multi‐Event manager Focus
Aurora Investment Management, LLC
Over 10% AUM invested with MFDB firms; Qualifies for Semi‐Finals; Finalists offer better fit
The Permal Group
No MFDB allocation; Qualifies for Semi‐Finals; Finalists offer better fit
Pool C ‐ Second Cut Eliminated
SURS/NEPC Comments:
Evanston Capital Management, LLC
Strong Performance, IL‐based; Definition of Diversified Multi‐Strategy not met
Goldman Sachs Asset Management
4% of AUM invested with diverse firms; High Multi‐Event manager focus
BlackRock
Poor performance in 2008 (‐28%); Currently have active investments with 5 MWBE firms; Portfolio data not provided in prescribed format; Less dynamic allocations; Preference for larger managers; Big drawdowns
Blackstone Alternative Asset Management, L.P.
13 of 131 managers on platform are MWBE; High Multi‐Strategy manager focus; Overly diversified
Crestline Investors, Inc.
Low volatility/low return profile
Use placement agents, although have not paid anyone in connection with SURS account; High Multi‐
Event manager focus
EACM Advisors LLC (A BNY Mellon Company)
J.P. Morgan Alternative Asset Management, Inc.
Several personnel departures in last 5 years; Manager profile similar to other shortlisted Semi‐Finalists
Magnitude Capital, LLC
Allocated capital to 6 MFDB firms (19% of portfolio capital); No SMA business
Morgan Stanley Alternative Investment Partners
Currently invest $1B with MFDB firms; Propose investing 10% of SURS mandate in MFDB sleeve ‐
currently do this for another client; High Multi‐Strategy manager focus, Event underperformance; Incomplete data
Northern Trust Investments, Inc.
High Multi‐Event manager focus; Macro underperformance
The Rock Creek Group, LP
SkyBridge Capital II, LLC
Definition of Diversified Multi‐Strategy not met; High Multi‐Strategy manager focus
Structured credit driven strong performance; Definition of Diversified Multi‐Strategy not met
Had small exposure to Amaranth; Little to no investing experience with MWBE firms; Incomplete data; High Multi‐Strategy manager focus
UBS Alternative and Quantitative Investments (A&Q)
*Denotes MFDB firm
24
Exhibit 4
Comments on Responding Firms
Pool D ‐ First Cut Eliminated
SURS/NEPC Comments:
Attucks Asset Management, LLC*
No AUM in HF products currently; Closed previous fund in 2013 due to small size; Not a core competency of the firm; Hedge Fund product closed in 2013; Incomplete Data
Aurum Fund Management Limited
Liquidity focus; Limited experience with MWBE firms; Focus on 4 strategies; High Multi‐Strategy manager focus
Carlyle Liquid Market Solutions
Carlyle bought DGAM in Feb 2014; Three largest clients represent 74% of AUM, 87% of fund; Client concentration, Leverage at FOHF level
Corbin Capital Partners, L.P.
Co‐CIO David Ben‐Ur left in 2012; Smaller global coverage, Les s frequent refresh of portfolio names
Cube Capital Holdings Limited
Recent loss of $400mm in AUM; Fund winding down
Not SEC registered (State of TN); Incomplete data
Disciplina Capital Management LLC*
EnTrust Capital Management LP
FRM Investment Management (USA) LLC
GAM USA Inc.
K2 Advisors, L.L.C.
LGT Capital Partners (Ireland) Limited
Down‐market performance in 2008 ; Skew toward Event (direct allocations to event managers and through multi‐
strategy managers); less well‐diversified across all hedge fund strategies
Wholly owned by MAN Group; May invest in other MAN‐owned hedge funds ‐ potential conflict of interest; Significant personnel turnover since 2012; Recent team turnover
Huge drop in HF assets from end of 2007 to end of 2014 ($12.8B to $1.5B); 25% gates; Declining firm/fund AUM
Would result in additional exposure to Franklin Templeton; 1 year soft lock; 20% gate; Definition of Diversified Multi‐
Strategy not met; High Multi‐Strategy manager focus
Limited AUM; Invested in 2 failed funds (LTCM & MotherRock Energy Fund); Fund HF AUM small relative to firm assets, No indication of SMA assets; HF probably not a core business
Mesirow Advanced Strategies, Inc.
Limited experience with MFDB firms; Manager profile similar to other shortlisted Semi‐Finalists
Neuberger Berman
Huge drop in # of institutional investors & AUM over the past few years; Definition of Diversified Multi‐Strategy not met
Pan Reliance Capital Advisors, LLC*
Exposure to Amaranth and Madoff; No AUM growth; Definition of Diversified Multi‐Strategy not met
PreserverPartners, LLC*
Not SEC‐registered; Incomplete data
Protégé Partners, LLC
Fund AUM declined significantly over past 2 years due to large redemptions and depreciation; Declining AUM; Incomplete data
Stenham Asset Management Inc.
Definition of Diversified Multi‐Strategy not met; Departure of senior macro analyst
FIS Group, Inc. (Talson FIS Paragon Discovery Fund)*
Heavy emphasis on long/short; Incomplete data; Historically not very institutionally oriented
Williams Capital Management / Lyrical Partners*
Heavy emphasis on long/short; Definition of Diversified Multi‐Strategy not met
*Denotes MFDB firm
25
Exhibit 4
Disclaimers & Disclosures
26
Exhibit 4
Disclaimer
• Past performance is no guarantee of future results.
• Data used to prepare this report was obtained directly from the
investment manager(s). While NEPC has exercised reasonable
professional care in preparing this report, we cannot guarantee the
accuracy of all source information contained within.
• This report may contain confidential or proprietary information and is
intended only for the designated recipient(s). If you are not a
designated recipient, you may not copy or distribute this document.
27
Exhibit 4
Alternative Investment Disclosures
It is important that investors understand the following characteristics of
non-traditional investment strategies including hedge funds and private
equity:
− Performance can be volatile and investors could lose all or a substantial portion of their
investment
− Leverage and other speculative practices may increase the risk of loss
− Past performance may be revised due to the revaluation of investments
− These investments can be illiquid, and investors may be subject to lock-ups or lengthy
redemption terms
− A secondary market may not be available for all funds, and any sales that occur may take
place at a discount to value
− These funds are not subject to the same regulatory requirements as registered
investment vehicles
− Managers may not be required to provide periodic pricing or valuation information to
investors
− These funds may have complex tax structures and delays in distributing important tax
information
− These funds often charge high fees
− Investment agreements often give the manager authority to trade in securities, markets
or currencies that are not within the manager’s realm of expertise or contemplated
investment strategy
28
Exhibit 5
Non-U.S. & Global Equity Asset Class Review
Quarter Ending June 30, 2015
Exhibit 5
Non-U.S. Equity
Exhibit 5
Country Weights
MSCI EAFE Index
•
•
•
•
MSCI EAFE captures large and mid
representation across the
Developed Market Countries
around the world, excluding the
U.S. & Canada.
Covers approximately 85% of each
country.
Average Market Cap is $4.6 billion.
Top 10 Holdings:
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
Nestle
Novartis
Roche Holding
Toyota Motor Corp
HSBC Holdings
Sanofi
Bayer
Novo Nordisk B
Royal Dutch Shell A
BP
Japan
23%
Other
28%
United
Kingdom
20%
Germany
9%
Switzerland
10%
France
10%
•
Managers = Herndon, Progress,
SGA, BlackRock Alpha Tilts.
•
Countries Include: Australia, Austria, Belgium, Denmark, Finland, France, Germany, Hong Kong, Ireland,
Israel, Italy, Japan, Netherlands, New Zealand, Norway, Portugal, Singapore, Spain, Sweden, Switzerland, UK.
Source: MSCI
Exhibit 5
Country Weights
MSCI ACWI ex-U.S. Index
•
•
•
•
MSCI ACW ex-U.S. captures large
and mid representation across 22
of 23 Developed Market Countries
and 23 Emerging Markets around
the world, excluding the U.S.
Covers approximately 85% of the
global equity opportunity set
outside of the U.S.
Average Market Cap is $9.1 billion.
Top 10 Holdings:
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
•
Japan
17%
United
Kingdom
15%
Other
47%
Nestle
Novartis
Roche Holding
Toyota Motor Corp
HSBC Holdings
Sanofi
Bayer
Novo Nordisk B
Samsung Electronics
Royal Dutch Shell A
France
7%
Germany
7%
Managers = Ativo, GlobeFlex,
Pyramis, BlackRock.
Source: MSCI
Switzerland
7%
Exhibit 5
Country Weights
MSCI Emerging Market Index
•
•
•
•
MSCI Emerging Market Index
captures large and mid
representation across 23
Emerging Market Countries.
Covers approximately 85% each
country.
Average Market Cap is $4 billion.
Top 10 Holdings:
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
•
•
Samsung Electronics
Taiwan Semiconductor
Tencent Holdings
China Mobile
China Construction BK H
Naspers N
ICBC H
Hon Hai Precision IND CO
Bank of China
Infosys
China
23%
Other
33%
South Korea
15%
South Africa
8%
India
8%
Taiwan
13%
Managers: BlackRock EM.
Countries Include: Brazil, Chile, China, Columbia, Czech Republic, Egypt, Greece, Hungary, India,
Indonesia, Korea, Malaysia, Mexico, Peru, Philippines, Poland, Russia, Qatar, South Africa, Taiwan,
Thailand, Turkey, and United Arab Emirates.
Source: MSCI
Exhibit 5
Total Non-U.S. Equity Performance
Net of Fees
12.00%
10.68%
9.44%
10.00%
8.99%
7.76%
8.00%
5.55%
6.00%
5.54%
4.00%
2.00%
0.00%
-2.00%
-4.00%
-6.00%
-3.71%
-5.26%
-8.00%
1 Year
3 Years
Total Non-U.S. Equity
5 Years
Benchmark
10 Years
Total Non-U.S. Equity
Comments:
•
•
•
•
Total Non-U.S. Equity market value
is $3.3 billion.
Target Allocation = 19%
Actual Allocation = 18.7%
MFDB Managers = 26% or $863M
•
•
•
•
•
•
Ativo (Latino)
GlobeFlex (Female)
Herndon (African American)
Progress (Multi-Manager)
SGA (Female)
Active
26%
Passive
44%
Passive assets are managed by
BlackRock.
Structured
Active
30%
Exhibit 5
Active Non-U.S. Equity
Exhibit 5
Comments:
•
•
Total Active Non-U.S. Equity
market value is $863 million.
100% of assets are managed by
MFDB managers.
Ativo
15%
SGA
19%
Globeflex
25%
Progress
22%
Herndon
19%
Exhibit 5
Active Non-U.S. Equity Performance
Net of Fees
14.00%
11.31%
12.00%
11.06%
9.85%
10.00%
8.89%
8.00%
5.92%
6.00%
5.96%
4.00%
2.00%
0.00%
-2.00%
-4.00%
-6.00%
-3.49%
-4.77%
1 Year
3 Years
Active Non-U.S. Equity
5 Years
Benchmark
10 Years
Structured Active Non-U.S. Equity
Comments:
•
•
Structured Active definition.
Total Structured Active Non-U.S.
Equity market value is $977
million.
Pyramis
52%
BTC Int’l
Alpha Tilts
48%
Exhibit 5
Exhibit 5
Structured Active Non-U.S. Equity Performance
Net of Fees
14.00%
13.03%
12.00%
10.60%
10.00%
10.55%
8.69%
8.00%
5.51%
6.00%
4.71%
4.00%
2.00%
0.00%
-2.00%
-1.61%
-4.00%
-6.00%
-4.77%
1 Year
3 Years
5 Years
Benchmark
10 Years
Exhibit 5
Non-U.S. Equity Characteristics
Sector Allocation
Cash
Utilities
Telecom
Info Tech
0.00%
0.90%
3.40%
3.20%
5.20%
5.80%
7.40%
7.90%
Consumer Staples
Consumer Disc
Industrials
Materials
Energy
Other
9.00%
9.30%
9.90%
9.70%
11.80%
12.20%
11.00%
11.30%
7.50%
7.30%
7.00%
6.50%
Benchmark
SURS
0.6%
0.8%
21.6%
16.9%
Emerging Markets
16.3%
17.5%
Japan
27.80%
25.90%
Financials
Health Care
Regional Allocation
8.4%
10.9%
Pacific ex Japan
14.6%
13.6%
United Kingdom
31.8%
34.1%
Europe Ex U.K.
United States
North America ex U.S.
0.0%
1.4%
6.6%
4.7%
Benchmark
SURS
Exhibit 5
Risk Stats
Exhibit 5
Global Equity
Country Weights
Exhibit 5
MSCI ACWI Index
•
•
•
•
MSCI ACWI captures large and
mid representation across 23
Developed Markets and 23
Emerging Markets countries.
Covers approximately 85% of the
global investable opportunity set.
Average Market Cap is $15.2
billion.
Top 10 Holdings:
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
Apple
Exxon Mobil
Microsoft
Johnson & Johnson
Wells Fargo
General Electric
Nestle
Novartis
JP Morgan Chase
Procter & Gamble
Other
27%
Germany
3%
France
3%
United
States
52%
United
Kingdom
7%
Source: MSCI
Japan
8%
Exhibit 5
Total Global Equity Performance
Net of Fees
16.00%
13.70%
14.00%
13.01%
12.45%
12.00%
11.93%
10.00%
8.00%
6.34%
6.21%
6.00%
4.00%
2.68%
2.00%
0.71%
0.00%
1 Year
3 Years
Total Global Equity
5 Years
Benchmark
10 Years
Exhibit 5
Global Equity
Comments:
•
•
•
Total Global Equity market value is
$1.5 billion.
Target Allocation = 8%.
Actual Allocation = 8%.
Wellington
25%
T. Rowe
Price
26%
Calamos
23%
Mondrian
25%
Exhibit 5
Global Equity Characteristics
Sector Allocation
Cash
Regional Allocation
0.00%
Other
14.90%
3.10%
2.10%
3.70%
2.40%
Utilities
Telecom
Emerging Markets
13.80%
14.50%
Info Tech
Japan
21.90%
Financials
15.40%
12.30%
12.40%
9.50%
9.30%
12.70%
11.60%
10.30%
8.40%
5.30%
3.90%
7.40%
5.00%
Health Care
Consumer Staples
Consumer Disc
Industrials
Materials
Energy
0.00%
5.00%
10.00%
Benchmark
15.00%
SURS
20.00%
Pacific ex Japan
United Kingdom
0.3%
2.7%
10.5%
5.7%
7.9%
5.7%
4.1%
5.1%
7.1%
7.3%
15.4%
14.0%
Europe Ex U.K.
51.5%
58.1%
United States
North America ex U.S.
25.00%
3.2%
1.4%
Benchmark
SURS
Exhibit 5
Risk Stats
Exhibit 6
(217) 378-8800 • (217) 378-9802 (FAX)
To:
From:
Date:
Re:
Alex Ramos
October 9, 2015
Herndon Capital Management, Non-U.S. Equity Manager Termination Memo
Overview and Recommendation
Mandate
Herndon Capital Management (HCM), previously known as Atlanta Life Investment Advisors,
was retained in June 2006 as a Non-U.S. equity manager in SURS’ Manager Diversity Program
(MDP) benchmarked to the MSCI EAFE.
Funding Timetable
Date
Jul-06
Feb-08
Oct-10
Nov-11
Amount($M)
15
15
50
46
As of June 30, 2015, the portfolio was valued at $159 million, which represents 23% of the NonU.S. equity portion of the MDP and 6.2% of the total MDP. The latest on-site due diligence
meeting with HCM was conducted in April 2015. SURS staff also conducts quarterly conference
calls with each MDP manager.
Staff and NEPC jointly recommend that Herndon Capital Management be terminated as a
Non-U.S. equity manager for the following reasons:
1) Poor investment performance relative to the benchmark and peer group.
 The relative performance of the Herndon Capital Management portfolio has been
unsatisfactory, especially over the most recent three-year period. HCM
significantly underperformed the index over the last year and has underperformed
compared to their peer group over the last three and five year time periods.
 Performance peer group rankings in the 94th, 96th and 97th percentiles over the last
one, three, and five year periods, respectively.
 Magnitude of underperformance appears to be increasing.
2) Decline in AUM for the strategy and in total for the firm.
Exhibit 6
Herndon Capital Management – Performance as of June 30, 2015
HCM
MSCI EAFE
Performance Performance
2006 (5 months)
15.11
13.56
2007
17.85
11.17
2008
(44.63)
(43.38)
2009
36.64
31.78
2010
7.63
7.75
2011
(13.12)
(12.14)
2012
16.82
17.32
2013
19.65
22.78
2014
(8.37)
(4.90)
2015 (6 months)
4.83
5.52
1 yr
3 yr
5 yr
Since Inception
(6.38)
8.96
7.25
2.88
(4.22)
11.97
9.54
2.89
Excess
Return
1.55
6.68
(1.25)
4.86
(0.12)
(0.98)
(0.49)
(3.13)
(3.47)
(0.69)
(2.16)
(3.01)
(2.28)
(0.01)
The HCM core international equity product underperformed the benchmark over the last one-,
three-, and five-year periods. Since inception, portfolio performance is in line with the
benchmark. On a calendar year basis, the portfolio has underperformed in six of the nine years.
Underperformance for the last year was due to an overweighting in the hard hit energy sector and
poor stock selection in the consumer discretionary, technology, and industrials sectors. In
addition, an underweighting of the Developed Europe region combined with an overweighting in
the North American region detracted from performance.
Over the past 3 years, attribution analysis indicates that 90% of underperformance has been
driven by poor stock selection especially in the financial sector and 10% due to the
overweighting in energy stocks. Herndon’s process is primarily focused on two criteria, the
book to value ratio and the return on equity ratio. Underperformance has been due to poor stock
and sector selection coinciding with the return on equity ratio as a factor falling out of favor in
the equity markets over the same period.
Exhibit 6
According to the Evestment table below, the rolling 3-year return has consistently ranked very
low versus the peer group
DATE
Jun-15
Mar-15
Dec-14
Sep-14
Jun-14
Mar-14
Dec-13
Sep-13
Jun-13
Mar-13
Dec-12
Sep-12
Jun-12
Mar-12
Dec-11
Sep-11
Jun-11
Mar-11
Dec-10
Sep-10
Jun-10
Mar-10
Dec-09
3 YR RETURN MEDIAN
9.30
13.20
7.00
10.20
9.00
12.80
11.90
15.20
6.50
9.50
4.80
9.00
7.10
9.70
5.80
10.20
7.50
12.10
3.90
7.40
3.40
6.10
3.50
4.90
6.30
8.70
17.40
19.50
9.10
10.00
0.70
0.70
0.30
0.20
-0.80
-0.90
-6.10
-5.00
-7.00
-7.60
-10.50
-11.20
-4.00
-4.90
-3.10
-4.10
3 YR RANK
96
92
94
94
90
93
88
95
94
89
89
71
83
74
58
51
49
48
63
44
43
40
37
The performance charts following are from NEPC’s June 30, 2015, performance book. The first
chart displays quarterly relative returns for Herndon’s portfolio versus the benchmark. Over the
past three years, the portfolio has lagged the benchmark in eight of twelve quarters.
Annualized Excess Performance
Exhibit 6
In the second table provided by NEPC, Herndon ranks in the 94th, 96th and 97th percentiles over
the last one, three, and five year periods respectively (as of June 30, 2015).
Herndon vs. eA All EAFE Equity Gross
Exhibit 6
The third chart shows the 3 year risk-return profile of the portfolio. It shows that the portfolio
has provided below average returns with a similar standard deviation to its peer group.
Clients/Assets
Strategy
Large Cap Value
Large Cap Growth
Large Cap Core International
Large Cap Core*
Mid Cap Value
Other
Total
# of Accounts
139
11
8
8
13
5
176
AUM (as of 6/30/15)
$7,530,344,123
$62,139,992
$370,073,636
$113,764,240
$136,097,736
$15,334,379
$8,113,989,866
*Core assets are represented in the Large Cap Value and Large Cap Growth Strategies
The number of accounts in the International products has declined from thirteen to eight and
asset under management (AUM) has declined from $516 million to $370 million over the last
year. The SURS account represents approximately 43% of the international product AUM. The
firm’s total number of assets under management was $4.8 billion in 2011 and grew to a high of
$10.3 billion in 2013. Since then, the total number of accounts has declined from 218 to 176, and
total assets under management have declined from $10.3 billion to $8.1 billion.
In addition to the MDP account, HCM manages a $41 million U.S. Large Cap Value portfolio
for SURS through Progress. HCM also previously managed a Non-U.S. Equity portfolio for
Progress. In May 2013, Progress terminated the Non-U.S. Equity portfolio due to portfolio fit
and underperformance.
Exhibit 6
Compliance
Portfolio Restrictions
The portfolio was slightly below the minimum for the Developed Europe Ex. UK region at the
end May. The benchmark weight for Developed Europe Ex. UK was 46.64%. The portfolio
weight was 36.32%. As a result, HCM was 32 bps below the 36.64 minimum for Developed
Europe Ex UK region. The portfolio was within the guideline bands by the end of June.
Usage of Minority-, Female- and Persons with a Disability-Owned Brokerage Firms
HCM directed 92.9% of its brokerage commissions to MFDB brokers
Consultant Comments
Herndon Capital Management is headquartered in Atlanta and was founded in 2001 as a division
of Atlanta Life Financial Group. The firm is currently 45% employee-owned by 3 principals
with the remaining ownership retained by Atlanta Life. Herndon has a total staff compliment of
approximately 45 employees, including 13 investment-professionals. The firm is currently
managing a total of $8.1 billion in client assets across 7 products, including $204 million across
2 client accounts in the Large Cap Core International Equity product, which is benchmarked to
the MSCI EAFE index and $166 million in a similar strategy that is benchmarked to the MSCI
ACWI index.
The portfolio manager, Ken Holley, is dedicated to the international strategy. The portfolio
manager believes that value outperforms over the long term and that growth stocks work in
bursts. Therefore both the quantitative screening process and fundamental analysis conducted by
the research team focus on identifying stocks with positive growth and valuation characteristics.
The portfolio also tends to hold early stage growth stocks and long term value stocks. While the
portfolio manager can make macro-driven sector calls, the overall sector positioning is driven by
bottom up screening and fundamental analysis. Portfolios are relatively concentrated and
typically include 55-70 individual names. Though benchmarked to the MSCI EAFE, the
portfolio will typically include an allocation of 5-8% to a small group of emerging markets
names. As of 6/30/15, the product has under-performed the MSCI EAFE Index over longer-term
trailing time periods, ranking in the bottom-quartile of the Evestment Alliance Universe over
both the trailing 3-, 5- and 10-year periods.
After experiencing significant firm-wide asset growth in 2012-2013, Herndon has experienced
net client & asset losses in calendar year 2014 and year-to-date 2015, when assets have declined
by approximately $970 million due to the loss of over 30 client accounts (6 months ended
6/30/15). Over the last twelve-months the investment team has experienced the departure of 3
Investment Analysts and replaced the departing individuals with the hire of 2 new and more
experienced analysts, but it is unclear whether those additions will be able to enhance the
performance of the International product given that the analyst team also supports the Large Cap
and Mid Cap U.S. equity products. NEPC is concerned with the inability of the firm to grow the
asset base of the Large Cap Core International product, the overall level of staffing, experience
and management of analyst group and the lack of consistent alpha generated from stock selection
over time. While a portion of the under-performance of the SURS product in both 2014 and
YTD 2015 is attributable to the modest emerging markets exposure, the product has benefited
from that same exposure in calendar years when it has out-performed the target benchmark.
Exhibit 6
Over longer-term cycles the product has not generated significant alpha from developed market
stock selection to justify the active management fee. Therefore, NEPC concurs with staff
recommendation that Herndon be terminated and the assets reallocated to other MDP managers
in the same category so that those account sizes can be increased.
Conclusion and Recommendation
The relative performance of the Herndon Capital Management portfolio has been unsatisfactory,
especially over the most recent three-year period. HCM significantly underperformed the index
over the last year and has underperformed compared to their peer group over the last three and
five year time periods. In addition, the asset base has declined in their non-U.S. equities as well
as in their core product, Large Value. Total assets under management have declined from $10.3
billion to $8.1 billion.
As a result, SURS staff and NEPC recommend:
 That Herndon Capital Management be terminated as a non-U.S. equity manager,
with the assets reallocated in approximately equal amounts to the following nonU.S. equity managers in the Manager Diversity Program
o Ativo Capital Management
o Strategic Global Advisors
Exhibit 7
(217) 378-8800 • (217) 378-9802 (FAX)
To:
From:
Date:
Re:
Shane P. Willoughby, CFA, CAIA
October 9, 2015
Calamos Advisors LLC, Global Equity Manager Termination Memo
Overview and Recommendation
SURS hired Calamos Advisors LLC (“Calamos”) as an active global equities manager in June
2008, with the MSCI ACWI index serving as its benchmark.
Funding Timetable
Date
June 2008
December 2009
November 2011
Amount($M)
100
30
105
As of June 30, 2015, Calamos managed $340 million for SURS, which represents 23.1% of the
global equity assets and 2.0% of the total SURS investment program. The latest staff on-site due
diligence meeting with Calamos was conducted in June 2015. In addition, NEPC met with
representatives from Calamos in June in NEPC’s Boston offices.
Staff and NEPC jointly recommend that Calamos Advisors LLC be terminated as a global
equity manager for the following reasons:
1) Persistent turnover in key senior staffing levels, including the departures of:
 Nick Calamos, former Co-CIO, who left in December 2013
 Jeff Scudieri, former Co-PM and Co-Head of Research, who left in April 2014
 Steve Klouda, former SVP and Co-Portfolio Manager on Growth/Fixed Income
team, who left in May 2015
 Gary Black, former Co-CIO, who is leaving in October 2015
2) Continual decline in AUM at the strategy, global equity, and total firm level since 2013
despite a relatively favorable investment environment
Senior Staff Turnover
Calamos has seen significant, repeated changes at the firm’s senior level over the last several
years. These actions have led to concern over organizational stability going forward.
On August 31, 2012, Calamos announced that Nick Calamos, Co- Chief Investment Officer, was
stepping back from the day-to-day business of the firm. He then continued to serve as a member
of the Calamos Asset Management, Inc. Board of Directors until December 4, 2013.
Exhibit 7
Also announced on August 31, 2012, was Calamos’ acquisition of Black Capital LLC. Black
Capital brought long/short capabilities to Calamos’ existing alternative investments offerings.
Gary Black, CEO and CIO of Black Capital LLC, was named Co-Chief Investment Officer at
Calamos. Mr. Black has previous experience as CEO, CIO, and President at Janus Capital
Group. Since Mr. Black’s arrival, Calamos increased investment staff by several individuals.
Another notable departure occurred in April 2014, when Jeff Scudieri, SVP, Co-PM and CoHead of Research left the firm to pursue other interests. Mr. Scudieri was a member of the
Investment Committee. His responsibilities were assumed by the other Co-Heads of Research
and Co-PMs on the Growth Team—Jon Vacko, SVP, Co-PM and Nick Niziolek, SVP, Co-PM.
In May 2015, Steve Klouda, Senior Vice President and Co-Portfolio Manager on the Calamos
Growth/Fixed Income Team, departed. Mr. Klouda was a member of the Investment Committee
and one of the investment team leaders responsible for analysis and research.
On September 10, 2015, staff was once again notified of a major organizational change. Gary
Black, who joined the firm in August 2012, is transitioning from the firm, with his tenure ending
October 31. In the collective view of Mr. Black, John Calamos, Sr., and the Board, the
objectives set forth for Mr. Black when he joined – expand the investment team resources and
product suite, and build out the “team of teams” structure – have largely been accomplished, and
Mr. Black has decided to move on to his next venture. Mr. Black was a member of the
Investment Committee.
Concurrent with Mr. Black’s announced departure, Calamos further announced the promotion of
four senior investment team members to Co-Chief Investment Officers. Nick Niziolek, Co-PM
on the SURS strategy, is now Co-CIO, Head of International and Global Strategies. As
contemplated by Calamos, Mr. Niziolek would continue to manage the SURS portfolio along
with Dennis Cogan and his team. It was also announced that Robert Behan, formerly Head of
Global Distribution, has been appointed President. While Mr. Black’s separation has been
termed amicable, it is further evidence of organizational instability at the senior level.
Clients/Assets
The following table displays Calamos’ global equity assets and clients and total firm assets under
management as of June 30, 2015. Despite positive absolute and relative performance over the
past year, assets under management and the number of clients across the firm have continued to
decline.
6/30/2009
6/30/2010
6/30/2011
6/30/2012
6/30/2013
6/30/2014
6/30/2015
SURS Product
AUM ($B) Clients
$1,278
27
$2,036
30
$3,020
34
$3,522
37
$1,973
23
$1,152
13
$1,070
12
Global Equity
AUM ($B) Clients
$1,352
15
$2,157
34
$3,275
23
$3,991
40
$2,566
26
$1,532
16
$1,385
15
Total Firm
AUM ($B) Clients
$27,032
1,741
$29,913
1,638
$37,351
1,671
$33,384
1,710
$26,634
1,458
$25,755
1,473
$24,432
1,448
Exhibit 7
Both the number of accounts (from 37 to 12) and AUM (from $3.5 billion to $1.1 billion) in the
SURS product have declined substantially since a peak in June 2012. The firm’s total AUM has
also fallen by nearly $9 billion over the same time period. Such a pattern during a positiveperforming market environment is cause for concern and could potentially lead to further erosion
of AUM. For the 3-year period ending June 30, 2015, the MSCI ACWI index returned a strong
13.01%.
Consultant Comments
NEPC supports staff’s recommendation to terminate Calamos based on the concern regarding the
staff turnover, changes to leadership structure, and loss of firm & product assets and accounts.
While the new multi-CIO structure is likely designed to support a strengthening of the individual
team silos, there is the potential for the new structure to dilute the oversight of the shared
resources, including the sector research and trading teams.
In addition, NEPC is concerned with the long-term performance of the firm’s U.S. security
selection strategies that make up core components of the Global Opportunities Strategy. The
U.S. All Cap Growth, U.S. Opportunities and U.S. Convertible strategies have all underperformed their respective benchmarks over the annualized 3-, 5- and 10-year periods ended
June 30, 2015. On a combined basis these three strategies represent over half of the firm’s total
assets under management, so there is concern these results could lead to additional asset
outflows. Given that the existing SURS Global Opportunities Strategy will typically have U.S.
equity and convertible bond exposure of at least 40-50% based on the target benchmark
composition, the lack of alpha generated in these three core U.S.-focused products is
representative of the firm’s security selection and portfolio construction track record over longerterm time periods.
Conclusion and Recommendation
Calamos has been included on SURS’ watchlist since September 2012 due to organizational
changes discussed above. Calamos has seen significant, repeated changes in the firm’s senior
leadership over the last several years. These actions, coupled with a steep drop in AUM at the
firm, global equity, and specific SURS strategy level, have led to concerns over organizational
stability going forward.
As a result, SURS staff and NEPC recommend that Calamos Advisors LLC be terminated
as a global equity manager, with the assets retained in the SURS cash account (with Policy
overlay in place) so that they can be used to fund the new Hedge Fund-of-Funds and
Commodity manager allocations in early 2016. As part of the funding of those new
accounts and necessary rebalancing, Staff and NEPC may recommend small Policy target
adjustments to the existing long-term Policy targets for Domestic, International and Global
Equities at the February 2016 Investment Committee meeting.
Exhibit 8
State Universities Retirement
System of Illinois (IL SURS)
Commodity Market Overview &
Inflation Protection
October 22, 2015
Doug Moseley, Partner
Kristin Finney-Cooke, CAIA, Sr. Consultant
Exhibit 8
Contents
Page
Overview of Commodity Markets & Strategies
Current Market Environment
Inflation & Asset Class Performance
Appendix
2
2
12
23
31
Exhibit 8
Overview of Commodity Markets &
Strategies
Exhibit 8
Overview of Commodity Markets
• Commodities are basic materials or goods that are grown or extracted
from the earth, processed or refined, and then used as key inputs in
the production of other goods & services
• Commodities generally fall into four basic categories
–
–
–
–
Energy: crude oil, natural gas, gasoline, heating oil
Metals: gold, silver, platinum, copper
Livestock & Meat: live cattle, pork bellies, lean hogs
Agricultural: corn, wheat, soybeans, rice, cocoa, coffee, cotton, sugar
• Commodities are most commonly accessed via the futures contracts
offered on derivative markets or exchanges
– Exchanges typically set agreed upon standards for condition & settlement
– Examples include Chicago Board of Trade, New York Mercantile Exchange
• Futures markets exist because the future supply & demand of
individual commodities is unknown or uncertain
– Producers and consumers can come together to establish pricing for future delivery
– Enables market participants to hedge their risk or exposure to future price movements
• Supply & demand for commodities is influenced by levels of economic
growth and consumption
– Result is a strong correlation to inflation
Exhibit 8
Commodity Strategy Return Drivers
• Spot Price
– Driven by supply and demand
– Inventories and market forecasts also affect spot price changes
• Roll Yield
– Yield that futures investors can capture when their futures contracts converges with
the current spot price
– Positive roll yield occurs when a commodity is in backwardation = futures expiration
price is below the current spot price
– Negative roll yield occurs in market that is in contango = futures expiration price is
higher than spot price
• Collateral Yield
– Futures contracts require margin collateral
– Returns may be generated from margin accounts – typically T-Bills
Exhibit 8
Roll Yield Overview
• Futures Contracts Expire
– Roll yield generated when contracts are “rolled” forward by selling the expiring
contract and buying a new longer-dated contract to maintain constant exposure
• (Normal) Backwardation: Futures Price < Spot Price
– Positive roll yields as futures contract appreciates towards spot price as contract date
approaches and cheaper futures contracts are purchased
– Occurs when producers/suppliers lock-in prices due to belief price will be lower in the
future
• Contango: Futures Price > Spot Price
– Negative roll yield occurs as futures contracts are more expensive than expiring nearterm contracts
– Occurs when buyers believe that prices will be higher than current spot prices
Sample Futures Curve
$100.60
$100.40
$100.20
$100.00
$99.80
$99.60
$99.40
$99.20
Today
Current Spot Price
Source: Credit Suisse
1 Month
3 Months
Futures Price (Backwardation)
6 Months
1 Year
Futures Price (Contango)
Exhibit 8
Commodities Investment Strategy Overview
• Index strategies
– Returns driven by spot price + return of collateral (usually T-bills)
– Index components and methodology drive return and risk over time
•
•
Bloomberg Commodity Index (Formerly DJ UBS) created in 1998
S&P Goldman Sachs commodity index created in 1991
• Enhanced Index strategies
– Components and weightings adjusted to enhance return & diversification
– Active roll-yield management employed
• Active long-only strategies
–
–
–
–
Employ same roll-yield and tactical weighting techniques as Enhanced Index managers
Tactical weightings typically vary to greater degree than enhanced products
Use of non-benchmark commodities can be more active
Can reduce market exposure on the margin with use of higher cash positions
• Long -short strategies
– Directional and relative-value trades used to capture price movements, volatility, and
geographic spreads
– Return driven more by active decision-making
– Typically perform better in down markets
– Market beta exposure is typically lower
Exhibit 8
Index Sector Components Examples
Commodity
Indexes are
Different
S&P GSCI
Bloomberg* Commodity Index
2014 Target Weights
2015 Target Weights
Agriculture
13.3%
Livestock
6.0%
Agriculture
23.0%
Energy
31.2%
Industrial
Metals
6.7%
Underlying weights
and rebalancing
schedules can
drastically affect
performance
Energy
71.3%
Livestock
5.3%
Precious
Metals
2.8%
Source: S&P Dow Jones Indices LLC
Precious
Metals
16.2%
Industrial
Metals
16.7%
Source: Bloomberg
*DJ-UBS Commodity Index was rebranded effective July 1, 2014
Index
Characteristics
S&P GSCI
Bloomberg Commodity Index
Weighting
Methodology
World production quantity, with minimum
liquidity thresholds
World production value (1/3) and market
liquidity (2/3)
Contracts Used
Front Month
Front Month
Number of
Individual
Commodities
24
20
Index
Reconstruction
Annual
Annual
Sector Weighting
Constraint
None
Max 33% single commodity group, max 15%
and min 2% single commodity
5 business days (5th to 9th business day of
month)
5 business days (5th to 9th business day of
month)
Roll Period
Exhibit 8
Current Market Environment
Exhibit 8
Executive Summary
• Recent Commodity price declines driven by multiple short- and longterm factors
– Both supply and demand shocks in key commodities including energy
•
•
•
Ongoing increase in US shale oil production
Unexpected supply rebound from Libya
OPEC decision to maintain production
– Slowing economic growth and concerns about future growth
– Strengthening US Dollar
• Uncertainty and headwinds still present
– US Dollar demand as result of potential for higher interest rates
– Slowing global demand (China)
– Abundance of negative roll yield in commodity futures markets
• Rationale for maintaining exposure to commodities include the
following:
–
–
–
–
–
–
Recent commodity price declines serve as self-correcting process for supply & demand
Capital spending in both energy and mining experiencing significant pull back
Valuations & sentiment at cyclical lows for most core commodities
Central banks targeting inflation and printing money
Hedge against geopolitical risks (Iran, Russia, Venezuela, Libya)
Low expected returns for developed-market stocks and bonds
Exhibit 8
Commodity Market Historical Performance
Annualized Returns (as of 8/31/15)
As of 12/31/10*
Benchmark
1 yr
3 yr
5 yr
7 yr
10 yr
15 yr
20yr
10 yr
15 yr
GSCI Commodity Index
GSCI non‐energy Commodity Index
‐28.14
‐41.55
‐26.42
‐14.56
‐18.47
‐14.74
‐6.96
‐7.10
‐5.39
‐9.88
‐14.91
‐9.02
‐4.91
‐9.41
‐3.90
0.46
‐2.27
‐0.20
2.17
0.92
0.43
5.84
1.72
4.41
6.33
NA
3.36
S&P 500
MSCI EAFE
BC Agg
0.48
‐7.47
1.55
14.31
8.53
1.53
15.87
7.05
2.98
8.69
2.24
4.54
7.15
3.96
4.46
3.76
3.05
5.29
8.49
4.76
5.60
1.41
3.5
5.84
6.76
4.7
6.04
Calendar-Year Returns
Benchmark
GSCI Commodity Index
GSCI non‐energy Commodity Index
2014
‐17.01
‐33.06
‐14.04
2013
‐9.52
‐1.22
‐11.02
2012
‐1.06
0.08
2.38
2011
‐13.32
‐1.18
‐9.64
2010
16.83
9.02
20.64
2009
18.91
13.49
15.99
2008
‐35.65
‐46.49
‐34.32
2007
16.23
31.92
22.58
2006
2.07
‐15.04
0.96
2005
21.36
25.55
19.26
S&P 500
MSCI EAFE
BC Agg
13.69
‐4.9
5.97
32.39
22.78
‐2.02
16
17.32
4.21
2.11
‐12.14
7.84
15.06
7.75
6.54
26.46
31.78
5.93
‐37
‐43.38
5.24
5.49
11.17
6.97
15.79
26.34
4.33
4.91
13.54
2.43
* Twenty-year annualized returns as of 12/31/10 not available for some indices
Exhibit 8
Commodity Market Corrections and Forward Returns
Source: Bloomberg, Wellington Management
Exhibit 8
Commodity Lifecycle – Supply, Demand & Capacity
Source: Wellington Management. Example for Illustrative Purposes only
Exhibit 8
Putting the Oil Supply and Demand Balance in Perspective
•
Short-term supply/demand fluctuations and imbalances are not uncommon
•
Current oil demand of 93.1 million barrels of oil per day (“MMbod”)
•
Current oversupply of 2.5 MMbod (~3% of current demand)
98
6.0
96
5.0
94
4.0
92
3.0
90
2.0
88
1.0
86
0.0
84
(1.0)
82
(2.0)
Forecast
80
(3.0)
2009
2010
2011
2012
Implied Stock Change (RH)
Source: EIA Short-Term Energy Outlook; data as of July 2015.
2013
2014
World Production (LH)
2015
2016
World Consumption (LH)
MMBod
MMBod
Global Liquids Supply & Demand Balance
Exhibit 8
Historical Perspective – Price to Marginal Cost
Source: Bloomberg, Datastream & Wellington Management
Exhibit 8
Inflation & Asset Class Performance
Exhibit 8
NEPC’s View on Inflation Hedging Assets
• Inflation hedging assets play an important role in an
investment program
• Exposure to inflation hedging assets can protect purchasing
power by delivering incremental returns during high
inflationary periods
• Inflation hedging assets are expected to:
– Provide a hedge against unexpected inflation
– Provide attractive real returns during periods of high inflation
– Provide attractive relative returns during normal/low inflation
– Increase overall portfolio diversification
• Diversified exposure to inflation hedging asset sub-sectors is
the most efficient way to:
– Build protection against a range of inflationary outcomes
– Produce better risk-adjusted returns through a full market and
inflationary cycle
Exhibit 8
What is Inflation?
• Inflation is the increase in the price of goods/services or the
decline in the value of money in an economy over a period of time
• Inflationary pressures come from supply/demand imbalances and
domestic/external sources
• Although interrelated, inflationary pressures can be categorized as
monetary, cost-push, or demand-pull driven
Type
Driver
Monetary
•
An increase in the supply of money by central
banks/the financial system
Cost-Push
•
Rising input costs / supply shock (raw materials, labor
costs, indirect taxes, etc.) passed along to consumers
Demand-Pull
•
Excess demand in an economy driven by accelerating
growth and resource constraints
Exhibit 8
How is Inflation Measured?
• Measures of inflation in the US include:
– Consumer Price Index (CPI)
– Producer Price Index (PPI)
– Employment Cost Index (ECI)
– Personal Consumption Expenditure Index (PCE)
– BLS International Price Index (Imports/Exports)
– Gross Domestic Product Deflator (GDP Deflator)
• However, each index has limitations
• CPI is the most commonly used measure
– CPI measures changes in the price level of a
market basket of consumer goods/services
purchased by households
– The ‘All Items Consumer Price Index for All Urban
Consumers’ (CPI-U) is the broadest and most
comprehensive CPI measure
Source: Bureau of Labor Statistics.
CPI Components
100%
25%
80%
10%
60%
14%
40%
20%
20%
32%
0%
CPI-U
Other Services
Energy
Food
Goods
Housing
Exhibit 8
Inflation in the US has Averaged 3.5% Annually Post WWII
15%
Historical US Inflation
10%
5%
0%
High Inflation
CPI YoY
‐5%
Source: Bloomberg, NEPC
•
High inflation has typically occurred during turbulent periods
such as wars (WWI, WWII, etc.) and unexpected supply
shocks
•
There have been seven periods of high inflation since 1913 –
defined as 12-month inflation of 5.5% or more
Exhibit 8
Asset Classes and Inflation Since 1947
Rolling 5‐Year Real Return
25%
20%
15%
10%
5%
0%
‐5%
‐10%
High Inflation
CPI
S&P 500
‐15%
25%
20%
15%
10%
5%
0%
‐5%
‐10%
High Inflation
CPI
30‐Day T‐Bill
BC High Yield
BC Long Treasury
‐15%
Exhibit 8
Rolling 5‐Year Return
25%
20%
15%
10%
5%
0%
‐5%
‐10%
High Inflation
CPI
US TIPS
MSCI EAFE
S&P GSCI
‐15%
3‐YR Return Correlation (1972)
S&P GSCI
FTSE NAREIT
MSCI EAFE
US TIPS
BC Long Treasury
Russell 2500
S&P 500
BC High Yield
BC Credit
BC Treasury
30‐Day T‐Bill
Correlation to CPI
‐0.6
‐0.4
‐0.2
0.0
0.2
0.4
0.6
0.8
Exhibit 8
25%
20%
15%
10%
5%
0%
‐5%
‐10%
High Inflation
CPI
US TIPS
‐15%
25%
20%
15%
10%
5%
0%
‐5%
‐10%
High Inflation
CPI
FTSE NAREIT
MSCI EAFE
S&P GSCI
‐15%
Exhibit 8
Asset Classes and Inflation Regimes Since 1972
20%
S&P 500
US TIPS
15%
S&P GSCI
10%
5%
0%
‐5%
‐10%
Normal Inflation
High Inflation
Low Inflation
All Periods (1972)
Exhibit 8
Asset Class Performance in Different Inflationary Environments (Real Returns)
Source: Wellington Management. Real Returns based on US CPI. Period classification based on monthly y/y change in US CPI
Exhibit 8
Eat Your Free Lunch…Stay Diversified and Balanced
1.60
Range of Historical 10 year Sharpe Ratios
1.40
1.20
1.00
0.80
0.60
0.40
0.20
Max
(0.20)
Min
(0.40)
LT Avg.
(0.60)
Bonds
Commodities
Equities
Equal Thirds
Source: Morningstar, Ibbotson, NEPC
Exhibit 8
Commodity Strategy Benefits
• Portfolio Diversifier
– Returns exhibit low correlation with equity and bond performance
• Inflation Hedge
– Commodities exhibit a high correlation with inflation
– Commodities generate attractive returns during periods of high inflation
– Collateral returns would benefit from rising interest rates typically associated with
rising inflation
Correlation to Inflation
60/40 Portfolio
Public REITs
Public REITs
0.03
0.59
MLPs
0.04
MLPs
0.34
0.10
0.42
Commodities
0.13
Commodities
0.00
Correlation to 60/40 Portfolio
0.20
0.30
0.40
Inflation(CPI)
0.00
0.41
0.03
0.10
0.20
0.30
0.40
0.50
0.60
0.70
Exhibit 8
Appendix
Exhibit 8
Putting the Oil Supply and Demand Balance in Perspective (Cont.)
Growing Global Demand
•
–
Demand for oil has grown at 1.2% per year since 2000
–
Unlike prior price declines, demand has not contracted (yet)
Rising Emerging Market Demand
•
–
Non-OECD demand growth rate of 3.3% per year since 2000
–
OECD demand growth of -0.4% during the same period
Average Annual Consumption
Global Liquids Consumption
100%
120
100
80
92.3
80%
76.6
MMbod
60%
60
40%
40
20%
20
OECD
Non-OECD
0%
0
2000
2002
2004
2006
Source: EIA; data as of December 2014.
2008
2010
2012
2014E
2000
2002
2004
2006
2008
2010
2012
2014E
Exhibit 8
Seven Factors that Will Impact Long-Term Oil Prices
1
Forward production ex-new drilling …
Supply rolls off quickly w/out continued investment
2
Breakeven prices …
Above current price levels
3
Capital investment response …
40%+ reduction in 2015 capex budgets, capital less available
4
Supply shocks from “at Risk” sources …
~50% of OPEC production from at risk countries -- OPEC 40% of world production
5
Non-OECD demand growth …
Rising middle class in large countries should drive long term demand
6
Market expectations …
Banks forecasting oil at $70+ a barrel
7
What keeps oil prices low …
Low economic growth, global production stability, US dollar strength
Expectations are that oil will remain volatile in 2015 (potentially falling below
current prices) as supply/demand forces work to balance … but by 2016 oil should
reach an equilibrium price of $70
Exhibit 8
US Market Capacity Trends
Source: Baker Hughes
Exhibit 8
2015 5-to-7 Year Return Forecasts
Geometric Expected Return
Asset Class
Cash
Treasuries
IG Corp Credit
MBS
Core Bonds*
TIPS
High-Yield Bonds
Bank Loans
Global Bonds (Unhedged)
Global Bonds (Hedged)
EMD External
EMD Local Currency
Large Cap Equities
Small/Mid Cap Equities
Int'l Equities (Unhedged)
Int'l Equities (Hedged)
Emerging Int'l Equities
Private Equity
Private Debt
Private Real Assets
Real Estate
REITS
Commodities
Hedge Funds
2014
1.50%
2.00%
3.50%
2.25%
2.53%
2.50%
4.50%
5.00%
1.25%
1.38%
5.00%
5.75%
6.25%
6.25%
7.25%
7.50%
9.50%
8.75%
8.00%
7.75%
6.25%
NA
5.00%
5.50%
2015
1.75%
1.75%
3.25%
2.00%
2.30%
2.25%
4.00%
4.50%
1.00%
1.17%
4.50%
5.50%
6.00%
6.00%
7.00%
7.50%
9.00%
8.50%
7.50%
8.00%
6.50%
6.50
5.25%
5.75%
2015-2014
0.25%
-0.25%
-0.25%
-0.25%
-0.23%
-0.25%
-0.50%
-0.50%
-0.25%
-0.21%
-0.50%
-0.25%
-0.25%
-0.25%
-0.25%
0.00%
-0.50%
-0.25%
-0.50%
0.25%
0.25%
NA
0.25%
0.25%
* Core Bonds assumption based on market weighted blend of components of Aggregate Index (Treasuries, IG Corp Credit, and MBS).
Exhibit 8
2015 30-Year Return Forecasts
Geometric Expected Return
Asset Class
Cash
Treasuries
IG Corp Credit
MBS
Core Bonds*
TIPS
High-Yield Bonds
Bank Loans
EMD External
EMD Local Currency
Large Cap Equities
Private Equity
Private Debt
Private Real Assets
Real Estate
REITS
Commodities
Hedge Funds
2014
3.75%
4.00%
5.25%
4.25%
4.40%
4.50%
6.00%
6.25%
3.00%
3.13%
7.00%
7.25%
7.75%
8.00%
8.25%
8.50%
9.50%
9.75%
8.25%
7.75%
6.50%
NA
6.00%
7.00%
2015
3.25%
3.50%
4.75%
3.75%
3.98%
4.00%
5.75%
6.00%
2.25%
2.42%
6.00%
6.75%
7.50%
7.75%
8.00%
8.49%
9.25%
9.50%
8.00%
7.75%
6.50%
6.75
5.75%
6.75%
2015-2014
-0.50%
-0.50%
-0.50%
-0.50%
-0.42%
-0.50%
-0.25%
-0.25%
-0.75%
-0.71%
-1.00%
-0.50%
-0.25%
-0.25%
-0.25%
-0.01%
-0.25%
-0.25%
-0.25%
0.00%
0.00%
NA
-0.25%
-0.25%
Exhibit 8
2015 Volatility Forecasts
Volatility
Asset Class
Cash
Treasuries
IG Corp Credit
MBS
Core Bonds*
TIPS
High-Yield Bonds
Bank Loans
EMD External
EMD Local Currency
Large Cap Equities
Private Equity
Private Debt
Private Real Assets
Real Estate
REITS
Commodities
Hedge Funds
2014
1.00%
6.00%
7.50%
7.00%
6.32%
7.50%
13.00%
8.00%
8.50%
5.00%
12.00%
15.00%
17.50%
21.00%
20.50%
18.50%
26.00%
27.00%
19.00%
23.00%
17.00%
NA
18.00%
9.00%
2015
1.00%
5.50%
7.50%
7.00%
6.03%
7.50%
13.00%
8.00%
9.00%
5.00%
12.00%
15.00%
17.50%
21.00%
21.00%
17.50%
26.00%
27.00%
17.00%
23.00%
15.00%
23.00
18.00%
9.00%
2015-2014
-0.50%
-0.29%
0.50%
0.50%
-1.00%
-2.00%
-2.00%
NA
Exhibit 8
Remember How Far We’ve Come…But How Much Further Can We Go?
Source: Bloomberg and NEPC as of 11/30
•
NEPC’s 2009 5-7 assumptions were eye-popping relative to previous years
–
•
Result of significant sell-off in the midst of the global financial crisis
Most fundamental forecasting models suggested even higher returns
–
We discounted original expectations heavily given tremendous path uncertainty at that time
•
–
•
If we could have offered certainty of our expectations, most would have seized it
Patient, long-term investors have been rewarded beyond our expectations
–
–
Tremendously beneficial in healing balance sheets, funded positions, grant making stability, etc.
But important to recall the range of outcomes that have been in play along the way
•
•
Still in the midst of drawdowns, frozen credit markets, unprecedented monetary policy
Quantitative Easing, Eurozone stability, etc.
Low yields and core fundamentals suggest muted returns looking forward
Exhibit 8
Disclosures
•
NEPC, LLC is an investment consulting firm. We provide asset-liability studies for
certain clients but we do not provide actuarial services. Any projections of funded
status or contributions contained in this report should not be used for budgeting
purposes. We recommend contacting the plan’s actuary to obtain budgeting
estimates.
•
The goal of this report is to provide a basis for substantiating asset allocation
recommendations.
•
Any projection of liabilities in this report uses standard actuarial projection
methods and does not rely on actual participant data. Asset and liability
information was received from the plan’s actuary, and other projection
assumptions are stated in the report.
•
Assets are projected using a methodology chosen by the client. Gains and losses
are estimated through investment returns generated by applying NEPC’s 5-7 year
asset class assumptions and scenario assumptions for the current year.
•
This report is based on forward-looking assumptions, which are subject to
change.
•
This report may contain confidential or proprietary information and may not be
copied or redistributed.
Exhibit 9
(217) 378-8800 • (217) 378-9802 (FAX)
To:
From:
Joseph M. Duncan and Shane P. Willoughby, CFA, CAIA
Date:
October 9, 2015
Re:
Commodities Manager Search Update
Background
At the June 12, 2014 Investment Committee meeting, the Board approved the asset/liability
study presented by NEPC. The new asset allocation includes a 2% allocation to commodities.
At the June 2015 Investment Committee meeting, the Board approved a search to identify
candidates to provide active commodities management. The Request for Proposal (RFP) was
advertised in the June 29, 2015 edition, and on the website, of Pensions & Investments, noticed,
as required, in the State newspaper, and posted to the SURS website.
Timeline
The timeline for the search process is as follows:
June 11, 2015
Quiet Period begins
June 29, 2015
Dissemination of RFP
July 10, 2015
Deadline for questions to SURS
July 17, 2015
Responses to questions submitted to SURS
July 31, 2015
RFP responses due by 4:30 p.m. CDT
August/September 2015
Identify firms for further consideration
October/November 2015
Interviews with selected firms
December 2015
Firms recommended to SURS Board of Trustees
Search Update
As discussed at the September 2015 Investment Committee meeting, staff and NEPC had
initially reviewed the responses and narrowed the initial list to twelve respondents, with the
intent to further narrow the list to 5-6 semi-finalist firms. This review has been completed and
the semi-finalists have been selected, using the following criteria:


Stability and General Experience of the Firm - Measured by the stability of the
financial condition of the firm and experience in providing active commodity
fund management to institutional clients.
Key Personnel – Personnel to be assigned to this account, including key
professionals, applicable portfolio managers, back-up and other staff assistance,
and education and experience of all such key personnel.
Exhibit 9




Expertise – Similar work performed for other clients.
Investment Philosophy and Process – Sound investment philosophy with
consistent process implementation, as measured by outcomes, communication,
and the implementation of risk controls.
Fees – Reasonableness and competitiveness of fees.
RFP Proposal – Completeness, clarity and responsiveness to requirements as
requested in the RFP and accompanying template.
Reasons for products that were eliminated from further consideration include:
 Product sub-sector concentration
 Product performance concerns
 AUM concerns at product and/or firm level
 Relative attractiveness of products offered by same firm
Opportunities for Minority-, Female-, and Persons with a Disability-Owned Firms
Based on the candidates that responded to SURS’ public RFP, it appears that a limited number of
MFDB-owned firms are active in commodities investing. Only one manager that responded
would be considered MFDB-owned. That manager, Galtere, submitted their Strategic
Commodity Fund for consideration. Given the following concerns, it was determined that
Galtere didn’t qualify for further consideration:


The fund is a long/short product that is heavily concentrated in agricultural commodities
(80+%) with the remainder of the fund invested opportunistically in commodity-driven
currencies and interest rates.
The firm has seen a significant decline in assets under management at both the firm and
fund level, along with staffing changes over the last few years.
The semi-finalists for active commodities management are:
Product Name
Cohen & Steers Active Commodities Strategy
CoreCommodity Program Founders I
CoreCommodity Program Founders II
Invesco Balanced-Risk Commodity Trust
PIMCO Commodity Alpha
Pinnacle Natural Resources
Wellington Commodities
Wellington Opportunistic Commodities
Product
Product AUM
Team Location Inception Date
($MM)
New York, NY
April 2013
$504
Stamford, CT
March 2010
$1,780
Stamford, CT
March 2010
$462
Atlanta, GA
Sept 2008
$1,300
Newport Beach, CA
Feb 2013
$375
New York, NY
October 2003
$2,300
Boston, MA
June 2003
$4,000
Boston, MA
March 2010
$250
Type
Net Long
Net Long
Net Long
Net Long
Long/Short
Long/Short
Net Long
Net Long
Anticipated
Beta
Benchmark-Like
Benchmark-Like
Benchmark-Like
Benchmark-Like
Low
Low
Benchmark-Like
≤ Benchmark
Anticipated Anticipated
Alpha
Tracking Error
250 bps
2-5%
250-400 bps
3-5%
300-500 bps
3-5%
500 bps
8-10%
No Target
No Target
No Target
No Target
200 bps
< 5%
No Target
No Target
Performance information on each semi-finalist is attached as Appendix A.
SURS staff and NEPC will conduct meetings with the six semi-finalist firms (8 total products)
October 15-16 in the SURS Champaign offices. Finalist firms will be invited to present to the
Board at the December 2015 Investment Committee meeting. Ultimately, NEPC and staff intend
to recommend two products for allocations.
The Quiet Period will remain in effect until a selection has been made by the Board and accepted
by the service provider.
Exhibit 10
Appendix A - Commodities Semi-Finalist Performance Information
2008
Cohen & Steers Active Commodities Strategy
CoreCommodity Program - Founders I
CoreCommodity Program - Founders II
Invesco Balanced-Risk Commodity Trust
Wellington Commodities
Wellington Opportunistic Commodities
-
PIMCO Commodity Alpha Fund
Pinnacle Natural Resources
15.4%
Bloomberg Commodity
S&P GSCI
HFRI Global
Barclays CTA
Newedge Trend
S&P 500
BC/LB US Agg
-35.7%
-46.5%
-23.3%
14.1%
20.9%
-37.0%
5.2%
1
For year-ending 6/30/15
2
Compared to Bloomberg Commodity Index
2015
1
2009 2010
2011 2012
2013
2014 YTD 1 Year
Net Long
-18.7% -3.4% -27.7%
-7.3% 0.5% -9.3% -18.2% 0.1% -23.2%
-8.6% 1.5% -6.9% -17.7% -0.4% -23.8%
31.1% -7.1% 8.8% -13.1% -15.4% -1.5% -19.1%
22.8% -4.0% 2.8% -12.7% -14.0% -2.4% -21.9%
-8.3% -1.6% -4.8% -13.9% -5.1% -25.3%
Long/Short
11.0% 0.7% 8.4%
14.6% 4.3% 2.7% 3.0% 1.1% 10.0% -6.7% 2.4%
Benchmarks
18.9% 16.8% -13.3% -1.1% -9.5% -17.0% -1.6% -23.7%
13.5% 9.0% -1.2% 0.1% -1.2% -33.1% -0.2% -36.8%
13.4% 5.2% -8.9% 3.5% 6.7% -0.6% 1.3% -1.1%
-0.1% 7.0% -3.1% -1.7% -1.4% 7.6% -0.4% 6.5%
-4.8% 13.2% -7.9% -3.5% 2.7% 19.7% -2.5% 17.6%
26.5% 15.1% 2.1% 16.0% 32.4% 13.7% 1.2% 7.4%
5.9% 6.5% 7.8% 4.2% -2.0% 6.0% -0.1% 1.9%
1
3 Year 5 Year
1
Beta
2
3 Year Rolling Through 6/30/15
Standard
Information
2
Correlation
Deviation Sharpe Ratio
Ratio
Tracking
Error
-8.4%
-7.2%
-8.8%
-8.3%
-7.7%
-1.5%
-1.1%
-0.6%
-1.3%
-2.8%
0.99
1.02
0.99
0.85
0.87
0.79
0.96
0.99
0.95
0.86
0.90
0.90
12.3%
12.4%
11.7%
11.5%
10.4%
(0.69)
(0.59)
(0.76)
(0.73)
(0.74)
0.17
0.40
(0.01)
0.09
0.21
2.03
3.83
6.20
5.15
5.10
1.4%
4.8%
(0.22)
(0.35)
7.4%
0.18
-
-
-8.8% -3.9%
-10.7% -4.3%
3.2%
1.5%
1.4%
1.7%
5.3%
3.9%
17.3% 17.3%
1.8%
3.4%
1.25
0.09
(0.05)
(0.17)
0.24
0.00
0.84
0.34
(0.14)
(0.18)
0.34
(0.01)
11.9%
17.6%
3.0%
4.4%
10.7%
8.6%
3.0%
(0.74)
(0.61)
1.04
0.31
0.49
2.02
0.60
-
-
Exhibit 11
(217) 378-8800 • (217) 378-9802 (FAX)
To:
From:
Date:
Re:
SURS Staff and NEPC
October 9, 2015
Portfolio Overlay RFP
Background
At the February 2014 Investment Committee meeting the concepts of selling options to capture
premium were discussed. Subsequently, in June 2014, the Board had further discussion on the
topic and engaged in significant conversation about whether an RFP should be issued and, if so,
the timing of issuing an RFP. At that time it was decided that staff should continue working on
implementing the approved asset allocation.
Summary
At the September 2015 Investment Committee meeting, the Board approved a motion to conduct
a search to identify qualified providers for portfolio overlay strategies and portfolio rebalancing.
NEPC has conducted a preliminary market survey of existing option overlay products available
in the marketplace in order to assess the risk & return parameters, impact of the mechanics of the
overlay on SURS cash management and existing Policy overlay, collateral management
requirements, reporting structure, fees and benchmarking. Based on this preliminary survey,
NEPC recommends that this mandate not be directly tied or integrated into the current
rebalancing policy or implementation structure with Parametric Clifton, but instead be presented
as a pure options overlay that is designed to generate yield premium income from the equity
exposure SURS already maintains (and consistent with directional rebalancing in the equity
portfolio).
Staff and NEPC recommend an initial allocation of approximately $250-400 million, depending
on the risk & return characteristics of the overlay strategy selected. Depending on the targeted
size and other parameters, this new mandate could either be included in the Opportunity Fund
Policy category or tracked as separate overlay with the required collateral amount included in the
Parametric Clifton policy overlay management. Staff and NEPC will make a recommendation to
the Committee at the December meeting regarding the Policy classification and any required
adjustments to other Policy category targets.
Proposed Timeline
A Request For Proposal (RFP) will be developed by NEPC and SURS Staff. The targeted
release date for the RFP is November 16, 2015. The RFP will be advertised in the print edition,
and on the website, of Pensions & Investments, noticed, as required, in the State newspaper, and
posted to the SURS website. The anticipated timeline for the search process is outlined in the
following table:
Exhibit 11
September 11, 2015
November 16, 2015
November 24, 2015
December 4, 2015
December 18, 2015
December 2015
February 2016
March 10, 2016
Proposed Search Timeline
Per Policy - Quiet Period Begins
Dissemination of RFP
Deadline for Questions to SURS
Responses to Questions Submitted to SURS Posted Online
RFP Responses Due by 4:30 p.m. CT
Review and Evaluation of Candidate Responses
Semi-Finalist Interviews with Selected Firms
Finalist Presentations to SURS Investment Committee
Quiet Period Policy Guidelines
The Quiet Period Policy is intended to establish guidelines by which Board Members and Staff
will communicate with potential service providers during the search process. The objectives of
the policy are to ensure that prospective service providers competing to become employed by
SURS have equal access to information regarding the search parameters; communications related
to the selection are consistent and accurate; and the process of selecting service providers is
efficient, diligent, and fair.
The following guidelines will be instituted during a search process for a service provider:
 A quiet period will commence upon Committee action (or Board action if the selection is
not initiated through a Committee) to authorize a search for a service provider and end
once a selection has been made by the Board and accepted by the service provider;
 Initiation, continuation and conclusion of the quiet period shall be publicly
communicated to prevent inadvertent violations;
 All Board members, and Staff not directly involved in the search process, shall refrain
from communicating with service provider candidates regarding any product or service
related to the search offered by the candidate throughout the quiet period and shall refrain
from accepting meals, travel, hotel, or other value from the candidates;
 Throughout the quiet period, if any Board member is contacted by a candidate, the Board
member shall refer the candidate to SURS Consultant or Staff directly involved in the
search process;
 All authority related to the search process shall be exercised solely by the relevant
Committee or Board as a whole, and not by individual Board Members;
 All information related to the search process shall be communicated by the SURS
Consultant and Staff to the relevant Committee or Board as a whole, and not to individual
Board Members;
 The quiet period does not prevent Board approved due diligence, client conference
attendance or communications with an existing service provider that happens to be a
candidate in the ordinary course of services provided by such service provider; however,
discussions related to the pending selection shall be avoided during those activities;
 The provisions of this policy will apply to service provider candidates throughout the
quiet period and shall be communicated to candidates in conjunction with any
competitive proposal process; and
 A service provider may be disqualified from a search process for a knowing violation of
this policy.
Exhibit 12
$42
$40
$38
$36
$34
$32
$30
$28
$26
$24
$22
$20
$18
$16
$14
$12
$10
$8
$6
$4
$2
$0
100%
80%
60%
40%
20%
0%
Jun-15
Jul-15
Assets
Jun-15 $
Jul-15
Aug-15
Estimated
Assets Liabilities
17.26 $
38.73
17.18
38.84
16.59
38.95
Liability
Aug-15
Funding Ratio
Market
Value
Unfunded Funding
Liabilities
Ratio
$
21.47
44.6%
$
21.66
44.2%
$
22.36
42.6%
Rate of Return
Month
FYTD
0.67%
-4.09%
0.7%
-3.5%
Note: Assets and liabilities are estimated and unaudited through August 31, 2015.
The fund has an actuarial value funding ratio of 42.3% at the end of Fiscal Year 2014,
utilizing a 7.25% assumed rate of return.
Percent Funded
$Billions
SURS Projected Funding Status
2016 Fiscal Year-to-Date Results
Exhibit 13
Illinois Public Pension Funds
Total Fund Performance
for periods ending June 30, 2015
Total
Plan
Assets
1 Year
Ending
(in billions) 6/30/15
IMRF
ISBI
CTPF
SURS
TRS
MEABF
MWRD
$
$
$
$
$
$
$
35.6
15.9
10.2
17.4
46.0
5.0
1.3
3.81%
5.06%
3.27%
3.11%
4.57%
4.20%
4.90%
3 Years
Ending
6/30/15
12.14%
12.45%
11.25%
11.27%
11.90%
10.90%
13.00%
5 Years
Ending
6/30/15
11.69%
11.77%
11.45%
11.49%
12.04%
11.00%
12.50%
10 Years
Ending
6/30/15
7.71%
6.52%
6.31%
7.34%
7.15%
6.20%
7.00%
Source: Staff at participating funds
Data presented in this report may be unaudited
IMRF, MEABF, and MWRD have fiscal years ending December 31st
ISBI, CTPF, SURS, and TRS have fiscal years ending June 30th
Returns are gross of fees
IMRF
ISBI
CTPF
SURS
TRS
MEABF
MWRD
Illinois Municipal Retirement Fund
Illinois State Board of Investments
Public School Teachers' Pension & Retirement Fund of Chicago
Teachers' Retirement System of the State of Illinois
Municipal Employees' Annuity and Benefit Fund of Chicago
Metropolitan Water Reclamation District Retirement Fund
20 Years
Ending
6/30/15
8.52%
n/a
n/a
8.42%
8.55%
7.64%
n/a
Illinois Public Pension Funds
Actual and Target Allocations
Exhibit 13
as of June 30, 2015
IMRF
Actual
Target
U.S. Equities
International Equities
Fixed Income
Real Estate
Private Equity
Hedge Funds
Other Alternative Investments
Cash Equivalents
Total
43.7%
38.0%
20.4%
17.0%
26.3%
27.0%
4.4%
8.0%
2.0% Target for
1.6% PE, HF &
0.6% Other is 9%
0.9%
1.0%
100.0%
100.0%
TRS
Actual
Target
U.S. Equities
Fixed Income
Real Estate
Private Equity
Hedge Funds
Other Alternative Investments
Cash Equivalents
Total
IMRF
ISBI
CTPF
SURS
TRS
MEABF
MWRD
Actual
ISBI
Target
30.8%
19.5%
21.8%
10.1%
4.2%
10.0%
3.4%
0.2%
30.0%
20.0%
20.0%
10.0%
5.0%
10.0%
5.0%
0.0%
100.0%
100.0%
MEABF
Actual
Target
CTPF
Actual
Target
30.9%
30.4%
23.1%
10.2%
2.9%
0.3%
2.2%
30.0%
30.0%
23.0%
9.0%
3.0%
2.0%
3.0%
33.3%
22.7%
27.1%
8.7%
5.6%
0.0%
2.5%
0.0%
33.0%
23.0%
26.0%
9.0%
6.0%
0.0%
3.0%
0.0%
100.0%
100.0%
100.0%
100.0%
Included in fixed income
MWRD
Actual
Target
20.2%
20.7%
17.5%
13.6%
11.6%
7.5%
8.4%
0.5%
22.0%
20.0%
16.0%
13.0%
11.0%
7.0%
10.0%
1.0%
24.6%
21.1%
25.7%
10.0%
5.1%
11.7%
0.0%
1.7%
26.0%
22.0%
27.0%
10.0%
5.0%
10.0%
0.0%
0.0%
50.0%
16.0%
34.0%
0.0%
0.0%
0.0%
0.0%
0.0%
42.0%
23.0%
35.0%
0.0%
0.0%
0.0%
0.0%
0.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
Illinois Municipal Retirement Fund
Illinois State Board of Investments
Public School Teachers' Pension & Retirement Fund of Chicago
Teachers' Retirement System of the State of Illinois
Metropolitan Water Reclamation District Retirement Fund
SURS
Actual
Target
Source: Staff at participating funds
Data presented in this report may be unaudited
IMRF, MEABF, and MWRD have fiscal years ending December 31st
ISBI, CTPF, SURS, and TRS have fiscal years ending June 30th
Exhibit 14
Exhibit 14
Exhibit 15
Exhibit 16
Minority and Female Investment Hearing Questionnaire
Senate Pensions & Investments Committee
1. What is the percentage of minority and women representation on the Board of Trustees of your
fund (“the Fund”)? Please identify the minority and women members of the Board of Trustees by
name, specifying which members are African American, Asian American, and Latino.
2. What is the percentage of minority and women representation on the Fund’s investment staff
(excluding support staff)? Please specify the percentage of African Americans, Asian Americans,
Latinos, and women.
3. What is the percentage of minority and women representation on the Fund’s consulting staff that
is specifically assigned to the Fund (excluding support staff)? Please specify the percentage of
African Americans, Asian Americans, Latinos, and women.
4. What is the percentage of minority and women representation at the Fund’s hired consulting firm
(excluding support staff)? Please specify the percentage of African Americans, Asian Americans,
Latinos, and women.
5. What is the percentage of minority and women representation at the Fund’s majority owned asset
managers who are specifically assigned to the Fund’s accounts (excluding support staff)? Please
specify the percentage of African Americans, Asian Americans, Latinos, and women.
6. As of December 31, 2014 and September, 2015, what were the total amounts of the Fund’s
assets?
7. What is your average initial allocation to MBE firms in each of the listed asset classes since
2012? What is your average initial allocation to non-MBE firms in each of the listed asset classes
since 2012: Domestic Equity, International Equity, Fixed Income, Hedge Fund, Real Estate, and
Private Equity.
8. What percent of assets were allocated to MWBE firms in searches not specifically designated for
emerging managers?
9. How many direct-hire RFP’s have you issued in 2015 for emerging managers in the following
alternatives asset classes: Real Estate, Hedge Fund, and Private Equity.
10. Are all of your underlying managers meeting MWBE brokerage goals? Are there any
consequences for underlying managers not meeting MWBE brokerage goals?
11. How many of your managers have violated your MWBE Brokerage Policy on multiple
occasions? Who are these firms and how many times have they violated the policy?
12. For 2014, please list [1] asset classes, [2] money managers, [3] the amount of assets managed in
that asset class (in column [1]) per manager as of December 31, 2014, [4] the percentage of
assets this represents in that asset class (in column [1]) as of December 31, 2014, and [5] the
percentage of assets this represents in the overall Fund as of December 31, 2014. Please also list
[6] the amount of fees paid per asset class (in column [1]) in 2014, [7] the percentage of fees paid
to this manager [2] compared to fees paid by the Fund in this asset class (in column [1]) in 2014,
Exhibit 16
[8] the percentage of fees paid to this manager [2] compared to fees paid by the overall Fund in
2013, and [9] the classification (i.e. African American, Latino, Asian American, Female) of the
manager [2]. Please be sure to sort the table by Asset Class [1] then Classification [9].
Asset Class
Manager
[1]
[2]
Assets Under Management
Total Fees Paid
[3]
[4]
[5]
[6]
[7]
$ in Asset % of Asset % of $ in Asset % of Asset
Class
Class
Total
Class
Class
[8]
% of
Total
Classification
[9]
Exhibit 16
13. For 2015, please complete the following table as of September, 2015. Please list [1] the asset
class, [2] the money manager, [3] the amount of assets managed in that asset class (in column
[1]), [4] the percentage of assets this represents in that asset class (in column [1]), and [5] the
percentage of assets this represents in the overall Fund. Please also list [6] the amount of fees
paid per asset class (in column [1]), [7] the percentage of fees paid to this manager [2] compared
to fees paid by the Fund in this asset class (in column [1]), [8] the percentage of fees paid to this
manager [2] compared to fees paid by the overall Fund, and [9] the classification (e.g. African
American, Latino, Asian American, Female) of the manager [2]. Please be sure to sort the table
by Asset Class [1] then Classification [9].
Asset Class
Manager
[1]
[2]
Total Fees Paid
[3]
[4]
[5]
[6]
[7]
[8]
$ in Asset % of Asset % of $ in Asset % of Asset % of
Class
Class
Total
Class
Class
Total
Classification
[9]
Exhibit 16
14. Please complete the following table in the same manner as Question #7, for 2014, but exclusive
of the manager of managers program. If your fund does not use a manager of managers program
you may leave this table blank.
Asset Class
Manager
[1]
[2]
Total Fees Paid
[3]
[4]
[5]
[6]
[7]
Class
Class
Total
Class
Class
[8]
% of
Total
Classification
[9]
Exhibit 16
15. Please complete the following table in the same manner as Question #8, but exclusive of the
manager of managers program. Please complete the table using information rendered through
September, 2015. If your fund does not use a manager of managers program you may leave this
table blank.
Asset Class
Manager
[1]
[2]
Total Fees Paid
[3]
[4]
[5]
[6]
[7]
Class
Class
Total
Class
Class
[8]
% of
Total
Classification
[9]
Exhibit 16
16. As of December 31, 2014 and September, 2015 what percentage (based on assets managed within
each asset class) of money managers retained by the Fund is African American? Latino? Asian
American? Female? Please identify these entities by name.
17. Exclusive of a manager of managers program, as of December 31, 2014 and September, 2015,
what percentage of money managers retained by the Fund is African American? Latino? Asian
American? Female? Please identify these entities by name.
18. Are any of your managers of managers minority- or female-owned firms? (If so, please name the
firm and the amount of assets being managed. If not, and you have hired a manager of managers,
please name the firm and the amount of assets being managed.)
19. If you have hired a manager of managers, what fees are paid to your manager of managers? What
amount of the manager of managers fees are paid to the underlying managers? Please be specific
and request this from your manager of managers.
20. At what point do you consider direct hiring of successful underlying managers in a manager of
managers program not including alternative investments?
21. What percent of assets by asset class were allocated to Illinois-headquartered minority- and
female-owned investment managers in 2014 and 2015 (September)? What is the total dollar
amount of those assets allocated to Illinois-headquartered minority- and female-owned
investment managers relative to each asset class?
22. What is the percentage of the total dollar amount of investment management fees that is paid by
the Fund to Illinois-headquartered minority- and female-owned investment managers in 2014 and
2015 (through September)? What is the total dollar amount of those fees by asset class? Please
specify the percentage and total dollar amount for African American-, Latino-, Asian American-,
and female-owned, Illinois-headquartered investment managers?
23. Please list, by investment manager, all brokers utilized during 2014 and through September,
2015, and the total commission paid to each broker utilized. Please denote MWBE brokers by
ethnic group and Illinois-based broker/dealers. Please separate the managers and their brokers
utilized by asset class (i.e., domestic equity, international equity, fixed income, etc.). For fixed
income, please list par value traded by manager with each broker as opposed to estimating
commissions. Separate commissions paid as follows: (a) total and (b) net of step outs,
correspondence, commission recapture, and/or any other non-direct trading. Please include all
asset managers that manage asset classes that trade publically traded securities. (e.g. REIT
Managers, Hedge Fund Managers, etc.) Are any managers excluded from your policy currently
and what are your plans to rectify this issue?
24. What are the consequences for individual managers who do not meet or exceed your MWBE
goals? Please list managers that are not in compliance with your goals and the total commissions
paid in 2014 and 2015 (through September). Please list by broker the dollar amounts on your
account.
Exhibit 16
25. In 2014 and 2015 (through September), what is the total dollar amount of commissions paid and
percentage of the total paid to Illinois-headquartered minority- and female-owned broker/dealers?
Please separate commissions paid as follows: (a) total and (b) net of step outs, correspondence,
and/or any other non-direct trading.
26. Do you require your fixed income managers to meet your goals by product or in aggregate? (e.g.
do you have goals for corporate bonds traded, treasury bonds traded, mortgage securities traded,
etc.) If not, why not?
27. Has the Board of Trustees implemented a policy encouraging the hiring of minority or women
money managers by the Fund across all asset classes? If so, when was the policy promulgated?
How has this policy been implemented? Describe any changes made to the policy and its
execution in the last year to improve minority and female-owned business enterprise
participation. Are there any asset classes that do not have minority and women representation?
Please provide a copy of the policy.
28. Has the Board of Trustees implemented a policy encouraging the hiring of minority- and femaleowned broker/dealers by the Fund’s asset managers? If so, when was the policy promulgated?
How has this policy been implemented? Does your policy include all asset managers who trade
publicly traded assets (e.g. REITs, hedge funds, etc)? Does your policy preclude the utilization of
non-direct trading methods toward meeting your goals? Describe any changes made to the
policy and its execution in the last year to improve minority and female-owned business
enterprise participation. Please provide a copy of the policy.
29. What steps is the Fund taking to encourage direct trading with minority- and female-owned
broker/dealers across all relevant asset classes instead of step-outs and correspondent
relationships?
30. Please list transition managers utilized in 2014 and 2015 (through September) and commissions
paid to each. Have you utilized any MWBE managers? If so who and if not why not?
31. If you don’t use a pool of transition managers, how do you determine which transition managers
to utilize?
32. Of the transitions that are conducted, what were the total fees and commissions paid to transition
managers? Please list and denote fees and commissions paid to all transition managers
individually and denote MWBE firms.
33. Please list gross commissions paid in 2014 and 2015 (through September) to brokers used during
transitions. In addition, please list the names and commissions paid to each broker.
34. Are the Fund’s transitions managers required to meet or exceed the Fund’s minority/women
owned brokerage firm utilization goals, if the Fund has goals, when conducting open market
trades during transitions? Please explain.
35. Public Act 96-6 required funds to adopt goals across all asset classes. How has the Fund’s goals
changed since passage of the new law? How else has PA 96-6 impacted the Fund’s use of
emerging investment managers? How do you promote transparency within the Board? Are your
full Board meetings and Investment Committee meetings entirely open to the public? Has the
Board gone into Executive Session regarding non-legal matters in the past? If so, for what
general reasons did the Board decide to hold an Executive Session instead of a public hearing?
Exhibit 16
Do you (or have you) given consideration to providing the same written materials to the public so
they can follow and understand the proceedings better? (as general referencing discloses little in
the greater interest of transparency)
36. Is there a maximum allocation your plan is allowed to allocate to a MWBE firm? If so, what is
the maximum? Is there a maximum allocation your plan is allowed to allocate to a MWBE firm
for each asset class? If so, what is the maximum by asset class?
37. Is there a maximum allocation your plan is allowed to allocate to trade with an MWBE firm? IF
so, what is the maximum? IS there a maximum volume or percent your plan is allowed to trade
with a MWBE firm for each asset class? IF so, what is the maximum? Is your policy a ceiling or
floor? Why?
38. What standards do you and your consultants use to confirm and certify that an investment
manager or broker is MWBE?
39. How many MWBE firms did your consultant recommend in searches which occurred in 2014 and
2015 (through September)? How many MWBE firms did your consultant recommend in searches
without a specific MWBE participation mandate? How many MWBE firms are currently on your
consultant’s recommended or select lists?
40. Have you issued any RFPs which preclude MWBE firms, as a whole, from responding due to
minimum requirements of the RFP? Please include all RFPs issued across all asset classes from
June 2014 to September 2015.
41. What, if any, precautions do you take so there is no discrimination in hiring or firing a firm based
on the political affiliation of a firm’s partners or employees?
42. Chart: Please complete the charts below to the best of your ability. If a chart does not apply to
your Fund please leave it blank.
Exhibit 16
NAME OF PENSION FUND
Total Fund Assets as of December 31, 2014
$0.0 Million
Total Fund Assets as of September 30, 2015
$00.00 Million
Goals
MWD Manager Utilization Goal
Total
%
Domestic Equity
00-00%
International Equity
00-00%
Fixed Income
00-00%
Alternative
00-00%
MWD Brokerage Goal
Domestic Equity
0.0%
0.0%
Fixed Income
0.0%
Transition Mgmt
00% of domestic eq.
Other Policy Aspects
Composition of Board and Staff
Total Minority/Female Trustees
0 of 0
African-American
0 of 9
Latino
0 of 0
Non-Minority Female
0 of 0
Total Investment Staff
0 of 0
African-American
0 of 0
Latino
0 of 0
Asian-American
0 of 0
Total Consultant Staff
0.00%
African-American
0.00%
Asian-American
0.00%
Non-Minority Female
0.00%
Two or More Races
0.00%
Latino
0.00%
Staff of Majority Owned Firms
0 of 0
African-American
0 of 0
Asian-American
0 of 0
Latino
0 of 0
Non-Minority Female
0 of 0
ASSET MANAGEMENT
For Calendar Year 2014
% of Assets
Managed by
Assets Managed by MWBE MWBE
African-American
%
Domestic
Latino(a)
%
International
Asian
%
Fixed Income
Female
%
Real Estate
Other
0.0% Private Equity
Hedge
% of fees paid to
MWBE
%
African-American 0.0%
Latino(a)
0.0%
Asian-American
0.0%
Other
0.0%
Female
0.0%
% of assets managed by IL MWBE firms
% of fees paid to IL MWBE firms
%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
As of September 30, 2015
% of Assets
Managed by
Assets Managed by MWBE MWBE
African-American
0.0% Domestic
Latino(a)
0.0% International
Asian
0.0% Fixed Income
Female
0.0% Real Estate
Other
0.0% Private Equity
Hedge
% of fees paid to
MWBE
%
African-American
0.0%
Latino(a)
0.0%
Asian-American
0.0%
Other
0.0%
Female
0.0%
% of assets managed by IL MWBE firms
% of fees paid to IL MWBE firms
%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
Exhibit 16
BROKERAGE
DOMESTIC EQUITY
Total commissions paid to MWBE firms in 2014
(in thousands)
$
%
African-American
$0.0 0.0%
Asian
$0.0 0.0%
Disabled
$0.0 0.0%
Latino
$0.0 0.0%
Female
$0.0 0.0%
Total
$0.0 0.0%
Total commissions paid to IL MWBE firms in
2014 (in thousands)
$
%
IL Based
$0.0 0.0%
Total commissions paid to MWBE firms in as
of September 30, 2015 (in thousands)
$
%
African-American
$0.0 0.0%
Asian
$0.0 0.0%
Disabled
$0.0 0.0%
Latino
$0.0 0.0%
Female
$0.0 0.0%
Total
$0.0 0.0%
as of September 30, 2015 (in thousands)
$
%
IL Based
$0.0 0.0%
INTERNATIONAL EQUITY
Total commissions paid to MWBE firms in 2014 (in
thousands)
$
%
African-American
$0.0
0.0%
Asian
$0.0
0.0%
Disabled
$0.0
0.0%
Latino
$0.0
0.0%
Female
$0.0
0.0%
Total
$0.0
0.0%
Total commissions paid to IL MWBE firms in 2014
(in thousands)
$
%
IL Based
$0.0 0.0%
FIXED INCOME
Total commissions paid to MWBE firms in as of
September 30, 2015 (in thousands)
$
%
African-American
$0.0
0.0%
Asian
$0.0
0.0%
Disabled
$0.0
0.0%
Latino
$0.0
0.0%
Female
$0.0
0.0%
Total
$0.0
0.0%
Total commissions paid to IL MWBE firms in as of
$
%
IL Based
$0.0 0.0%
Exhibit 16
Total commissions paid to MWBE firms in 2014
(in thousands)
$
%
African-American
$0.0
0.0%
Asian
$0.0
0.0%
Disabled
$0.0
0.0%
Latino
$0.0
0.0%
Female
$0.0
0.0%
Total
$0.0
0.0%
2014 (in thousands)
$
%
IL Based
$0.0
0.0%
Total commissions paid to MWBE firms in as of
$
%
African-American
$0.0 0.0%
Asian
$0.0 0.0%
Disabled
$0.0 0.0%
Latino
$0.0 0.0%
Female
$0.0 0.0%
Total
$0.0 0.0%
Total commissions paid to IL MWBE firms in as
of September 30, 2015 (in thousands)
$
%
IL Based
$0.0 0.0%
Exhibit 17
(217) 378-8800 • (217) 378-9802 (FAX)
To:
From:
Date:
Re:
Daniel L. Allen and Alex Ramos
October 9, 2015
Annual Review of Minority-, Female- and Persons with a Disability- Owned
Broker/Dealer Usage by SURS Investment Managers
A brokerage usage policy was instituted by SURS at the December 9, 2005, Board of Trustees
meeting when approved as a component of the Investment Policy. Annual revisions have been
approved by the Board beginning in 2007, providing modifications to brokerage expectations.
Standard investment reports prepared quarterly for the Board include brokerage cost reviews
by asset class that summarize the total usage of minority-, female- and persons with a
disability-owned (MFDB) brokerage firms over the prior four quarters by investment
managers in SURS defined benefit portfolio.
A brokerage review is presented to the Board of Trustees on an annual basis to summarize
results of the previous fiscal year and to identify investment managers facing challenges in
achieving the established expectation levels of usage of MFDB firms over the previous fiscal
year. Based on information included in the quarterly reports and annual reviews, investment
managers may be invited to participate in a presentation to the Board to assist in explaining
current brokerage compliance issues. An investment manager that is continually unable to
attain the expected level of usage of MFDB firms may be potentially terminated. In 2013, one
manager was terminated due to the continued inability to achieve the expected level of
utilization of MFDB firms.
Fiscal Year 2015 Results
SURS Summary Goals
Utilization of Minority-, Female- and Persons with a Disability- Owned
Broker/Dealer Firms
Asset Class
Goal
U.S. Equity
30.0%
Non-U.S. Equity
15.0%
Fixed Income
20.0%
The table above lists the minority-, female- and persons with a disability-owned brokerage
goals by asset class included in SURS Investment Policy, as approved at the Board Meeting on
September 10, 2015.
The summary table on the following page indicates that in the four previous fiscal years, total
commissions paid by SURS equity investment managers declined from 2010 through 2012
while utilization of MFDB brokerage firms steadily increased. Since 2012, MFDB utilization
has been about the same while total commissions paid has slightly increased.
Exhibit 17
Equity Commissions Summary Results
Total
Commissions Actual MFDB
Fiscal Year Commissions * to MFDB Firms
Utilization
2010
$ 5,081,540
$
1,622,970
31.94%
2011
$ 4,299,700
$
1,483,763
34.51%
2012
$ 3,871,797
$
1,556,867
40.21%
2013
$ 4,266,669
$
1,658,716
38.88%
2014
$ 3,982,710
$
1,518,156
38.12%
2015
$ 4,035,852
$
1,565,431
38.79%
* Total commissions exclude electronic trades and emerging market trades.
The following table summarizes the utilization of MFDB broker/dealers in each of the major
asset classes for the one-year period ending June 30, 2015.
Trading with Minority-, Female- and Persons with a Disability- Owned Broker/Dealer Firms
Year Ending June 30, 2015
Asset Class
U.S. Equity, Active
U.S. Equity, Passive
U.S. Equity, Enhanced Active
U.S. Equity, Total
Commissions
Actual MFDB
to MFDB Firms
Utilization
$
401,649
41.28%
$
67,085
100.00%
188,083
40.58%
$
656,817
43.68%
Non-U.S. Equity, Active
Non-U.S. Equity, Enhanced Active
Non-U.S. Equity, Total
$
Goal
Variance
30.00%
11.28%
35.00%
65.00%
10.00%
30.58%
30.00% 13.68%
$
539,446
51,976
591,422
50.17%
11.71%
38.93%
15.00%
10.00%
15.00%
35.17%
1.71%
23.93%
Global Equity 1
$
258,790
29.93%
17.50%
12.43%
REITs 2
$
58,402
39.32%
10.00%
29.32%
$
1,565,431
38.79%
Total Equity
Fixed Income
TIPS
3
3
N/A
30.18%
20.00%
10.18%
N/A
16.18%
10.00%
6.18%
1 The global equity goal increased to 20.00% on 1/1/15. As of 6/30, the 4-quarter rolling goal was 18.75%
2 Domestic REITs and global REITs, combined.
3 Commissions are not applicable to fixed income. Percentage calculation is based on percent of total market
value traded with MFDB firms.
Exhibit 17
Commissions totaled $4.0 million on equity trades for the year ended June 30, 2015. As the
table above indicates, commissions to MFDB broker/dealer firms were approximately $1.6
million, representing 38.8% of total commissions paid on equity trades for the period.
In aggregate, all asset classes exceeded the brokerage goals set forth in the Investment
Policy for trading with minority-, female- and persons with a disability-owned firms.
As a component of the annual compliance process, SURS’ staff communicates with each of
the investment managers, to remind them of SURS commitment to the MFDB brokerage
utilization initiative adopted by the Board at the March 19, 2004 meeting. This initiative was
created to develop a strategy for increasing the utilization of minority- and women-owned
broker/dealers. Since January 2006, SURS has been formally communicating quarterly with
investment managers that are not attaining the desired levels of utilization. The evaluation is
based on a rolling four-quarter period. Due to the inherent seasonality embedded in the
reporting process, managers may occasionally fall below levels of utilization for truncated
periods of time while consistently reaching overall utilization goals over the longer term.
SURS domestic equity, non-U.S. equity, global equity and REIT managers submit brokerage
information quarterly that is reconciled to data provided by SURS custodian, Northern Trust.
Managers Not Achieving Desired Expectation Levels
For the rolling four-quarter periods ended during Fiscal Year 2015, the level of MFDB usage
achieved by the following investment managers was below the expectations established by
SURS.
Asset Class
Non-U.S.
Equities
Global
Equities
Investment Manager
Pyramis Global Advisors
12-Month
Period End
03/31/2015
T.Rowe Price1
06/30/2015
Utilization Actual MFDB
Goal
Utilization
10.00%
9.68%
18.75%
18.27%
Each manager unable to achieve minimum level of minority-owned broker/dealer usage for a
rolling four-quarter period in Fiscal Year 2015 received a letter reiterating SURS usage
expectations. Discussions are ongoing between SURS staff and these managers to understand
and resolve the reasons for failure to attain the expected utilization levels.
Pyramis missed the goal for the period ending 3/31/15 but was able to exceed the objective by
the end of the fiscal year. Although T. Rowe Price missed the goal for the period ending
6/30/15, the manager did meet the objective for the other three quarters during the last fiscal
year.
SURS Monitoring Process
During Fiscal Year 2015, staff visited and communicated with the investment managers not
meeting the established usage levels of MFDB broker/dealers. Letters of non-compliance
were sent to the managers listed above with a response requested that was to address the
reason(s) for not attaining the expected level of MFDB utilization. All managers are aware of
the importance of the initiative as well as the goals set forth in the Investment Policy, with
1 It should be noted that the T. Rowe Price global equity account exceeded the minimum utilization rate for the
first three quarters of FY 2015. The global equity goal was increased on January 1, 2015, and T. Rowe Price has
indicated it will meet the new goal going forward.
Exhibit 17
some acknowledging challenges in achieving both best execution and the established MFDB
utilization levels. The September 2010 revision to the Investment Policy that allows credit
only for direct, rather than indirect, trading with MFDB firms has proven challenging for
several non-U.S. and global equity managers. The universe of MFDB firms capable of
providing direct international trade execution at competitive rates is relatively small at this
time, hindering the efforts of some investment managers to meet expectations. Staff is
regularly communicating with managers in an effort to achieve the MFDB utilization goals
without compromising best execution.
When selecting a broker, the manager must consider several factors, including achieving best
price, commission rate, liquidity and willingness to commit capital, trade flow, transaction
size, confidentiality, technology infrastructure, operational capabilities, broker research,
expertise in particular markets and use of local desks in global markets.
Compliance Enforcement Measures
Included in Appendix 2 and as stated in section XIV (B) of SURS Investment Policy adopted
by the Board of Trustees on September 11, 2015, an investment manager will be subject to the
following sequence of events when continuing to fall short of achieving the desired level of
MFDB broker/dealer utilization:
1) A follow-up letter will be distributed to the investment manager not achieving the
minimum level of minority-owned broker/dealer usage. The investment manager will be
reminded of the usage expected by SURS. Currently, as stated in the Annual Report to the
Governor and General Assembly on the Use of Emerging Investment Managers, prepared
as required in Public Act 87-1265, a letter is distributed to all of the investment managers
on an annual basis listing the level of expectations.
2) Not achieving the desired level of minority-owned broker/dealer usage will be noted in the
annual investment manager review. This could impact the evaluation of the firm.
3) SURS Staff will conduct a meeting with the investment manager to discuss the reasons for
not achieving the desired level of trading.
4) Investment managers not achieving the expected levels of broker/dealer usage may be
subject to a moratorium on additional funding.
5) If an investment manager fails to comply with the request, they may be invited to appear
before the SURS Board of Trustees to explain why they are unable to achieve the desired
level of trading.
SURS On-line Brokerage Reporting System
An on-line brokerage reporting system, developed by SURS staff in 2010, has been used by
investment managers since the first quarter of calendar year 2011 to enter quarterly data. Staff
uses information in the system to complete various reports, including quarterly brokerage cost
reviews, annual reports of the utilization of the Chicago Stock Exchange, and the annual
utilization of Illinois broker/dealers. The data in the system is available for ad hoc purposes as
well. The system has provided significant time savings for staff by eliminating cumbersome,
labor-intensive tasks involved in reconciling, recording and reporting brokerage information.
Additional annual cost savings were realized by eliminating the need for a $35,000 contract to
monitor and report manager utilization of the Chicago Stock Exchange. The system is
enhanced to address specific needs as they arise.
Exhibit 17
Summary
Appendix 1 includes a comparison of SURS desired usage levels of MFDB broker/dealer firms
versus other Illinois large public pension funds. Appendix 2 lists the brokerage expectation
levels stated in the Investment Policy approved by SURS Board on September 10, 2015.
Staff continues to expand its knowledge regarding the brokerage oversight function. SURS
does not identify broker/dealers to be used by investment managers; however, when SURS
becomes aware of a MFDB broker/dealer, the firm’s information is shared with SURS
investment managers. The investment managers are expected to communicate with the
prospective broker/dealer firm to assess the feasibility of establishing a relationship. SURS
has increased awareness of the brokerage community as a result of the Board initiative and the
Senate Pensions and Investments Committee hearings.
Staff will continue to monitor investment manager utilization of MFDB broker/dealers on a
quarterly basis. In addition, staff will continue to encourage managers to enhance efforts in
achieving the expected levels of direct trading with MFDB broker/dealers while maintaining
best execution practices.
Exhibit 17
Appendix 1
Minority-, Female- and Persons with a Disability- Owned Broker/Dealer Usage
Expectation Levels
September 2015
Teachers Retirement System of Illinois (TRS)
Domestic Equity
Fixed Income (based on volume)
19%
13%
15%
Illinois Municipal Retirement Fund (IMRF)
(All trade levels must be directly executed)
U.S. Equities
Fixed Income
High-Yield Bonds
U.S. Micro-Cap Equities
International Small-Cap Equities
Emerging Market Equities
25%
20%
22%
5%
7%
5%
5%
State Universities Retirement System (SURS)
(All trade levels must be directly executed)
Active U.S. Equity Separate Accounts
Passive U.S. Equity Separate Accounts
Structured Active Domestic Equity Separate Accounts
Non-U.S. Equity Separate Accounts
Structured Active Non-U.S. Equity Separate Accounts
Global Equity Separate Accounts
Fixed Income Separate Accounts
Real Estate Investment Trusts (REITS) & Treasury Inflation-Protected Securities (TIPS)
30%
35%
10%
15%
10%
20%
20%
10%
Illinois State Board of Investment (ISBI)
Domestic Equity
Fixed Income
International Fixed Income and Emerging Market Small Cap Equity
30%
20%
20%
0 - 5%
Public School Teachers' Pension & Retirement Fund of Chicago (CTPF)
(All trade levels must be directly executed unless otherwise noted)
Active Domestic Managers and Manager-of-Managers All Cap, Large Cap Equity
Active Domestic Small Cap Equity and Passive Domestic Equity
Active International Managers and Manager-of-Managers All Cap, Large Cap Equity and Passive International Equity
Active International Small Cap Equity
Active and Passive fixed income managers (goal is based on volume traded)
Active REIT managers
50%
35%
25%
5%
25%
10%
County Employees' Annuity & Benefit Fund of Cook County
Domestic Equity
International Small Cap and Emerging Market Equity
Transition Mgmt.
35%
10%
3%
10%
40%
Domestic Equity
International Equity - Developed
International Equity - Emerging
40%
20%
10%
25%
Exhibit 17
Appendix 2
Minority-Owned Broker/Dealer Usage Policy 1
Section XIV(B) of SURS Investment Policy (9/15)
The Board of Trustees of the State Universities Retirement System has an established
policy that seeks increased participation of investment management firms owned by
minorities, females, and persons with a disability. As part of this policy, the Board also
adopts minimum expectations for the use of minority-owned broker/dealers2 by the
System’s investment managers. Only trades executed directly with minority-owned
broker/dealers will be considered in the achievement of these goals.
Summary goals for the utilization of minority-owned broker/dealers have been
established for the aggregate U.S. equity, non-U.S. equity and fixed income asset
classes as shown in the table below. SURS seeks to consistently exceed these high
level goals while achieving best execution.
Asset Class
U.S. Equity
Non-U.S. Equity
Fixed Income
Goal
30.0%
15.0%
20.0%
In order to achieve the goals at the asset class level, minimum expectations have been
established for individual investment managers. These levels are based on the asset
class in which the investment manager invests. SURS encourages its investment
managers to strive to exceed the minimum expectations shown in the table that follows.
Asset Class
EQUITY
Active U.S. Equity
Passive U.S. Equity
Structured Active U.S. Equity
Non-U.S. Equity
Global Equity
Real Estate Investment Trusts (REITS)
FIXED INCOME
Fixed Income
Treasury Inflation-Protected Securities (TIPS)
Minimum Expectation
30.0%
35.0%
10.0%
15.0%
10.0%
20.0%
10.0%
20.0%
10.0%
U.S. Equity Separate Accounts
Subject to best execution, active U.S. equity investment managers for SURS are
required to direct 30% of the total eligible commission dollars to minority-owned
2 For purposes of this section and in accordance with 40 ILCS 5/1-109.1, “minority-owned broker dealer” means
“a qualified broker-dealer who meets the definition of ‘minority owned business’, ‘female owned business’, or
‘business owned by a person with a disability’, as those terms are defined in the Business Enterprise for
Minorities Females, and Persons with Disabilities Act.”
Exhibit 17
broker/dealers. Trades executed using electronic trading platforms are excluded from
this requirement.
Subject to best execution, passive U.S. equity investment managers for SURS are
required to direct 35% of the total eligible commission dollars to minority-owned
broker/dealers. Trades executed using electronic trading platforms are excluded from
this requirement.
Structured Active U.S. Equity Separate Accounts
Subject to best execution, structured active U.S. equity investment managers for SURS
are required to direct 10% of the total eligible commission dollars or eligible trading
volume to minority-owned broker/dealers. Trades executed using electronic trading
platforms are excluded from the 10% requirement.
Non-U. S. Equity Separate Accounts
Subject to best execution, active non-U.S. equity investment managers for SURS are
required to direct 15.0% of the total eligible commission dollars to minority-owned
broker/dealers. Trades executed in emerging market countries3 or using electronic
trading platforms are excluded from this requirement.
Structured Active Non-U.S. Equity Separate Accounts
Subject to best execution, structured active non-U.S. equity investment managers for
SURS are required to direct 10% of the total eligible commission dollars or eligible
trading volume to minority-owned broker/dealers. Trades executed in emerging
market countries or using electronic trading platforms are excluded from the 10%
requirement.
Global Equity Separate Accounts
Subject to best execution, active global equity investment managers for SURS are
required to direct 20.0% of the total eligible commission dollars to minority-owned
broker/dealers, effective January 1, 2015.4 Trades executed in emerging market
countries or using electronic trading platforms are excluded from the 20.0%
requirement.
Fixed Income Separate Accounts
Subject to best execution, fixed income investment managers for SURS are required to
direct 20% of eligible fixed income trading volume to minority-owned broker/dealers.
Trades executed in emerging market countries or using electronic trading platforms are
excluded from the minimum trading requirements.
Treasury Inflation-Protected Securities (TIPS) Separate Accounts
Subject to best execution, active TIPS investment managers for SURS are required to
direct 10% of eligible TIPS trading volume to minority-owned broker/dealers. Trades
executed in emerging market countries or using electronic trading platforms are
excluded from the minimum trading requirements.
3
As defined by Morgan Stanley Capital International
The minimum expectation for global equity investment managers increases from 17.5% to 20.0%, effective
January 1, 2015.
4
Exhibit 17
Real Estate Investment Trust Securities (REITS) Separate Accounts
Subject to best execution, active REITS investment managers for SURS are required to
direct 10% of the total eligible commission dollars to minority-owned broker/dealers.
Trades executed in emerging market countries or using electronic trading platforms are
excluded from this requirement.
Reporting Guidelines
Each investment manager will submit a compliance report within 30 days after March
31, June 30, September 30 and December 31 of each year. Reporting will be
monitored over a rolling twelve-month period.
Consequences of Non-Compliance
SURS continuously monitors investment managers’ compliance with this policy and
has established a series of consequences for those investment managers who
continually fail to meet expectations. The investment managers are expected to achieve
the desired levels over rolling twelve-month periods. The following steps will occur if
the investment manager continues to fall short of expectations:
1) A follow-up letter will be distributed to the investment manager not
achieving the minimum level of minority-owned broker/dealer usage.
The investment manager will be reminded of the usage expected by
SURS. Currently, as stated in the Annual Report to the Governor and
General Assembly on the Use of Emerging Investment Managers,
prepared as required in Public Act 87-1265, a letter is distributed to all
of the investment managers on an annual basis listing the level of
expectations.
2) Not achieving the desired level of minority-owned broker/dealer usage
will be noted in the annual investment manager review presented to the
SURS Board of Trustees. This could impact the evaluation of the firm.
3) SURS Staff will conduct a meeting with the investment manager to
discuss the reasons for not achieving the desired level of trading.
4) Investment managers not achieving the expected levels of broker/dealer
usage may be subject to a moratorium on additional funding.
5) If an investment manager fails to comply with the request, they may be
invited to appear before the SURS Board of Trustees to explain why
they are unable to achieve the desired level of trading.
Exhibit 18
Fiscal Year 2016-17 Summary Work Plan
Investment Committee Schedule

-
Denotes recurring items
Denotes non-recurring items
FISCAL YEAR 2016
October 22, 2015
 Certification of State Contribution for Fiscal Year 2017
 Annual Broker/Dealer Review
 Annual Global/International Equity Asset Class Reviews
- Finalist Interviews for Search for Managers of Hedge Fund-of-Fund Strategies (Phase I)
- Status Update of Commodities Search
- Status Update of Private Equity Emerging Manager Fund-of-Funds Search
- Status Update of Portfolio Overlay Search
December 10, 2015



-
Receipt of Annual Report to the Governor and General Assembly on Utilization of Emerging Investment Managers
Annual Index Fund Investments Review
Annual Real Estate Asset Class Review
Finalist Interviews for Commodities Search
Status Update of Private Equity Emerging Manager Fund-of-Funds Search
Status Update of Portfolio Overlay Search
Educational Topic (TBD)
February 4, 2016



-
Annual Review of 2015 Proxy Season (Corporate Governance)
Annual Approval of SURS Proxy Policy Statement (Corporate Governance)
Annual Fixed Income Asset Class Review
Status Update of Private Equity Emerging Manager Fund-of-Funds Search
Status Update of Portfolio Overlay Search
Educational Topics – Trustee Educational Forum (TBD)
March 10, 2016
-
Finalist Interviews for Private Equity Emerging Manager Fund-of-Funds Search
Finalist Interviews for Portfolio Overlay Search
Exhibit 18
April 21, 2016


-
Annual U.S. Equity Asset Class Review
Annual Investment Review of Self-Managed Plan (SMP)
June 9, 2016





-
SURS FY ’17 Budget
Consultant Annual Review of MDP
Approval of Scrutinized Companies List as Defined by Iran Legislation
Annual Private Equity Asset Class Review
Annual Opportunity Fund Asset Class Review
FISCAL YEAR 2017
September 15, 2016




-
Annual Review of SURS Portfolio
Consideration of SURS Fiscal Year 2017 Investment Plan
Annual Investment Policies Review
Review of Goals for Utilization of Minority- and Female-Owned Investment Managers & Broker/Dealers
October 20, 2016
 Certification of State Contribution for Fiscal Year 2018
 Annual Broker/Dealer Review
 Annual Global/International Equity Asset Class Reviews
December 8, 2016



-
Receipt of Annual Report to the Governor and General Assembly on Utilization of Emerging Investment Managers
Annual Index Fund Investments Review
Annual Real Estate Asset Class Review
February 2, 2017



-
Annual Review of 2016 Proxy Season (Corporate Governance)
Annual Approval of SURS Proxy Policy Statement (Corporate Governance)
Annual Fixed Income Asset Class Review
Educational Topics – Trustee Educational Forum (TBD)
Exhibit 18
March 9, 2017
-
April 20, 2017


-
Annual U.S. Equity Asset Class Review
Annual Investment Review of Self-Managed Plan (SMP)
June 8, 2017





-
SURS FY ’18 Budget
Consultant Annual Review of MDP
Approval of Scrutinized Companies List as Defined by Iran Legislation
Annual Private Equity Asset Class Review
Annual Opportunity Fund Asset Class Review
Exhibit 19
Summary of Investment Projects
The table below lists the major work projects designed to implement the asset allocation policy mix approved by the Board in June 2014.
The table below does not reflect the ongoing monitoring and administrative duties carried out by staff or the educational opportunities that will
be provided to the Board during the period.
Tentative Date
Project
Estimated Amount
Fall 2014
Implementation of Cash Overlay
Varies
April 2014 - February 2015
Emerging Market Debt Search
$500 - $550 million
September 2014 - March 2015
Non-Core Real Estate Search -- Phase I
$90 million
Fall 2014
Additional Private Equity Commitments - Phase I
$125 million
Spring 2015
Additional Private Equity Commitments - Phase II
$125 million
September 2014 - April 2015
Non-Core Real Estate Search - Phase II
$105 million
December 2014 - October 2015
Hedged Strategies Search - Phase I
Fund-of-funds allocation likely to be implemented first.
Remainder of 5% allocation will be gradually implemented over
the next 12-24 months
$450 - $550 million
September 2015 - December 2015
Commodities Search -- Synthetic passive exposure was
implemented during October 2014 - January 2015
$350 million
April 2015 - April 2016
SMP Provider Search (approved September 2014)
N/A
June 2015 - March 2016
Private Equity Emerging Manager Fund-of-Funds
Provider Search
$100 million
September 2015 - March 2016
Portfolio Overlay Search
$250 - $400 million
2015 - 2016
Additional Hedged Strategies Allocations - Phase II
(to reach 5% total allocation)
$350 - $400 million
2015 - 2017
Additional Private Equity Commitments
(per approved funding plan for 2015-2017)
$750 million
2016 - 2017
Additional Real Estate Commitments
(per proposed funding plan for 2016-2017)
$105 million
Note:
See pages 23-25 of SURS FY 2016 Investment Plan for more information.
Project Implementation Complete
Project Underway
Preliminary work underway
Exhibit 20
(217) 378-8800 • (217) 378-9802 (FAX)
Memorandum
To:
From:
Date:
Re:
SURS Board of Trustees
W. Bryan Lewis
August 28, 2015
Schedule of 2016 Meetings Dates
Thursday, February 4, 2016
Friday, February 5, 2016
Chicago
9:00 a.m. – 5:00 p.m.
9:00 a.m. – 1:00 p.m.
Investment Forum
Thursday, March 10, 2016
9:00 a.m. – 5:00 p.m.
5:00 p.m. – 9:00 p.m.
9:00 a.m. – 12:00 p.m.
Committee Meetings
Legislative Event
Committee Meetings
Board Meeting
Thursday, April 21, 2016
Chicago
9:00 a.m. - 5:00 p.m.
Thursday, June 9, 2016
Friday, June 10, 2016
Chicago
9:00 a.m. - 5:00 p.m.
9:00 a.m. - 12:00 p.m.
Committee Meetings
Committee Meetings
Board Meeting
Thursday, September 15, 2016
Friday, September 16, 2016
Champaign
9:00 a.m. - 5:00 p.m.
9:00 a.m. - 12:00 p.m.
Committee Meetings
Committee Meetings
Board Meeting
Thursday, October 20, 2016
Chicago
9:00 a.m. - 5:00 p.m.
Thursday, December 8, 2016
Friday, December 9, 2016
Chicago
9:00 a.m. - 5:00 p.m.
9:00 a.m. - 12:00 p.m.
Committee Meetings
Committee Meetings
Board Meeting
Friday, March 11, 2016
Champaign

MINUTES Meeting of the Investment Committee of the Board

Transcription

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