State Universities Retirement System of Illinois

Transcription

1 State Universities Retirement System of Illinois Serving Illinois Community Colleges and Universities 1901 Fox Drive Champaign, IL (217) (217) (FAX) Investment Department To: Investment Committee From: Tony J. Lee, Lou Ann Fillingham, CPA, Kimberly K. Pollitt, CFA, and Joseph M. Duncan Date: February 28, 2011 Re: Executive Summary of the Manager Diversity Program U.S. Equity Manager Reviews The SURS Manager Development Program was initiated in On September 3, 2010, the name of the program was changed to the Manager Diversity Program (MDP) to reflect the evolution of the program s goals and objectives. Currently, the MDP consists of sixteen managers across the U.S. equity, Non-U.S. equity, private equity, Treasury Inflation-Protected securities (TIPS) and fixed income asset classes. As of December 31, 2010, the Manager Diversity Program was valued at $781 million, representing 5.8% of the SURS Total Fund. The basic structure of the MDP is shown in the table below. Asset Class Domestic Equity # of Managers 6 12/31/10 Assets ($MM) $239 % of MDP 31% Non-U.S. Equity % Private Equity % Fixed Income % TIPS % Total MDP 16 $ % SURS staff meets with MDP managers via quarterly conference calls as part of its regular due diligence process. In addition to these conference calls, staff regularly conducts in-person meetings as part of its efforts to facilitate interaction with the minority-, female-, and persons with a disability-owned investment manager community. In calendar year 2010, staff conducted 41 meetings with currently funded and prospective minority-, female-, and persons with a disabilityowned investment management firms. In the past year, the overall MDP underperformed its benchmark, returning 14.8% versus the benchmark return of 15.9%. Since inception, the program has slightly outperformed its benchmark return of 4.6% by 31 basis points. With the exception of the Private Equity asset class, all asset classes have outperformed their respective benchmarks since inception. Performance

2 attribution charts are provided by Callan Associates for the MDP and are included at the end of this memorandum. The Fixed Income managers in the program were reviewed during the recent Fixed Income search that was concluded in September 2010 and are not included in this MDP Executive Summary. In addition, the TIPS, Private Equity and Non-U.S. equity MDP managers will be reviewed as part of their respective asset class reviews in April, June and October. On the following page, a table lists the managers in the program along with their assets under management and performance since inception. Organizational Issues Listed below are organizational issues relating to investment managers in the U.S. Equity portion of the MDP. Buford, Dickson, Harper and Sparrow over the past four years experienced no client gains or losses in the small cap product utilized by SURS. BDHS lost one account in the large cap portfolio in the last calendar year due to the client s liquidity needs. The lack of growth in accounts and the low level of assets is a concern. NCM Capital Management experienced the loss of two key sector leaders in the past year: Ron Elmer, Healthcare Sector Leader, as well as Patrick Lyons, Technology Sector Leader. As a result of these departures, NCM lost two sizeable accounts which represented $593 million in assets in total. Mr. Elmer and Mr. Lyons have been replaced by Hudson Boyer and Benjamin Kadlec, respectively. There are no additional organizational issues. Investment Performance Issues Since inception, the Active U.S. equity MDP portfolio has outperformed its blended benchmark by 88 basis points, returning 6.7%. However, the Active U.S Equity asset class has underperformed its benchmark in the past year by 221 basis points with a 23.7% return. In the past year, negative performance contribution from the U.S. Equity asset class resulted in underperformance for the MDP. Overall, performance of most managers was positive relative to their benchmarks although a number of managers have limited performance history. The following table shows each manager s performance relative to their benchmark for the one year and since inception time periods.

3 SURS Manager Diversity Program Returns Investment Performance for Month Ended December 31, 2010 Assets Manager Incep Benchmark ($mil) 1YR Mgr 1YR Bmark Incep Mgr Incep Bmark TOTAL MDP Jan-05 Policy Portfolio % 15.9% 4.9% 4.6% U.S. Equity: Active Buford, Dickson, Harper & Sparrow Jun-05 Custom/Russell 2000 Grow th % 29.1% 4.9% 5.5% Channing Capital Management Apr-05 Russell Midcap Value % 24.8% 4.3% 5.6% Holland Capital Management Apr-05 Custom/Russell Midcap Grow th % 26.4% 5.8% 7.3% Lombardia Capital Partners Apr-05 Russell 2000 Value % 24.5% 7.6% 4.6% NCM Capital Management Apr-05 Russell Midcap Growth % 26.4% 8.7% 6.6% Profit Investment Management Apr-05 Russell % 26.9% 8.4% 5.7% Composite, Active U.S. Equity Blended % 25.9% 6.7% 5.9% TOTAL U.S. Equity Jan-05 Blended % 25.9% 5.5% 5.3% Non-U.S. Equity Ativo Capital Management Jul-08 MSCI ACWI Ex-U.S % 11.2% 1.9% -0.5% Herndon Capital Management Aug-06 MSCI EAFE % 7.8% 2.3% 0.3% Strategic Global Advisors Aug-08 MSCI EAFE % 7.8% 1.5% -1.2% TOTAL Non-U.S. Equity Aug-06 Blended % 8.2% 2.1% -0.1% Private Equity Muller and Monroe ILPEFF Dec-04 DJ U.S. Total Stk Mkt + 5% (1) % 16.3% -3.2% 8.6% Muller and Monroe MPEFF Mar-08 DJ U.S. Total Stk Mkt + 5% (1) 13 NMF NMF NMF NMF TOTAL Private Equity Dec-04 DJ U.S. Total Stk Mkt + 5% (1) % 16.3% -2.7% 8.6% Fixed Income: Core Garcia Hamilton (Davis Hamilton) Feb-09 Barclays Capital Aggregate % 6.5% 11.0% 7.6% LM Capital Group Dec-10 Barclays Capital Aggregate 50 NMF NMF NMF NMF Pugh Capital Management Apr-06 Barclays Capital Aggregate % 6.5% 7.0% 6.3% Smith Graham & Company Apr-06 Barclays Capital Aggregate % 6.5% 6.3% 6.3% Composite, Core Fixed Inc Barclays Capital Aggregate % 6.5% 6.4% 6.3% Fixed Income: TIPS Longfellow Investment Mgmt Apr-10 Barclays Capital U.S. TIPS % 3.3% 3.6% 3.3% New Century Advisors Apr-10 Barclays Capital U.S. TIPS % 3.3% 3.4% 3.3% Composite, TIPS Barclays Capital U.S. TIPS % 3.3% 3.6% 3.3% TOTAL Fixed Income Apr-06 Blended % 6.3% 6.5% 6.2% Three of the six U.S. equity managers have underperformed their benchmarks in the past year. Additional comments on the three underperforming accounts are provided below. Risk-adjusted return charts for the U.S. active equity asset class as well as for the MDP are shown at the end of this document. Channing Capital Management returned 18.2%, trailing the Russell Midcap Value benchmark return of 24.8% by 654 basis points. The 2010 underperformance was primarily the result of specific stock selections within the consumer discretionary, financial and industrial sectors. The portfolio lagged the benchmark return by 67 basis points over the past three years and underperformed the benchmark by 128 basis points annually since inception, net of fees. Holland Capital Management had disappointing relative performance in 2010, lagging the benchmark by 644 basis points. This poor performance follows a difficult 2009 in relative terms, when Holland returned 37.92% but underperformed the benchmark by 838 basis points. Holland s long-standing overweight in the energy sector (+8.41%) and weak relative performance of energy holdings combined to create a significant drag on portfolio

4 performance throughout the year. Staff is concerned over two consecutive years of weak performance and will look to see marked improvement over the coming months. NCM Capital Management returned 25.4% during calendar year 2010 compared to the Russell Midcap Growth Index return of 26.4%. The primary drivers of NCM s underperformance during the past year were poor stock selection coupled with significant negative performance contribution from holding cash in the portfolio. Since inception, the portfolio has surpassed the benchmark by 209 basis points, returning 8.7% compared to the Russell Midcap Growth Index return of 6.6%. NCM was placed on the SURS Watch List on December 9, 2010, for poor performance relative to the benchmark over the two consecutive quarters on a rolling 3-year period basis ending September 30, Update of the MDP Domestic Equity Search On February 22 nd and 23 rd, SURS staff interviewed eight finalists for the US Equity Mid and Small Cap core searches. At the February 2011 Investment Committee meeting, staff provided the board an update which stated the criteria used for the search to identify the four mid cap and four small cap finalists. Currently, staff is further reviewing the finalists and conducting additional levels of due diligence and analysis. Staff expects to provide recommendations regarding the search at the April Investment Committee meeting. Recommendations SURS staff recommends: That Buford, Dickson, Harper & Sparrow be retained as a domestic equity manager. That Channing Capital Management be retained as a domestic equity manager. That Holland Capital Management be retained as a domestic equity manager. That Lombardia Capital Partners be retained as a domestic equity manager. That NCM Capital Management be retained as a domestic equity manager. That Profit Investment Management be retained as a domestic equity manager.

5 8 Total MDP Risk/Return (Annualized) January December Total MDP Return 4 T-Bills Policy Benchmark Risk 10 Active U.S. Equity MDP Risk/Return (Annualized) April December Active U.S. Equity Return 6 4 T-Bills Blended Index Risk

6 Total MDP Attribution Analy sis One Year Ending 12/31/ US Equity Private Equity 0.23 Non-US Equity 0.24 Fixed-Income Allocation/ Cash Flow Effect MDP Since Inception (6 Years) Ending 12/31/2010

7 US Equity Private Equity Non-US Equity 0.18 Fixed-Income 0.08 Allocation / Cash Flow Effect 0.15 MDP MDP U.S. Equity Manager Attribution Analysis One Year Ending 12/31/2010 BDHS Channing Holland Lombardia 0.05 NCM Profit 0.15 Cash Flow Effect Total U.S Equity

8 Since Inception (6 Years) Ending 12/31/2010 BDHS Channing Holland Lombardia 0.48 NCM 0.33 Profit 0.30 Attucks Cash Flow Eff ect Total U.S Equity