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: Daniel L. Allen and Tony J. Lee Date: November 19, 2009 Re: Annual Review of Minority-Owned and Women-Owned Broker/Dealer Usage by SURS Investment Managers SURS staff is presenting an annual review of the usage of minority-owned and women-owned broker/dealers by its investment managers. This is a result of ongoing oversight administered by staff in regard to the brokerage usage policy initially approved at the December 9, 2005 Board meeting. At the September 2007, 2008, and 2009 Board meetings, additional revisions to the Investment Policy were approved, providing further modifications regarding brokerage expectations. On a quarterly basis, a brokerage cost review is prepared as part of the Standard Reports to the Board. The review highlights the total usage of minority-owned and womenowned brokerage firms by each of the retirement system s investment managers over the previous 12-month period. Annually, a review will be presented to the Board of Trustees identifying investment managers who are facing challenges meeting the desired expectation levels. At times, investment managers may be invited to present to the Board to assist in explaining specific issues regarding brokerage compliance. Fiscal Year 2009 Results The table below illustrates the extent of trading with minority-owned or women-owned broker/dealers in each of the major asset classes, for the year ending June 30, Trading with Minority-Owned or Women-Owned Firms Year Ending June 30, 2009 Commissions ($) to Minority-Owned or Women-Owned Firms % of Asset Class Total Goal Variance Asset Class U. S. REIT and Equity $ 599, % 25.0% 14.3% Non-U.S. Equity $ 363, % 10.0% 19.4% Global REIT and Equity $ 387, % 17.5% 5.7% Total Equity $ 1,351, % Fixed Income 1,2 N/A 18.8% 20.0% -1.2% 1 Commissions generally not applicable to fixed income. Percentage calculation based on percent of total market value traded with minority-owned or female-owned firms. 2 Fixed income goal increased to 20% as of July 1, Total commissions on equity trades for the one year period ending June 30, 2009 were approximately $4.95 million. As shown in the table above, commissions allocated to

2 minority-owned and women-owned broker/dealers totaled $1.35 million, representing 30.5% of total equity commissions paid for the period. In aggregate, all asset classes with the exception of fixed income exceeded the brokerage goals set forth in the Investment Policy for trading with minority-owned or women-owned firms. Annually, as a component of the annual compliance process, SURS management communicates with each of the investment managers, reminding them of the commitment by SURS to the 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 communicating quarterly with investment managers who are not achieving the desired levels of trading. The evaluation period is based on a continually rolling twelve-month 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 longer term. SURS receives trade utilization data from its domestic equity, non-u.s. equity, global equity and fixed income managers. Managers Not Achieving Desired Expectation Levels For the twelve month period ending June 30, 2009, five investment managers across six mandates were unsuccessful in achieving the levels desired by SURS. The managers having difficulty meeting the levels are Wellington Management Co., LLP, RREEF U.S. and Global REITS, Mondrian Investment Partners, Progress Investment Management and PIMCO. Global Equities Wellington Management (Wellington) manages a global equities mandate for SURS. As stated above, the global equity asset class expectations are 17.5% usage of minority-owned or women-owned broker dealers, subject to best execution. Over the twelve month period ending June 30, 2009, Wellington has measured 16.8% usage with minority-owned and womenowned brokerage firms. Wellington has consistently been able to achieve the broker dealer utilization goals set by SURS since becoming a manager in June However, when trades requiring natural liquidity or broker capital are excluded, Wellington s trading increases to 23.9%, exceeding the 17.5% minimum expectation. SURS expects Wellington to refocus their efforts to achieve the expectation levels set forth. Staff will closely monitor Wellington s progress toward increasing its utilization levels Mondrian Investment Partners (Mondrian) manages a non-u.s. equity account for SURS. As stated above, the non-u.s. equity class expectations are 10% usage of minority-owned or women-owned broker dealers, subject to best execution. Over the twelve months ending June 30, 2009, Mondrian has measured 7.1% usage with minority-owned and women-owned brokerage firms. Real Estate Investment Trust Securities (REITS) RREEF manages both domestic and global REIT accounts which respectively have stated asset class expectations of 25% and 17.5% usage of minority-owned or women-owned broker dealers, subject to best execution. Over the twelve months ending June 30, 2009, RREEF has

3 measured 19.6% and 2.7% usage respectively with minority-owned and women-owned brokerage firms. Fixed Income PIMCO, a fixed income manager, also has been unable to achieve desired expectation levels at this time, utilizing minority- and women-owned broker/dealers for 11.5% of overall trading volume. For the year ending June 30, 2009, the minimum expectation level for fixed income managers was 20% usage. Although PIMCO has not achieved the desired trading level, significant improvement has been noted, increasing from the 2007 level of 5.3% to the 10.5% level in PIMCO indicated it has been difficult to identify firms that meet the approval of the Counterparty Risk committee and provide best execution. PIMCO continues to work to establish new trading relationships with minority-owned and women-owned firms. Progress Investment Management (Progress) has been unable to achieve desired expectation levels at this time, utilizing minority- and women-owned broker/dealers for 18.8% of overall trading volume. For the year ending June 30, 2009, the minimum expectation level for fixed income managers was 20% usage. Progress was funded in its current mandate in May Progress has modified its reporting systems and notified its underlying investment managers to better enable it to reach the minority- and women- owned broker dealer utilization goals in the fixed income asset class. Managers Showing Improvement Since receiving notification of its inability to meet the SURS minority- and women- owned brokerage requirements, RREFF has made significant strides in reaching the stated goals of 25% and 17.5% in the domestic and global REIT asset classes. RREFF estimates in the trailing one year ending September 30, 2009, that 57% of trades were executed with minorityand women- owned brokers for the domestic REIT account. Additionally, the firm estimates that it will exceed the 17.5% targeted goal in the global REIT account based on trading commission level in the quarter ending September 30, As of the one year ending September 30, 2009, Mondrian is achieving the expected level of utilization required by the investment policy with a 13.7% level of utilization. SURS expects Mondrian to continue to achieve its trading utilization goals. Enforcement of Compliance by Investment Managers As stated in section XV of the Investment Policy, the following steps will occur if the Investment Manager continues to fall short of achieving desired brokerage level expectations: 1) A follow-up letter will be distributed to the investment manager not achieving the minimum level of minority-owned and women-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 , 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 and women-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 ranking provided to the firm.

4 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. 6) The investment manager may be placed on the Investment Manager Watch List in accordance with section VIII of this policy. SURS Monitoring Process During the summer, staff visited or communicated with each of the investment managers not meeting the desired levels of trading with minority- and women- owned brokerage firms. For the investment managers listed above, a follow-up letter was distributed requesting information as to why the desired levels were not achieved. SURS received responses from each of the three investment managers. The managers acknowledged difficulty in achieving the levels but are aware of the importance of the initiative and will attempt to identify methods to assist in achieving these levels, while continuing to utilize best execution practices. Summary Appendix 1 includes a comparison of the desired usage levels for minority and women- owned broker/dealer firms by other large public pension funds in Illinois. Appendix 2 lists the brokerage expectation levels stated in the Investment Policy approved by the SURS Board effective September 11, Staff continues to enhance its level of knowledge regarding the brokerage oversight function. SURS does not direct the investment managers to utilize specific broker/dealers. However, SURS assists in the identification of such firms by forwarding their names and pertinent information to its investment managers. It is expected the investment managers will have communications with the prospective broker/dealer firms to evaluate if a relationship is viable. SURS has developed an increased awareness of the brokerage community as a result of the Board initiative and the Senate Pensions and Investments Committee hearings. In the meantime, staff will continue to monitor the investment manager usage levels on a quarterly basis and ask for enhanced efforts to achieve the expected levels while always maintaining best execution practices.

5 Minority- and Women-Owned Broker/Dealer Usage Expectation Levels October 2009 Appendix 1 Teachers Retirement System of Illinois (TRS) Domestic Equity 15% International Equity 8.5% Fixed Income 15% Illinois Municipal Retirement Fund (IMRF) (All trade levels must be directly executed) Domestic and International Equities, Fixed Income 20% Domestic Micro-Cap Equities, International Small-Cap Equities, Emerging Market 5% Equities and High Yield State Universities Retirement System (SURS) Domestic Equity Separate Accounts including 30% Real Estate Investment Trust Securities (REITS) Structured Active Domestic Separate Accounts 10% Non-U.S. Equity Separate Accounts 12.5% Structured Active Non-U.S. Equity Separate Accounts 10.0% Global Equity Separate Accounts including REITS 17.5% Fixed Income Separate Accounts 20% Illinois State Board of Investments (ISBI) Domestic Equity 20% International Equity 20% Fixed Income 20% Public School Teachers Pension & Retirement Fund of Chicago (CTRS) (All trade levels must be directly executed unless otherwise noted) Active Domestic Large and Mid-Cap Equity 50% Active Domestic Small Cap Equity 35% Passive Large Cap Equity 35% International Equity (At least 50% of trades must be executed directly) 25% Fixed Income 25% County Employees' Annuity & Benefit Fund of Cook County Fixed Income (as a % of par value) 10% Domestic Equity 33.3% International Equity 10% Transition Management 40% Municipal Employees Annuity and Benefit Fund of Chicago Domestic Equity 35% International Equity 15% Fixed Income 25%

6 Appendix 2 State Universities Retirement System of Illinois Minority- and Women-Owned Brokerage Usage Policy Section XV(B) of SURS Investment Policy (9/09) Minority-Owned Broker/Dealer Usage Policy The Board of Trustees of the State Universities Retirement System has an established policy that seeks increased participation of emerging, minority-owned and women-owned investment management firms. As part of this policy, the Board also adopts minimum expectations for the use of minority-owned broker/dealers 1 by the System s investment managers. The minimum expectations are established based on the asset class in which the investment manager invests. Domestic Equity Separate Accounts including Real Estate Investment Trust Securities (REITS) Subject to best execution, active domestic equity investment managers for SURS are required to direct 25% of the total eligible commission dollars to minority-owned broker/dealers. Expectations will increase to a level of 30% effective January 1, 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, non-u.s. equity investment managers for SURS are required to direct 10% of the total eligible commission dollars to minority-owned broker/dealers. Expectations will increase to a level of 12.5% effective January 1, Trades executed 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 1 For purposes of this section and in accordance with P.A , 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.

7 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. Global Equity Separate Accounts including Real Estate Investment Trust Securities (REITS) Subject to best execution, global equity investment managers for SURS are required to direct 17.5% of the total eligible commission dollars to minority-owned broker/dealers. Trades executed using electronic trading platforms are excluded from the 17.5% requirement. Fixed Income Separate Accounts Effective July 1, 2008, subject to best execution, fixed income investment managers for SURS are required to direct 20% of eligible fixed income trading volume to minorityowned broker/dealers. Trades executed using electronic trading platforms are excluded from the minimum trading requirements. 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 , 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 ranking provided to 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. 6) The investment manager may be placed on the Investment Manager Watch List in accordance with section VIII of this policy.