REQUEST FOR PROPOSALS STABLE VALUE FUND DISCRETIONARY MANAGER. July 21, 2017

Transcription

1 REQUEST FOR PROPOSALS STABLE VALUE FUND DISCRETIONARY MANAGER July 21, 2017 Designated Contacts for this Procurement: Rod Bare, Senior Vice President, Callan Associates, Inc. Ben Taylor, Senior Vice President, Callan Associates, Inc. All contact/inquiries shall be made by to the following addresses: and

2 I. PURPOSE The Kentucky Public Employees Deferred Compensation Authority, (the Authority) is seeking formal written proposals from financial organizations to provide stable value investment management services as detailed below. The Program includes a 457(b), a 401(k) plan, and deemed IRAs. As of March 31 st, 2017 the Program included 76,143 participants, and $2.73 billion in total assets. Assets invested in the Fixed Contract Fund represented $684 million of the combined Program assets. Historical cash flow information, the current investment policy statement, and current holdings are attached to this RFP. To be eligible for selection, the financial organization must be an organization duly authorized to do business in the Commonwealth of Kentucky, and be (i) a registered investment adviser under the Investment Advisers Act of 1940, as amended, or (ii) a bank, as defined in that Act; or (iii) an insurance company qualified under the laws of more than one state to manage, acquire or dispose of assets of plans which meet the requirements for qualification under the Internal Revenue Code, governmental plans and eligible state deferred compensation plans. This Request for Proposals is divided into six sections. The sections include: (I) Purpose, (II) Background, (III) Product Design Requirements, (IV) Timing and Procedures Governing Submission of Proposals, (V) Selection Process, (VI) Contract Questionnaire. Exhibit 1: Exhibit 2: Exhibit 3: Exhibit 4: Exhibit 5: Exhibit 6: Investment Management Agreement Summary of the Fixed Contract Fund Personal Service Contract, Standard Terms and Conditions EEOC Affidavit Bidder Affidavit Resident Affidavit 2

3 II. BACKGROUND As of March 31 st, 2017, total assets administered by the Authority were approximately $2.73 billion, of which $684 million was invested in the Fixed Contract Fund. Across the 457(b), 401(k), and deemed IRA plans, the Authority administers accounts on behalf of 76,143 participants. The following organizations currently provide administrative, custodian, trustee and investment services to the Plan: Administrative Service Agency: Nationwide Retirement Solutions, Inc. Auditor: CliftonLarsonAllen LLP. Stable Value Structure Manager: Invesco Custodian for FCF: Bank of New York Mellon Custodian for Authority: Kentucky State Treasury Independent Consultant: Callan Associates Inc. Legal Counsel: Reed Weitkamp Schell & Vice PLLC Fixed Contract Fund (the Fund ) Invesco manages the Fund, subject to the constraints in the attached Investment Policy Statement. The sub-managers employed currently, and wrap issuers, are listed below. Sub-Managers: PIMCO Dodge & Cox Goldman Sachs BlackRock Dreyfus (money market) Voya Invesco 3

4 Wrap Issuers: Voya Life & Annuity The Prudential Insurance Company of America Pacific Life Transamerica RGA Life Insurance Company of the Southwest A detailed summary is provided in Exhibit 2. III. PRODUCT DESIGN REQUIREMENTS: The Authority is seeking proposals for stable value fund management services, subject to the restrictions listed in the attached investment guidelines, attached as Exhibit B, contained within Appendix 1. Stable value fund management is meant to be inclusive of managing (i) assets directly for the Fund, (ii) contracting with and overseeing sub-managers for the Fund, and (iii) wrap coverage for the Fund. In addition, a successful proposer must meet the following Minimum Qualifications: To certify compliance with campaign finance laws under KRS Chapter 121 and KRS 45A.110 and 45A. 115 and other requirements under KY law, the proposer must complete, sign and notarize attached affidavit: Required Affidavit for Bidders, Offerors and Contractors, Exhibit 5. To certify compliance with KY Civil Rights Act, KRS Chapter 344 the proposer must complete, sign and notarize attached affidavit: EEOC Affidavit of Intent to Comply, Exhibit 4. To certify compliance with KRS 45A.494(2), the proposer must complete, sign and notarize attached affidavit: Required Affidavit for Bidders, Offerors and Contractors Claiming Resident Bidder Status, Exhibit 6. To certify compliance with KRS 45A.485 Model Procurement Code, execution of Addendum, PSC Standard Terms and Conditions, attached hereto as Exhibit 3 (no exceptions and upon negotiation of final contract). 4

5 The proposing firm must have managed a minimum of $10 billion of stable value fund assets for a minimum of 5 years as of June 30, Please note that assets managed within the general account of a bank or insurance company does not satisfy this requirement. A GIPS compliant strategy track record for this performance history is strongly preferred. Simulated track records will not be accepted. At least one of the individuals who will be a proposed portfolio manager must possess a minimum of five (5) years of experience providing similar services. The proposing firm must be a Registered Investment Advisor with the SEC under the Investment Advisors Act of The firm must be willing to undertake complete discretion with respect to the management of the Fixed Contract Fund. This includes, but is not limited to, acknowledging fiduciary status and making security selection decisions, hiring and firing investment managers, purchasing and terminating all investment contracts (including negotiating and replacing wrap contracts). IV. TIMING AND PROCEDURES GOVERNING SUBMISSION OF PROPOSALS A. Calendar of Events Activity Date 1. Distribution of RFP July 21 st, Closing date for Submission of Questions July 26 th, Posting of Response to Questions July 28 th, Closing Date for Submission of Proposals August 4 th, Review by Consultant and Staff On or about and Notification of Finalists Selected August 25 th, Presentations to the Authority, Authority Staff, On or about and/or Authority Advisors. September 15 th,

6 7. Anticipated Notification of Successful Investment Managers On or after September 15 th, Allocation of Funds On or about January 1 st, 2018 Submission of Questions: Proposers may submit written questions regarding this RFP by no later than 5:00 p.m. (ET), July 26, 2017 via only to Ben Taylor (taylorb@callan.com) and Rod Bare (Bare@callan.com). Questions should not be directed to Authority Staff, individual Board members or Invesco. Questions and answers will also be posted on Callan s Web site ( and can be accessed by clicking on the Request for Proposals icon on the home page. The firms that submitted the questions will not be identified. B. Form and Substance of Proposals Proposer must execute an Investment Management Agreement (Stable Value) in the form attached hereto as Exhibit 1. Redlined proposed exceptions are accepted (to be negotiated). No redlines accepted for the Addendum, PSC Standard Terms and Conditions. Addendum is nonnegotiable. To receive consideration, all proposals must include: A Cover Letter, which must be signed by at least one individual who is authorized to bind the respondent contractually. The cover letter must include: the respondent s name, address, telephone number, and address; a statement to the effect that the Proposal is an irrevocable offer; and a representation that the proposal complies with all requirements of the Rules and Regulations. An Executive Summary of not more than 3 pages in length that summarizes the contents of the Proposal. In addition, all proposals must include fully completed: 1. Required Affidavit for Bidders, Offerors and Contractors, Exhibit EEOC Affidavit of Intent to Comply, Exhibit Required Affidavit for Bidders, Offerors and Contractors Claiming Resident Bidder Status, Exhibit 6. 6

7 Neither the Authority nor the Commonwealth will be liable for any costs of work performed in the preparation and production of a proposal or for any work performed prior to the execution of an effective contract. By submitting a proposal, each proposer agrees not to make any claims for or to have any right to damages because of any misunderstanding or misinterpretation of the specifications, because of any misinformation or lack of information or because such proposer is not selected to provide the services proposed. To receive consideration, two (2) hard copies of all proposals must be received at the following address no later than the close of business August 4 th, Callan address: Callan Associates Care of Rod Bare 120 North La Salle St. Suite 2400 Chicago, IL Additionally, an electronic copy of all proposals must be provided in Word and Excel and sent to the following addresses no later than the close of business Friday, August 4 th, 2017: Bare@callan.com taylorb@callan.com Coons@callan.com In addition, the evaluation process will leverage product information and statistical details submitted to the Callan research database. Prior to submitting a response, each respondent is required to review the data supplied to the Callan database and confirm it is accurate for the purposes of this RFP. Any financial organization that receives a copy of this RFP, but who declines to make a proposal is requested to send a formal "Decline to Make a Proposal" letter electronically to: Coons@Callan.com C. Award or Rejection 7

8 All qualified proposals will be evaluated and an award will be made to the financial organization whose product represents the best option to the Authority and whose product is determined to be in the best interests of the Plans participants. The evaluation of proposals will be made by the Authority based on information supplied in the financial organization's proposal including, without limitation, the provision of references by the proposer and verification thereof and such other available information which the Authority determines advisable to consult. V. SELECTION PROCESS A. General Evaluation Criteria Examples of information that will be evaluated to rank proposals are as follows: (i) The qualification of the organization as evidenced by the experience, reputation, and clients over a substantial period of time; a. Investment philosophy and portfolio strategy. b. Risk control measures. c. Investment record over substantial period of time. d. Length of time offering similar products. (ii) The ability of the organization to meet its contractual obligations and to provide the services set forth herein; a. Stability of the firm as measured by its organizational structure and financial condition. b. Organization s ability to provide the product described in Section III, Product Design Requirements. (iii) The organization s experience with plans that meet the requirement for qualification under the Code, including eligible state Section 457 Plans; a. Experience providing services to 457, 401(k) and deemed IRA plans. b. Number of plans serviced by size and type and categories of services provided. 8

9 (iv) The organization s ability to interface with financial organizations with which the Authority might have contact; a. Experience receiving assets from investment options managed by different financial organizations with which the Authority has or may have a contract. b. Experience transferring assets to investment options managed by different financial organizations with which the Authority has or may have a contract. (v) The overall cost efficiency of the proposal; a. Fee structure. b. Supplemental costs and expenses involved. (vi) The overall quality and scope of the services to be provided. B. Review Based on the criteria described above, Callan Associates and Authority staff will review and screen all bids and recommend finalists to the Authority Board on or about August 25 th, All finalists will receive notice of their selection. C. Presentations to Authority The Authority, Authority Staff and/or Authority advisors may conduct interviews of selected finalists on or after August 25 th, D. Notification of Selected Financial Organization(s) It is anticipated that the selected financial organization(s) will be notified by the Authority on or after September 15, E. Allocation of Funds Allocations to the selected financial organization will begin on or after January 1 st, F. Terms of Contract 9

10 The Authority expects to enter into a contractual arrangement of three years, with up to two optional three year extensions as reflected in the draft contract, attached to this RFP. 10

11 Rights Reserved In order to serve the best interests of the Plan and its participants, the Authority reserves the right to: 1. Postpone or cancel this RFP upon notification to all proposers. 2. Amend the specifications after their release with appropriate notice to all proposers. 3. Request proposers to present supplemental information clarifying their proposal, either in writing or in formal presentation. 4. Waive or modify minor irregularities in proposals received after prior notification to the proposer. 5. Reject any and all proposals received in response to this RFP. 6. The Authority may ask for a best and final offer during the finalist interviews. 7. Negotiate all terms of the contract with the selected proposer, including fees, and make the selection contingent on successful negotiation of the contract. 8. Negotiate with the next highest rated proposer if negotiating a contract with the selected proposer(s) cannot be accomplished within an acceptable time frame. No proposer will have any rights against the Authority or the Plan arising from such negotiations. 9. Make any payment contingent upon the submission of specific deliverables. 11

12 VI. CONTRACT QUESTIONNAIRE FIRM HISTORY AND EXPERIENCE 1. Firm Name: Address: Telephone: Contact(s)/Title: address: 2. History & Background a. Describe the ownership of your firm. Specify whether ownership is public or private, identify major owners (holders of 10% or more of equity in the company), and the major owners working interests in the operation and investment management phases of the organization. Include any recent or anticipated changes in the ownership structure. How long have the principals been in place? b. Please state if your organization, or any investment managers proposed for the mandate, are designated MWBE. c. Describe your firm s business plan. What are the long-term objectives of your firm? Do you plan to limit the total number of accounts, total value of assets to be managed, or the number of professional and staff employees? What growth factors do you feel are important to control in order to maintain an ability to provide superior investment results and why? d. Provide the year that investment management services were initiated for institutional clients. e. Is your firm registered with the Securities and Exchange Commission under the Investment Advisers Act of 1940? f. State whether your organization is a qualified professional asset manager (QPAM) as defined in the Department of Labor Prohibited Transactions Exemption g. Provide a copy of your most recent Form ADV, SAS 70, SOC Type II, or Form 10-K. 12

13 h. Discuss briefly your firm s disaster recovery plan. When was the plan last updated? i. Provide the date when your organization became duly authorized to do business in the Commonwealth of Kentucky. j. Provide your firm s stable value AUM for your separate account and pooled vehicle products. Please indicate number of separate account clients and average/min/max AUM for those separate account clients. 3. Conflicts, Ethical Compliance: Please provide the following information with respect to the organization providing the investment management services for the Fund: a. Specify all affiliates of the firm and attach an organization chart showing same. What are the lines of relationship between the firm and its affiliates and their respective lines of business? Would the affiliates have any role in the investment process related to the Plans? b. If the firm accepts soft dollars as a method of payment for services, describe the parties involved and the nature of such arrangements. c. Does your firm have a written personal trading policy and established methods for monitoring the same? Is it automated? Have there been any violations of the personal trading policy within the past 12 months and what was the response? d. What services, if any, does your firm or its affiliates offer in addition to asset management services? What is the total revenue generated by asset management services and its percentage of the firm s (parent) total income? e. Has the firm been involved in litigation within the last five years relating to separate accounts, the management of clients assets or the provision of advisory services such as those proposed? f. Within the past five years, has the firm, or any officer or principal of the firm, been the subject of, or sanctioned as a results of, any criminal or civil administrative proceeding or investigation by a federal, state or local prosecuting or investigative agency (other than routine examinations) relating to investment advisory or related services? This includes, without limitation, those matters involving the Commonwealth or any agency or political subdivision thereof. If so, describe and provide the outcome and/or status. g. Please describe your trading and compliance oversight capabilities for sub-advisors within a stable value fund. Specifically describe how your firm oversees compliance with the investment policy, investment management agreement, and wrap contract guidelines 13

14 in accounts managed by (1) your firm, and (2) sub-advisors managing assets within a stable value fund managed by your firm. Include within this description the frequency with which security level details are shared, and abilities to manage purchase decisions, sales, duration and credit limits. Also include any requirements of self-certification of compliance from sub-advisors. h. Please provide amount of insurance coverage and bonding in: 1) Errors and Omissions 2) Fiduciary Liability 3) Other insurance 4. Product Detail and Information: a. Describe the staff within your firm that will be responsible for managing and servicing the Fixed Contract Fund. For the following categories of personnel and any others that will also provide services to the Authority please list the number of employees within each category that are either (1) wholly dedicated to stable value, or (2) shared resources across the firm or other lines of business. i. Portfolio managers (differentiate between client PM s and full-time portfolio managers in your response) ii. Analysts by sector: short, intermediate, core, ABS, MBS, etc. iii. Marketing iv. Traders v. Wrap Specialists/Analysts vi. In-house counsel b. Please describe how your portfolio managers allocate their time. Including, but not limited to the following activities: i. Managing portfolios ii. Research iii. Compliance iv. Administration/Management v. Client Presentations/Travel vi. Other (please describe) c. Please provide resumes for all staff that will be assigned to service the Authority. d. Please describe how many stable value portfolios each portfolio manager is responsible for. Describe how your firm measures and manages capacity for additional accounts, including how and when a portfolio manager may be reassigned from existing relationships to accept new funds to manage. e. Please describe how management duties and tasks are divided and coordinated across commingled products and separate accounts. Please address how securities 14

15 are purchased across both product types, prioritization of access, and any differences in compliance or staffing. f. Please provide a list and job description for all stable value staff that have been gained and lost within the past five years, including a reason for departure. g. How are investment professionals compensated? h. Discuss your firm s general investment philosophy, methodology and decisionmaking process utilized for the management of stable value portfolios, including your strategy for managing the liquidity needs of portfolios in a daily-valued environment. i. Describe your firm s philosophy in establishing and managing the following characteristics of a stable value fund: i. Duration ii. Diversification iii. Liquidity buffer(s) iv. Maturity structure v. Credit quality vi. Cash allocation j. Describe in detail your firm s wrap management philosophy and process. Distinguish between preferred wrap features and styles, and how your firm believes your wrap management approach sets you apart. Address, in particular, how this philosophy fared during the reduction in wrap capacity following the financial crisis. k. Describe in detail how your firm manages duration, and whether duration management is a source of additional alpha within your portfolio management approach, or that of your sub-advisors. l. Describe, in detail, any securities lending program in place within your stable value portfolios. As part of that description, describe average revenues derived from the lending programs, as well as collateralization standards. m. Describe in detail your credit quality research/underwriting expertise and capabilities. Does your firm individually underwrite or rate each security purchased internally? If so, describe the process. If not, please describe the process for analysis of credit quality using external research capabilities. n. Describe in detail any use of derivatives within your stable value composite. How, if at all, would this practice be implemented (or not) for the Fixed Contract Fund. 15

16 o. Describe your crediting rate formula(s), and the frequency with which rates can be declared and calculated. p. Describe your proposed fund structure for the Fixed Contract Fund, if awarded. Include within that description: i. Sub-sector detail, with estimated ranges and asset allocation ii. A transition plan overview, detailing how to move from the current structure to the proposed structure, including timing and costs iii. A description of the wrap structure, wrap conditions, costs, and anticipated wraps iv. Expected/preferred crediting rate formula v. Details of communications support provided to the Authority, if any vi. Detailed list of sub-advisors, including anticipated contracting structure (the Authority will prefer to contract only with the selected fund manager) q. Please provide a detailed fee quote, inclusive of fees for all sub-advisors, wrap providers, and any services for which fees would be charged. 16