University of Maine System Operating Funds

Transcription

1 University of Maine System Operating Funds Third Quarter 2014 Investment Committee Meeting December 3, 2014 Jay E. Roney, Partner Kelly Regan, Consultant

2 Executive Summary 1

3 Executive Summary ASSET ALLOCATION ASSET PERFORMANCE (NET OF FEES) Plan Assets: $284.3 Million FYTD YTD 1 YR 3 YRS 5 YRS 7 YRS 10 YRS COMPOSITE % 29.5% Liquidity Pool ALLOC. INDEX Income Pool 46.8% Total Return Pool Asset Allocation Plan assets as of were $284.3 million. This represents a $43.4 million increase from June 30, Currently the Plan is overweight in the Liquidity Pool (29.5% v 25.0%) and is underweight in the Income Pool (46.8% v 50.0%) and Total Return Pool (23.6% v 25.0%). Throughout the year, asset allocation will change based on cash inflows and outflows. NEPC reviews this on a monthly basis. Performance PLAN COMMENTS The Plan returned -0.6% during the third quarter (fiscal-year-to-date) and 1.6% for the calendar year to date periods. Long term returns remain favorable. Third quarter was a difficult quarter for all asset classes and most managers underperformed their respective benchmarks, except for Cube. RECENT ACTIONS/RECOMMENDATIONS Recent Actions In October 2014, $12 million was rebalanced within the portfolio, all of which was withdrawn from the Liquidity Pool. $6 million was deposited into IR&M along with an additional $2 million each into Vanguard Core Bond, Windhaven Diversified Conservative and PIMCO All Asset. Recommendations There are no recommendations at this time. NEPC will be reviewing asset allocation with the Committee during the 1 st quarter of Manager Updates There are currently two manager updates on the Due Diligence Monitor Pages, both have a Client Review status. 2

4 Due Diligence Monitor The items below summarize any changes or announcements from your Plan managers/funds. A Yes indicates there was an announcement and a brief summary is provided separately. NEPC s Due Diligence Committee meets every two weeks to review events as they relate to investment managers and determines if any action should be taken by NEPC and/or by our clients. They rate events: No Action, Watch, Hold, Client Review or Terminate. NEPC considers ourselves to be a fiduciary, as ERISA defines the term in Section 3(21). Investment Options Manager Changes/ Announcements (Recent Quarter) NEPC Due Diligence Committee Recommendations PIMCO Several Announcements Yes Client Review Windhaven Yes Client Review A legend key to our recommendations is provided below. NEPC Due Diligence Committee Recommendation Key No Action Watch Hold Client Review Terminate Informational items have surfaced; no action is recommended. Issues have surfaced to be concerned over; manager can participate in future searches, but current and prospective clients must be made aware of the issues. Serious issues have surfaced to be concerned over; manager cannot be in future searches unless a client specifically requests, but current and prospective clients must be made aware of the issues. Very serious issues have surfaced with a manager; manager cannot be in future searches unless a client specifically requests. Current clients must be advised to review the manager. We have lost all confidence in the product; manager would not be recommended for searches and clients would be discouraged from using. The manager cannot be in future searches unless a client specifically requests. Current clients must be advised to replace the manager. 3

5 Due Diligence Monitor (Cont.) Below is a summary of manager changes, announcements and due diligence events since the issuance of our last quarterly report. Manager Changes/Announcements PIMCO Several Announcements On September 26, 2014 PIMCO announced several changes to senior leadership and portfolio management in reaction to the sudden resignation of founder and CIO Bill Gross. The following changes were announced: Bill Gross resigned from the firm, effective immediately, and will join Janus Capital Group, Inc. Daniel Ivascyn was elected Global CIO, succeeding Bill Gross PIMCO appointed Andrew Balls, CIO Global; Mark Kiesel, CIO Global Credit; Virginie Maissoneuve, CIO Equities; Scott Mather CIO U.S. Core strategies; and Mihir Worah, CIO Real Return and Asset Allocation Scott Mather, Mark Kiesel, and Mihir Worah were appointed Portfolio Managers for the Total Return Fund Saumil Parikh, Mohsen Fahmi, and Dan Ivascyn will serve as Portfolio Managers for the Unconstrained Bond Fund. PIMCO also announced Chris Dialynas will return from sabbatical in the fourth quarter of 2014NEPC believes that PIMCO s investment expertise will not be materially impacted by this change. PIMCO has a deep base of senior investment talent that has shown an ability to generate superior investment performance across a broad array of strategies. The news comes on the heels of a number of organizational related developments at PIMCO, including the departures of co-cio and CEO Mohammed El-Erian and Managing Director Marc Seidner, the appointment of six deputy CIOs, as well as numerous unfavorable media profiles of Mr. Gross and his at times erratic behavior. At that time NEPC believed that many of the announcements were disconcerting and a potential risk to the overall health of the organization; however because Mr. Gross remained with the firm, the investment process was unaltered, and the enactment of a Deputy CIO structure tempered succession concerns, NEPC did not believe PIMCO s investment capabilities would suffer. 4

6 Due Diligence Monitor (Cont.) Below is a summary of manager changes, announcements and due diligence events since the issuance of our last quarterly report. Manager Changes/Announcements On October 30, 2014, PIMCO announced two additions to the firm and one new appointment within the firm. Rejoining PIMCO will be Michael Spence and Jeremie Banet. Mr. Banet will be returning to the Real Return team where he will focus on inflation-linked strategies. He will report to Mihir Worah, CIO of Real Return. Michael Spence, a Nobel Laureate and Professor at NYU Stern School of Business, will be rejoining the firm as a consultant similar to role he held until early He will focus on macroeconomic and global policy issues, and he will be contributing to the secular and cyclical forums and directly to the investment committee upon his return. The third announcement is that Rahul Seksaria will become a member of the GMAF and the PIMCO Absolute Return Strategy (PARS) strategy teams. Mr. Seksaria is a member of the Real Return team and is the PM that took over for Mr. Banet s accounts following his departure this past June. He will remain on the Real Return team and continue to report to Mihir Worah. On November 3, 2014, PIMCO also announced that Marc Seidner will re-join the firm effective November 12th after spending only 8 months with GMO as the head of fixed income. We do not have all of the details, but were given some color from PIMCO on what his role and responsibilities will be. Marc will be named CIO of Non- Traditional strategies, joining the five platform CIOs and Global CIO Dan Ivascyn. He will be working out of the New York offices and will act as Head of Portfolio Management in New York, a position previously held by Curtis Mewbourne. Curtis will move to Newport Beach, where he will continue in his previous responsibilities, including as lead portfolio manager on the Diversified Income strategy. Marc will also be named a member of the Investment Committee and will take on some generalist portfolio management responsibilities. Marc resigned from PIMCO earlier this year, following the departure of former CEO and co-cio Mohamed El-Erian, and moved to Boston to lead GMO s fixed income team. When at PIMCO, Marc held the title of Managing Director and managed separate account portfolios across several strategies including Unconstrained Bond, Total Return, and Low Duration. He was a highly respected member of the investment team and was considered for one of the original Deputy CIO roles appointed in January of this year. NEPC maintains a CLIENT REVIEW status for PIMCO given all recent announcements. 5

7 Due Diligence Monitor (Cont.) Strategy Initial Product Bias Portfolio Manager Comments Portfolio & Investment Considerations All Asset Fund Client Review: Remain in Strategy Asset allocation process managed by Research Affiliates is the core of the investment thesis Exposure to strategies with Gross as the named PM were primarily equity portfolios (StocksPlus, etc.) Research Affiliates remains supportive of PIMCOs PMs and alpha capabilities Large majority of the investment returns are the result of asset allocation decisions Extremely unique approach ideal for GAA mandates Recommend clients remain in these strategies New CIO, Dan Ivascyn s Income Fund is the largest single exposure in the portfolio Limited replacement options Floating Income Client Review: Remain in Strategy Continues to be managed by Curtis Mewbourne Broad credit team remains to support the PMs and IC Unique strategy providing broad credit exposure Broadly diversified with top-down & bottom-up credit themes Tactically allocates around three main sectors - US High Yield, US Investment Grade, and EMD Recommend clients remain in these strategies Limited replacement options 6

8 Due Diligence Monitor (Cont.) Below is a summary of manager changes, announcements and due diligence events since the issuance of our last quarterly report. Manager Changes/Announcements Windhaven Update from 2Q 2014: Windhaven Investment Management recently announced the resignation of Mr. Stephen Cucchiaro, effective June 27, Mr. Cucchiaro was the founder of Windhaven and served as Windhaven s Chief Investment Officer, Chair of its Investment Committee, and developed the proprietary quantitative model that serves as the foundation for the Firm s investment process. According to Windhaven s senior management and parent, Charles Schwab & Co., Mr. Cucchiaro resignation was unexpected and solely his decision. The motivations for Mr. Cucchiaro resignation from Windhaven are not fully known but are personal in nature. While Mr. Cucchiaro s departure is a sudden and a significant event, the underlying investment team remains in place. Over the last two years Mr. Cucchiaro has sought to expand and institutionalize the investment team by bringing on four new individuals to provide both investment and quantitative modeling expertise. Under Mr. Cucchiaro s leadership, the four person investment team tested and validated Windhaven s quantitative model under a broad range of economic and financial market scenarios. Effective June 27th, the investment team will be led by current Head of Research, Linda Zhang and newly appointed Chair of the Investment Committee, Liz Ann Sonders. Ms. Sonders has been a member of Windhaven s Advisory Board since Schwab s acquisition of Windhaven in 2010 and will provide global macro and thematic investment views. This was a perspective previously provided by Mr. Cucchiaro. In addition to her duties as Investment Committee Chair, Ms. Sonders will remain in her current role as Chief Investment Strategist for Charles Schwab. Windhaven s quantitative investment model remains unchanged and will continue to be the foundation of their investment approach. NEPC believes Windhaven s asset allocation strategies to be unique and differentiating, nevertheless, as Founder and CIO, Mr. Cucchiaro provided a unique and valuable role within the organization. As a result, NEPC recommends clients invested in the Windhaven global asset allocation strategies review their relationship with Windhaven Investment Management. Update from 3Q 2014: On October 2, 2014, Windhaven announced the hiring of Christian Menegatti as new co-chief Investment Strategist. Windhaven also announced that current Chief Investment Strategist, Fritz Folts, will be retiring in early 2015 and will work alongside Christian in the role. Upon Fritz retirement, Christian will assume the main role of Chief Investment Strategist. Christian was a Managing Director and Global Head of Research at Roubini Global Economics for the past nine years. NEPC views this as a neutral event as they continue to build the team out after the departure of their founder, Stephen Cucchiaro in June of The strategy and process remain intact under the leadership of Liz Ann Sonders. While NEPC has a favorable view of the investment model and transition, we continue to monitor the situation and performance of the team. Windhaven has taken several steps in balancing the team since Stephens departure and we will continue to monitor asset flows, quarterly rebalancing, and management changes. Maintain Client Review status. 7

9 Total Fund Asset Allocation Target Asset Allocation Liquidity Pool: 25.0% Income Pool: 50.0% Total Return Pool: 25.0% Money Market Funds State Pool Short-term Bonds Floating Income Bank Loans Core Bonds Hedge Funds GAA Global Equity 25.0% 25.0% 7.5% 7.5% 10.0% 5.0% 15.0% 5.0% Actual Asset Allocation Liquidity Pool: 29.5% Income Pool: 46.8% Total Return Pool: 23.6% State Pool Dreyfus Bank of America Federated IR&M PIMCO Loomis Vanguard Permal Cube Windward PIMCO Vanguard 18.7% 10.8% 24.2% 7.5% 6.5% 8.7% 6.7% 12.7% 4.2% State Pool Money Market Liquidity Pool Short-term Bonds Floating Income Bank Loans Core Bonds Hedge Funds GAA Large Cap Eq *May not add up to 100% due to rounding 8

10 Total Plan Performance Detail (Net of Fees) Market Value ($) % of Portfolio Operating Funds Composite 284,358, Allocation Index Liquidity Pool Composite 84,008, State Pool 53,130, Dreyfus Inst'l Cash Advantage 21,535, BOA General Fund 127, Federated Prime Cash Obligations 9,215, Citi 3mth Treasury Bill Income Pool Composite 133,206, Income Research + Management 68,822, Barclays 1-3 Yr. Govt/Credit PIMCO Floating Income Fund 21,299, Dur, 1/3 JPM EMBIG, 1/3 BC Agg, 1/3 ML HY BB Loomis Sayles Bank Loans 18,412, S&P LSTA Leveraged Loan Index Vanguard Total Bond Market Instl' Fund 24,671, Barclays Aggregate Total Return Pool Composite 67,143, Cube 9,685, HFRI Fund of Funds Composite Index Permal Fixed Income Holdings 9,472, HFRI Fund of Funds Composite Index Windhaven Diversified Conservative 17,752, Blended Index PIMCO All Asset 18,381, Blended Index Vanguard Total World Stock Index 11,851, FTSE All World XXXXX Policy % Fiscal YTD YTD 1 Yr 2 Yrs 3 Yrs 5 Yrs 7 Yrs 10 Yrs Notes: Fiscal YTD begins 7/1 Blended Index: 40% BC Aggregate, 30% BC U.S. TIPS 1-10YR, 10% S&P 500, 10% BC High Yield, 10% JPM EMBI+ Composite excludes external loans. 9

11 Snapshot of Hedge Fund Managers Categories Permal Cube Management Company Permal Asset Management, Inc. Cube Capital LLP Portfolio Manager Investment Committee Scott Gibb Product Permal Fixed Income Holdings, N.V. Cube Global Multi Strategy Fund Type of Fund Multi Strategy Hedge Fund of Funds Multi Strategy Fund of Hedge Funds Fund Strategy Permal Fixed Income Holdings features a performanceoriented investment philosophy that employs a unique combination of fixed income spread strategies, opportunistic bets on events, and nimble, liquid macro strategies. It is positioned as both a performance enhancer and a good diversifier to a core hedge fund allocation. The Cube Global Multi Strategy Fund (CGMS) is a high conviction portfolio of hedge funds and direct trades (unlike most FOHFs). The portfolio is a dynamic expression of top down views adjusted tactically in response to market conditions with an aim to opportunistically maximize returns in all market environments while preserving gains in adverse market conditions. Firm AUM $22.4B $1.0B* Product AUM $3.9B $948MM Management Company Inception Product Inception Dec 96 Oct 03 Minimum Investment $1MM $1MM Management Fee 0.95% 0.85% Incentive Fee None 7.50% Lock Up Period None None Subscription Frequency Semi Monthly Monthly Redemption Frequency & Notice Monthly w/20 Days Notice/25 Day payout (100% in 45 days after month end) Quarterly w/90 Days Notice *As of 06/30/

12 Operating Fund Balances and Monthly Changes 350,000,000 Balances 70.0% 300,000, % 250,000, % 200,000, % 150,000, % 100,000, % 50,000, % 0.0% (50,000,000) 10.0% (100,000,000) 20.0% July August September October November December January February March April May June % Balance Change FY 2015 FY 2014 FY 2013 FY 2012 FY 2011 Note: Historical data provided by the University of Maine System Staff. % Balance Change is based of the average balance of years

13 Monthly Net Inflows (Outflows) 100,000,000 Monthly Net Inflows (Outflows) 80,000,000 60,000,000 40,000,000 20,000,000 (20,000,000) (40,000,000) (60,000,000) July August September October November December January February March April May June FY 2015 FY 2014 FY 2013 FY 2012 FY 2011 Note: Historical data provided by the University of Maine System Staff. 12

14 Reporting Methodology 13

15 Information Disclaimer 14