Mercer Consultant, Fund General Consultant

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1 DATE: March 1, 2010 TO: CC: FROM: SUBJECT: Website Posting Consultant, Fund General Consultant Investment Department-Public Equities International Manager of Managers Search This memo discusses: (1) The candidates for the international managers of managers search (2) The outcome of the international managers of managers search During the September 16, 2008 board meeting the Board of Trustees directed staff to liquidate the hire a new international manager of managers investment manager to replace United Investment Managers (UIM). The size of the initial mandate was $200MM; the following timeline was used for this search and funding RFP due date Proposals (RFP) /16/2009 Finalist Presentation to the Board of Trustees and selection /17/2009 Candidates notified of Board decision /21/20010 Funding Date /1/2010 The finalist selected were (1) Attucks Asset Management, (2) Fiduciary Investment Services Group (FIS) (LEIA), (3) Leading Edge Investment Advisors (LEIA) and (4) Progress Investment Management Company. After careful consideration by the Board of Trustees, Leading Edge Investment Advisors was selected as the finalist for this mandate. Following the Board of Trustees decision, all investment managers were notified of the Board s decision and why there firm was not selected. Internal Memorandum

2 Public School Teachers' Pension and Retirement Fund of Chicago International Manager of Manager Search Matrix - Finalist Presentations in January 2010 Candidate Main contact (for the firm) Contact Number Contact Comments / Reasons for Exclusion from Finalist* Attucks Asset Management Les Bond (312) lesbond@attucksfunds.com Finalist Bivium Capital M. Nancy Hollis nancy.hollis@biviumcapital.com Semi-Finalist / Geographical Market Position FIS Group Kila D. Weaver kweaver@fisgroup.com Finalist Leading Edge Clayton Jue ex 11 cjue@leia.net Finalist Northern Trust Anna Domb ad116@ntrs.com Semi-Finalist / Employee Turnover PFM Michael Harris harrism@pfm.com Semi-Finalist / Staffing Progress Mona S. Williams ext. 26mwilliams@progressinvestment.com Finalist UIM Yolanda Waggoner Foreman ywaggoner@unitedim.com Semi-Finalist / Employee Turnover

3 January 14, 2009 International Manager of Managers Search Public School Teachers Pension & Retirement Fund of Chicago Doug Kryscio Patrick Silvestri Services provided by Investment Consulting, Inc.

4 Table of Contents Search Process Minimum Qualifications Other Considerations Semi-Finalist Candidates Recommended Finalists 1

5 Search Process The international manager of manager search RFP was posted on the Chicago Teachers Pension Fund website on October 30, received 8 proposals by the deadline of November 16, All Candidates were considered semi-finalists Once the finalist candidates are selected, they will be scheduled to present at the January Board meeting. 2

6 Minimum Qualifications Company is registered with the Securities and Exchange Commission (SEC) pursuant to the Investment Advisors Act of The company and its personnel have all authorizations, permits, licensees and certifications required by federal, state and/or local law. The company will carry errors and omissions insurance or comparable instruments to cover negligent acts or omissions. The company must maintain sufficient procedures and capabilities to ensure the timely and accurate backup and full recovery for all computers and other data storage systems. The company must have a policy and practice of equal employment opportunity and non-discrimination based on race, creed and/or gender. The company must comply with the Fund s MWDBE brokerage policy. 3

7 Other Considerations Organization Experience and skills of the investment team. Manager Selection (Investment Process) How well the firm identifies new managers. Portfolio Construction What value, if any, does the manager s portfolio construction process add. Performance Most of the candidates have small allocations to international equity, commonly through a best-in-class program. Therefore there are no appropriate track records to consider. Fees The proposed fees of the recommended finalist candidates are on slide 8. 4

8 Semi-Finalist Candidates Attucks Asset Management Bivium Capital Partners, LLC FIS Group, Inc. Leading Edge Investment Advisors, LLC Northern Trust Global Investments PFM Asset Management, LLC Progress Investment Management Company, LLC United Investment Managers 5

9 Semi-Finalist Candidates General Information Candidate Firm Inception Product Inception Firm Wide AUM International Equity AUM Main contact Contact Number Attucks $1.3B $44.4M Les Bond (312) Bivium Capital $1.0B $90.8M M. Nancy Hollis FIS Group $1.9B $162.4M Kila D. Weaver Leading Edge 2005 N/A $1.4B $181.2M Clayton Jue ex 11 Northern Trust $33.4B $2.9B Anna Domb PFM $36.0B $643.0M Michael Harris Progress $6.4B $461.3M Mona S. Williams ext. 265 UIM $174.0M $70.0M Marcellus Taylor

10 Recommended Finalists Based on a review of the candidates, and taking into account the criteria for the mandate, recommends the following finalist candidates: Attucks FIS Leading Edge Progress 7

11 Recommended Finalists Fees Firm Attucks FIS Leading Edge Progress Stated fee schedule (%) 0.75% over $100MM 0.90% on the first $50MM 0.70% on the next $50MM 0.60% on the next $50MM 0.58% on the next $50MM Negotiable on the balance 0.90% on the first $50MM 0.85% on the next $50MM Negotiable on the balance 0.80% (fee and breakpoints negotiable) Effective fee % 0.80% 0.88% 0.80% 1 Based on a $100 million mandate. 8

12 Recommended Finalists Attucks Asset Management Firm Background and History Attucks Asset Management (Attucks) was founded in 2001 and is headquartered in Chicago, Illinois. The founding members including majority owner Les Bond, along with Geri Hansen and Dennis Lloyd. Several of the firms employees are from Columbia Capital Management, LLC. Attucks is an independent, minority owned and operated manager of managers that holds 95% of their assets with MWDBE firms (minorityowned, women-owned or firms owned by a disabled person). At the end of 2009, the bulk of Attucks business remains in the domestic equity space, however, there are international equity investments in their best-in-class offerings. Key Decision Makers Les Bond, Senior Managing Director, and Geri Hanson, Managing Director, are the driving forces behind Attucks portfolio construction and manager selection process. Kevin Wickliffe, Senior Vice President and General Counsel, Catherine Sweeney, Senior Vice President, and Silvija Martincevic, Senior Vice President, along with several research analysts contribute to the investment process. Les has over 20 years of investment management experience and is responsible for the overall management of the Firm. Geri Hanson has over 20 years of experience as well, many as an investment consultant. The team has grown significantly since inception, allowing Geri and Les to concentrate more on client portfolios. Investment Style/Philosophy Attucks was formed with the belief that smaller, more nimble managers offer an advantage over larger investment management firms. The firm seeks to find emerging investment managers, with a focus on MWDBE firms, on behalf of their clients. They view their managers as strategic partners and are willing to help managers through common operational or investment issues when necessary. 9

13 Recommended Finalists Attucks Asset Management Investment Process / Manager Selection Attucks relies on a seven step investment process, similar to many consulting firms. They establish investment guidelines, analyze benchmark components, screen managers, manager research, risk review, portfolio construction, and finally on-going monitoring. While the firm s portfolio construction process is robust, the majority of the value added by Attucks is designed to be achieved through manager selection. The firm uses their PerTrac Analytical Platform in their construction and risk measurement process. In addition, Zephyr StyleADVISOR, an analytical program used for risk/style analysts, is used in both the portfolio construction and manager research process. Attucks does use fee collection opportunistically as a way to rebalance the portfolio on an ongoing basis. Attucks Manager selection process draws on the relationships and experience of its senior partners. Attucks uses a proprietary manager database (SuperOffice) to house their research and assist in portfolio construction. Attucks conducts both a quantitative and qualitative review of all managers. The qualitative review covers; a summary of the people, process and investment philosophy, a review of legal and regulatory history, operations and continuity plan as well as assets under management and client growth. If a firm shows promise but needs help to become institution ready, Attucks is willing to assist with marketing materials, ownership structure, fee structure and portfolio structure. 10

14 Recommended Finalists FIS Group Firm Background and History FIS Group was founded in February 1996 by Tina Byles Williams in Philadelphia, PA. Over the years the Firm has grown to 23 investment professionals, with fund of funds strategies in public equity, fixed income, mezzanine private equity (through a strategic partnership) and an environmental fund (including carbon credit origination and trading, clean technology and water strategies). The firm also provides investment consulting advice on a limited basis. Tina Byles Williams has focused on selecting emerging minority managers since 1988 through various CIO type and consulting positions, prior to founding FIS. Key Decision Makers The investment Committee includes Tina Byles Williams, CEO and CIO, Roger Kenyon (specialize in environmental funds), Diallo Johnson, Senior Vice President and Director of Manager Research, and Xiaofan Yan, Senior Vice President Portfolio Construction & Operations. Investment Style/Philosophy FIS holds a deep seeded philosophy that outperformance can be achieved through the use of strong emerging firms. Advantages of emerging managers that FIS notes include; more concentrated portfolios thus best ideas are less diluted, an ability to trade more nimbly in the market place, and an greater alignment of interests as compensation at smaller firms is more directly tied to alpha production. FIS seeks managers that hold a clear competitive edge with a well executed, consistent and repeatable investment process. Additionally, FIS seeks firms with a stable and sound business plan along with talented investment professionals dedicated to long-term success. 11

15 Recommended Finalists FIS Group Investment Process / Manager Selection FIS has two sources of value added, portfolio construction accounts for 25%-50% of the firms expected alpha while manager selection accounts for 50%-75% of the expected alpha. FIS utilizes several different systems to assist in portfolio construction, including FactSet PA, evestment, Statistical Process Control and Wilshire Compass. FIS seeks to optimize the overall portfolio on a risk/return basis relative to the benchmark based on the combined characteristics of the underlying managers. Funding of managers during the portfolio construction process considers capacity, fit within the total portfolio, any client guidelines, correlation analysis and risk/return analysis. Manager Selection uses similar tools as portfolio construction with the addition of a robust proprietary database (which tracks over 1400 products). FIS utilizes a five step manager selection process labeled as sourcing, screening, initial due diligence, final due diligence and portfolio fit. FIS uses several sources for new manager ideas including their proprietary database, third parties and networking. The initial due diligence process includes an on-site visit, a review of the managers investment thesis, and risk analysis in various markets. The final due diligence process is an in depth review of the firm and strategy along with reference checks. The result of their manager research is a forward looking coring process that includes 27 factors across 5 categories. Buy list managers must obtain at least a 76% maximum score during this process to be considered for funding. In addition, all candidates must present to, and be approved by the Investment Committee for funding. 12

16 Recommended Finalists Leading Edge Investment Advisors, LLC Firm Background and History Leading Edge Investment Advisors, LLC was founded in August 2005 by the President and CIO of Leading Edge, Clayton Jue. Clayton Jue was part of the first fund of emerging managers in 1990 and has worked in this space at various other firms including Northern Trust and Progress for over 20 years. Clayton Jue owns 52% of the firm. Other owners include an outside investor, Columbus Nova (40%), Chris Fong, Executive Director and Deputy CIO (4%), Michael Lucas, Managing Director Sales (3%) and Dani McLeod, Director of Client Services (1%). Equity ownership is available to all employees through a stock option program. Key Decision Makers The Chief Investment Officer, Clayton Jue, makes all final decisions on Manager selection. Chris Fong is integral to the portfolio construction process and the firms liability driven investment strategies. The Investment Committee includes; Clayton Jue (President & CIO), Chris Fong (Deputy CIO Portfolio & Risk Manager), Rick Yamamoto (Senior Research Analyst), Dani McLeod (Director of Client Services, Research Analyst), Peter Cheung (Portfolio Manager Fixed Income), Susan Williamsen (Chief Compliance Officer), Vicky Lau (Senior Research Analyst) and A. Henry Lu (Senior Research Analyst). Investment Style/Philosophy Leading Edge is a research intensive firm that through its observations of performance differences between emerging and established firms has come to the conclusion that smaller firms offer a better opportunity to outperform, with stronger results when dispersion within the stock universe is higher. Leading Edge s database results show that emerging managers did better comparatively during the periods but produced mixed results during the markets, supporting their theory that emerging firms perform better when the market shows greater dispersion. While they do offer managers advice, their first and foremost duty is to create portfolios for their clients. Because of this Leading edge does not engage in helping managers grow to the same extend as other manager of manager firms. Finally, Leading Edge believes significant value can be achieved through their robust portfolio construction. 13

17 Recommended Finalists Leading Edge Investment Advisors, LLC Investment Process / Manager Selection One of Leading Edge s strengths is their proprietary comprehensive manager database of over 1700 emerging strategies (over 1200 MWDBE strategies). The database houses qualitative and quantitative reviews of the managers including electronic feeds for holdings. Each portfolio is analyzed and the managers characteristics are available for review by Leading Edge. A short list of managers is created based on the qualitative and quantitative review. Leading Edge then reviews the managers on the short list for their investment approach (process/style), infrastructure and procedure (personnel, organization, operations) and Business Enterprise (financial review, business model). Validation of investment style and performance consistency are additional characteristics that Leading Edge looks for in their investment managers. Portfolio structure is an optimization process based on the characteristics of the underlying mangers and how they combine to form a total portfolio vs. the benchmark. Style analysis, benchmark evaluation, attribution analysis, portfolio characteristics and risk analysis are considered in the portfolio construction process. Optimization considers performance statistics, style regression, BARRA risk factors and qualitative evaluations. 14

18 Recommended Finalists Progress Investment Management Company Firm Background and History Progress Investment Management was founded in 1990 as a manager of emerging managers based in San Francisco, CA. In 1998 Progress was sold to a consortium of investors including Liberty Financial Companies, FleetBoston Financial and Columbia Management Group/Bank of America. In 2004, a manager buyout resulted in the firm being 60% employee owned and 40% owned by outside investors. In 2008, Progress purchased the 40% stake in outside investors and is now 100% employee owned with Thurman White, the CEO, retaining the largest ownership share. Key Decision Makers Thurman White and Alex Hsiao are the key drives to the firms overall process. The Investment Committee consists of Thurman White (CEO), Alex Hsiao (CIO and chair of the Investment Committee), Mona Williams (Executive Vice President), Jose Balagot and Laura Nickols. All members of the Investment Committee have at least 17 years of industry experience. Investment Style/Philosophy Progress views the manager of manager business as a partnership with the client and underlying managers. They stress direct access to the underlying managers for clients, an ability to reserve capacity for direct investments (important for small cap managers), ability to participate with staff at due diligence meetings, and direct access to the research staff on request. Progress has published a number of research papers touting the advantages of emerging managers during its near 20 years of existence. They believe that nimble emerging managers provide a good alternative to large firms by providing insulation from group think that the market experiences from time to time and being more open to innovation. Progress believes the advantages of emerging managers include; efficient use of technology, an ability to execute swiftly, an absence of bureaucracy, ownership incentives and a passion to succeed. 15

19 Recommended Finalists Progress Investment Management Company Investment Process / Manager Selection Progress utilizes a six step investment process. Progress identifies emerging managers for their portfolio through their proprietary databases and qualitative and quantitative review in the first two steps. Then the fund structure is optimized to maximize returns and manage risk. Investment monitoring and evaluation follow after the initial funding. Throughout the process Progress offers manager s assistance in their processes and organization. Finally, when necessary, Progress will terminate or reallocate manager assets or, if the client chooses, graduate a manager to a direct relationship. The sourcing of new managers is a team approach for which all members of the investment committee participate. Full research candidates are found through screens of the database. In addition, Progress seeks to find little known managers through third party relationships, hedge funds, prime brokers, executive search firms, private equity firms and financial intermediaries as well as referrals and industry conferences. From there a peer review by another researcher is established and a deeper dive into the firm and its processes is taken. Finally, the candidate is considered by the investment committee. Managers are scored in several different areas. Progress scoring is based on four areas; investment process (60%), performance (10%), people (10%), and organization (20%). Investment process refers to the consistency and quality of the firms investment process. The market environment is taken into consideration when reviewing performance. Progress seeks firms with depth of experience and a management team that works well together. Organization is an important piece in the emerging space as many firms are transitioning from the high net worth space to the institutional space, which requires a higher level of reporting and standards. 16

20 Next Steps All candidates have been notified and are prepared to present next week. recommends inviting all 4 managers (Attucks, FIS, Leading Edge and Progress) to the January Board meeting for consideration for this placement. 17

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