CITY OF LOS ANGELES DEPARTMENT OF WATER AND POWER INTRADEPARTMENTAL CORRESPONDENCE

Size: px

Start display at page:

Download "CITY OF LOS ANGELES DEPARTMENT OF WATER AND POWER INTRADEPARTMENTAL CORRESPONDENCE"

Rose Daisy Gordon
5 years ago
Views:

1 Date: May 4, 2016 CITY OF LOS ANGELES DEPARTMENT OF WATER AND POWER INTRADEPARTMENTAL CORRESPONDENCE To: From: Subject: Retirement Board Members Linda P. Le, Retirement Plan Manager Board Agenda Item No. 3: Report on Fidelity Institutional Asset Management - On-Site Due Diligence Visit (May 11, 2016, Regular Retirement Board Meeting) Recommendation That the Board of Administration (Retirement Board) of the Water and Power Employees' Retirement Plan (Plan) receive and file this report on the on-site due diligence visit to Fidelity Institutional Asset Management (FIAM). Summary Investment Officer Ravi Sharma met with representatives from FIAM on April 7, 2016, in Boston, Massachusetts, to review and discuss the organization and operational processes relating to the investment portfolios it manages on behalf of the Plan. The Retirement Board hired FIAM (formerly Pyramis Global Advisors) to manage a developed markets international growth equity mandate for the Retirement Fund (RF) in November 2004 and for the Retiree Health Benefits Fund (RHBF) in September As of March 31, 2016, FIAM manages $470.6 million and $79.3 million for the RF and the RHBF, respectively. Mr. Sharma interviewed the personnel directly responsible for managing the Plan's assets. He reviewed the capabilities of the management team and observed available resources to manage the Plan's portfolios. Mr. Sharma met with the following members of the firm: Ramona Belcher - Relationship Manager Paul Cahill - Senior Account Executive Camille Carlstrom - Associate Portfolio Manager Dave Censorio - Assistant Treasurer Horace Codjoe - Head of Investment Risk Management Casey Condron - Head of Institutional Sales & Relationship Management Sue Curran - Senior Vice President & Relationship Manager Eileen Dibb - Portfolio Manager 3.1

2 Demetra Dillon - Director, Technology Risk Management Dan Fabrizio - Director, Fund Accounting Peter Hadden - Portfolio Manager Brian Hoesly- Institutional Portfolio Manager David Lane - Head, Global Institutional Trading Jeff Lees - Senior Manager, Global Trade Operations Traci McCormack-Vice President, Asset Management Compliance Bryan Mehrmann - Vice President, Risk Management Dana Rancourt - Director, Oversight of Institutional Products David Shore - Vice President, Asset Management Compliance Chris Steward - Institutional Portfolio Manager. Matthew Thibault - Director, Valuation Matt White - Director, Disaster Recovery & Business Continuity Key functional areas discussed were the overview of the company, strategy and trading, portfolio operations, compliance, disaster recovery and business continuity. FIAM is currently not on watch status. Company Overview Fidelity Institutional Asset Management, formerly Pyramis Global Advisors is the institutional arm of Fidelity Investments. FIAM states that their focus is on meeting the unique needs of the institutional marketplace. As part of the Fidelity organization, they claim to leverage Fidelity's institutional investment expertise to deliver products and solutions to meet clients' investment goals. Historically, Fidelity served institutional firms (including intermediary firms, such as broker-dealers) through two separate business units - Pyramis Global Advisors (Pyramis) and Fidelity Financial Advisor Solutions (FFAS). Pyramis was established in 2005 as a standalone organization with a stated goal to focus on ensuring its investment, distribution and client servicing platform would bring the best of Fidelity to the institutional marketplace. FFAS was established in 1979 with a focus on distributing Fidelity-managed investment products (e.g., mutual funds, 529 plans, Variable Insurance Products, etc.) to national broker dealers, regional and independent broker dealers, banks, trust companies, registered investment advisors (RIAs) and insurance companies. The rapidly evolving and increasingly complex investment needs of institutional clients presented an opportunity, and, in October 2015, Fidelity Institutional was established. FIAM brings together the distribution and client service teams from Pyramis and FFAS to create a single, integrated distribution and service organization. The investment management units of FIAM, FIAM, LLC, and Fidelity Institutional Asset Management Trust Company, and the other entities that make up FIAM, are wholly owned, indirect subsidiaries of FMR, LLC, commonly known as Fidelity Investments. 3.2

3 Fidelity was founded in 1946 by Edward Johnson II, the father of the current Chairman, Edward Johnson Ill. The firm has been privately held for nearly 70 years, Strategy Process and Portfolio Construction Review Mr. Sharma met with the portfolio management team which consists of Brian Hoesly, Chris Steward, Camille Carlstrom, Eileen Dibb, and Peter Hadden. Also present for this discussion was Horace, Codjoe, Head of Investment Risk Management. The portfolio is co-managed by Mr. Hoesly and Mr. Steward who make allocation decisions to the respective regional portfolios that comprise the strategy. The regional portfolios which comprise the aggregate strategy are individually managed through bottom-up security selection. Ms. Dibb and Ms. Carlstrom manage the Asia growth and Japan growth sleeves. Mr. Hadden along with an analyst in London, manage the European sleeve of the portfolio. The Pac Basin ex-japan and Canadian portfolio sleeves are managed by Bruce MacDonald and Joe Overdevest, respectively. They reside outside of the United States. International Developed Growth is a core, growth-oriented strategy that provides diversified exposure to the developed international markets. The objective of the International Growth strategy is to seek to provide long-term capital growth via a diversified portfolio of large, medium, and small-cap companies in Europe, Japan, the Pacific Basin and Canada. The International Growth strategy seeks to provide excess returns relative to the MSCI World ex-us IMI Index over a full market cycle. The portfolio investment process combines active stock selection with active regional asset allocation. The portfolio managers use bottom-up, fundamental research to construct regional portfolios in Europe, Japan, the Pacific Basin, ex-japan and Canada. In the International Growth investment process, the portfolio managers select stocks for their regional portfolios, and this process usually contributes 80%-85% of the active return. In the first phase of the investment process, the regional portfolio managers work closely with analysts in identifying the most appropriate "buy" rated stocks for inclusion in the portfolio. Within any particular region, the universe of buy-rated stocks may be as large as 300; the regional portfolio manager's role is to create a diversified portfolio that incorporates the analysts' best ideas and meets risk parameters and client guidelines. Generally, each regional portfolio contains stocks. The total portfolio typically contains approximately 250 stocks. The regional portfolio managers each have ultimate decision-making authority and accountability for their respective regional portfolio within the investment guidelines. The guidelines determine the approximate number of holdings, average market capitalization exposure, and maximum and minimum active weightings in industry groups and stocks. The aim of these guidelines is to ensure that the risks taken in the portfolio are commensurate with the performance target and to focus active risk on stock selection. Country and industry group (as defined by MSCl's classification of 24 industry groups) relative active weights are a residual of the stock selection process; 3.3

4 country weights are held within +/- 5% of the benchmark, while industry group weights are constrained to +/-10% of the benchmark weight. The regional portfolio managers construct diversified regional portfolios using the best fundamental investment ideas from the global research platform. Using proprietary and third-party optimization models, portfolio managers monitor and control risk within each regional module. Regional portfolio managers, analysts and traders continually monitor the markets and portfolio holdings. Buy and sell decisions are implemented as appropriate to ensure that the portfolio contains the highest conviction investment ideas and that risk parameters remain consistent with the benchmark and within client guidelines. Finally, the regional asset allocation positions are determined by the lead portfolio management team based on a wide variety of inputs from across the Fidelity enterprise and external sources. These inputs include data and analysis from Fidelity Management and Research's (FMR) global asset allocation resources and FIAM's own internal resources. FMR's global asset allocation resources include macroeconomic, quantitative/technical, and qualitative data and analysis, with scheduled and ad hoc meetings and conference calls, and model portfolios. FIAM inputs include monthly reviews of each region by the regional portfolio managers on the International Growth team based on their qualitative and macro views of their respective areas of focus and expertise. Additional FIAM inputs include detailed quantitative models. External. resources include third-party and sell-side regional and macroeconomic analysis and research. The process culminates with a full review of all internal and external inputs by the lead portfolio management team which then determines the regional portfolio weightings relative to the appropriate benchmark. The lead portfolio management team is also responsible for the overall strategy, including the allocations to the regional portfolios. The team monitors the regional portfolios and meets regularly with the regional portfolio managers to review the positioning and performance of each portfolio and assess the level of conviction of the regional portfolio managers in their stock ideas. Although the lead portfolio management team is responsible for the overall strategy, it has no responsibility for stock selection within the regional portfolios. Portfolio Operations and Trading Review Mr. Sharma discussed Fidelity's middle and back office operations and trading capabilities with Dan Fabrizio, Director, Fund Accounting, David Lane, Head, Global Institutional Trading, Jeff Lees, Senior Manager, Global Trade Operations, and Matthew Thibault, Director, Valuation. FIAM utilizes two operations centers to service portfolio operations. One center is located in Merrimack, New Hampshire, and the second is located near Scottsdale, Arizona. Both centers provide crossover operations services for FIAM, but Merrimack focuses primarily on equity portfolios and Scottsdale focuses primarily on fixed income. These centers also provide operations support for the mutual fund and defined 3.4

5 contribution divisions of Fidelity. Both centers perform general fund accounting, security pricing, asset servicing, and corporate action processing. Trading functions at FIAM are performed separately and distinctly from portfolio management functions. Although traders and portfolio managers communicate regularly on a variety of market and economic factors essential to the performance of their respective functions, actual trade execution is performed exclusively by the trading desks. This separation enhances internal controls and allows the investment professionals to focus on their particular functions and areas of expertise. The workflow is a straight-through process from order delivery to the desk through the communication to the custodian and accounting team. On a real-time basis, portfolio managers electronically deliver their orders to the trading desk while traders communicate information back to them about market and stock events and insights. Orders are systematically checked for compliance with portfolio guidelines as well as internal and external limits. FIAM has a global trading operation with synchronized desks in Boston, London and Hong Kong. These desks are connected through an on-line global trading system that allows Fidelity to deliver 24-hour trading capabilities in local markets. Fidelity achieves low transaction costs through varied types of execution capabilities, including: Basket (program) trades Electronic crossing networks (ECNs) Direct access to liquidity centers In selecting brokers for specific transactions, FIAM evaluates and classifies individual brokers into various categories according to a rating criteria on areas such as trading capability, creditworthiness, security coverage and back office resources. This program enables selection of the "best" broker for each part of the business. A significant amount of trading activity is concentrated with a core group of brokers who are constantly monitored for trade execution quality and other criteria. The core group consists of those firms believed to provide the highest level of service and best execution possibilities. Brokers receive feedback regarding their relationship with FIAM on a quarterly basis which compels them to constantly strive to improve the level of service they provide. As stated by FIAM, these trade management practices promote tighter control of trade information, allow for more thorough monitoring of brokers' execution quality and support best execution by channeling trading activity to brokers who meet FIAM's standards. Compliance & Risk Management Mr. Sharma met with Traci McCormack, Vice President, Asset Management Compliance, Dana Rancourt, Director, Oversight of Institutional Products, David Shore, 3.5

6 Vice President, Asset Management Compliance, and Horace Codjoe, Head of Investment Risk Management. FIAM relies upon processes and controls established by Fidelity's centralized compliance function, Asset Management Compliance (AMC), to monitor portfolio management activity with respect to compliance with applicable client/pool/fund guidelines. AMC reviews guidelines to determine the restrictions that need to be applied on the automated proprietary compliance monitoring system. The system is maintained by AMC and provides pre-trade and post-trade testing. AMC compliance professionals and investment professionals receive potential guideline exception messages at the time of trade. If it is determined that a breach will occur, AMC will notify the investment professional that the trade order is not permitted. In addition, AMC professionals perform a review of account holdings the day after trading occurs (e.g., T +1 check) to capture passive market movements and corporate actions. The FIAM Investment Risk Management Team, led by Horace Codjoe, provides dedicated risk management services and ongoing evaluation and oversight to the International Growth portfolios. The Risk Management Team utilizes a proprietary risk management platform that conducts real-time and regressive risk analysis and measurement. This platform enables the investment team to decompose the portfolio's risk into a variety of different factors, helping the portfolio managers to identify any inadvertent concentration of exposure to any single risk factor. The Risk Management Team conducts formal quarterly reviews with the International Growth lead portfolio management team that combine a variety of time series and snapshot data from several outside risk management systems to view the portfolio from a variety of perspectives. Disaster Recovery and Business Continuity Mr. Sharma met with Matt White, Director, Disaster Recovery & Business Continuity. At FIAM, significant resources including staff, time, facilities, and equipment are dedicated to managing the Business Continuity Program. This program allows FIAM to continue to provide the full spectrum of financial services in the event of an incident affecting operational functions, applications, networks, and/or building sites. The goal is to provide uninterrupted service; and to ensure that clients' interests are best protected. The Asset Management Business and IT Continuity team manages the FIAM Business Continuity Plan, which addresses FIAM's specific business unit needs while also leveraging Fidelity-wide resources. Fidelity has established an Enterprise Business Continuity ("EBC") team that drives overall business continuity planning efforts for the firm. This team provides guidance, training, expertise, and governance to all Fidelity business units. 3.6

7 EBC maintains ties with Federal, state, and local agencies (e.g., Homeland Security, police, fire, etc.) that have jurisdiction over event management for each Fidelity location. EBC is responsible for emergency event management and alternate site readiness. EBC also provides oversight of business unit continuity plans and testing practices, which culminates in a monthly performance scorecard. EBC assigns a business continuity liaison to work with the Asset Management Business and IT Continuity Planner, who in turn works with relevant business function representatives, application owners, and network owners to evaluate the business requirements and identify alternative facilities, equipment, and essential personnel to ensure that procedures are in place to quickly recover from any type of business interruption. The main goals of the FIAM Business Continuity Program are to: Understand and anticipate a disruption in service Create awareness and avoid complacency Establish, test, and maintain effective recovery procedures The program documents the planning and recovery processes required to maintain critical business functions during an unexpected business interruption and throughout the recovery. It is guided by procedures that involve all employees and vendors and is subject to periodic audits. Summary and Findings Mr. Sharma covered a comprehensive agenda with various representatives from FIAM, and discussed and observed various areas and functions of the firm. From Mr. Sharma's perspective, FIAM demonstrated a strong culture of compliance, corporate processes and controls, and adequately addressed managef11ent and operational topics of discussion relating to the Plan's portfolios. Mr. Sharma did not observe any areas of concern during this visit. Jeremy Wolfson Chief Investment Officer LPUJW/CM/RS:mea 3.7

CITY OF LOS ANGELES DEPARTMENT OF WATER AND POWER INTRADEPARTMENTAL CORRESPONDENCE

Date: September 17, 2015 CITY OF LOS ANGELES DEPARTMENT OF WATER AND POWER INTRADEPARTMENTAL CORRESPONDENCE To: From: Subject: Retirement Board Members Linda P. Le, Retirement Plan Manager J V Board Agenda