TEACHERS RETIREMENT BOARD INVESTMENT COMMITTEE. SUBJECT: Selection of General Investment Consultant and ITEM NUMBER: 16 Division of Duties

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1 TEACHERS RETIREMENT BOARD INVESTMENT COMMITTEE SUBJECT: Selection of General Investment Consultant and ITEM NUMBER: 16 Division of Duties CONSENT: ATTACHMENT(S): 1 ACTION: X DATE OF MEETING: April 3-4, 2014 / 20 mins. INFORMATION: PRESENTER(S): Christopher J. Ailman POLICY The Board s standing policy is to retain a general investment consultant to assist the Investment Committee with the oversight of the CalSTRS Investment Portfolio. HISTORY OF THE ITEM This is the conclusion of Item 7 from the December 2013, Investment Committee meeting. At that meeting, the Committee interviewed four firms and selected two potential finalists, Pension Consulting Alliance and Meketa Investment Group, to serve as the CalSTRS General Investment Consultants. However, the exact division of duties between the two was left for further development and final adoption. PURPOSE To purpose of this item is to approve the final selection of the firms to serve as the CalSTRS General Investment Consultant, Lead and Co-Consultant, and direct staff to negotiate final contracts with each. BACKGROUND The duties of the general investment consultant have remained fairly consistent over the decades. In the 2013 Request for Proposal, the duties were split into two roles to allow the Investment Committee the option to retain two firms if it so desired. The Committee voted and unanimously chose to hire two firms but debated dividing the duties in a way different than outlined in the RFP. The overall full scope of duties did not change, only the division was discussed, and the descriptions were expanded and clarified to eliminate confusion. There was a uniform consensus to hire both firms to work on the tri-annual asset allocation study because it is the most important and profound investment decision for the Committee. The remaining duties were proposed to be split equally 50/50. At the December meeting, the Committee Chair and Vice-Chair, along with the staff, were tasked with developing an appropriate split. After discussions and input from the finalists, it was concluded that fiduciary INV475

2 Investment Committee Item 16 April 3-4, 2014 Page 2 of 2 standards demanded one firm be responsible for the start to finish of the general consulting duties. To ensure the Investment Committee still received a second opinion and different voice, a lead and co-consultant model was developed. DISCUSSION The exact duties for the lead and the co-consultant are outlined in detail on Attachment #1. The shared/common duties of both consultants remain unchanged. In addition, both firms are retained to participate fully in the tri-annual asset allocation study. The lead consultant will be responsible for all the same duties the CalSTRS General Consultant has traditionally performed. The co-consultant will be responsible to participate in two major projects per year and to monitor and comment on the Fund s strategic asset allocation. This will include a short written commentary to be included in the semi-annual investment performance report. Further, the co-consultant will be expected to comment at any Investment Committee meeting if they have a different or alternative opinion to that of the lead consultant and staff. The intent is to provide the Investment Committee with expanded input and oversight into critical investment decisions that are more important than ever to the future health of the CalSTRS Defined Benefit Program. This will result in a slightly higher consulting cost than in past years but, given the $175 billion in assets and its critical role in funding CalSTRS, it is a very worthwhile investment. RECOMMENDATION Staff recommends the Investment Committee approve the attached scope of duties for the CalSTRS General Investment Lead and Co-consultant and select the respective firms to fulfill each specific role, subject to negotiation of final contract terms and conditions. The contract term will be three years with two (2) one year extensions. INV476

3 Request for Proposal General Board Consultants Realigned Exhibit A Page 1 of 3 Attachment 1 SCOPE OF WORK Investment Committee - Item 16 April 3-4, 2014 Under the direction of the Investment Committee (Committee) or designee, the services to be provided by the consultant(s) shall include, but not be limited to, the following: GENERAL SCOPE OF WORK OF BOTH LEAD CONSULTANT AND CO-CONSULTANT 1. Common Duties of both Investment Consultants a) Provide input on all components of the CalSTRS investment portfolio as requested by the Committee. b) Attend the meetings of the Investment Committee of the Teachers Retirement Board and other meetings as required. c) Research and make recommendations for use of potential and innovative investment strategies and securities. 2. Research and Analysis a) Prepare comprehensive analysis and provide advice on specific pension issues as requested by the Committee. b) Prepare and present analysis on current issues as they may pertain the CalSTRS investment portfolio. 3. Investment Training a) Provide training to the Committee on investment topics covered under this Agreement. b) Participate in the annual planning of the Investment Committee work-plan. c) Conduct workshops on specific issues designated by the Committee. 4. Additional Duties or Activities Other duties or activities as may be required consistent with and contemplated by the Foregoing. INV477

4 Request for Proposal General Board Consultants Realigned Exhibit A Page 2 of 3 CATEGORY A: DUTIES SPLIT INTO A LEAD CONSULTANT AND A CO-CONSULTANT: LEAD CONSULTANT Policy; Portfolio Investment; Performance Measurement and Reporting Investment Consultant 1. Provide written recommendations for amendments and/or modifications to the CalSTRS Investment Policy and Management Plan as well as the CalSTRS portfolio structure and strategy as warranted by changes in the marketplace. Provide detailed justification for recommendations. 2. Prepare and present reports and recommendations reviewing and updating all CalSTRS investment policies, criteria, and objectives which include strategies for public and private markets. This would also include strategies for U.S., Non-U.S. and global investments. 3. Provide information, recommendations and training on investment managers/advisors, service providers and investments ideas. These subject matters will include a wide range of investment services including U.S. and non-u.s. equity, fixed income, private equity, alternative investments, real estate, and other specialties, including, but not limited to options and future managers. 4. Manager Search and Selection: a) Participate in Investment Request for Proposal processes as requested by the Committee. b) Contractor shall participate in the evaluation, consideration and review of Structured Product as requested. 5. Assist the Committee in establishing appropriate performance benchmarks for each program and the total CalSTRS fund. 6. Contractor shall provide continuous review of the CalSTRS investment policy, portfolio mix / asset allocation, and investment strategy relative to changes in the capital markets and structures of similar retirement systems. 7. Using the Performance reports produced by the CalSTRS Master Custodian, prepare and present a semi-annual evaluation report on the performance of CalSTRS investment managers including a comparison with the performance of other managers with similar mandates. 8. Provide CalSTRS with semi-annual performance analysis on the total CalSTRS fund including comparison to other retirement systems. 9. Provide CalSTRS with semi-annual performance reports of theoretical portfolios, i.e., market indices, benchmarks, and composite total fund portfolio. 10. Present report identified above semi-annually to the Investment Committee of the Board. 11. Prepare a one (1) page annual report on the investment performance for the CalSTRS Annual Report. 12. Advise the CalSTRS Compensation Committee investment incentive measures and objectives 13. Advise on the Investment Policy and specific investment options in the Pension2 program. 14. Contractor may also be requested to perform other duties, activities, due diligence, and independent fiduciary work on infrastructure investments and projects as requested by CalSTRS staff. The terms and conditions of the performance of such other duties or activities shall be documented in additional agreements as necessary. The additional services will be paid for as performed outside of the retainer fee schedule established by this contract, based on previously agreed contract provisions. The amount paid for these additional infrastructure services will be reported annually to the Investment Committee. INV478

5 Request for Proposal General Board Consultants Realigned Exhibit A Page 3 of 3 CO-CONSULTANT Research Projects and Asset Allocation Strategy Consultant 1. Research and make recommendations for use of potential and innovative investment strategies and securities on up to two (2) projects per year (the Investment Committee major work-plan projects of the year. 2. Using the Performance reports produced by the CalSTRS Master Custodian, prepare and present a semi-annual evaluation report on the asset allocation of the CalSTRS portfolio. 3. Provide comments and opinions on all Investment Polices, benchmarks and changes to benchmarks, if different than the Lead Consultant. 4. Contractor may also be requested to perform other duties, activities, due diligence, and independent fiduciary work on infrastructure investments and projects as requested by CalSTRS staff. The terms and conditions of the performance of such other duties or activities shall be documented in additional agreements as necessary. The additional services will be paid for as performed outside of the retainer fee schedule established by this contract, based on previously agreed contract provisions. The amount paid for these additional infrastructure services will be reported annually to the Investment Committee. CATEGORY B: (BOTH LEAD AND CO-CONSULTANT) LEAD CONSULTANT AND CO-CONSULTANT Asset Allocation Investment Consultant 1. Contractor shall provide continuous review of the investment policy, portfolio mix / asset allocation and investment strategy relative to changes in the capital markets and structures of similar retirement systems and advice the Investment Committee and staff as warranted. 2. At least every three (3) years, commencing in 2015, or more often if requested by the Committee, the Contractor shall prepare and conduct a comprehensive Asset Liability Study, which factors in the future changes to the System s cash flow and uses a stochastic or other model to deal with the variability of future investment results. INV479

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