Health Care Foundation of Greater Kansas City (HCF) Finance and Investment Committee Minutes of Meeting Held Tuesday, January 24, 2017 at 2:00pm

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1 Health Care Foundation of Greater Kansas City Finance and Investment Committee Minutes of Meeting Held Tuesday, January 24, 2017 at 2:00pm Location: Health Care Foundation of Greater Kansas City (HCF) 2700 East 18 th Street, Jonas Board Room (Suite 211) Kansas City, Missouri Committee Members in attendance: Thomas C. Carignan, Chair; Tom Cranshaw; Jim Dockins, Ed.D., FACHE; Charles Chuck Foudree; Julia Simmons, M.D. Committee Members unable to attend: Peg VanWagoner, Chair; Spence Heddens; John Martin (all notified HCF of inability to attend prior to meeting) Health Care Foundation of Greater Kansas City Board Members and Associates in attendance: Wayne Powell, HCF Board Chair; Roy Robinson, HCF Board Member; Bridget McCandless, M.D., President/CEO; Richard H. Zimmer, CFO/Assistant Treasurer; Paula Cornwell, Vice President of Operations & Human Capital; Graciela Couchonnal, Ph.D., Vice President of Programs; Christena Diven, Accountant; Karen Guile, Grants Administration Manager Guests in Attendance: Kirloes Gerges (AON Hewitt); David Keil (AON Hewitt); Brandon Patterson (AON Hewitt) Tom Carignan, called the meeting to order at 2:05 p.m. on behalf of Committee Chair Peg VanWagoner, who was unable to attend. Review and Accept December 2016 Financial Statements Mr. Zimmer summarized the Financial Statements for December 2016, which were included in the meeting packet. SCHEDULE OF INVESTMENTS Investment Activity: 1. Preliminary value of HCF s Investments at 12/31/16 = $548.4M. Preliminary 2016 Investment earnings = $35.5M. Both numbers are expected to increase $2 to $3M once 4th Quarter Private Equity and December results for two Hedge Funds (Aetos and Maverick) are available. 2. YTD investment revenue exceeds the budgeted revenue goal for the year of $32.5 Million. The difference in HCF s computed annual rate of return of 6.2% and Aon Hewitt s published return of 6.6% will be reconciled. Currently, there is a $5.2M difference in recorded investment revenue for the year, some of which may be due to Aon s use of estimated December results for several investments noted above. (There is often variance in the numbers HCF presents in the preliminary Investment Activity report and the numbers Aon Hewitt reports, due to differences in methodology in tracking investment earnings; however, this internal analysis is a good tool to ensure HCF s internal Investment Accounting is on track.) 3. HCF sold $31.7M in investment during the year with $10.7M being reinvested due to rebalancing. $14.7M in realized gains on investment sales was recorded.

2 4. Private Equity investments distributed $11.9 in cash during These cash distributions were partially offset by capital calls on new commitments of $9.4M. Net cash requirements provided by Private Equity = $2.5M. Mr. Zimmer stated that he will look to Aon Hewitt for a recommendation subsequent to this meeting to sell off approximately $10 M in investments in order to pay down HCF s Line of Credit. Balance Sheet (Statement of Financial Position) 1. HCF s Cash balance at year-end was $1.8M Operating Cash requirements was $32.7M of which $23.3M was used for Grant payments and operational expenses. The remaining cash requirement of $9.4M was used for Capital Calls. 2. Liquidity for 2016 was provided by the following: (a) Beginning Cash Balance $2.5M; (b) Net Investment Sales: $20.8M, (c) Private Equity Cash Distributions: $11.9M and (d) CHG public support contribution = $1.2M. Uses of cash were: (a) Grants & Operations: ($23.3M), (b) Capital Calls ($9.4M) and reduction of our outstanding LOC balance ($1M) Average Cost of Capital on LOC balance = 1.2%. 4. YTD Net Assets of $524M have increased $9.6M or 1.9% in Net Assets are above Contributed Capital by $26.8M or 5.4%. On an Inflation Adjusted Contributed Capital basis, Net Assets have decreased in purchasing power (since inception) by ( $93.5M) or ( 17.8%). However, $225M in Grant awards have been awarded since inception. Income Statement (Profit & Loss Statement) 1. Preliminary 2016 HCF s financial performance shows a $9.6M increase to Net Assets or 1.9%. $34.4M in revenues have been recorded (including CHG Contribution) against $24.7M in expenses. 2. Program expenses of $22.9M was favorable to budget by $1.2M. This 2016 favorable budget variance will be spent in future years as the board has approved special initiatives totaling this amount, but unspent at this time. 3. Operating expenses of $1.9M was favorable to budget by $805k. More than half ($413k) of the positive variance is in Professional Service expense. Communication expenses were also $146k favorable due to an accounting change in expensing contracts. Tom Cranshaw made a motion to accept the December 2016 Financial Statements as presented. Chuck Foudree seconded the motion. The motion was approved by unanimous voice vote. Aon Hewitt Asset Allocation Updates: Dave Keil introduced Kirloes Gerges, a new member of Aon Hewitt s Real Estate Research Team. Mr. Gerges will provide a Real Estate Performance Review later in the meeting. Brandon Patterson from Aon Hewitt provided an update on recent market activity. Monthly Market Snapshot (see Aon Hewitt Supplemental Meeting Materials, Section 1) Highlights Mr. Patterson touched upon included: - Re: Index Return all major capital markets posted positive results, particularly US Equities - US Stocks led the market rally at the end of 2016, advancing more than 12%; value stocks outperformed growth index stocks - Most non- US Equity indices posted positive results, with the exception of MSCI EAFE Growth Index Page 2

3 - Re: Bond market yields plunged early in 2016 and dropped again when Brexit was announced; however, yields rose late in the year and eventually ended at 2.4%, while high yields advanced as much as 17.1% Medium Term View (MTV) Update (see Aon Hewitt Supplemental Meeting Materials, Section 2) Dave Keil Mr. Keil highlighted a few points under this section: - P. 4 Regional Equities: Aon Hewitt slightly upgraded EAFE Equity & EM Equity; Current conditions mean the firm remains neutral US vs non-us equities - Aon Hewitt slightly downgraded Highly-Rated Corporate Bonds. The firm is currently recommending portfolios stay slightly underweight in this category as well as in Government Bonds - All in all, 2016 was a very volatile year - HCF s portfolio earned approximately 6.6%, which was the Expected Rate of Return (Emerging Market Debt performance was a large contributor to this success) Mr. Zimmer inquired whether HCF should move some global equity investments and shift closer to a 40% asset allocation when it is time to rebalance its portfolio. Mr. Keil responded that Aon Hewitt would recommend some shifting. For example, HCF s portfolio is currently at the upper limit of its Real Estate allocation. Aon Hewitt feels it would make sense to shift a small portion from Real Estate to Equities. It was determined that, subsequent to this meeting, the CFO and Aon representatives will meet to talk about re-balancing actions for HCF s current asset allocations. Research Update The Year that was Dave Keil (Aon Hewitt Supplemental Meeting Materials, Sec 3) KAREN, IN THE FUTURE, CAN YOU USE THE SECTION TITLES INSTEAD OF USING TAB NUMBERS. MEL HAS BEEN PULLING OUT THE SECTION TABS FROM OLD MATERIALS BECAUSE SHE THINKS THEY WONT SCAN. This document provides a summary of the global economic and political events and how markets reacted. It contains a Key View Tracking document that illustrates the performance of Aon Hewitt s views for Dave Keil provided some highlights: - P.4 - Aon was slightly off on its views re: Gilts and Treasuries and Currency Hedges in 2016 (they had anticipated a narrow Remain rather than a narrow Leave result. The bond yield fall was far larger in the UK than elsewhere in the aftermath of Brexit, reflecting a drastic shift in interest rate expectations. The HCF portfolio does not include gilt. - Aon was also slightly off on its views of US Stocks, because they did not anticipate their sharp rise post-us presidential election. It is uncertain whether the equity market will sustain these gains. - P5 re: expectations for 2017 and expected key drivers: Aon Hewitt is working on the following views: o potential moderate US fiscal stimulus in the first year of Trump s presidency, but that the stimulus will not achieve very much by way of a growth acceleration in 2017 o do not believe that a major upward US/global growth shift is coming o mild inflation pick-up, as opposed to a significant inflation pick up, which would threaten a much faster pace of interest rate rises o re: path of China s sustainable growth: things will remain mildly uncertain but Aon Hewitt does not anticipate large disruption in Chinese markets; however, it will be an area that requires attentiveness. Page 3

4 Aon Hewitt HCF Performance Updates: 2016: Quarterly Investment Review (Flash Report) (Aon Hewitt Supplemental Meeting Materials, Sec 4) Brandon Patterson Mr. Patterson provided highlights: - HCF s total fund preliminary estimate = 6.6% Return - Asset Class Performance Summary o US Equities rallied to end the year faintly over benchmark o Non-US Equity - performed just slightly under benchmarks o Global Equity Templeton & GMO both out-performed benchmarks o Emerging Markets Debt underperformed nearly all benchmarks, but expected to perform well in January o Fixed Income out-performed benchmarks as a whole o Opportunistic Strategies - out-performed benchmarks throughout year (Aon Hewitt very pleased with portfolio allocation in this area) o Private Equity no data as of yet o Real Estate UBS seems underperforming slightly; RREEF outpaced its benchmark Mr. Zimmer inquired whether Aon Hewitt anticipated maintaining the same balance between US and European Private Equities when it came time to rebalance the Foundation s portfolio. Mr. Keil stated that HCF s current PE allocation is 80 (US)/20 (global). Aon Hewitt would recommend maintaining this balance, as well as the balance within Secondary and Distressed, while focusing on other diversification opportunities as they open up. Private Equity Benchmark Update (Aon Hewitt Supplemental Meeting Materials, Sec 5 Memo) Dave Keil At the last meeting Ms. VanWagoner requested that the Committee reserve a place in a future agenda to consider Publicly Traded Global Equities as a benchmark for HCF s Private Equity managers. Mr. Keil explained that, in September 2004, the Health Care Foundation of Greater Kansas City included a target allocation to private equity in its long-term asset allocation goals. The initial goal of the private equity program was focused on building a broadly diversified portfolio of core investments. As private equity was funded, we implemented a U.S. public equity index plus a premium of 300 basis points as the benchmark proxy for private equity (i.e., Russell 3000 Index + 3%). In building its diversified portfolio of core investments, the Foundation, at our recommendation, decided to include a non-us component to its private equity program. The portion in non-us was originally set at 20%. As of September 30, 2016, the private equity program is close to that target with approximately 22% in non-u.s. and approximately 78% in U.S. investments. Aon Hewitt Recommendation: In order to reflect the international exposure in the private equity portfolio, Aon Hewitt recommends that the Health Care Foundation of Greater Kansas City change the private equity benchmark to a spliced benchmark that includes both a U.S. and international public equity index with a premium of 300 basis points. For example, the new private equity benchmark would be 80% Russell 3000 Index and 20% MSCI EAFE Index plus a premium of 3%. Committee felt that this recommendation was a more appropriate benchmark for this asset class. They discussed whether it was necessary to retroactively re-rate Private Equities using this new benchmark valuation but, while it would provide more accurate data, they determined it was not Page 4

5 ultimately necessary. Because language regarding benchmarks was included in HCF s Spending Policy, Mr. Carignan called for a motion to approve this recommendation. Chuck Foudree made the motion to change the private equity benchmark to a spliced benchmark that includes both a U.S. and international public equity index with a premium of 300 basis points. Julia Simmons, M.D. seconded. The motion was approved by unanimous voice vote. Real Estate Portfolio Review (Aon Hewitt Supplemental Meeting Materials, Sec 6) Kirloes Gerges provided a presentation regarding the Foundation s Real Estate Portfolio. Overview (p.3): The economic occupancy index remains strong and supply has stayed relatively muted from previous peaks and therefore strong showing for real estate. - CPPI chart shows pricing, which also remains strong, with the exception of a dip in retail o Industrial (e-commerce) continuing to do well o While the story of Retail is bifurcated: mega-malls and high street retail Is doing well, yet strip malls are downsizing o Office had a dip in 2015 but has since rebounded o o Apartment fundamentals remain strong There is a healthy spread between Real Estate Risk Premium v US 10-year Treasury Yield (Aon Hewitt is not concerned about interest rates at this time) - (p.4) Risk premiums remain at healthy levels - (p.5) Annual Returns - Real Estate has returned 9.1% (net of fees) over trailing one year - HCF Real Estate Portfolio Review (UBS and RREEF-AM II) o UBS has most conservative fund in Real Estate = in robust times, tend to underperform; whereas in market downturns, perform better = Aon likes fund diversification in this asset allocation (both managers are buy-rated) - Mr. Gerges overviewed UBS and RREEF performance over last 10 years. o Summary: these are 2 complementary managers. However, HCF is slightly overallocated at this time and may want to consider re-balancing. The Foundation can expect to enjoy moderate return, but less than in years past. - Re: shifting funds to/away from Real Estate allocations: UBS is an open-end core fund (openended because you can add/subtract funds every quarter); however, queues often form because it takes time to find/buy or sell properties. Queue shift since early 2016 is mainly due to hit taken asequities markets rebalanced towards real estate. Pertaining to HCF s real estate portfolio, RREEF s incoming subscription queue exceeds its redemption queue. Therefore HCF s redemption request from this portfolio could occur by the end of the current quarter. Conversely, rebalancing from the UBS portfolio could take as long as 3 to 4 quarters due to the size of its redemption queue compared to its incoming subscriptions. HCF s Real Estate Target is 10% of total investments, and allocation is currently at 13.1%. The Foundation is approximately $7.5 M overweight in each fund. If HCF would like to rebalance (i.e - place redemption requests in both funds), it may behoove the Foundation to get in queue now. We can withdraw our request in the next few months if we change our minds. Aon Hewitt still recommends taking Real Estate in cash as opposed to re-investing; but, can t expect to get the cash immediately from redeemed Real Estate investments in order to pay down LOC since could take up to 4 quarters once HCF gets in queue. Mr. Zimmer stated that he will plan a separate meeting with Aon Hewitt to determine how to rebalance the Foundation s portfolio and will send out a memo with explanations to the Committee. Page 5

6 (No vote was necessary from the Committee for this decision because it falls within CFO s range to rebalance with Consultants.) --BREAK Vote to Close Meeting Tom Carignan requested a motion to go into Close Session pursuant to Section of the Missouri Sunshine Law, upon proper motion, this meeting may be closed to the public at any time for the purpose of: (1) discussing any legal issue with our attorneys; (2) any lease or purchase or sale of real estate; (3) hiring, firing, disciplining or promoting of particular employees; (4) health records involving identifiable persons; (5) any contract or request for proposal specifications; (5) individually identifiable personnel records; (6) employee performance evaluations; (6) communications with our Auditor; (7) any other topic protected from disclosure by law. The motion was made by Tom Cranshaw; seconded by Chuck Foudree at 4:15pm. Roll call vote: Tom Carignan - yes James Dockins, Ed.D. - yes Chuck Foudree -yes Julia Simmons, M.D. yes Bridget McCandless - yes The following guests were invited to attend the closed session: Kirloes Gerges (AON Hewitt); David Keil (AON Hewitt); Brandon Patterson (AON Hewitt) Staff in attendance: Paula Cornwell, Vice President of Operations & Human Capital; Graciela Couchonnal, Ph.D., Vice President of Programs; Christena Diven, Accountant; Karen Guile, Grants Administration Manager. The meeting continued in Closed Session. Upon motion made and seconded and roll call vote taken, the meeting returned to Open Session at 4:55pm. Tom Cranshaw made the motion to approve the following staff recommendations in regards to revisions to the HCF Spending Policy: For Grant and Grant Support Budgets: Maintain the banded inflation method with the following changes: 1. Change the net asset smoothing technique from 8Q to 12Q 2. Reduce the lower end of the inflation band from 4% to 3% 3. Annually evaluate (at budget time) whether to add the inflation component (CPI-U) to the recommended grant/grant support budget for the following year (with the goal being to determine how important loss of purchasing power is relative current economic/civic/political environments. For Operating Expenses: HCF s current approved stewardship goal states, Limit operating expenses (other than investment expenses and grant/grant support budgets) to 1.0% of Foundation s Net Assets Page 6

7 Staff recommends adding: Not to exceed 20% of Total Approved Expense Budget for a Given Year. Jim Dockins, Ed.D. seconded the motion. The motion was unanimously approved by voice vote. Other Business HCF Finance & Investment Strategic Plan Review & Approval (see Finance section of 2017 Strategic & Operating Plan 2017) - Rick Zimmer Mr. Zimmer presented the Strategic Plan Initiatives and Operating Plan, concentrating on 2017 Strategies (two of which will be considered in greater detail in the next agenda items.) Investment Advisor RFP Process (see 2017 Investment Advisor RFP Process Documents) Rick Zimmer Mr. Zimmer described the process the Foundation underwent in 2010 to conduct a RFP process to determine Investment Consultants. He asked the Committee to pay close attention to the Primary Screening Criteria in RFP Process established by the F&I Committee in 2010, and the Annual Survey of Not-for-Profit Fund Execs and Corporate Execs for Pension Fund Management, Investment Consultant Satisfaction Ratings. The Committee discussed the RFP Process steps and timeline. Mr. Zimmer requested participants from the F&I Committee to serve on an Investment Advisor RFP Sub-committee. Participation on the sub-committee could be intensive. Meetings of the ad-hoc committee must be noticed, but a vote may be taken to go into closed session. Peg VanWagoner previously expressed interest. Tom Carignan and Chuck Foudree also volunteered. Committee members who were interested in serving on the ad-hoc committee were asked to notify Mr. Zimmer as soon as possible. New Lease Financial Commitment Temporary Location Mr. Zimmer informed Committee that HCF was in negotiations with the property owners of a building the Foundation is considering for an interim location until a permanent location can be determined. The Foundation hopes to execute the lease by the end of the week and has a communications plan in place to announce the interim move. HCF is pleased with the favorable lease terms. Rick Zimmer informed Committee that he believes the July 18 th meeting will need to be moved to August 10 th and an poll will be sent out to determine the best date/time. The meeting adjourned at 5:05pm. The next meeting of the HCF Finance and Investment Committee will tentatively be held on April 18, 2017 at 2:00pm (location to-be-determined) Page 7