INTERDEPARTMENTAL CORRESPONDENCE

Transcription

1 Date: September 20,2011 CITY OF LOS ANGELES DEPARTMENT OF WATER AND POWER INTERDEPARTMENTAL CORRESPONDENCE To: Retirement Board Members From: 4angeeta Bhatia, Retirement Plan Manager Subject: Board Agenda Item No. 11: Discussion of International Equity Portfolio Structure; and Possible Action (September 28,2011, Regular Board Meeting) At the Regular Board meeting held on June 22, 2011, the Retirement Board adopted an asset allocation plan that included an international equity weighting of 21 % (Resolution No ). The purpose of the international equity portfolio is to achieve long-term growth and diversification. The performance objective of the international equity portfolio is to generate a total return, net of fees, that exceeds the MSCI ACWI ex U.S. IMI Net Dividends. The Plan's current investment managers with international developed market (DM) mandates are INVESCO Global Asset Management (INVESCO) - Core, The Boston Company Asset Management (TBC) Developed - Value, and Pyramis Global Advisors - Growth. These managers were originally funded in 2004 to manage approximately $80 millio in total assets on behalf of the Retirement Fund (RF). The Retirement Board funded an additional $117 million for the Retiree Health Benefits Fund (RHBF) in September The Plan's current investment managers with emerging markets (EM) mandates are TBC Emer Iing and T. Rowe Price. This mandate was funded with a total of $9 million for the RF in April 200. As of June 30, 2011, the market value of the entire international equity portfolio (DM and EM) including bot the RF and RHBF portfolios was $1.7. billion. It should be noted that the Retirement Board recently selected Vontobel Asset Manageme t to replace T. Rowe Price for the EM mandate, pending contract negotiations and execution (Resolutions No and No ). The Retirement Board also voted to begin the RFP process to replace TBC Developed for the DM mandate (Resolution No ). T. Rowe Price and TBC are being replaced for not meeting the Plan's performance criteria as stated in the Investment Policy. At the Regular Board meeting on August 31, 2011, representatives from Pension Consulting Alliance (PCA) presented the International Equity Asset Class Structural Review. The review addressed issues within the current portfolio such as: underperformance, investment style, active risk, active vs. p ssive management, and 11.1

2 under-allocation to emerging markets based on market weight. To address these issues, PCA presented the strategy options listed in the table below. Further detail about the restructuring is provided in the attached memo from PCA. Option 1 a tion 2 Option 3a Opt.ion 3b Option 4 Option Keep existinq structure and manaqers a) Replace INVESCO c) Replace TBC for both OM and EM mandates a) Replace INVESCO with a passive manager a) Replace INVESCO with a passive manager c) Replace TBC for both the OM and EM mandates a) Convert OM portfolio to 100% passive a) Convert the OM portfolio to 100% passive c) Replace TBC for the EM mandate PCA recommends restructuring the Plan's international equity asset class in accordance with Option 3b, which will require the following ctions: 1) replace INVESCO with a passive International Developed Equity Index Manager; 2) increase the emerging market allocation to match its % representation (by market capitalization) within the Plan's policy benchmark, the MSCI ACWI Ex-US IMI; and 3) replace TBC Emerging for both the OM and the EM mandates. According to PCA, Option 3b is designed to benefit the Plan by eliminating all underperlorming and overlapping managers and by lowering both fees and active risk due to the inclusion of passive management. PCA also notes there will be transition costs involved in restructuring the Plan's international asset cl ss with Option 3b. Please see attached PCA memo. The followi g documents are attached: Resolution o PCA's Memo Resolution No (approved ) Resolution No (approved ) Resolution No (approved ) Resolution o (approved ) Jeremy Wolfson Chief Investment Officer SB:JW:SV:DB 11.2

3 RESOLUTION NO RESOLUTION TO ADOPT THE RESTRUCTURING PLAN FOR THE INTERNATIONAL EQUITY ASSET CLASS WHEREAS, at the Regular Board meeting held on June 22, 2011, the Retirement Board adopted an asset allocation plan that included an international equity weighting of 21 % (Resolution o ); and WHEREAS, the Plan's current investment managers with international developed mandates are INVESCO Global Asset Management. (INVESCO) - Core; the Boston Company Asset Management (TBC) Developed - Value; and Pyramis Global Advisors - Growth; and WHEREAS, the Plan's current investment managers with Emerging Markets (EM) mandates are TBC Emerging and T. Rowe Price; and WHEREAS, as of June 30, 2011, the market value of the entire international equity portfolio (developed and emerging), including both the Retirement Fund and Retiree Health Benefits Fun portfolios, was $1.7 billion; and WHEREAS, at the Regular Board meeting on August 31, 2011, Pension Consulting Alliance (pea) presented an International Equity Asset Class Structural Review which addressed issues within the current portfolio such as: underperformanc6, investment style, active risk, active vs. passive management, and under-allocation to emerging markets based on market weight; and WHEREAS, PCA presented the following strategy options to address these issues and restructure the international equity portfolio: Option 1 Option 2 Option 3a Option 3b Option 4 Option Keep existing structure and managers a) Replace INVESCO c) Replace TBC for both the OM and EM mandates a) Replace INVESCO with a passive manager b) Market-weiQht the EM portfolio a) Replace INVESCO with a passive manager c) Replace TBC for both the OM and EM mandates a) Convert the OM portfolio to 100% passive a) Convert the OM portfolio to 100% passive c) Replace TBC for the EM mandate ; and 11.3

4 WHEREAS, PCA recommends restructuring the Plan's international equity asset class in accorda ce with Option 3b. NOW, THEREFORE, BE IT RESOLVED, the Retirement Plan Manager is hereby authorized to restructure the Plan's International Equity asset class in accordance with Option as outlined above. I HEREBY CERTIFY, the foregoing is a full, true, and correct copy of a Resolution adopted by the Retirement Boar of Administration [created by Section 1102 (b) of the Los Angele City Charter] at its regular meeting held on September 28, Sangeeta Bhatia Retirement Plan Manager 11.4

5 RESOLUTION NO RESOLUTION TO BEGIN REQUEST FOR PROPOSAL PROCESS FOR THE POTENnAL REPLACEMENT OF INTERNATIONAL EMERGING MARKET MANAGEIR T. ROWE PRICE WHEREAS, the Retirement Board hired T. Rowe Price to manage an international. emerging arket mandate for the Retirement Fund with an initial funding of $4 million in March 200; and WHEREAS, the Plan's Investment Policy provides that active international equity managers may be placed or extended on medium-term performance watch status if their returns trail the benchmark by more than 2.% for two consecutive quarter ending dates and may be placed or extended on long-term performance watch status if their Value Relative Ratio (VRR) falls below 0.99 at two consecutive calendar quarter endings; a d WHEREAS, in May 2009, T. Rowe Price was placed on watch status for failing to meet the Plan's medium and long-term performance criteria as stated in the Investment Policy, and their watch status was extended in April 2010 and in October 2010 due to continued underperformance; and WHEREAS, T. Rowe Price underperformed its benchmark, the MSCI Emerging Markets IMI Index, by 3.64% for the three-year period ending September 30, 2010, and by 4.73% for the three-year period ending December 31, 2010, and generated VRR values of 0.9 and 0.94 for the same quarter endings, respectively; and WHEREAS, since April 200, T. Rowe Price generated negative returns 36 out of the previous 6B months, or approximately 2% of the time; and WHEREAS, T. Rowe Price's underperformance, relative to the benchmark, largely occurred during the market crisis of despite outperforming their peers before, du 'ng, and immediately after the crisis; and WHEREAS, representatives from Pension Consulting Alliance recommend, and Staff concurs, that the Board begin the Request for Proposal (RFP) process for an international manager due to T. Rowe Price's extended tenure on watch status and allow T. Rowe Price to participate in the RFP. NOW, THEREFORE, BE IT RESOLVED, the Retirement Plan Manager is hereby authorized '0 begin the RFP process for an international emerging market manager. I HEREBY CERTIFY, the foregoing is a full, true, and correct copy of a Resolution adopted by the Retirement Board of Administration, [created by Section 11 2 (b) of the Los Angeles City Charter], at its regular meeting held 0 March 9, fee PY 11. ~ ~d:l ~atia Retirement Plan Manager

6 RESOLUTION NO RATIFICATION OF THE BOARD'S ACTION REGARD!ING THE OVE'RALL ASSET ALLOCATION STRUCTURE FOR THE RETIREMENT FUND AND THE RETIREE HEALTH BENEFITS FUND WHEREAS, at the Regular Board meeting held on June 8, 2011, Pension Consulting Alliance (PCA) proposed the following revised Asset Allocation St cture, which includes the new Covered Calls asset class, for the Retirement Fund and the Retiree Health Benefits Fund (RHBF); and New Retirement Fund and RHBF Investment Allocation Targets Cash Fixed Income Real Return Real Estate Domestic E ui International E 21 Covered Calls Private Ec uit 0 0 WHEREAS, at the Regular meeting on June 8, 2011, the Board, after considerable discussion, adopted the proposed new Asset Allocation Structure as noted above. NOW THEREFORE, BE IT RESOLVED, the Board hereby ratifies the action taken on June 8, 2011, to adopt the proposed new Asset Allocation Structure and authorizes the Retirement Plan Manager to implement the new Asset Allocation Targets for the Retirement Fund and the Retiree Health Benefits Fund. I HEREBY CERTIFY, the foregoing is a full, true, and correct copy of a Resolution adopted by the Retirement Board of Administration [created by Section 1-' 02 (b) of the Los Angelt3s City Charter] at its regular meeting held June on 22, f\l 11_ 6 ~~ angeeta Bhatia Retirement Plan Manager

7 RESOLUTION NO RESOLUTION TO RATIFY THE RETIREMENT BOARD'S DECISION TO SELECT AN ACTIVE INTERNATIONAL EMERGING MARKETS MANAGER WHEREAS, at the Regular Retirement Board meeting held on March 9, 2011, the Retirement Board decided to pursue the Request for Proposal (RFP) process for an Active International Emerging Markets manager for the Plan, and allowed T. Rowe Price to participate; and WHEREAS., in May 2011, an RFP was published to hire an Active International Emerging Markets investment manager for the Retirement Fund and the Retiree Health Benefits Fund; and WHEREAS: at the Regular Board meeting held on July 13, 2011, the Board decided to interview the top four candidates, as evaluated by Pension ConsuUing Alliance; and WHEREAS~ after interviews were conducted at the Special Retirement Board meeting held on August 17, 2011, Vontobel Asset Management Inc., (Vontobel), was unanimously selected by the Board; and WHEREAS, Vontobel will be funded with assets currently held in the Emerging Markets account ma.naged by T. Rowe Price and with funds from existing managers, once contract terms are negotiated. NOW, THEREFORE, BE IT RESOLVED, the Board hereby ratifies the selection of Vontobel as the Plan's Active International Emerging Markets investment manager, pending agreement of negotiated contract terms. I HEREBY CERTIFY, the foregoing is a full, true, and correct copy of a ReSOlution adopted by the Retirement Board of Administration [created by Section 1102 (b) of the Los Angeles City Charter] at its special meeting held on August 31,2011. ~ed:~~ angeeta Bhatia Retirement Plan Ma ager p 11.7

8 RESOLUT10N NO RESOLUTION TO SELECT A NEW MANAGER FOR THE INTERNATIONAL DEVELOPED MARKETS PORTFOLIO WHEREAS, the Retirement Board hired The Boston Company Asset Management (TBC) to manage an international developed equity mandate for the Retirement Fund (RF) with an initial funding of $270.0 million in March 200, and for the Retiree Health Benefits Fund (RHBF) with an initial funding of $39.4 million in September 2009; and WHEREAS, the market values of the RF and RHBF accounts are $4.6 million and $67.3 million, respectively; and WHEREAS, the Plan's Investment Policy provides that active international developed equity managers may be placed on ong-term performance watch if their Value Relative Ratio (VRR) falls below 0.98 for two consecutive quarters; and WHEREAS, on December 1, 2010, the Retirement Board placed TBC on long-term performa c:e watch status for failing to meet the Plan's long-term performance criteria; and WHEREAS, TBC continued to underperform its benchmark, the MSCI EAFE + Canada plus All-World Ex-US IMI, by 1.28% and 7.00% for the six-month and one-year periods ending June 30, 2011, respectively; and WHEREAS, TBC's continued underperformance resulted in VRR measurements of 0.94 and 0.92 for the quarters ending March 31,2011, and June 30,2011, respectively; and WHEREAS, Pension Consulting Alliance recom ends, and Staff concurs, that the Board begin the Request for Proposal process to replace TBC as one of the Plan's international developed equity managers for not meeting the Plan's long-term performance criteria as stated in the Investment Policy. NOW, THEREFORE, BE IT RESOLVED, the Retirement Plan Manager is hereby authorized to begin the RFP process for an international developed market manager to replace TBC. I HEREBY CERTIFY, the foregoing is a full, true, and correct copy of a Resolution adopted by the Retirement Board of Administratio [created by Section 1102 (b) of the Los Angeles City Charter] at its Regular meeting held September 14, FILE CO Y ~~ Sangeeta Bhatia Retirement Plan Manager