Absolute Return Strategy Process & Recommendations September 22-23, 2016

Transcription

1 Absolute Return Strategy Process & Recommendations September 22-23, 2016 Marc L. Leavitt, Director of Absolute Return Strategies (ARS) Martha delivron, ARS Senior Investment Analyst Lisa Ann Needle, Albourne America

2 Agenda I. ARS Search Process & Allocation Objectives II. Manager Search Process III. Manager Selection Recommendations IV. Requested Board Action 2

3 I. ARS Search Process & Allocation Objectives

4 ARS Search Process Timeline Phase I (Completed) Hired BAAM August 2014 Hired Director of ARS December 2014 Hired Albourne as Hedge Fund Consultant March 2015 Hired Absolute Return Analyst June 2015 Phase II (Completed) First direct hedge fund investments (group of 6): Board approved October 2015 and fully funded by February 2016 Second group of direct hedge fund allocations (group of 7): Board approved March 2016 and fully funded by June 2016 Phase III (Current focus) Phase IV (Q1 2017) Recommendation and allocation to an additional 2 managers Fully Diversified Portfolio: approximately hedge funds across strategies / sub-strategies and opportunistic, niche strategies Strategically decrease exposure to BAAM, simultaneously ramping up manager weights in the ARS Direct Portfolio Phase V (Ongoing) Monitor and selectively add/redeem/rebalance strategically, opportunistically, and tactically 4

5 II. Manager Search Process

6 Manager Search Process Review (1 of 3) Sourcing (Y/N) Preliminary Due Diligence (1/2) Manager Screen & Universe Analysis Scoring Scoring Category Manager Screen - Is vehicle consistent w/ TMRS' objectives? Manager Analysis - Does vehicle have adequate capacity and timeline? - PPPPT Preliminary Review Score / Outcome Yes - Take Meeting; No - Don't Take Meeting 1 - Advance; 2 - Stop Research Prioritization (A,B,C) Comprehensive Due Diligence (Score) Semi-Finalist Scoring Scoring Category Finalist Manager Review - Due Diligence Questionnaire Review - Detailed PPPPT* Review - In-depth Manager Qualifications - Compliance with TMRS IPS - Verification of Research, References, Further Market Research Score A - Prioritize for Final Due Diligence B - Perform More Research C - Stop Research / Manager not Selected Staff Recommendation Board Approval Final Scoring Scoring Category Possible Points People (Firm & Team) 0-25 points Process (Investment Process & Risk Management) 0-25 points Performance History 0-25 points Philosophy (Attractiveness of Opportunity / Portfolio Fit) points Terms (Fees, Liquidity, etc.) points Total 100 *PPPPT People, Philosophy, Process, Performance, Terms Selected managers standardized to a score of 100 to allow comparability among selected managers. 6

7 Manager Search Process Review (3 of 3) Iterative Process Primary input from Albourne; Secondary from BAAM Meetings with consultants, portfolio managers and sector analysts used to ID areas of opportunity and to narrow the search field Blackstone PM Mtgs Manager Mtgs Blackstone Sector Head Mtgs Over the course of the direct manager search processes, TMRS staff conducted 475 meetings with 204 distinct managers across a variety of strategies: Strategy Number of Meetings Albourne Sector Analyst Mtgs Manager Mtgs Albourne Consultant Mtgs Manager Mtgs Credit 100 Event Driven 33 L/S Equity 56 Macro 73 Relative Value 39 Multi-Strategy 45 Other 129 Grand Total 475 Distinct Managers Seen 204 7

8 Manager Search Process Review (2 of 3) Sourcing (Y/N) Preliminary Due Diligence (1/2) Prioritization (A,B,C) Based on analysis, meetings are sought with qualified managers 475 meetings taken with 204 distinct managers since the start of the ARS search process Comprehensive Due Diligence (Score) 8 managers selected for on-site due diligence Staff Recommendation Board Approval 2 managers selected for investment recommendation Selection Rate: 4% Advance to Finalist 1% Selected for Recommendation 8

9 Final Selected Managers Scoring Matrix Final Due Diligence Scoring Matrix Aggregated Results* Recommended Manager/Fund Selected Manager Score Comparable Mgr. A Score Comparable Mgr. B Score D.E. Shaw Valence Fund, L.L.C. (Valence) Redmile Capital Fund, LP (Redmile) *Scoring matrices utilize difference calibrations depending on the strategy being utilized. Selected managers standardized to a score of 100 to allow comparability among selected managers. 9

10 III. Manager Selection Recommendations

11 Summary of Manager Recommendations Recommended Fund Strategy Classification Recommended Amount D.E. Shaw Valence Fund, L.L.C. (Valence) Relative Value $70 million* Redmile Capital Fund, LP (Redmile) Long/Short Equity Healthcare Total Recommendation $60 million $130 million *Lift out from BAAM Treaty Oak. Amount is approximate based on current market value of position. Final amount TBD year-end

12 Portfolio Considerations Strategy Diversification ARS Direct Portfolio (post September recommendations) Exposure by Strategy 15% 6% 7% 13% Fundamental EMN Global Macro Credit Multi-Strat Proposed ARS Direct Portfolio has 15 managers vs. BAAM s 35 managers Both portfolios are similarly diversified across strategies 8% 19% 5% 6% 22% Event Driven L/S Equity Systematic Macro Quant EMN Fixed Income Arbitrage Staff focused on identifying consistent alpha at the individual manager level as well as portfolio construction considerations Addition of Valence and Redmile takes into account individual investment quality as well as diversification benefits at the manager, strategy, and portfolio level EMN = Equity Market Neutral 2% 12% 15% 4% 15% BAAM Treaty Oak Exposure by Strategy 0% 10% 26% 16% Fundamental EMN Global Macro Credit Multi-Strat Event Driven L/S Equity Systematic Macro Quant EMN Fixed Income Arbitrage 12

13 Portfolio Considerations Position Sizing $90 million: AHL PDT Valence $60 million: Myriad Roystone Southpoint Field Street Pharo Redmile $70-75 million: Alyeska Graticule Varde DSAM East Lodge River Birch Valence Redmile Sizing of managers is based on both qualitative and quantitative factors 13

14 Top Candidate Characteristics Valence (1/2) $70 Million Recommendation Highlights Management: Anne Dining, Julius Gaudio, Max Stone, and Eric Wepsic Firm AUM: $38 billion Employees: 895 Office Location(s): New York, Boston, Princeton, Bermuda, Kansas City, Menlo Park, London, Hyderabad, Shanghai, Hong Kong VAMI* Valence DE Shaw Valence HFRI EH: Equity Market Neutral Index *VAMI definition: Value-Added Monthly Index is the growth in value of a $1,000 invested calculated by multiplying (1 + current monthly rate of return) x (previous month VAMI). 14

15 Top Candidate Characteristics Valence (2/2) $70 Million Recommendation Valence is an equity-focused, multi-strategy portfolio that invests in statistical equity arbitrage, quantitative volatility and convertible arbitrage, and discretionary long/short equity trading strategies. This strategy is attractive to TMRS given its uncorrelated nature and high risk-adjusted return profile. This allocation is a lift out from the BAAM portfolio and so is not a new allocation to the ARS portfolio. Investment Case Uncorrelated and attractive risk-adjusted returns Highly institutional organization Capacity Issues to Watch Transparency Leverage Scoring Matrix Category Valence Comp. Mgr. A Comp. Mgr. B People Process Performance Philosophy Terms Total Points

16 Top Candidate Characteristics Redmile (1/2) $60 Million Recommendation Highlights Founder: Jeremy Green Firm AUM: $1.6 billion Employees: 23 Office Location(s): San Francisco & New York VAMI Redmile Redmile HFRI EH: Sector - Technology/Healthcare Index 16

17 Top Candidate Characteristics Redmile (2/2) $60 Million Recommendation Redmile invests long and short in global healthcare equities based on bottom-up fundamental analysis. In addition to the public equity investments, Redmile also invests up to 15% of the portfolio in private companies. The Fund s focus on the healthcare sector is attractive to TMRS given the low levels of intra-sector correlations within healthcare. In addition, TMRS expects that Redmile s focus on the biotech sector will add to volatility as well as the potential for outsized gains. Investment Case Senior, cohesive team Private investments Differentiation from generalists Issues to Watch Investor concentration Binary biotech exposure Scoring Matrix Category Redmile Comp. Mgr. A Comp. Mgr. B People Process Performance Philosophy Terms Total Points

18 Hypothetical Portfolio Performance ARS Direct Pro Forma Returns VAMI Cumulative Return versus Benchmarks ARS Direct Portfolio Pro Forma S&P 500 Index HFRI FOF Diversified Index Aggregate Bond Index TR Performance Analysis: Aug-13 to Jul-16 Annualized Return Annualized Volatility Sharpe Ratio Max Drawdown ARS Direct Portfolio Pro Forma 8.02% 3.28% % HFRI FOF Diversified Index 2.20% 3.45% % S&P 500 Index 11.16% 10.95% % Aggregate Bond Index TR 4.23% 2.62% % 18

19 Hypothetical Portfolio Performance Up/Down Capture Fund Performance Across S&P Up & Down Markets Fund Performance Across Hedge Fund Up & Down Markets 4.00% 3.00% 2.00% 1.00% 0.00% 2.82% 0.96% 0.11% 1.50% 1.00% 0.50% 0.00% 1.13% 1.07% 0.12% -1.00% -2.00% -3.00% -2.39% -0.50% -1.00% -0.83% -4.00% S&P Up Months S&P Down Months -1.50% HF Up Months HF Down Months S&P 500 ARS Direct Portfolio Pro Forma HFRI FW Composite ARS Direct Portfolio Pro Forma Pro Forma Performance: August July

20 IV. Requested Board Action

21 Approval of Recommendation TMRS Staff and Albourne recommend that the Board of Trustees approve the selection of the following investment strategies specified below: D.E. Shaw Valence Fund, L.L.C. $70 million* Redmile Capital Fund, L.P. $60 million *Lift out from BAAM Treaty Oak. Amount is approximate based on current market value of position. Final amount TBD year-end

22 DISCLOSURE TMRS periodically discloses public information that is not excepted from disclosure under Section (b) of the Texas Public Information Act. Information provided by a manager, a general partner or other data provider to TMRS or a TMRS service provider, and contained in these materials, may have been independently produced or modified by TMRS or the TMRS service provider. 22