MEMORANDUM To: From: Cc: Board of Trustees, Fresno County Employees Retirement Association Brian Rowe, CFA, Research Associate Bee G. Lim, CFA, CAIA, Associate Director of Research Jeffrey MacLean, Chief Executive Officer Date: October 22, 2010 Re: CIO Replacement at Standish Mellon Active Fixed Income Recommendation David Leduc, CFA has been appointed Chief Investment Officer, but of greater impact to Wurts & Associates clients is his transition as lead portfolio manager on the Opportunistic strategy. While concerning, Wurts & Associates does not believe that the change warrants immediate termination, as the strategy will continue to utilize the firm s sector team models and relative value scoring, as well as have the continued influence of its co-portfolio manager. Importantly, the opportunistic allocation is a beta play requiring active management. Wurts & Associates remains bullish on credit, and the 10.6% yield on the Opportunistic strategy as of August 31, 2010 is at attractive levels. We recommend maintaining the exposure to Standish but placing the manager on Watch status. Executive Summary Kent Wosepka, CFA resigned in October 2010 as Standish Mellon Asset Management Company LLC (Standish) Chief Investment Officer (CIO) of Active Fixed Income to join Goldman Sachs Asset Management as a partner and head of the 41-member global corporate credit team in January 2011. He is being replaced by long-time (15 years) Standish investment professional, Director of Global Fixed Income David Leduc, CFA, who plans to continue managing the products with the same process and philosophy and to retain continuity with the existing investment team. Over the years, Mr. Leduc has been positioned as a candidate for the CIO role. Of the $50 billion Active Fixed Income portfolios, Mr. Leduc s Global sector now represents close to $8 billion, up from less than $2 billion in 2005. Mr. Leduc will be transitioning his current single-sector and multi-sector portfolio management duties to Brendan Murphy, CFA over the next few quarters. This leadership shift raises some concerns given Mr. Murphy s short, five-year tenure with Standish and also because it will require Mr. Leduc to devote substantial time to overseeing the transition. Additionally, Mr. Wosepka had primary responsibility and authority over the Opportunistic strategy in which our clients are invested. His authority was shared essentially 51%-49% with David Horsfall, CFA, Deputy CIO Active Fixed Income. Mr. Horsfall will continue co-managing the strategy with Mr. Leduc going forward. While some of Mr. Leduc s time will necessarily be 1
spent meeting clients of the Active Fixed Income group, Standish President and CEO, Desmond Mac Intyre, has assured clients of his desire is to have the CIO role be active in portfolio management decisions. All investment professionals bios are included in the appendix for further reference. Since investment ideas will continue to be generated by the group s long-standing team-oriented process, Wurts recommends no portfolio changes at this time, but the short history of this strategy coupled with turnover of the portfolio manager and CIO does elevate the portfolio to our watch list. Wurts will monitor the strategy monthly for any potentially material changes that may be introduced going forward, with a target of six months for an in-depth performance review and manager evaluation. Background and Detail On September 22, 2010, Standish announced the additions of Tom Higgins, Ph.D. as Global Macro Strategist reporting to the CIO and Rebecca Braeu, Ph.D. as Macroeconomic Analyst and Portfolio Manager reporting to the Director of Global Fixed Income. These positions were created in April 2010 to enhance the macroeconomic and global strategic approach to the group s research capabilities. That September communiqué was subsequently followed by the announced appointment of David Leduc, CFA as CIO of Active Fixed Income on October 13, 2010. All communications are attached in the appendix for reference. Performance of the Opportunistic strategy to date has been robust with monthly returns outpacing the Barclay s Aggregate + 300 basis point return target in 13/18 months, and returning approximately 12% cumulative outperformance since inception through June 2010. Key considerations Wurts remains comfortable with this leadership change at the overall Active Fixed Income group: 1. The structure and investment philosophy of the fixed income team have not changed; there are no changes to the roles of other key employees. 2. The strategy s investment process remains primarily influenced by quantitative models at the single-sector level which result in a relative value score used by individual Sector Strategists to establish preferred weightings within their specific portfolio; the team will continue to employ their consistent, disciplined and repeatable investment process. 3. Significantly, Mr. Leduc s 15-year tenure with the firm and more than 20 years of investment experience both longer than Mr. Wosepka s tenures along with his successful turnaround and subsequent growth of the Global sector unit have enhanced his industry standing and profile. However, Wurts recommends closely watching for potential performance and style shifts specifically related to the Opportunistic strategy: 1. Mr. Wosepka was the primary driver of asset allocation decisions and sector weightings; though, Mr. Horsfall as co-manager also had significant influence on the weighting decisions and he will remain closely involved in the strategy portfolio decisions. 2. Mr. Leduc did not have direct influence or oversight of the Opportunistic strategy, though many of his sector picks may have been included; his prior involvement with the strategy was not significantly influential.
3. While Mr. Leduc assumes the CIO responsibilities, he will transition primary responsibility for the Global sector portfolio which represents nearly $8 billion of the overall $50 billion Active Fixed Income portfolio. Conclusion The recent leadership changes raise the portfolio to Watch status, particularly focusing on the impact on the Opportunistic strategy. That strategy will continue to benefit from the firm s investment selection process of sector team models and relative value scoring; the Opportunistic strategy specifically will also continue to be influenced by its co-portfolio manager as the new CIO transitions into the lead PM role. While the strategy s short history compares favorably against its benchmark and peer group, Wurts will continue to monitor the strategy s monthly returns relative to its own performance-to-date in addition to its peer group and benchmark. No portfolio changes are recommended at this time.
Appendix: Key Personnel Bios David Leduc, CFA David is Chief Investment Officer of Active Fixed Income responsible for overseeing the management of all single and multi-sector taxable bond portfolios and strategies. Prior to this, he was Managing Director of Global Fixed Income and Senior Portfolio Manager responsible for overseeing the management of all non-us and global bond strategies. David joined Standish in 1995 as a portfolio manager and analyst for US domestic fixed income, moving from structured finance to global strategies in 1999. Prior to joining Standish, David spent seven years as an Investment Officer at State Street Bank & Trust Company. He has an M.B.A. from Boston University and a B.S. from the University of Rhode Island. David holds the CFA designation and has 23 years of investment experience. David Horsfall, CFA David is Standish's Deputy Chief Investment Officer, reporting to the Chief Investment Officer. In conjunction with the CIO, David is responsible for overseeing the management of all single and multi-sector active fixed income portfolios and strategies. In addition, the Head of Active Fixed Income Trading reports to him. David also serves as the head of Standish's Counterparty Risk Committee and is a senior member of the firm's Fiduciary Committee. Prior to being promoted to Deputy CIO in September 2008, he spent 11 years as the firm's Head of Active Fixed Income Trading. He has broad experience trading investment grade corporates, high yield corporates, emerging markets debt, liquid products (i.e., Treasuries, agencies, TIPS), structured products (i.e., ABS, CMBS), derivatives (i.e., swaps, futures, forwards, options), and global/non-us securities. He joined the firm in 1989 and has spent his entire 21-year career with Standish. David has an M.B.A. from Boston College, a B.A. from St. Lawrence University and holds the CFA designation. Brendan Murphy, CFA Brendan is Portfolio Manager of Global Fixed Income responsible for working with the global team to formulate portfolio strategy and assisting with developed market country and global currency research. Before being promoted to Portfolio Manager in 2009, he was a Senior Trader responsible for trading developed and emerging market non-dollar securities as well as all foreign currencies. He joined Standish in 2005 from State Street Research, where he was a Senior Trader responsible for investment grade corporate bonds. Brendan holds a BA from Trinity College, holds the CFA designation, and has 14 years of investment experience. Copy of newly appointed positions announcement dated September 22, 2010: Standish is pleased to announce significant additions to our fixed income staff with the appointment of Tom Higgins, Ph.D. and Rebecca Braeu, Ph.D. Tom Higgins has been hired as Global Macro Strategist, reporting to Kent Wosepka, Chief Investment Officer. He joins from Payden & Rygel Investment Counsel. Rebecca has been hired as Macroeconomic Analyst & Portfolio Manager for Standish s Global Fixed Income team, reporting to David Leduc, Managing Director of Global Fixed Income. Tom joins Standish with over 19 years of investment management experience. In his six years at Payden Rygel, Tom served as Chief Economist, responsible for developing the firm s view on the global economy and leading a team of economists. Prior to Payden Rygel, Tom was
Managing Director at Geoffrey Bell & Company, and International Economist at The Conference Board. Tom received his Ph.D. and M.A. in Economics at Fordham University. Rebecca joins Standish with over 12 years of investment management experience. She served as an Economist and Emerging Market Strategist at MFC Global Investment Management. Prior to joining MFC Global Investment Management, Rebecca was an Assistant Professor of Economics at California State University. Rebecca received her Ph.D. in Applied Economics and International Finance and an M.A. in Macroeconomics and Econometrics at the University of Colorado. Tom and Rebecca s addition represent an important contribution to Standish s global macroeconomic research platform. Please let Dan Richter (Director of Consultant Relations) or me know if you have any questions about either Tom s or Rebecca s appointment. Copy of announcement letter from Desmond Mac Intyre, CEO, dated October 13, 2010: We are writing to let you know that we have named David Leduc CIO, overseeing the management of all Active Fixed Income portfolios and strategies, following Kent Wosepka s decision to leave the firm. As you know, David has been at Standish since 1995 and has most recently been our Managing Director of Global Fixed Income. David has broad experience in the global and U.S. fixed income markets and is well groomed to assume this position. David Horsfall, our Deputy CIO, will continue in his role providing critical people and process management support to David. Kent Wosepka, CIO for Standish s Active Fixed portfolios since 2008, is taking a position with another asset management firm. We are indeed sorry to see him go and wish him well in his new endeavors. We are confident that this change will have little impact on your portfolios. Standish has a very strong team-based investment process built around single sector teams managed by experienced investment professionals. These teams will continue to work together with David and the multisector team heads to deliver outstanding single and multi strategy products. Going forward, the deep and experienced Active Fixed investment team under David s leadership will continue to provide the superior investment results our clients expect. You should expect no change in our philosophy. The investment team will continue to employ our consistent, disciplined, and repeatable investment process incorporating multiple sources of excess return in a rigorous and robust risk management framework. If you have any questions, please do not hesitate to contact me or colleagues Dan Richter (Director of Consultant Relations) and Chris Austin (Managing Director U.S. Sales and Global Consultant Relations). Press release dated October 13, 2010 from BNY Mellon Standish Appoints Leduc to Lead Investment Team Industry Veteran Named CIO at BNY Mellon Asset Management Boutique BOSTON and LONDON, October 13, 2010 Standish Mellon Asset Management Company LLC, the award-winning fixed income specialist for BNY Mellon Asset Management, has announced the appointment of David Leduc as Chief Investment Officer of Active Fixed Income.
"We are pleased to announce David's appointment as chief investment officer for our active fixed income portfolios," said Desmond Mac Intyre, president and chief executive officer of Standish. "As our business expands globally, David's experience in the US and international markets will help position us for future growth." Leduc has 23 years of investment experience, and has been working at Standish since 1995, most recently as Managing Director of Global Fixed Income and Senior Portfolio Manager responsible for overseeing the management of all non-us and global bond strategies. He joined Standish as a portfolio manager and analyst for US domestic fixed income, moving from structured finance to global strategies in 1999. He was previously an Investment Officer at State Street Bank & Trust Company, and has a MBA from Boston University and a BS from the University of Rhode Island. Leduc holds the CFA designation. Kent Wosepka, previously Chief Investment Officer, Active Fixed Income, at Standish, is leaving the organization to pursue other interests. "Our clients are looking for stability and continuity of returns across market cycles," added David Leduc. "We have a strong team-based investment process build around single sector teams headed by experienced investment professionals. Our focus is on continuing to provide the investment results our clients expect." Headquartered in Boston, Massachusetts, Standish is a specialist active fixed income manager investing in all global fixed income markets and across the full credit spectrum. The company is widely regarded as one of the world's premier fixed income managers, and has established a track record of managing portfolios in the US and Global Fixed Income market over the last several decades on behalf of a wide range of global clients. The company currently offers a wide range of credit-based and specialty bond strategies, including structured product workout solutions, for US and global pension funds, sovereign wealth funds, endowments, foundations, insurance companies, and other institutions. Standish emphasizes fundamental research and quantitative models in attempt to outperform agreed-upon client benchmarks. This combination permits highly customized client solutions and also requires both strong risk controls and a high level of dedicated client service. Email from GSAM to Clients dated October 14, 2010 regarding Kent Wosepka: Sent: Thursday, October 14, 2010 8:42 AM Subject: GSAM Global Fixed Income Team Update We are very pleased to announce that we have hired Kent Wosepka as a partner to serve as the new head of our 41-member global corporate credit team effective January 2011. Kent will lead our long-only credit business, which is integrated across the investment grade, high yield and bank loan strategies. Kent joins GSAM from Standish Mellon Asset Management where he was a managing director and chief investment officer of Fixed Income. In that role, Kent was responsible for overseeing the management of single and multi-sector taxable bond portfolios and strategies that totaled over $50 billion in assets. With 16 years of experience, Kent brings a tremendous amount of credit and investment expertise to the team. He will be a member of GSAM s Fixed Income Strategy Group and will co-head our cross-sector team. Kent will report to Jonathan Beinner and Andrew Wilson, coheads of our Global Fixed Income business. We are delighted to have Kent join our team and are pleased that we can continue to invest in the business and augment our existing team with such a high caliber investment professional.
With Kent taking responsibility for our traditional credit business, we have asked Gregg Felton to focus exclusively on the alternative credit business through the formation of a distinct credit alternatives platform. As head of credit alternatives, Gregg and 14 members of the team will manage the Liberty Harbor hedge funds, the corporate credit hedge funds and related alternative credit strategies. Gregg has been a strong leader for the credit organization. The processes and communication forums he has put in place will continue to serve the credit team well. Gregg s leadership has resulted in improved communication and consistency between regions and increased resourcing. Gregg will remain as head of our global corporate credit team until Kent joins in January. Today, as we look at the investing landscape, it is critical that we anticipate changing conditions in order to continue to deliver results to our clients. We are confident that these enhancements will allow us to maintain our ability to identify the best investment opportunities for our clients. We continue to see significant opportunity to add value in corporate credit and are excited to have assembled a talented and experienced group of credit professionals to lead the firm s efforts in this space.