City and County of San Francisco Employees Retirement System RETIREMENT BOARD INVESTMENT COMMITTEE MINUTES 1145 Market Street, 6 th Floor San Francisco, CA 94103 1:00 PM MISSION STATEMENT San Francisco City and County Employees Retirement System is Dedicated to Securing, Protecting and Prudently Investing the Pension Trust Assets, Administering Mandated Benefit Programs, and Providing Promised Benefits. INVESTMENT COMMITTEE MEMBERS Malia Cohen Herb Meiberger, CFA Leona Bridges, Chair Joseph Driscoll Victor Makras Wendy Paskin Jordan Brian Stansbury Jay Huish Executive Director
Page 2 of 7 DISABILITY ACCESS The San Francisco Employees' Retirement System is wheelchair accessible. Accessible seating is available for persons with disabilities. To obtain a disability related modification or accommodation, including large print agendas, American Sign Language interpreters, FM sound amplification system and auxiliary aids or services, please contact Norman Nickens at (415) 487 7025 at least two (2) business days before the meeting. There is accessible parking in the vicinity of 1145 Market Street at Civic Center Plaza. Accessible MUNI lines are available at the corner of Market Street and 8 th Street. The closest accessible MUNI /BART station is Civic Center Station. Materials accompanying the agenda are available for public inspection and copying at SFERS, 1145 Market Street, 7th Floor. For additional information, please contact Norman Nickens, Executive Assistant, at (415) 487 7025. In order to assist the City s efforts to accommodate persons with severe allergies, environmental illness, multiple chemical sensitivity or related disabilities, attendees at public meetings are reminded that other attendees may be sensitive to various chemical based products. Please help the City to accommodate these individuals. The ringing of and use of cell phones, pagers and similar sound producing electronic devices are prohibited at this meeting. Please be advised that the Chair may order the removal from the meeting room of any person(s) responsible for the ringing or use of a cell phone, pager, or other similar sound producing electronic devices. Know Your Rights Under the Sunshine Ordinance (Chapter 67 of the San Francisco Administrative Code) Government's duty is to serve the public, reaching its decisions in full view of the public. Commissions, boards, councils and other agencies of the City and County exist to conduct the people's business. This ordinance assures that deliberations are conducted before the people and that City operations are open to the people's review. FOR MORE INFORMATION ON YOUR RIGHTS UNDER THE SUNSHINE ORDINANCE OR TO REPORT A VIOLATION OF THE ORDINANCE, CONTACT THE SUNSHINE ORDINANCE TASK FORCE. Sunshine Ordinance Task Force City Hall 1 Dr Carlton B. Goodlett Place, Room 244 San Francisco, CA 94102 4689 (415) 554 7724 by fax at (415) 554 7854 or by email at sotf@sfgov.org Citizens interested in obtaining a free copy of the Sunshine Ordinance can request a copy from Mr. Darby or by printing Chapter 67 of the San Francisco Administrative Code on the Internet, http://www.sfgov.org/sunshine/ Any materials distributed to the Retirement Board (or committee) within 72 hours of the meeting or after distribution of the agenda packet to Board (or committee) members are available for public inspection at SFERS, 1145 Market Street, 7 th Floor, during regular office hours. Lobbyist Registration and Reporting Requirements Individuals and entities that influence or attempt to influence local legislative or administrative action may be required by the San Francisco Lobbyist Ordinance (San Francisco Campaign and Governmental Conduct Code sections 2.100 2.160) to register and report lobbying activity. For more information about the Lobbyist Ordinance, please contact the Ethics Commission at 25 Van Ness Avenue, Suite 220, San Francisco, CA 94102, telephone (415) 252 3100, fax (415) 252 3112 and web site: www.sfgov.org/ethics Meetings are recorded by SFGovTV, the Government Channel 26. For DVD copies and rebroadcast scheduling call (415) 554 4188. Video on demand is available at: http://sfgovtv.org
Page 3 of 7 OPENING CALENDAR Commissioner Bridges called the meeting to order at 1:10 PM 1. Pledge of Allegiance 2. Roll Call Commissioner Bridges 1:10 PM Commissioner Cohen 1:10 PM Commissioner Driscoll 1:10 PM Commissioner Makras 1:57 PM Commissioner Meiberger 1:10 PM Commissioner Paskin Jordan 1:10 PM Commissioner Stansbury Absent 3. 06152016 03 General Public Comment Commissioner Bridges called for public comment. John Furlan recommended that SFERS implement a tail risk hedging strategy. There were no further comments from the public and public comment was closed. 4. 06152016 04 Action Item Approval of the Minutes of the March 16, 2016 Investment Committee Meeting Documents provided to the Committee prior to the current meeting: Draft Minutes of the March 16, 2016 Investment Committee Meeting Action: Moved by Commissioner Meiberger, Seconded by Commissioner Driscoll to approve the Minutes of the March 16, 2016 Investment Committee Meeting. Ayes: Bridges, Cohen, Driscoll, Meiberger, Paskin Jordan Absent: Makras, Stansbury 5. 06152016 05 Discussion Item Education Presentation on Investment Process: Investment Process for Public Markets Investing, Allan Martin, NEPC Public Equity Investment Manager Procurement Process by Phil Paroian, Washington State Investment Board Documents provided to the Committee prior to the current meeting: Presentation materials from Phil Paroian, Washington State Investment Board, and Allan Martin, NEPC William J. Coaker, Jr., Chief Investment Officer, introduced Allan Martin, Partner, NEPC (Board General Investment Consultant) and Phil Paroian, Washington State Investment Board, who
Page 4 of 7 presented verbal and written reports. Mr. Martin recommended moving to an expedited manager selection process: Goal is to streamline the manager search process in order to focus on generating more alpha from the public markets portfolio; The best way to add alpha to the public markets asset classes is to identify and fund smaller, high conviction (higher active share) managers; Staff and Consultant are recommending to selectively move towards a streamlined RFP process from a publicly advertised process. Mr. Martin reviewed the current low return environment, the benefits of a streamlined RFP process, the elements of an implementation process, and provided examples of an expedited search process based on NEPC s experience in conducting similar searches. Mr. Paroian described the Washington State search process: He provided an overview of the Washington State Investment Board; The history of the Washington State public equity procurement process; The current Washington State investment search process, including initial definition of the search, identification of candidates, due diligence, and the approval process; He reviewed the results of changing from an RFP to a search process, which have included consideration of more investment managers, improved performance, and a transparent procurement process. Mr. Coaker asked if their public equity program as a whole, including passive and active managers, has out performed its benchmarks. Mr. Paroian confirmed that it has. Mr. Coaker asked about time requirements for the prior and current search process. Mr. Paroian noted that the manager search process has been reduced from eighteen months to 6 9 months. Commissioner Meiberger discussed the process for managers placing data on a database such as evestment. Mr. Paroian noted that managers provide the data, which has to be compliant with Global investment performance standards (GIPS) and Association for Investment Management and Research Performance Presentation Standards (AIMR PPS); there are no other minimum standards. Commissioner Bridges noted that staff conducts the screening process and asked what is role of investment consultants. Mr. Paroian noted that consultants assist in providing additional analysis and in identifying issues to be addressed as part of due diligence. Commissioner Bridges noted the need to minimize operational risk as part of the due diligence process. Commissioner Driscoll asked what is the first step in the search process. Mr. Paroian noted the initial step is clearly identifying why the particular search is being conducted.
Page 5 of 7 Commissioner Driscoll discussed potential time savings as a result of a staff driven process. Mr. Paroian noted the time savings result in part from a change in allocation of staff time away from simply reviewing RFPs. Commissioner Meiberger discussed the use of placement agents. Mr. Paroian noted that placement agents are occasionally used in the Washington State process, but the fees and relationship must be fully disclosed. Commissioner Bridges called for public comment. There were no comments from the public and public comment was closed. Commissioner Makras joined the meeting at 1:57 PM. Action: This was a discussion only item. 6. 06152016 06 Discussion Item Education Presentation on Risk Management: Risk Management Update by Ellen Brownell, Director of Asset Allocation, Risk Management and Innovation Approaches to Mitigate Portfolio Risk, Philip Nelson, NEPC Downside Protection: Exploring the Options, Michael Connor, PIMCO Documents provided to the Committee prior to the current meeting: Presentation materials from Ellen Brownell, Director of Asset Allocation, Risk Management and Innovation; Philip Nelson, NEPC; and, Michael Connor, PIMCO William J. Coaker, Jr., Chief Investment Officer, introduced, Ellen Brownell, Director of Asset Allocation, Risk Management and Innovation; Philip Nelson, Director of Asset Allocation, NEPC; Michael Connor, Executive Vice President, Stephanie King, Executive Vice President, and Sasha Talcott, Vice President, PIMCO, who presented verbal and written reports. Ms. Brownell provided an update on risk management initiatives: Risk management platform capabilities have been evaluated, including total plan aggregated holdings based exposures, scenario analysis, liquidity monitoring. The next step will be to initiate a trial period with actual SFERS holdings. Downside protection and derivatives strategies; and Ongoing research of risk management innovation and best practices. Mr. Nelson presented an overview of approaches to mitigate portfolio risk, including case studies of various strategies: Fixed Income Barbell Long Bonds;
Page 6 of 7 Low Volatility Equity Strategies; Currency Hedging; Multi Asset Strategies; Hedge Fund Strategies; Buy/Write Option Strategy; and, Protective Put Option Strategy Michael Connor, Executive Vice President, Stephanie King, Executive Vice President, and Sasha Talcott, Vice President, PIMCO, presented on the evaluation of downside protection strategies for the plan, including: Hard assets such as long US Treasury bonds and low volatility stocks; Tail risk hedging; Trend following/managed futures. They noted that: Direct tail risk hedging provides the most reliable protection in equity selloffs; however, many public plans view it too expensive to implement. Indirect tail risk hedging can mitigate these concerns (but not fully address them). Long Treasuries have historically been an effective hedge to equity downturns, but given low starting yields the intended effect may not be as strong in the future. Trend following strategies have the potential to earn positive return and offer protection during prolonged equity downturns, but may be ineffective in the event of a sharp selloff. Certain categories of equity investing, such as low volatility stocks, may also help address downside risk mitigation objectives. A combination approach may offer the most cost effective and reliable solution. President Cohen left the meeting at 2:45 PM Commissioner Paskin Jordan discussed the impact of low return rates on the portfolio and the Board s tolerance for impacted returns of tail risk hedging. Commissioner Paskin Jordan asked who would make the call to turn off a tail risk hedging program. Mr. Coaker noted the decision would be automatic, as it would be part of manager guidelines. Mr. Coaker asked what percentage of their clients do nothing in regard to hedging. Mr. Connor noted that tail risk hedging is rare for public clients. Commissioner Meiberger discussed options strategies, and requested NEPC to provide more detail on their options strategy activities with other public clients. Commissioner Bridges called for public comment. John Furlan recommended that SFERS implement a tail risk hedging strategy.
Page 7 of 7 There were no further comments from the public and public comment was closed. Mr. Coaker noted that staff and consultant will be meeting to discuss the presentations as well as the Board s feedback. Staff will come back to the Board with initial thoughts and recommendations for moving forward in the next few months. Action: This was a discussion only item. 7. 06152016 07 Adjournment Having no further business, the Committee adjourned the meeting at 3:47 PM. Respectfully submitted, Jay Huish, Executive Director