I. RFP Summary Statement.doc


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I. RFP Summary Statement.doc

  1. 1. State Universities Retirement System of Illinois (SURS) Request for Proposal Treasury Inflation Protected Securities (TIPS) Mandate SURS Manager Development Program December 2009
  2. 2. Table of Contents I.Request For Proposal Summary Statement 3 II.Background Information 3 III.Specific Services Requested from the Investment Manager 4 IV.RFP Specifications 4 V.Projected Schedule of Events 6 VI.Selection Criteria 6 VII.Treasury Inflation Protected Securities Manager Questionnaire 6 2
  3. 3. State Universities Retirement System of Illinois (SURS) Request for Proposal (RFP) December 2009 SURS Manager Development Program Treasury Inflation Protected Securities (TIPS) Mandate I. RFP Summary Statement The State Universities Retirement System (SURS) requests proposals from qualified emerging investment management firms to provide a TIPS product which, after fees, exceeds the return of the Barclays Capital U.S. TIPS Index. The information is requested with regard to the System’s Manager Development Program, which was created in an effort to assist the development of investment management firms owned by minorities, women, and persons with a disability. On April 3, 2009, Illinois Governor Pat Quinn signed Public Act 96-006 into law. Public Act 96-006 is the Government State Reform Act of 2009 and provides guidelines for ethical practices amongst state pension plans and defines several investment manager classifications. All applicant firms must qualify as emerging managers based on the Illinois state definition that can be found at http://www.ilga.gov/legislation/publicacts/96/PDF/096-0006.pdf II. Background Information Agency Description SURS is the administrator of a cost-sharing, multiple employer public employee retirement system. SURS membership includes employees of the public universities and other affiliated organizations. Currently, SURS membership totals more than 205,000 active, inactive and retired participants. SURS maintains both a defined benefit and defined contribution plan. Proposals are being solicited for the defined benefit plan. Defined Benefit Plan Investment Program SURS investment program, as of September 30, 2009, totaled $12.3 billion. The target asset allocation as of September 30, 2009 is as follows: U.S. Equities – public markets 35.0% U.S. Equities – private markets 6.0% Non-U.S. Equities 18.0% Global Equities 9.0% Fixed Income 21.0% Real Estate 6.0% TIPS 5.0% Opportunity Fund 0.0% As of September 30, 2009, TIPS holdings totaled $291 million, all of which is actively managed by a single external manager. 3
  4. 4. Legislated Investment Restrictions Relating to the Republic of the Sudan and Iran In 2007 the Illinois General Assembly passed Public Act 095-0521, restricting investment in companies domiciled in, managed or controlled by, or doing business with the Republic of the Sudan. SURS investment managers are required by law to abide by the restrictions. Appendix A contains a letter sent by SURS to its investment managers and provides information relating to these Sudan-related investment restrictions. Additionally, information pertaining to the Iran divestment law, Public Act 095-0616, approved by the Illinois General Assembly on September 11, 2007 can be found at http://www.ilga.gov/legislation/publicacts/fulltext.asp?Name=095-0616. III. Specific Services Requested from the Investment Manager SURS is requesting proposals from qualified investment managers to manage a TIPS strategy as part of the System’s Manager Development Program. Manager of managers investment firms will not be considered for this mandate. The Manager Development Program was created in an effort to assist the development of minority, women, or disabled person owned investment management firms. The overall goal of the fund will be to exceed the return of the Barclays Capital U.S. TIPS Index, net of fees. It is anticipated that the selected manager(s) will be funded with up to $175 million in total. IV. RFP Specifications If, in response to this RFP, trade secrets or commercial or financial information are furnished under a claim that they are proprietary, privileged or confidential and that disclosure of the trade secrets or commercial or financial information would cause competitive harm to the person or business, such claim must be clearly made and such information must be clearly identified. The information must be identified in the RFP response and provided separately from the RFP response. Such a claim is not definitive. SURS has the right and obligation to determine initially whether such information is exempt from disclosure under the Illinois Freedom of Information Act. However, no information will be determined to be proprietary, privileged or confidential unless it is identified and separated as indicated here. Submission Deadline The completed RFP must be delivered by 5:00 pm CDST January 25, 2010. Earlier responses are welcome. Any RFP delivered after the deadline will not be considered. Send two hard copies and one electronic copy to the attention of: Mr. Tony J. Lee, Investment Officer State Universities Retirement System of Illinois 1901 Fox Drive Champaign, IL 61820 invest@surs.org 4
  5. 5. Submission of Questions In order to clarify any issues in this Request for Proposals, the System will respond only to questions that are presented in writing via e-mail to invest@surs.org All questions should be submitted to the System by 8:00 AM CDST January 4, 2010. These questions will be consolidated into a single Q&A document and responded to by the System on or about January 11, 2010. The Q&A document will be sent by the System to all parties receiving the RFP without divulging the source of the query. SURS Investment Policy Please note the Quiet Period Policy that establishes guidelines by which Board Members and staff will communicate with prospective service providers during a search process. The SURS Board of Trustees adopted the Policy at the December 8, 2006 meeting. Currently in force, the Policy is available at http://www.surs.org/pdfs/invinfo/policy.pdf. Please review Section 7 of the Policy and be familiar with Quiet Period guidelines. Rights Reserved SURS reserves the right to amend any segment of the RFP prior to the announcement of a successful contractor. In such an event, all responders will be afforded the opportunity to revise their proposal to accommodate the RFP amendment. SURS reserves the right without prejudice to reject any or all proposals submitted. There is no express or implied obligation for SURS to reimburse for any expenses incurred in preparing proposals in response to this request. Ex-parte Communications Public Act 93-617, which became effective December 9, 2003, brought about new Illinois ethics procedures. All “ex parte communications” concerning investment, rulemaking or quasi- adjudicatory matters pending before the State agency must be documented and some must be reported. An “ex parte communication” is any written or oral communication by any person that imparts or requests material information or makes a material argument regarding potential action concerning an investment, a rulemaking process, or a quasi-adjudicatory matter. An ex parte communication does not include statements publicly made in a public forum or communications among employees of the State agency. An ex parte communication from an interested party or his or her official representative or attorney to an employee or the agency must be memorialized and made a part of the record. An “interested party” is a person or entity whose rights, privileges, or interests are the subject of or are directly affected by an investment, regulatory or quasi-adjudicatory matter. An ex parte communication other than that just described must be reported by the staff member or Trustee immediately to the agency’s Ethics Officer. The communication must be memorialized and made a part of the record. The communication must be filed with the Executive Ethics Commission, accompanied by a memorandum from the ethics officer. 5
  6. 6. V. Projected Schedule of Events December 23, 2009 Dissemination of RFP January 4, 2010 Deadline for questions to SURS January 11, 2010 Responses to questions submitted to SURS January 25, 2010 RFP responses due by 5:00 p.m. CDST February 2010 Identify firms for further consideration February - March 2010 Staff interviews with selected firms (Champaign) March 10, 2010 Firms recommended to SURS Board of Trustees VI. Selection Criteria SURS will consider the following in making its decision: A. Organization, Structure, and Personnel B. Assets Under Management and Client Base C. Investment Philosophy, Policy, and Process D. Research Capabilities and Resources E. Historical Performance/Risk Factors F. Fee Structure G. Investment Operations, Compliance and Internal Controls H. Ability to comply with applicable legislative mandates (i.e., Iran, Sudan, Anti-Predatory Lending legislation) VII. Treasury Inflation Protected Securities Manager Questionnaire Product Under Consideration: ____________________________________ Firm Name: ________________________________________________ Contact Person: ________________________________________________ Address: ________________________________________________ Telephone: ________________________________________________ E-mail: ________________________________________________ Date Completed: ________________________________________________ If any of the following questions are not applicable, please respond with N/A. 6
  7. 7. A. Investment Management Agreement 1) The investment manager will agree to the language in the standard Investment Management Agreement, see http://www.surs.org/pdfs/invinfo/IMA_2009.pdf for additional details. Are these terms acceptable? Yes______ No________ B. Organization 1) Please indicate whether your firm is a Bank or Registered Investment Advisor. 2) Provide a brief history of the firm including: a) The month and year of SEC 1940 Act registration. b) The month and year the subject product was introduced. c) Ownership structure (if an affiliate, designate percent of parent firm’s total revenue generated by your organization). d) If the firm is a joint venture partner, identify the percentage of ownership and revenues recognized by each partner to the combined association. 3) Please provide a copy of your MWBE Certification. 4) Provide an organizational chart diagramming the relationships between the professional staff as well as the parent-subsidiary, affiliate, or joint venture entities. 5) Describe the levels (U.S. dollar amounts) of coverage for SEC-required (17g-1) fidelity bonds, errors and omissions coverage and any other fiduciary coverage which your firm carries. List the insurance carriers supplying the coverage. 6) Over the past five years, has your organization or any of its affiliates or parent, or any officer or principal been involved in any business litigation, regulatory or legal proceedings? If so, provide a detailed explanation and indicate the current status. Also provide complete Form ADV (Parts I and II). 7) Has your firm been the subject of an audit, censure (fine), inquiry or administrative action by the SEC, IRS, or DOL in the past 7 years? If so, explain findings and provide a copy, as well as evidence of any changes in procedures implemented as a result of such audit. 8) Describe the material developments in your organization (changes in ownership, personnel, business, etc.) over the past three years in detail. Are there any changes anticipated in the coming year? 7
  8. 8. 9) Discuss your organization’s compensation and incentive program. How are professionals evaluated and rewarded? What incentives are provided to attract and retain superior individuals? If equity ownership is possible, on what basis is it determined and distributed? How is the departure of a shareholder treated? 10) Provide information regarding the expiration date of current employment contracts with key personnel. Please include discussion of long term incentives, options or performance clauses. 11) Describe succession plans for the management of the firm and the continuity of leadership within the investment team. 12) Please provide details on the financial condition of the firm (i.e., most recent annual report filed with the SEC). 13) When was your firm’s last external audit? Identify the firm that conducted the audit. Please discuss any material findings. C. Clients/Assets 1) Complete Table 1 (page 13 of the RFP) with information as of December 31, 2009 (or September 30, 2009 if information is not yet available). 2) Provide the number of accounts and assets under management for all TIPS strategies as of December 31, 2009 (or September 30, 2009 if information is not available), and each of the prior four calendar year ends. 3) For each of the last five years, provide the number of TIPS accounts gained and the number lost, and the respective asset values for the product under consideration. Include the client type and a brief explanation for each account lost. 4) If possible, provide the names of clients who are invested in the product being considered by SURS. Include inception date and market value of each account. Please identify any clients that are large public plan sponsor investment programs. 5) List any fixed income products that have been liquidated or merged with an existing product, including the reason(s) why the action was taken. 6) Does the firm have a policy limiting assets under management for this strategy? If so, what is the level at which your firm would close the strategy to new business. What do you think is this product’s capacity? 8
  9. 9. D. Management Fees 1) Please provide a proposed fee schedule for the proposed strategy, including any breakpoints. Are these fees negotiable? 2) Will you certify that the fee schedule provided above is the most favorable fee schedule that the firm offers for accounts of similar size? If not, please explain why. 3) Would you be willing to include a “Most Favored Nations” clause as in your contract? If not, please provide an explanation of why not. Once a manager has been selected, negotiations of the fee structure may become necessary in order to account for the size of funding, the increments of funding, and any clarification. In no case will the negotiations result in a fee that is higher than the fee contained in the proposal. E. Strategy 1) What types of vehicles are offered for this strategy? 2) Please briefly describe your firm’s philosophy and process for managing the subject strategy. 3) What is the preferred benchmark, expected excess return, and expected tracking error? 4) Please explain your firm’s research process as it applies to the subject strategy. 5) Describe your firm’s risk management process. 6) Does this strategy utilize leverage in any way? If so, please describe. What is the expected and maximum leverage employed in the strategy? 7) From what sources does your strategy expect to generate its performance, and in what percentage (i.e., XX% issue selection, XX% sector selection, XX% duration positioning, etc.)? 8) Describe your firm’s use of derivatives in full discretion mandates. If applicable, please list any procedures that serve as guidelines for your firm’s management of the collateral. 9) Describe your firm’s approach to duration management. What is the duration range you manage to, both stated and in practice? F. Trading Practices 1) Describe your firm’s trading function. Who would be responsible for trading this portfolio? 9
  10. 10. 2) Describe the annual turnover for the past three years and the source of that turnover. 3) Does your firm utilize soft dollars in the management of its fixed income strategies? 4) Does your firm trade with any broker/dealer affiliates? If so, disclose who. 5) What is the maximum and/or minimum issue size that your firm will consider for potential investments? 6) What pricing service does your firm use? Please discuss procedures for overriding a price provided by the pricing service. 7) What guidelines and practices does your firm employ in managing its counterparty risk? 8) Describe your firm’s trade allocation process. Provide your firm’s official policy that governs the trade allocation procedure. 9) Describe your firm’s process for executing trades. Include information regarding: a) Does the firm use electronic trading systems? b) How are trading costs monitored? How are costs minimized? c) Do clients direct trades? If so, what percentage of trades are directed by clients? d) SURS encourages its investment managers to utilize the services of minority- and women-owned brokerage firms. Further, it is SURS expectation that the investment managers meet certain minimum levels of minority- and women- owned broker participation. The minimum level of participation for fixed income is 20% of total market value traded. For the one year ending December 31, 2009 (or September 30, 2009 if information is not yet available), what percentage of fixed income trading volume was executed with minority- and women-owned firms? Please comment as to your ability to utilize these firms. G. Performance 1) Provide since inception monthly composite performance, net of fees, for the subject strategy. Provide your firm’s GIPS disclosure as a separate attachment. If not provided in the GIPS disclosure, provide the annual number of accounts and market value of the composite as of December 31, 2009 (or September 30, 2009 if information is not available). 2) Provide quarterly modified adjusted duration for the subject strategy’s accounts over the past twelve quarters ending December 31, 2009 (or September 30, 2009 if information is not available). 10
  11. 11. 3) Provide quarterly sector allocation for the past twelve quarters ending December 31, 2009 (or September 30, 2009 if information is not available). Please categorize assets into the sectors listed below. Detail the contents of the Other classification. Treasury Securities Agency Mortgage Backed Securities (Agency) MBS (Non-agency) Investment Grade Corporate Bonds CMBS Asset Backed Securities High Yield Corporate Bonds Leveraged Loans/Bank Debt Developed Non-U.S. Emerging Market Debt Convertibles Non-U.S. Dollar Municipal Other TIPS Non-U.S. Inflation Linked Securities 4) Provide an attribution of investment performance for the past one-, three-, and five-year periods ending December 31, 2009 (or September 30, 2009 if information is not yet available), for the product relative to the relevant benchmark. Provide commentary to address underperformance or outperformance relative to benchmark. 5) Discuss the dispersion of returns in this product’s composite. H. Staffing 1) Provide the following information about your staff: a) Number of investment professionals 1. Number of Fixed Income investment professionals 2. Number of Fixed Income portfolio managers 3. Number of Fixed Income traders 4. Number of Research Analysts 5. Number of Client Service Personnel b) Number of other staff members c) Total staff 2) Investment Professionals: a) Please provide biographical information for all senior investment professionals and portfolio managers in the fixed income group. Highlight the person(s) who would be responsible for the subject product and for this account. 11
  12. 12. b) Indicate when and why any investment professionals involved with the subject product left or joined the firm in the last three years. For personnel who have left, indicate job titles and years with the firm. Please include all additions and departures, regardless of seniority. c) Describe your firm’s backup procedures in the event the key investment professional assigned to this account/product should leave the firm. 3) Provide any other information about your staff that you consider material including reassignments of responsibility, committee changes, prospective additions, etc. I. Investment Process 1) Describe in detail the firm’s investment philosophy and process with regard to the product. Include discussion of portfolio construction guidelines. a) Under what circumstances, if any, would you deviate from the disciplines associated with this methodology? 2) Have you made or are you planning any modifications to your overall investment philosophy or process? If so, describe the process used to identify and effect the change. Evaluate the relative success or failure of the change. 3) Compare the portfolio’s characteristics to a relevant benchmark as of December 31, 2009 (or September 30, 2009 if information is not yet available). Please include information on exposure to non-U.S., high yield, and emerging markets securities, if any. 4) Discuss the risk control and monitoring systems utilized by your firm. 5) On average, how many securities are in the product? Has this number been increasing, decreasing or holding constant over the last three years? 6) What is the average expected portfolio turnover? What has been the actual portfolio turnover during each of the last three years? 7) Do you utilize Exchange Traded Funds in the portfolio? If so, please describe. 8) Provide the firm’s fully discretionary investment guidelines for the product. Also, provide a prospectus if commingled funds are offered. 9) Under what market conditions will this product perform well? Poorly? 12
  13. 13. J. Client Service Capabilities 1) Who will serve as the client service officer for the account? How often will the person be available for client meetings? 2) Provide samples of client reports and indicate their frequency of issuance. K. Compliance/Internal Control Structure 1) Provide a detailed summary of your firm’s internal control structure. Who serves as your firm’s compliance officer? Does the firm conduct periodic risk assessment? Provide a copy of your internal control review documentation, preferably prepared by an independent third party. 2) Have you ever violated a client guideline in an actively-managed portfolio? If so, please describe the violation and the resolution. 3) Is your firm, its parent, or affiliate a broker/dealer? Does your firm trade for the management of client accounts through this broker/dealer? L. Miscellaneous 1) Describe any other recent developments within your firm that you consider material. 2) What are the key factors that differentiate this product and give it a competitive advantage over the others in the marketplace? 13
  14. 14. Table 1 Product Under Total TIPS Assets Firm Wide Assets Under Consideration Under Management Management # of Market Value # of Market Value # of Market Value Accounts ($'s in Millions) Accounts ($'s in Millions) Accounts ($'s in Millions) Public Funds Corporate Funds Endowments / Foundations Other Total
  15. 15. Appendix A Re: New Sudan Divestment Law in Illinois Dear Manager: Please be advised that the Illinois Pension Code was recently amended to reinstate a Sudan divestment provision that will impact your management of SURS’ account (the “Sudan Law”).1 We have enclosed, for your reference, a full copy of the new Sudan Law. As with the old Sudan law, SURS must obtain an annual certificate from each manager confirming that the investments in SURS’ account comply with the requirements of the Sudan Law because SURS’ assets are not invested in any “forbidden entities,” as defined in the Sudan Law. You must deliver the first such manager certificate to us by February 28, 2008. Thereafter, annual compliance certificates must be delivered to us by [June 30] of each year, including [June 30, 2008]. While there is no longer a form of certificate prescribed by the Illinois State Treasurer’s office or otherwise, we have enclosed a form of compliance certificate that includes the confirmations that certifying companies are required to provide under paragraph (c) of the new Sudan Law. As with the old Sudan Law, managers of publicly traded securities will need to contract with a firm that specializes in global risk management to identify companies that are considered forbidden entities under the new Sudan Law, and will be required to screen the investments in SURS’ account in order to avoid holding such securities. The new Sudan Law contains certain differences from the old Sudan law that may impact compliance by SURS’ managers, including: Mutual Funds. Mutual funds are excluded from the definition of “forbidden entity” if they satisfy the requirements under Section 1-113.2 of the Illinois Pension Code, which are: i. The mutual fund is managed by an investment company as defined and registered under the federal Investment Company Act of 1940 and registered under the Illinois Securities Law of 1953. ii. The mutual fund has been in operation for at least 5 years. iii. The mutual fund has total net assets of $250 million or more. iv. The mutual fund is comprised of diversified portfolios of common or preferred stocks, bonds, or money market instruments. We are aware that under the National Securities Market Improvement Act of 1986 (“NSMIA”) states were pre-empted from requiring registration of federally "covered securities," and that Section 1-113.2 of the Illinois Pension Code, which predated NSMIA, may also be pre-empted to the extent it would require such dual registration. However, you should rely on your own counsel to advise you on compliance with your duties under the Sudan Law. Private Market Funds. The new Sudan Law includes special rules applicable to a “Private Market Fund”, which is defined as “any private equity fund, private equity fund of funds, venture capital fund, hedge fund, hedge fund of funds, real estate fund, or other investment vehicle that is not publicly traded.” A Private Market Fund will not be deemed to be a forbidden entity if it 1 As you may be aware, the old Sudan law was challenged by the National Foreign Trade Counsel in a suit filed on behalf of eight Illinois municipal pension funds and ruled unconstitutional in an opinion issued on February 23, 2007 by the Federal District Court for the Northern District of Illinois.
  16. 16. delivers either an affidavit or certificate confirming essentially that it does not own or control assets in the Republic of Sudan and does not conduct business operations in the Republic of Sudan. (See paragraph (d) of the Sudan Act for the specific affidavit or certificate requirements). We hope that this new rule will simplify compliance with respect to investments of SURS’ assets made through a Private Market Fund because the manager will no longer need to confirm that each security held by the fund is not a forbidden entity, as long as the Private Market Fund itself can provide the requisite affidavit or certificate. We appreciate your attention to this new compliance requirement. Sincerely, [Douglas Wesley Deputy Chief Investment Officer]