Annual performance review of Investment Consulting Firm, relating to the Agreement

174 Pages·2016·1.51 MB·English

by  City User

Agenda Item No. D-7
Board Meeting April 26, 2016
Reviewed by
Retirement Administrator

REPORT TO THE JOINT RETIREMENT BOARDS

April 20, 2016
FROM: ROBERT T. THELLER, Retirement Administrator
BY: KATHLEEN RILEY BROWN, Assistant Retirement Administrator
SUBJECT: ANNUAL PERFORMANCE REVIEW OF INVESTMENT CONSULTING FIRM,
RELATING TO THE AGREEMENT BETWEEN NEPC AND THE CITY OF
FRESNO RETIREMENT SYSTEMS
BACKGROUND
In keeping with Retirement Board Policy and Reference Manual Section 2-37 (copy
attached), Professional Service Provider Annual Evaluation Policy, the Boards are
charged with the duty to review and evaluate the Boards’ Investment Consultant on an
annual basis, to ensure that services and communications provided by the Retirement
Boards’ primary consultants are clear, effective and meaningful while aligned with the
Boards’ overall policy objectives and that the Boards are receiving the quality services
envisioned at the time of the consultant’s engagement.
Evaluation of Investment Consulting firm – NEPC, Don Stracke
According to the Boards’ policy to annually review and evaluate the Boards’
Investment Consultant, the following criteria provides guidance with respect to the
detail and quality of the primary services:
1. The detail and quality evaluations of portfolio managers’ performance, including
quarterly written and verbal presentations to the Boards.
2. Quality of Investment policy statement development.
3. Quality of Manager Guideline and portfolio structure development.
4. The results of special investment research projects.
5. The quality and results of portfolio manager searches for all asset classes.
6. The results of asset allocation studies, with and without liability analysis.
7. The quality of written performance evaluations and investment analytics.
8. The results of due diligence reviews, evaluations and recommendations.
Members of the Joint Retirement Boards were asked to thoughtfully evaluate NEPC
and Mr. Stracke as our lead consultant, by completing the attached Evaluation Forms
which we have summarized in a lead sheet. It is worth noting that we have a new
Board member on the Fire & Police Retirement Board and appropriately we do not
have comments from this newest member.
Page 2
Report to the Joint Boards
Annual Evaluation and Performance Review of NEPC
April 26, 2016

Consultant’s Report

Mr. Stracke has provided the attached list of his primary and secondary client
responsibilities for formal review with the Boards for assessment of the Consultant’s
overall accessibility/availability; a 2015 Activity list of deliverables, manager search
initiated, projects and education presentations provided along with the status of
completion for the past year; and the most recent NEPC Forms ADV Part II dated
March 30, 2016. To further assist our Board Members with their annual evaluation of
NEPC, we have also included the Work Plan for calendar year 2016.

Areas of focus and opportunities for communication:

The goal of the annual evaluation process is to establish a line of communication; to
determine agreed upon objectives; and to clarify expectations for the coming year.

Board Member ratings and Comments:

Overall, Board Member ratings and comments of Mr. Strake and NEPC were very
good. There were many comments from Board Members of a positive nature; the
following comments from Board Members may warrant some discussion:

• Have not seen any scheduling conflicts. Have not reviewed Lead
Consultant’s client list. Not sure how to mark bullets.

• Areas of concern in next twelve months are: PIMCO, Private Equity, Asset
Allocation and GTAA.

• Very interested in Private Lending. Interested in Private Equity, Real
Estate. Would like to know our tolerance level for liquidity.

• I would like to see the CFRS stay with the same or similar investment
strategy and not continue to pursue high risk investments.

• I like having regular meetings with the consultant but I am comfortable
with those meetings being in the form of a conference call rather than a
site visit every time.

Work Plan for Investment Consultant:

Although the Boards conducted a review of the proposed 2016 Calendar Year
Work Plan with Mr. Stracke in February 2016, as part of this annual review, the
Boards may want to take this opportunity to revisit and discuss the Work Plan
with NEPC if on reflection there are any changes to propose to the Work Plan for
remainder of this calendar year.
Page 3
Report to the Joint Boards
Annual Evaluation and Performance Review of NEPC
April 26, 2016

From staff’s perspective, our relationship with NEPC has provided the System’s with
an independent consulting firm free of inherent financial conflicts that sometimes exist
with other firms. After three years, with a better sense of awareness of risk tolerances
and enhanced communication has led us to a more effective relationship and provides
the expectation for meaningful recommendations in the future.

NEPC’s Focus Placement Lists and Manager Searches:

Staff continues to have some concern over NEPC’s focus placement lists which
are developed in the NEPC Boston Office and are the basis for their investment
manager search process in traditional asset classes. In the past, we have
attempted to renew an ACWIexUS manager search and found the Focus
Manager list provided to staff had not been updated within the past twelve
months making it difficult to ascertain whether or not the Focus Manager list is
currently appropriate. It would appear that less focus is given by NEPC to the
traditional asset classes. We will continue to strive for improvement in this area.

The more recent non-core real estate manager search process has provided a
very positive experience with enhanced communications and interactions with
our Consultant and the NEPC Boston Office. Matt Ritter, CAIA, Senior Analyst,
Real Assets from the Boston office delivered particularly impressive level of
knowledge and depth of understanding of the real estate managers under
consideration; interacting at a high level with each call that we conducted.

Asset Allocation Modeling:

Asset Allocation modeling has been difficult issue for everyone due to the
introduction of new asset classes that the Boards have not fully vetted nor
accepted. Last year staff recommended that the Boards approve an updated
Asset Allocation Plan and agreed that we would update the Plan if a new asset
class is approved by the Boards and a manager search is completed. The
Boards completed the Direct Lending manager search and in August 2015
officially adopted a 5% allocation to direct lending. The Boards are in the
process of reviewing NEPC’s 2016 Asset Allocation Assumptions and will
continue education on various new asset classes. Once decisions are made the
Boards will officially adopt an updated Asset Allocation Plan.

Watch List Reviews – Manager Evaluations:

Last year staff requested that NEPC’s quarterly manager watch list evaluations
not repeat prior reported information, but instead the report would be limited to
new information on each manager on the watch list. This change has eliminated
the repetition of information allowing staff and Board Members to focus on new
information which is pertinent to the Boards decisions concerning a manager on
watch list status.
Investment Consulting Firm Evaluation Summary
April 2016
NEPC Members
Evaluation
Question 1 2 3 4 5 6 7 8 9 10 Average
1 The Lead Consultant provides objective, relevant and timely 5 5 4 3 5 5 5 4 5 4.6
information and recommendations to the Trustees regarding
investment managers performance and provides advice
consistent with their fiduciary duty.
2 Consultant answers to questions raised by the Retirement 4 4 3 4 5 5 5 4 5 4.3
Boards are clear, timely and complete.
3 Consultant's recommendation have been very important to the 4 5 4 3 5 3 5 3 5 4.1
Retirement Boards.
4 Data presented by Consultant supports the recommendations 4 5 4 5 5 4 5 4 5 4.6
of the Consultant.
5 As a Trustee, I generally support the consultant's 4 3 4 3 4 3 5 3 5 3.8
recommendations to the Retirement Boards.
6 Consultant keeps the Retirement Boards informed of events 4 5 4 3 5 4 5 4 5 4.3
affecting the Systems' investment managers and the markets.
7 It is important to meet with the Consultant every month. 5 5 5 5 5 5 5 5 5 5.0
8 I would like to see changes in presentations and/or materials
from the Consultant, explain.
9 The Lead Consultant conducts Investment Manager searches 4 5 4 3 5 5 5 5 5 4.6
that provide the Systems with managers who have performed at
or above the appropriate benchmark.
10 The Lead Consultant provides asset allocation studies that 5 5 3 4 5 5 5 4 5 4.6
quantify the probable long-term impact of different investment
strategies.
11 The Consultant has analyzed performance of investment 5 5 3 4 5 3 5 5 5 5
portfolios as they relate to industry benchmarks.
12 I think there is a need for more training by the Consultant in 4 1 4 3 4 4 2 4 5 3.4
investment risk/reward analysis.
13 The Consultant recommends ways to manage or reduce 4 5 4 2 5 3 4 3 5 3.9
investment and transaction fees, management and consulting
costs.
14 Are there any scheduling conflicts due to the Lead Consultant's 4 4 3 1 1 1 1.8
workload which impact scheduling of projects, or completion of
projects for the Systems?
Ratings 5-Strongly Agree
4-Most Often Agree
3-Often Agree
2-Sometimes Disagree
1-Strongly Disagree
To: City of Fresno Retirement Systems (CFRS) Joint Board
From: Don Stracke, CFA, CAIA
Date: April 20, 2016
Subject: NEPC – Consultant Client Responsibilities and Review of Activities Conducted

Don Stracke – Current 2016 Client Responsibility

Lead Consultant
City of Fresno
City of Seattle
Oklahoma Pension Commission (qtrly meetings)
Oklahoma Tobacco Endowment (qtrly meetings)
Co-lead with High Degree of Involvement
Orange County
Back-up Consultant with Low Degree of Involvement

Arizona Public Safety
San Bernardino

2015 Activity

Quarterly Deliverables
Manager Watch List
Quarterly Performance Report

Annual Deliverables
CAFR Letter

Manager Presentations to the Boards 2015 - NEPC Review Evaluations Written
Acadian
Axiom
Prudential
Dodge & Cox
PIMCO – Frequent reviews of strategy
JP Morgan
Eagle
Heitman
Kennedy
MacKay Shields

900 Veterans Blvd. | Ste. 340 | Redwood City, CA 94063-1741 | TEL: [phone] | www.nepc.com
BOSTON | ATLANTA | CHARLOTTE | CHICAGO | DETROIT | LAS VEGAS | SAN FRANCISCO
Manager Searches - Calendar Year 2015
1. Direct Lending manager search – Supported full RFP search, finalists Monroe and
Crescent selected in August 2015 to manage $50.0 million each.
2. GTAA Search –decision of the Boards to end this asset class manager search.
3. ACWI ex US Search – Updated Screen and reviewed current and potential managers
4. Real Estate Search – Initiated and Currently in Process

Projects/Educational Presentations in 2015

1. Educational presentation on leverage
2. Educational presentation on direct lending
3. Educational presentation on securities lending
4. Review of assumptions and actions for 2015
5. Review and update Investment Policy Statement
6. Real Estate Asset Class Review and Plan
To: City of Fresno Retirement Systems (CFRS) Joint Board

From: Don Stracke, CFA, CAIA, Allan Martin, and Anthony Ferrara, CAIA

Date: February 23, 2016 Updated April 20, 2016

Subject: Proposed 2016 Projects

Background

In an effort to promote dialogue between the Joint Boards, Staff and NEPC
regarding our focus for the upcoming calendar year, we have prepared the
following document. Fully realizing that things change over the course of a
year, it is nevertheless helpful to understand the general priorities and
desires as we move forward. This should be viewed as an initial proposal;
we can certainly adjust the focus or add new projects as desired.

Key Projects

Small Cap Searches

Two concerns have been expressed about Eagle Asset Management, a small
cap growth manager who is on the watch list for performance reasons.
Obviously, performance is one of those issues, and the second is succession
planning since the senior portfolio manager has been in the business a long
time. Staff and NEPC believe that we should consider the structure of the
small cap asset class and consider additional diversification.

Asset Allocation

On an annual basis, NEPC releases our asset class assumptions and actions
for our clients. We will deliver that information, customized to the specific
goals and strategies of CFRS. We are presenting some options to the Joint
Boards for consideration at the February meeting.

900 Veterans Blvd. | Ste. 340 | Redwood City, CA 94063-1741 | TEL: [phone] | www.nepc.com
BOSTON | ATLANTA | CHARLOTTE | CHICAGO | DETROIT | LAS VEGAS | SAN FRANCISCO
Private Equity

Staff has asked that we re-evaluate the Boards past inclination to not invest
in this asset class. We plan to provide education to the board on this asset
class to examine whether it has a role in the CFRS portfolio.

Direct Lending

Direct lending has the highest risk-adjusted return forecasts in our model.
We will be examining whether an increase to this asset class makes sense,
and the approach we would pursue to invest the capital.

Real Asset Education

Real assets are investments that provide a degree of protection, or
enhanced performance, in inflationary periods. We plan on offering
education on this asset class and its potential role in the CFRS portfolio.

Non-US Equity Review/Recommendation

The CFRS has adopted an ACWI ex-US structure, which adds emerging
markets to the mandate of the developed non-US managers. Currently the
fund has money invested with Principal under an EAFE mandate, which
includes solely non-US developed markets. It seems logical that this
mandate should either be expanded, a new manager identified, or these
assets combined with other existing managers.

Asset Class Reviews

Over the course of the year, we plan on conducting reviews of each of the
major asset classes. These reviews will focus on the roles of each asset
class, the strategies being used to access these asset classes, and a review
of the underlying managers.

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City of Fresno Retirement Systems
2016 CY Proposed Board Meeting Agenda Items
Board Meeting Agenda Item
February 23, 2016  Initial asset allocation review
 PIMCO discussion
 Discuss small cap search
 Real estate search update
March 22, 2016  PE education
 Review of specific asset
allocation options
April 26, 2016  Direct Lending
discussion/decision
 RE semi-finalist presentations
May 24, 2016 • Quarterly Investment Report
• RE selection made
 Non-US equity
review/recommendation
• Watch list memo
June 28, 2016  Real asset education
 Manager write-up
July 26, 2016  US fixed income asset class
review
August 23, 2016  Quarterly Investment Report
 Watch list memo
 Manager write-up
September 27, 2016  Fresno asset allocation review
October 25, 2016  Manager write-up
 US-equity asset class review
November 22, 2016  Quarterly investment report
 Watch list write-up

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Form ADV – Part 2A
Item 1 – Cover Page

255 State Street
Boston, MA 02109

617-374-1300

www.NEPC.com

Date of this Brochure: 3/30/2016

Contacts:
William Y. Bogle - Chief Compliance Officer
Steven F. Charlton, CFA - Director of Consulting Services

This Brochure provides information about the qualifications and business practices of
NEPC, LLC (“NEPC”). If you have any questions about the contents of this Brochure, please
contact us at 617-374-1300.
The information in this Brochure has not been approved or verified by the United States
Securities and Exchange Commission (the “SEC”) or by any state securities authority.
NEPC is a registered investment adviser. Registration of an Investment Adviser does not
imply any level of skill or training.
Additional information about NEPC also is available on the SEC’s website at
www.adviserinfo.sec.gov .
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