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MINUTES
Meeting of the Investment Committee of the Board of Trustees of the
State Universities Retirement System Thursday, January 30, 2020, 10:30 a.m.
Northern Trust Global Conference Center
50 S. LaSalle St., Chicago, IL The following trustees were present: Mr. Antonio Vasquez, chair, Mr. John Atkinson, Ms. Jamie-Clare Flaherty, Dr. Fred Giertz, Mr. John Lyons, Dr. Steven Rock, Mr. Collin Van Meter and Mr. Mitch Vogel. Others present: Mr. Martin Noven, Executive Director; Mr. Doug Wesley, Chief Investment Officer (CIO); Ms. Ellen Hung, Deputy CIO; Mr. Shane Willoughby and Ms. Kim Pollitt, Senior Investment Officers; Mr. Alex Ramos and Mr. Brian DeLoriea, Investment Officers; Ms. Bianca Green, General Counsel; Ms. Kristen Houch, Head of Legislative Affairs; Mr. Albert Lee, Associate General Counsel; Ms. Suzanne Mayer, Chief Benefits Officer; Ms. Kelly Carson, and Ms. Chelsea McCarty, Executive Assistants; Ms. Tiffany Reeves of Reinhart, Boemer, Van Deuren; Mr. Neil Rue, Mr. David Sancewich, Ms. Mary Bates, and Ms. Ghiane Jones of Meketa; Mr. Mike Saunders of Cammack; Mr. Ray Decker and Mr. Howard Li of Alliance Bernstein; Mr. Mike Krems and Ms. Heidi Poon of TorreyCove; Ms. Jennifer Wildman of Aksia; and Mr. Anton Britton of Northern Trust. Investment Committee roll call attendance was taken. Trustee Vasquez, chair, present; Trustee Ammons, absent; Trustee Figueroa, absent; Trustee Giertz, present; Trustee Rock, present and Trustee Van Meter, present. Trustee Ammons joined the meeting via conference call at 11:10 a.m. and dropped off the call at 1:15 p.m. Trustee Giertz made the following motion.
• That trustees be allowed to participate via conference call for all meetings on January 30, 2020, pursuant to Section 7(a) of the Open Meetings Act.
Trustee Van Meter seconded and the motion carried with all trustees present voting in favor.
APPROVAL OF MINUTES
Trustee Vasquez presented the minutes from the Investment Committee meeting of December 5, 2019. Trustee Rock made the following motion:
• That the minutes from the December 5, 2019 Investment Committee meeting be approved as presented.
Trustee Giertz seconded and the motion carried with all trustees present voting in favor. Copies of staff’s memorandums titled “Investment Contracts Approved” and “Report from the December 2019 Investment Committee Meeting” are incorporated as part of these minutes as Exhibit 1 and Exhibit 2.
CHAIRPERSON’S REPORT Trustee Vasquez did not have a formal report.
CHIEF INVESTMENT OFFICER REPORT
Mr. Wesley provided an update on assets currently managed by Progress in the emerging manager-of-managers program. Staff issued a request for proposals on January 17, 2020, to identify a firm to manage an emerging manager-of-managers credit portfolio. This search will be expedited to conclude in March which will delay the global equity search process. Global equity interviews will likely occur in April rather than March. Mr. Wesley also provided a preview of real asset manager interviews expected in March, including a possible commitment to an existing general partner. Finally, an update was provided on the contract status and funding of recently selected managers. A copy of the Meketa memorandum titled “Life Settlements and Other Niche Alternative Risk Premia Strategies” is incorporated as part of these minutes as Exhibit 3.
CLOSED SESSION
Trustee Giertz moved that the Investment Committee go into closed session pursuant to §2(c)(7) of the Open Meetings Act to consider the sale or purchase of securities or investments or to consider an investment contract. Trustee Rock seconded and the motion carried in a roll call vote:
Trustee Ammons - absent Trustee Figueroa - absent Trustee Giertz - aye Trustee Rock - aye Trustee Van Meter - aye Trustee Vasquez - aye
RETURN TO OPEN SESSION
Upon a motion by Trustee Rock, seconded by Trustee Giertz, the motion carried, and the Investment Committee resumed its meeting in open session.
Trustee Giertz made the following motion:
• That based on the recommendation of SURS staff and Meketa, the Investment Committee approve FIS Group to be retained to coordinate the evolution of the existing Progress Non-US equity portfolio to a global equity manager of emerging managers program, subject to successful completion of contract negotiations.
Trustee Rock seconded and the motion carried with all trustees present voting in favor.
INVESTMENT BELIEFS REVIEW (Educational Session)
Mr.Rue of Meketa provided an educational session on SURS investment beliefs. Based on prior board conversations, a proposed investment belief was presented that would integrate Environmental, Social and Governance (ESG) into SURS investment decision-making and monitoring of proxy voting activities. The education session lasted for 30 minutes; ending at 1:40 p.m. Trustee Vogel made the following motion:
• That based on the recommendation of SURS staff and Meketa, the Investment Committee adopt the revised Investment Beliefs as presented.
Trustee Rock seconded and the motion carried with all trustees present voting in favor. A copy of the Meketa memorandum titled “SURS Investment Beliefs” is incorporated as part of these minutes as Exhibit 4.
RECAP AND DISCUSSION OF PRIOR STRATEGIC DECISIONS (Educational Session)
Mr. Rue and Mr. Sancewich of Meketa provided an educational review on the asset allocation policy and the stabilized growth component. The education session lasted for 30 minutes; ending at 2:10 p.m. A copy of the Meketa presentation titled “Asset Allocation and Stabilized Growth Review” is incorporated as part of these minutes as Exhibit 5.
APPROVAL OF DEFINED CONTRIBUTION INVESTMENT LINEUP Mr. Wesley and Mr. Noven provided a brief background on the progress of implementing changes to the Self-Managed Plan (SMP) and establishing a new supplemental deferred compensation plan. Implementation of the changes to the SMP is targeted for June 1, 2020. The new deferred compensation plan is currently targeted for a September 2020 implementation. Representatives from Cammack discussed the investment selection process, including the proposed investment menu, annuity provider and fee assessment recommendations to the board. Representatives from Alliance Bernstein explained the specifics of the custom target date glidepath constructed for the lifetime income strategy, which will be the defined contribution default investment option. Trustee Rock made the following motion:
• That based on the recommendation of SURS staff and Cammack, the Investment Committee approve the investment lineup for the defined contributions plans as presented.
Trustee Giertz seconded and the motion carried with all trustees present voting in favor. Trustee Rock made the following motion:
• That based on the recommendation of SURS staff and Cammack, the Investment Committee retain Principal Financial Group as the annuity provider for the defined contribution plans, subject to successful contract negotiations.
Trustee Van Meter seconded and the motion carried with all trustees present voting in favor. A copy of SURS Memorandum titled “DC Introduction” and copies of the Cammack and Alliance Bernstein presentations titled “SURS January 2020” and “AB Glidepath Discussion” are incorporated as part of these minutes as Exhibit 6, Exhibit 7 and Exhibit 8.
APPROVAL OF DEFINED CONTRIBUTION PLAN DOCUMENTS
Mr. Lee provided a summary of the substantive changes to the Self-Managed Plan (SMP). Mr. Lee explained that staff collaborated with Ice Miller to draft a Third Restatement of the Self-Managed Plan documents. The Third Restatement incorporates prior amendments and makes changes to accommodate the use of the Alliance Bernstein lifetime income solution. Mr. Lee also discussed the new governmental deferred compensation plan and summarized the features of the supplemental plan. The plan will be optional and offered to all SURS members who are actively employed by a SURS-covered employer. Trustee Rock made the following motion:
• That based on the recommendation of SURS staff, the Investment Committee approve the Third Restatement of the Self-Managed Plan, effective June 1, 2020, and the 457(b) Supplemental Plan, effective September 1, 2020, substantially as presented.
Trustee Vogel seconded and the motion carried with all trustees present voting in favor. A copy of the staff memorandum titled “SMP and 457(b) Plan Documents” is incorporated as part of these minutes as Exhibit 9.
APPROVAL OF THE DEFINED BENEFITS AND DEFINED CONTRIBUTION INVESTMENT POLICIES
Ms. Hung presented the summary and recommendations regarding the Defined Benefit and Defined Contribution Investment Policies. Trustee Rock made the following motions:
• That based on the recommendation of SURS staff and Meketa, the Investment Committee approve the revised Defined Benefit Investment Policy as presented.
• That based on the recommendation of SURS staff and Cammack, the Investment Committee approve the revised Defined Contribution Plans Investment Policy as presented.
Trustee Vogel seconded and the motions carried with all trustees present voting in favor. A copy of the SURS staff memorandum titled “IPS Update Memo” and a copy of the red-line version titled “January 2020 IP Redline” are incorporated as part of these minutes as Exhibit 10 and Exhibit 11. Copies of the Defined Contribution Plan Policies titled “DC Policy 2020 Redline” and “DC Policy 2020 Clean” are also incorporated as part of these minutes as Exhibit 12 and Exhibit 13.
INFORMATIONAL ITEMS NOT REQUIRING COMMITTEE ACTION The following items were provided for reference and are incorporated as a part of these minutes:
1. Exhibit 14 – 2020 SURS Fixed Income Asset Class Review 2. Exhibit 15 – CMO and Risk Metrics – January 2020
PUBLIC COMMENT
There were no public comments presented to the Investment Committee. There was no further business brought before the committee and Trustee Rock moved that the meeting be adjourned. The motion was seconded by Trustee Giertz and carried with all trustees present voting in favor.
Respectfully submitted,
Mr. Martin Noven
Secretary, Board of Trustees MMN/kc
To: Martin Noven From: Douglas C. Wesley, CFA Date: January 17, 2020 Subject: Investment Contracts Approved The following investment contract agreements were approved by the Executive Director subsequent to the mailing for the October 17, 2019 Investment Committee meeting. November 2019 Campbell & Company Subscription documents and side letter were fully executed on November 26, 2019. Aspect Capital Subscription documents and side letter were fully executed on November 26, 2019. December 2019 Prologis Targeted U.S. Logistics Fund Subscription documents and side letter were fully executed on December 17, 2019. Credit Suisse IMA was fully executed on December 23, 2019. LongTail Alpha Subscription documents and side letter were fully executed on December 23, 2019. ARP Investments Subscription documents and side letter were fully executed on December 23, 2019. Lombard Odier Subscription documents and side letter were fully executed on December 23, 2019.
Exhibit 1
To: Investment Committee From: Douglas C. Wesley, CFA Date: January 17, 2020 Subject: Report from the December 5, 2019 Investment Committee Meeting Enclosed are the Minutes of the December 5-6, 2019 Board Meeting. The purpose of this memorandum is to provide a status report on the action items for Investments. Three motions were approved during the Investment Committee Meeting. These included the approval of the minutes from the October 17, 2019 Investment Committee Meeting and a motion that the closed session minutes from the October 17, 2019 Investment Committee Meeting be approved and remain closed. The remaining motions were approved by the SURS Board of Trustees and required further action by SURS staff. Open motions requiring further action by SURS Staff are listed below. 1. That based on the recommendation from SURS staff and Meketa, the Investment
Committee approve the revised defined benefit plan Investment Policy as presented.
The revised Investment Policy for the defined benefit plan was posted on the SURS website and filed with the Department of Insurance.
Open item from October 17, 2019 2. That based on the recommendation of SURS staff and Meketa, the Investment
Committee approve retaining Credit Suisse as a Systematic Trend Following manager, subject to successful contract negotiations.
Investment management agreement with Credit Suisse was fully executed and account funded on December 30, 2019.
3. Pending successful contract negotiations, SURS staff and Meketa recommend an initial allocation of the 1.75 percent of total fund assets be split among the finalist firms in the systematic trend following search in the following proportions:
a. Aspect Capital – 27% b. Campbell & Company – 27% c. Credit Suisse – 27% d. LongTail Alpha – 19%
Exhibit 2
Subscription documents and side letters were fully executed with Aspect, Campbell and LongTail. As stated in item # 2 above, the IMA with Credit Suisse was fully executed. All four managers are fully allocated as approved.
4. That based on the recommendation of SURS staff and Meketa, the Investment Committee approve ARP Investments, Lombard Odier and PIMCO to be retained as Alternative Risk Premia managers with each firm receiving an allocation of approximately 0.5 percent of total fund assets, subject to successful completion of contract negotiations.
Subscriptions documents and side letters were fully executed with ARP Investments and Lombard Odier. Both accounts are fully allocated as approved. Staff is in the process of contract negotiations with PIMCO.
5. That based on the recommendation from SURS staff and Callan, the Investment
Committee approve a commitment of $100 million to Prologis Targeted U.S. Logistics Fund and $50 million to Cabot Industrial Value Fund VI, subject to successful completion of contract negotiations.
Subscription documents and side letter with Cabot and Prologis were fully executed on November 7, 2019 and December 17, 2019 respectively.
Open item from September 12-13, 2019 6. That based on the recommendation of SURS staff and Meketa, the Investment
Committee grant authority to staff to restructure the Traditional Growth portfolio to implement the Streamlined Structure (option 2) as presented, subject to successful completion of contract negotiations. Staff has started implementing the Streamlined Structure as approved and is negotiating contracts with various firms.
7. That based on the recommendation from SURS Staff and Cammack, the Investment Committee approve the retention of Voya Financial as the sole record-keeper for the existing Self-Managed Plan and the new Supplemental Plan, subject to successful contract negotiations. Staff is in the process of contract negotiations with Voya Financial.
8. That based on the recommendation from SURS Staff and Cammack, the Investment Committee approve the retention of AllianceBernstein as the income solution provider for the existing Self-Managed Plan and the new Supplemental Plan, subject to successful contract negotiations.
Staff is in the process of contract negotiations with AllianceBernstein.
Exhibit 2
9. That based on the recommendation of SURS staff and Meketa, the Investment Committee approve RhumbLine to be retained to manage a U.S. Long Government passive strategy with an initial allocation of 1.75 percent of the SURS total portfolio, subject to successful completion of contract negotiations. An amendment to Rhumbline’s IMA, to include investment guidelines for long-duration mandate and revised fee schedule, was fully executed on September 17, 2019. This mandate has been partially funded, with further allocation pending the funding of the Pimco account as mentioned in item 4 above.
Open item from September 13, 2018 10. That based on the recommendation from SURS staff and SURS investment consultant,
that SURS coordinate full redemption from the KKR Prisma Codlin Fund and from the Newport Monarch Fund. At either the October or December 2018 Investment Committee meeting, staff will recommend where proceeds will be invested.
The notifications for full redemption were submitted to KKR Prisma Codlin Fund and Newport Monarch Fund on September 19, 2018. Total assets remaining in the hedge fund-of-funds are approximately $32 million as of mid-January. A total of $334.7 million has been received from Prisma and $193.5 million from PAAMCO. All remaining distributions will be transferred to the Cash account when received.
Open item from December 7, 2017 11. The Investment Committee recommends that based on the recommendation of staff and
SURS investment consultant, that staff be able to coordinate a full redemption from the UBS Trumbull Property Fund and use proceeds to invest $300 million in core-plus, open-end real estate fund(s).
The notification was submitted on December 21, 2017. SURS has received total distributions of $299 million as of mid-January. As the exit queue has significantly increased, it may take a few years before the remaining proceeds, approximately $95 million, are returned.
Please advise if you have any questions prior to the January 30, 2020 Investment Committee meeting.
Exhibit 2
MEMORANDUM
BOSTON CHICAGO LONDON MIAMI NEW YORK PORTLAND SAN DIEGO
411 NW Park Avenue
Suite 401
Portland, OR 97209
503.226.1050
Meketa.com
TO: Board of Trustees, State Universities Retirement System
Doug Wesley, CFA – Chief Investment Officer,
Ellen Hung, CFA - Deputy Chief Investment Officer
FROM: Neil Rue, CFA, Colin Bebee, CFA, David Sancewich,
Meketa Investment Group
DATE: January 30, 2020
RE: Life Settlements and Other Niche Alternative Risk Premia Strategies
Summary
Over time, the global capital markets continue to evolve and new investment strategies come to market
as potential enhancements to institutional investment portfolios. One of Meketa’s/Staff’s primary duties
is to monitor and research these sorts of developments for their relevance to the SURS investment
portfolio. Over the last handful of years, a prominent area of growth has been in illiquid, niche
alternative risk premia (ARP) strategies. Two examples of niche ARP strategies include Life
Settlements and Reinsurance, among others. While such strategies may be able to help enhance the
overall risk-return posture of the SURS investment portfolio, Meketa and Staff recommend that the
Board postpone their consideration until the implementation of the new portfolio structure is more
complete (particularly with respect to the new ARP component) and the Board has deliberated further
on the merits/tradeoffs of specific niche ARP strategies.
Discussion
As discussed throughout the Meketa-SURS relationship, examining the risk factor exposures of
investment strategies is paramount to understanding their behavior and portfolio function, and building
a corresponding investment portfolio. In particular, understanding the risk premiums (or risk premia)
that SURS is exposed to is an important process. Risk premia can generally be grouped into two
categories:
Traditional Risk Premia Examples Alternative Risk Premia Examples
Equity
Duration/Interest Rate Risk
Credit
Illiquidity
Value
Carry
Momentum
Trend
Defensive
Volatility
Other (i.e., reinsurance, longevity, etc.)
Exhibit 3
January 30, 2020
Page 2 of 3
The key underlying principle behind the concept of a “risk premium” is that investors are paid a
premium/return (on average and over time) for bearing a specific risk. As part of the Crisis Risk Offset
class, SURS has begun allocating assets to alternative risk premia (ARP) managers that are harvesting
a variety of alternative risk premia across asset classes in market-neutral (i.e., avoiding traditional risk
premia) constructs. These strategies are expected to produce uncorrelated return streams over time
and further diversify the SURS investment portfolio. An important characteristic of these currently
approved strategies is that they are liquid and can be rebalanced relatively rapidly.
The liquid ARP strategies that SURS is stepping into represent the first venture for SURS into this
dedicated market segment. In addition to these liquid variants, the investment management
community has also begun to offer more illiquid strategies that harvest different risk premia. While
these strategies can potentially be additive to an investment portfolio, it is always prudent for
institutional investors to first gain experience in the respective liquid strategies prior to venturing into
illiquid strategies.
As a brief background, two commonly discussed illiquid, niche alternative risk premia strategies include
Life Settlements and Reinsurance. While both of these strategies can potentially provide uncorrelated
return streams and are supported by economic intuition, they are not necessarily appropriate for all
portfolios. Brief descriptions of these strategies are provided below:
• Life Settlements: These strategies consist of portfolios of various life insurance policies. The capital that is provided to these strategies is used to purchase life insurance policies (and
make the remaining premium payments) and the return on the investment occurs when the
insured individual dies, in which case the life insurance policy benefit is paid to the investor
rather than the insured. Since the main risk in this strategy is individuals living longer than
expected (i.e., experience “longevity risk”), this strategy may not be appropriate for public
defined benefit plans (which are seeking to mitigate/minimize longevity risk). While this risk
is completely unrelated to the global capital markets (i.e., stocks and bonds), this same risk
is already embedded in the liability structure of a public plan.
• Reinsurance: This strategy is effectively insurance for insurance companies. For a variety of reasons, direct insurers often want to offload certain parts of their insurance
policies/books, and one way in which they accomplish this is by buying insurance on their
own policies (i.e., buying reinsurance). Reinsurance providers often exist as either dedicated
companies (e.g., Swiss Re) or as investment funds (i.e., alternative risk capital providers).
The policies that are sold/purchased almost exclusively pertain to major natural
catastrophes/perils (e.g., earthquakes, hurricanes, etc.). Investors in these strategies
receive the insurance premiums as the return but are exposed to potentially large losses if
perils occur within the specified coverage period. While this risk is completely unrelated to
the global capital markets, it may not be prudent for certain public plans (e.g., Florida plans)
whose tax revenues may be negatively impacted by the damages of certain natural perils.
Exhibit 3
January 30, 2020
Page 3 of 3
Illiquid, niche alternative risk premia strategies are a growing area in the institutional marketplace.
Meketa and Staff plan on continuing to research these areas and will provide the SURS Board with
further education and recommendations in the future after the new portfolio structure has evolved and
matured through its current implementation phase. It is essential that the SURS Board gain experience
with the behavior of its new liquid alternative risk premia strategies before considering further
enhancements.
NAR/CB/DPS/hls/ndb
Exhibit 3
MEMORANDUM
BOSTON CHICAGO LONDON MIAMI NEW YORK PORTLAND SAN DIEGO
411 NW Park Avenue
Suite 401
Portland, OR 97209
503.226.1050
Meketa.com
TO: Board of Trustees, State Universities Retirement System
Doug Wesley, CFA – Chief Investment Officer,
Ellen Hung, CFA - Deputy Chief Investment Officer
FROM: Neil Rue, CFA, Colin Bebee, CFA, David Sancewich,
Meketa Investment Group
DATE: January 30, 2020
RE: Review of Current Investment Beliefs and Recommendation to Add ESG Belief Statement
Summary
After several meetings of discussion and deliberation, the SURS Board approved an initial list of nine
Investment Beliefs in August 2018. These Investment Beliefs provide an important foundation for the
investment policy and decision-making framework at SURS.
Attachment A lists out SURS’ current Investment Beliefs. The Investment Beliefs are also located on
SURS’ website at http://www.surs.com/surs-investment-beliefs.
Given the change in the SURS Board over the last several months (5 of 10 board members changed),
a review of the Investment Beliefs by the Board is warranted. While there is a low expectation that any
of the Investment Beliefs would change, it is a priority of the investment fiduciary process for Board
members to acquaint themselves with the Investment Beliefs, understand why each Belief exists, and
to ask questions about and/or provide commentary on any of the Investment Beliefs, where needed. In
addition, the Board may have some interest in adding an Investment Belief related to Environmental,
Social & Governance (ESG) issues. Draft language for an ESG-related investment belief is presented
below. Meketa and Staff recommend that the Board approve the ESG-related investment belief.
Discussion
From the beginning of 2018 through September of that same year, the SURS Board deliberated on,
developed (through a survey process), and approved an initial set of Investment Beliefs. Documenting
and memorializing Investment Beliefs is a best-practices approach for fiduciaries and institutional
investment management.1 Investment Beliefs are typically defined as a set of guiding principles for
investing. They help set the context for all other investment activities, including determining investment
policy.
SURS’ nine current Investment Beliefs cover a spectrum of topics, including the importance of asset
allocation, passive vs. active management, investing in private markets, and the importance of diversity,
1 Investment Governance for Fiduciaries, Michael Drew and Adam Walk, CFA Institute Research Foundation, Chapter 2: Investment Beliefs:
Decision Making in Context, ©2019; Meketa Investment Group, “Investment Beliefs,” 2019.
Exhibit 4
January 30, 2020
Page 2 of 4
among others (see Attachment). It is expected that, while they can be adjusted/revised from
time-to-time, a set of Investment Beliefs would reflect long-standing guiding principles of an investing
entity and its fiduciaries.
Since, over the last few months, the SURS Board has experienced significant change (5 new board
members have replaced legacy board members), reviewing the Investment Beliefs now achieves two
basic functions: (i) informs new Board members of their existence/importance and (ii) allows for
discussion and feedback as to their sufficiency and/or relevance to current Board priorities.
Incorporating ESG issues into SURS’ Investment Beliefs
In late 2019, the Illinois State legislature passed Public Act 101-0473 which revised the Illinois Pension
Code. This act requires that pension funds within the jurisdiction of Illinois integrate ESG-related
issues/factors into their investment decision-making processes and portfolios. The Act also stipulates
that pension funds revise their investment policies by 1/1/2020 to reflect this requirement. However,
SURS’ Investment Beliefs have not yet been revised to place a priority on ESG-related investment
matters.
It was clear from the December 2019 meeting deliberations (and discussions from other prior
meetings) that the Board believes ESG consideration(s) should be integrated into SURS’ investment
decision-making and activities, in addition to closer monitoring of proxy voting activities. While some
of this integration is currently taking place, any future approach(es) to ESG integration is(are) expected
to be more explicit and measurable as SURS’ ESG investment activities evolve over time.
In fact, according to the Illinois State Treasurer, there are three steps to implement and comply with
the Act:
1. Update SURS investment policy to include the consideration of sustainability factors:
After reviewing ESG concepts as part of its December 2019 meeting agenda, the SURS Board
approved new policy language to reflect an emphasis on and consideration of ESG-related
factors. By design, this newly-adopted language is consistent with policy language utilized
by other Illinois state-sponsored peer systems.
New policy language specifies that sustainability factors will be considered in monitoring
SURS’s proxy voting, and in the selection and ongoing monitoring of SURS’s investment
managers and mandates, and other service providers as appropriate. Such factors include
but are not limited to: (1) corporate governance and leadership factors; (2) environmental
factors; (3) social capital factors; (4) human capital factors; and (5) business model and
innovation factors.
2. Talk to fund managers:
SURS will maintain open communication with its managers regarding consideration and
integration of sustainability factors into their investment practice as appropriate. Changes
to managers’ current investment processes are not required per the PA.
Exhibit 4
January 30, 2020
Page 3 of 4
3. Other requirements:
SURS will consider any adjustment of roles and responsibilities of staff and contractors at
the agency’s discretion.
Given these expectations, a key first step is reflecting the Board’s proactive stance to addressing ESG
issues through a specific investment belief that addresses ESG explicitly.
Below is a draft Investment Belief establishing ESG-related issues as an investment priority for SURS:
Addressing material environmental, social, and governance-related (ESG) issues can lead to
positive portfolio and governance outcomes. To integrate critical ESG issues into its investment
process, SURS may apply certain investment and/or engagement strategies/approaches to its
portfolio investments. In addition, proxy rights attached to shareholder interests in public
companies are also “plan assets” of SURS and represent a key mechanism for expressing SURS’s
positions relating to specific ESG issues.
The implication of adopting this belief statement is that SURS will become more intentional and
systematic in addressing ESG-related issues across its portfolio’s assets and develop an institutional
framework for executing ESG-related directives. Along these lines, SURS’ current ESG-related
investment activities will likely require heightened monitoring and reporting. In addition, new
models/procedures for incorporating ESG considerations may also be considered in the near future, in
the spirit of the newly-adopted Illinois statute.
NAR/CB/DPS/hls/ndb
Exhibit 4
Attachment A
Page 4 of 4
SURS Investment Beliefs
SURS believes that an appropriately diversified strategic allocation policy is the primary policy tool for
maximizing the investment program’s long-term return in light of its risk profile. The timing and
magnitude of projected SURS’s employer contributions and future benefit payments (i.e., its funding policy) can
have significant cash flow implications and thus should receive explicit consideration during SURS’s
risk-framing and asset allocation decision-making process.
SURS believes that, in order to achieve its objectives, it must incur a certain amount of investment risk
that is tied to economic performance. Exposure to economic growth comes about primarily through the
equity risk premium which, while highly variable, produces a significantly positive long-term return.
SURS believes that diversification within strategic classes helps to mitigate the risks of the class.
Appropriate manager diversification helps to maximize the breadth of capturing alpha after accounting for the
major biases in a portfolio. As a result, added value consistency should improve.
SURS believes disciplined allocation of capital is necessary to manage the systematic risk of the portfolio
and maximize the likelihood of achieving its long-term expectations. Key examples of maintaining
disciplined capital allocation includes consistently rebalancing back to strategic targets where appropriate and
dollar-cost averaging (and/or pacing) new capital allocations over time into both public-market and private-
market portfolios.
SURS believes that utilization of passive approaches in highly-efficient publicly-traded markets should
take priority because it is extremely difficult to add consistent value, net of fees, in these markets. In addition,
passive management typically provides for rapid, relatively liquid, low-cost exposure to the major risk
premiums of the global investment markets.
SURS believes active management can prove beneficial in certain market segments when there is
evidence that active management can produce consistent significantly-positive, net of fee performance over
various market cycles.
SURS believes that investment costs (fees, expenses, and frictional costs) directly impact investment
returns and should be monitored and managed carefully. Such costs should be evaluated relative to both
expected and realized returns and take into account appropriate alignment of interest considerations.
SURS believes that the private markets should produce higher returns than public markets due to
exposure to the illiquidity risk premium. While illiquidity risk can cause a portfolio’s risk to increase, over the
long-term the illiquidity risk premium is positive and material.
SURS is committed to enhancing diversity by incorporating emerging (minority, woman-owned, disability-
owned) investment managers into the portfolio.
SURS believes that addressing material environmental, social, and governance-related (ESG) issues can
lead to positive portfolio and governance outcomes. To integrate ESG issues into its investment process
SURS may apply certain investment and/or engagement strategies/approaches to its portfolio investments. In
addition, proxy rights attached to shareholder interests in public companies are also “plan assets” of SURS and
represent a key mechanism for expressing SURS’s positions relating to specific ESG issues.
Exhibit 4
BOSTON CHICAGO LONDON MIAMI NEW YORK PORTLAND SAN DIEGO MEKETA.COM
Asset Allocation Policy and
Stabilized Growth Review
State Universities Retirement System
January 30, 2020
Exhibit 5
State Universities Retirement System
MEKETA INVESTMENT GROUP
Table of Contents
1. Asset Allocation Policy Review
2. Stabilized Growth Component Review
Page 2 of 28
Exhibit 5
State Universities Retirement System
MEKETA INVESTMENT GROUP
Asset Allocation Policy Review
Page 3 of 28
Exhibit 5
State Universities Retirement System
Asset Allocation Policy Review
MEKETA INVESTMENT GROUP
Asset/Liability Study Recap
In September 2018, the Board approved a new long-term allocation policy.
The new structure represents a shift from an asset class paradigm to one focused on portfolio functions and underlying risk factors.
Current SURS Long-term Allocation Policy
Principal Protection
8%
Inflation Sensitive
6%
Broad Growth
66%Crisis Risk Offset
20%
Page 4 of 28
Exhibit 5
State Universities Retirement System
Asset Allocation Policy Review
MEKETA INVESTMENT GROUP
Principal Protection
Inflation Sensitive
Broad Growth
Crisis Risk Offset
Each major portfolio class/component can be classified based on its primary role:
Growth or Diversifying.
Diversifying
Growth
Page 5 of 28
Exhibit 5
State Universities Retirement System
Asset Allocation Policy Review
MEKETA INVESTMENT GROUP
Growth
Functional/Risk-based Allocation Framework
Risk-taking assets/strategies that produce high total returns relative to other classes
Requires exposure to economic engine in order to succeed.
Often utilize significant levels of financial/economic leverage.
Often linked closely to overall economic success/failure.
Long-term holding periods often result in significant growth in purchasing power/wealth.
Page 6 of 28
Exhibit 5
State Universities Retirement System
Asset Allocation Policy Review
MEKETA INVESTMENT GROUP
Functional/Risk-based Allocation Framework
Anchor
Low volatility (e.g., 2-6%).
Known source of liquidity at all times.
Typically cash + 0-2% returns.
Not powerful/volatile enough to materially rebalance away from and into
Public Equity.
Offset
High volatility (e.g., 10-20%) / capital efficient.
Zero-to-negative conditional correlation to public equity.
Certain implementations work in inflationary crises and others work in
deflationary crises.
Can be rebalanced away from and into Public Equity.
Diversification
Two Forms of Diversification
Page 7 of 28
Exhibit 5
State Universities Retirement System
Asset Allocation Policy Review
MEKETA INVESTMENT GROUP
Underneath the high level classifications of Growth and Diversifying, we recognize that there is a range of strategies with different attributes.
Three strategic components within each major group; each consisting of a wide, and evolving, range of potential strategies.
Role Groups Description
Gro
wth
Non-Traditional
Growth
Provide growth in excess of Traditional Growth investments (i.e., Public Equity markets) through exposure to investments driven mainly by
exposure to both the equity risk and illiquidity risk premiums. (i.e. Private Equity and Non-Core Real Assets).
Traditional
Growth
Provide growth in-line with traditional Public Equity markets through Global Public Equity investments and those of similar risk/return (e.g. Global
Equity and REITS).
Stabilized
Growth
Provide growth through strategies that are exposed to equity market beta, exhibiting expected returns similar to Traditional Growth but with 50-
75% of the volatility (e.g., Credit, Options strategies, and Levered Core Real Assets).
Div
ers
ifyin
g
Inflation
Protection Designed to primarily help protect the portfolio during periods of high inflation.
Principal
Protection
Provide an anchor to the portfolio by exhibiting low volatility with minimal or zero exposure to the equity risk premia. Designed to provide
consistent, stable returns during all or most market environments and preserve principal during periods where growth investments are
experiencing significant drawdowns (e.g., Core Fixed Income).
Crisis Risk
Offset
Provide an offset to portfolio growth risk through liquid exposures to systematic market and non-market based risk premiums expected to
exhibit offsetting behavior to growth investments during periods of significant drawdowns (e.g., Long Duration, Systematic Trend Following, and
Alternative Risk Premia). Focused on deflationary crises.
Newly Implemented
Page 8 of 28
Exhibit 5
State Universities Retirement System
Asset Allocation Policy Review
MEKETA INVESTMENT GROUP
The broad institutional community continues to evolve from traditional asset class frameworks to those more
functional/risk-based.
Asset Class Framework
Organizes investments based on type of instrument.
Fundamental drivers of results not prioritized.
Often leads to “diversification-in-name-only.”
Portfolios typically contain “Alternatives” allocations that are catch-all buckets.
Works well during “normal times.”
Historically applicable when investments were primarily public equities and government
bonds.
Functional/Risk-based Framework
Organizes investments by primary risk drivers and/or
function/role.
Improves transparency into the portfolio’s true risk posture.
Incorporates portfolio flexibility to address continually changing product offerings.
Classes more commonly contain mixtures of active/passive and public/private strategies.
Shifts the oversight prism to “bad times.”
Requires new strategies to be truly additive in an economic/intuitive sense.
Improves full-cycle and intra-A/L portfolio risk positioning (i.e., avoids risk drift).
Page 9 of 28
Exhibit 5
State Universities Retirement System
Asset Allocation Policy Review
MEKETA INVESTMENT GROUP
After two bear markets in the 2000s, several sophisticated institutional investors recognized that the traditional
asset allocation paradigm fell short.
Simply investing in more classes did not/has not provided a solution.
Portfolios still exhibit high linkages to economy (procyclical).
High “growth” (or equity-related) factor exposure.
Growth factor exposure pervasive across numerous investment classes.
Traditional statistical measures of diversification not helpful.
Page 10 of 28
Exhibit 5
State Universities Retirement System
Asset Allocation Policy Review
MEKETA INVESTMENT GROUP
Over the last 10 – 15 years, institutional investors have begun to consider more functional/risk-based allocation
paradigms:
In 2005/2006 Meketa began advocating “purpose-driven” policy paradigm.
“The first and most fundamental challenge is the need for increased flexibility, a quality not necessarily encouraged
in the established paradigm…The new risk management paradigm removes the old boundaries and constraints of
asset management silos…I prefer to consider portfolios as bundles of risk exposures.”
Brian Singer, UBS Asset Management, 2006
“Risk factors are to assets what nutrients are to food. We eat food because it tastes good, but more importantly
because food contains nutrients that are essential for life. Food contains different bundles of these nutrients and
similarly, asset classes contain different bundles of factors and those factors give us different risk premiums.”
Andrew Ang, Blackrock, 2014
Page 11 of 28
Exhibit 5
State Universities Retirement System
Asset Allocation Policy Review
MEKETA INVESTMENT GROUP
While the pros outweigh the cons of a functional/risk-based allocation framework, it does have certain drawbacks.
Main Drawbacks of Functional/Risk-based Allocation Framework
Partial mismatch between allocation framework and manager strategy offerings. Plan sponsors still have to invest in asset classes and related strategies.
Difficult to break the long-standing, industry-wide asset class verbiage and semantics.
Increased challenge of peer allocation comparisons and/or statutory reporting requirements.
Staffing and consultant coverage/overlap can be more complicated.
Page 12 of 28
Exhibit 5
State Universities Retirement System
Asset Allocation Policy Review
MEKETA INVESTMENT GROUP
New allocations incorporate material changes relative to the prior policy.
New targets improve the probabilities of achieving the System’s objectives. Significant improvement in expected System risk profile.
Prior Policy
(%)
New LT
Targets
(%)
Ass
et
On
ly S
tats
Median Comp. Return 6.9 7.0
Average Standard Deviation 12.9 8.8
Best Calendar Year 27.0 22.5
Worst Calendar Year -32.8 -19.4
A/L
Sta
ts
Average Worst 10% FR Year 5 27.5 32.8
Scenarios < Lower FT Year 5 28.3 21.9
Median FR Year 15 52.0 51.6
Avg. Prob. > Lower FT 2028-37 59.7 65.5
Prior
Policy
New LT
Targets
Broad
Growth
Non-Traditional Growth 9.0 15.0
Traditional Growth 54.0 25.0
Stabilized Growth 23.5 26.0
Diversifying
Inflation Protection 6.0 6.0
Principal Protection 7.5 8.0
Crisis Risk Offset 0.0 20.0
Policy Allocations Asset-Liability Model Output
Page 13 of 28
Exhibit 5
State Universities Retirement System
Asset Allocation Policy Review
MEKETA INVESTMENT GROUP
$0.10
$1.00
$10.00
$100.00
0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20
$ V
alu
e -
Lo
g S
cale
Year
$0.10
$1.00
$10.00
$100.00
0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20
$ V
alu
e -
Lo
g S
ca
le
Year
Prior Policy
New LT Targets
Median long-term
compound
return: 7.0%
8.9%
5.0%
Median long-term
compound
return: 6.9%
9.8%
4.0%
Asset-Liability Study – Expected Return Output
Improvement in long-term expected return.
Much tighter range of return paths.
*Based on 2018 capital market assumptions Sources: Meketa
Page 14 of 28
Exhibit 5
State Universities Retirement System
Asset Allocation Policy Review
MEKETA INVESTMENT GROUP
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
2017 2019 2021 2023 2025 2027 2029 2031 2033 2035 2037 2039 2041 2043 2045
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
2017 2019 2021 2023 2025 2027 2029 2031 2033 2035 2037 2039 2041 2043 2045
Asset-Liability Study – Funding Ratio Output
Prior Policy
New LT Targets
Funding ratio paths bunched more toward planned path.
Trade-off: reduction of both extreme high and low funding paths.
*Based on 2018 capital market assumptions Sources: Meketa, GRS
Page 15 of 28
Exhibit 5
State Universities Retirement System
Asset Allocation Policy Review
MEKETA INVESTMENT GROUP
Implementation Progress
SURS is currently in the initial implementation phase for the new long-term allocation policy.
At a 5% initial weight for the CRO class, the underlying components represent less than 2% (each) of the Total Portfolio.
The phase-in process helps to minimize portfolio disruptions and market timing risks. Each step of the process is expected to occur around fiscal year-ends.
Current
Policy
Step #2
(7/1/2020)
Step #3
(7/1/2021)
Step #3
(7/1/2022)
New LT
Targets
Broad
Growth
Non-Traditional Growth 8.0 9.0 11.0 13.0 15.0
Traditional Growth 47.0 41.0 29.0 27.0 25.0
Stabilized Growth 26.0 26.0 26.0 26.0 26.0
Diversifying
Inflation Protection 6.0 6.0 6.0 6.0 6.0
Principal Protection 8.0 8.0 8.0 8.0 8.0
Crisis Risk Offset 5.0 10.0 20.0 20.0 20.0
Approximate Phase-in Schedule
Page 16 of 28
Exhibit 5
State Universities Retirement System
Asset Allocation Policy Review
MEKETA INVESTMENT GROUP
Summary
New long-term allocation policy that reflects a functional, risk-based allocation framework.
Each major strategic class now reflects their major roles and risk drivers.
Along with the new framework, the addition of new strategies (i.e., within Crisis Risk Offset) and modifications to class weights are expected to improve the long-term return and volatility/drawdowns of the SURS
portfolio.
Principal Protection8%
Inflation Sensitive6%
Broad Growth66%
Crisis Risk Offset20%
New SURS Long-term Allocation Policy
Page 17 of 28
Exhibit 5
State Universities Retirement System
MEKETA INVESTMENT GROUP
Stabilized Growth Component Review
Page 18 of 28
Exhibit 5
State Universities Retirement System
Stabilized Growth Component Review
MEKETA INVESTMENT GROUP
Stabilized Growth Component
One of the three components within Broad Growth is called Stabilized Growth.
Overarching goal: provide long-term returns similar to that of Public Equity but with 50-75% of the volatility.
During normal times – Stabilized Growth can be complementary to Traditional Growth (i.e., Public
Equity).
During bad times – lower exposure to the same risk (i.e., correlate together on the downside).
Relative to other classes/components, Stabilized Growth has the potential to contain the most diverse/heterogeneous set of asset classes and strategies.
Role Groups Description
Bro
ad
Gro
wth
Non-Traditional
Growth
Traditional
Growth
Stabilized
Growth
Provide growth through strategies that are exposed to equity market beta, exhibiting expected returns similar to Traditional Growth but with
50-75% of the volatility (e.g., Credit, Options strategies, and Levered Core Real Assets).
Page 19 of 28
Exhibit 5
State Universities Retirement System
Stabilized Growth Component Review
MEKETA INVESTMENT GROUP
In order to achieve “equity-like returns but with lower volatility,” strategies within Stabilized Growth inherently
demonstrate a beta (i.e., scaled correlation) to the equity markets.
Example Asset Classes and Corresponding Full-Cycle Equity Betas
*Based on 2019 capital market assumptions.
Page 20 of 28
Exhibit 5
State Universities Retirement System
Stabilized Growth Component Review
MEKETA INVESTMENT GROUP
While full-cycle equity betas may appear low, they are often increased during times of market stress, further
reflecting their commonality with Global Equity.
Example Asset Classes and Corresponding Bear Market Equity Betas
*Based on 2019 capital market assumptions and approximate annual conditional correlations from 1970-2019.
Page 21 of 28
Exhibit 5
State Universities Retirement System
Stabilized Growth Component Review
MEKETA INVESTMENT GROUP
In order for strategies within Stabilized Growth to achieve equity-like returns while exhibiting betas of 0.2-0.7 to Global Equity, they must also harvest other sources of return/risk.
These other sources of return/risk are additional “risk premia.”
These additional risk premia can be diversifying to equity risk during “normal times,” but they often correlate with equity risk during stressed market environments.
Ex. Credit risk, volatility risk, and illiquidity risk typically generate negative returns during equity
drawdown periods.
Page 22 of 28
Exhibit 5
State Universities Retirement System
Stabilized Growth Component Review
MEKETA INVESTMENT GROUP
It is the combination of these multiple risk premia that results in Stabilized Growth strategies exhibiting equity-like returns but with lower volatility.
Example: ������������� ���������� ≈ (0.6 × ������������) + (1.0 × ����������������)
Every strategy can be broken down and examined via its various risk premia components.
Volatility Risk Premia
Equity Risk Premia
+ Multiple sources of return for Options Strategies.
Page 23 of 28
Exhibit 5
State Universities Retirement System
Stabilized Growth Component Review
MEKETA INVESTMENT GROUP
During the 2018 Asset/Liability Study and the initial portfolio restructuring, SURS’s Stabilized Growth component was modeled to account for SURS’s pre-existing strategies.
Stabilized Growth Construct During 2018 Asset/Liability Study
Geometric Return
(%)
Standard Deviation
(%) Comments/Notes
Sta
biliz
ed
Gro
wth
Hedged Strategies 4.75 9.00 Each strategy contains a high statistical or economic
correlation/beta to Global Equity but
with materially less volatility
Each strategy exhibits downside protection relative to Global Equity
Exposure to risk premiums in addition to equity market beta (e.g.,
volatility risk premia) tends to
enhance expected return
EMD 5.60 12.80
Options Strategies 6.50 13.00
Credit Fixed Income 5.50 12.20
Core Real Assets1 6.05 13.33
1 Ex: Core Real Estate, Core Infrastructure, Core Timber, Core Agriculture, etc.
Page 24 of 28
Exhibit 5
State Universities Retirement System
Stabilized Growth Component Review
MEKETA INVESTMENT GROUP
Due to portfolio transitions (e.g., hedge funds) and structure reviews (e.g., fixed income), the Stabilized Growth component was marginally reconstituted as it was implemented.
Modeled Structure
Sta
biliz
ed
Gro
wth
Hedged Strategies
EMD
Options Strategies
Credit Fixed Income
Core Real Assets2
This structure will continue to evolve over time in order to enhance its risk-return posture.
The first area of enhancement will likely occur in the Credit segment.
1 EMD and Other Credit Mandates were combined into a higher-level component as part of the Principal Protection and Credit structure reviews. 2 Ex: Core Real Estate, Core Infrastructure, Core Timber, Core Agriculture, etc.
Current Structure
Sta
biliz
ed
Gro
wth
Options Strategies
Credit1
Core Real Assets2
Evolution of Stabilized Growth
Page 25 of 28
Exhibit 5
State Universities Retirement System
Stabilized Growth Component Review
MEKETA INVESTMENT GROUP
Options
Strategies, 23%
Core Real
Assets, 23%
Credit, 54%
Current Stabilized Growth Structure
The component structure of Stabilized Growth was optimized during the 2018 Asset/Liability Study.
Underlying manager structure is reviewed on an ongoing basis.
The structure of Stabilized Growth will be reviewed as components evolve.
Staff and Meketa are currently in the process of examining additional market opportunities within Credit for potential inclusion.
5 funds
3 managers
5 managers
Page 26 of 28
Exhibit 5
State Universities Retirement System
Stabilized Growth Component Review
MEKETA INVESTMENT GROUP
In June 2019, the Board approved a Credit benchmark that consists of 15% Bank Loans, 30% High Yield, 30% EMD, and 25% Investment Grade.
This construct is expected to generate a yield in the 5-6% range.
All of these components are publicly-traded and focused on corporate borrowers/collateral.
Over time, this component can be enhanced by transitioning to a more private-oriented credit portfolio that will be expected to: 1) broaden the opportunity set to different borrower/collateral types (i.e., diversify), 2)
incorporate more floating-rate debt, and 3) increase the expected return.
Bank Loans,
15%
High Yield, 30%
EMD, 30%
Inv. Grade, 25%
SURS Opportunity Set / Benchmark
Page 27 of 28
Exhibit 5
State Universities Retirement System
MEKETA INVESTMENT GROUP
DISCLOSURES: This document is provided for informational purposes only. It does not constitute an offer of securities of any of the issuers that may be described herein. Information contained herein may have been
provided by third parties, including investment firms providing information on returns and assets under management, and may not have been independently verified. The past performance information contained in
this report is not necessarily indicative of future results and there is no assurance that the investment in question will achieve comparable results or that the Firm will be able to implement its investment strategy or
achieve its investment objectives. The actual realized value of currently unrealized investments (if any) will depend on a variety of factors, including future operating results, the value of the assets and market conditions
at the time of disposition, any related transaction costs and the timing and manner of sale, all of which may differ from the assumptions and circumstances on which any current unrealized valuations are based.
Neither Meketa nor Meketa’s officers, employees or agents, make any representation or warranty, express or implied, in relation to the accuracy or completeness of the information contained in this document or any
oral information provided in connection herewith, or any data subsequently generated herefrom, and accept no responsibility, obligation or liability (whether direct or indirect, in contract, tort or otherwise) in relation
to any of such information. Meketa and Meketa’s officers, employees and agents expressly disclaim any and all liability that may be based on this document and any errors therein or omissions therefrom. Neither
Meketa nor any of Meketa’s officers, employees or agents, make any representation of warranty, express or implied, that any transaction has been or may be effected on the terms or in the manner stated in this
document, or as to the achievement or reasonableness of future projections, management targets, estimates, prospects or returns, if any. Any views or terms contained herein are preliminary only, and are based on
financial, economic, market and other conditions prevailing as of the date of this document and are therefore subject to change.
The information contained in this report may include forward-looking statements. Forward-looking statements include a number of risks, uncertainties and other factors beyond the control of the Firm, which may result
in material differences in actual results, performance or other expectations. The opinions, estimates and analyses reflect Meketa’s current judgment, which may change in the future.
Any tables, graphs or charts relating to past performance included in this report are intended only to illustrate investment performance for the historical periods shown. Such tables, graphs and charts are not intended
to predict future performance and should not be used as the basis for an investment decision.
All trademarks or product names mentioned herein are the property of their respective owners. Indices are unmanaged and one cannot invest directly in an index. The index data provided is on an “as is” basis. In no
event shall the index providers or its affiliates have any liability of any kind in connection with the index data or the portfolio described herein. Copying or redistributing the index data is strictly prohibited.
The Russell indices are either registered trademarks or trade names of Frank Russell Company in the U.S. and/or other countries.
The MSCI indices are trademarks and service marks of MSCI or its subsidiaries.
Standard and Poor’s (S&P) is a division of The McGraw-Hill Companies, Inc. S&P indices, including the S&P 500, are a registered trademark of The McGraw-Hill Companies, Inc.
CBOE, not S&P, calculates and disseminates the BXM Index. The CBOE has a business relationship with Standard & Poor's on the BXM. CBOE and Chicago Board Options Exchange are registered trademarks of the
CBOE, and SPX, and CBOE S&P 500 BuyWrite Index BXM are servicemarks of the CBOE. The methodology of the CBOE S&P 500 BuyWrite Index is owned by CBOE and may be covered by one or more patents or
pending patent applications.
The Barclays Capital indices (formerly known as the Lehman indices) are trademarks of Barclays Capital, Inc.
The Citigroup indices are trademarks of Citicorp or its affiliates.
The Merrill Lynch indices are trademarks of Merrill Lynch & Co. or its affiliates.
FTSE is a trademark of the London Stock Exchange Group companies and is used by FTSE under license. All rights in the FTSE indices and/or FTSE ratings vest in FTSE and/or its licensors. No further distribution of
FTSE data is permitted with FTSE’s express written consent.
Page 28 of 28
Exhibit 5
To: Investment Committee From: SURS Staff Date: January 17, 2020 Re: Defined Contribution Implementation Update At the September 2019 Investment Committee meeting Voya Financial and AllianceBernstein were selected to be the sole recordkeeper and the income solution provider, respectively, for the Self-Managed Plan and the new Supplemental Plan, collectively referred to as the defined contribution plans. Over the past several months, staff has been working closely with Cammack, Voya, and AllianceBernstein to begin the transition process. It’s important to note that the transition project impacts most functional teams within SURS – accounting, IT, communications, defined contribution member services and counseling, legal, and investments. Finalization of the investment line-up and annuity provider are needed to complete other project requirements (i.e. communications and web interfaces). Staff and Cammack have had multiple calls to discuss the appropriate number and types of investment options to include in the plans. Cammack has also analyzed the universe of providers capable of offering an annuity option to the defined contribution plans. The Cammack presentation provides additional details on the process and recommended investment line-up and annuity provider. After AllianceBernstein’s selection in September they presented an overview of the Lifetime Income Strategy (LIS) in December. LIS, which will serve as the default investment option in each defined contribution plan, will give members the ability to save for retirement in a customized target-date fund while also dollar-cost averaging the purchase of guaranteed income for up to 15 years prior to retirement. In retirement, the LIS will allow members to receive guaranteed lifetime monthly income while maintaining control of their account balance. The AllianceBernstein presentation provides additional information on the design of the LIS customized glidepath. Next Steps Expected implementation of the redesigned Self-Managed Plan is June 1, 2020. The Supplemental Plan will be available in September 2020. Prior to implementation of the Self-Managed Plan, a communication campaign will take place. Employers and members will start receiving formal notifications and educational materials regarding the upcoming changes 90 days in advance of the go-live date. SURS and Voya representatives will visit employer campuses this Spring to hold educational seminars and counseling. A similar communication campaign will take place in advance of the September implementation of the Supplemental Plan. Staff and Cammack will continue to update the Board throughout the implementation process.
Exhibit 6
Recommendations • SURS Staff and Cammack jointly recommend the investment line-up for the defined
contribution plans be approved as presented.
• SURS Staff and Cammack jointly recommend that Principal Financial Group be retained as the annuity provider for the defined contribution plans, subject to successful contract negotiations.
Exhibit 6
Board Meeting | January 30, 2020
STATE UNIVERSITIES RETIREMENT SYSTEM OF ILLINOIS
Exhibit 7
Cammack Retirement Group | © 2020 All Rights Reserved | For Plan Sponsor Use Only
Board Recommendations Overview
Investment Menu
− Investment Selection Process
− Proposed Investment Menu
Annuity Provider Recommendation
Fee Assessment Recommendation
Appendix
− Investment Selection and Analysis Overview
− Performance vs. Benchmark
− Proposed Investments Strategy Overview
AGENDA
2
Exhibit 7
Cammack Retirement Group | © 2020 All Rights Reserved | For Plan Sponsor Use Only 3
RECOMMENDATIONS
• SURS, in partnership with Cammack Retirement Group and AllianceBernstein, present the following recommendations for the Board’s consideration and approval:
- Proposed investment menu for the Self-Managed Plan (SMP) and Supplemental Plan (SP) Presented by Cammack Retirement Group
- Retention of Principal Life Insurance Company as the provider of annuity services for the Self-Managed Plan (SMP) and Supplemental Plan (SP) Presented by Cammack Retirement Group
- Utilization of a per-participant (e.g. per-head) fee assessment structure for the Self-Managed Plan (SMP) and Supplemental Plan (SP) Presented by Cammack Retirement Group
- Custom Lifetime Income Solution (LIS) components developed from SURS demographic data Presented by Alliance Bernstein
- Revisions to the plan document for the Self-Managed Plan (SMP) and final version of the plan document for the Supplemental Plan (SP) Presented by SURS
BOARD RECOMMENDATIONSOverview
Exhibit 7
Cammack Retirement Group | © 2020 All Rights Reserved | For Plan Sponsor Use Only 4
INVESTMENT SELECTION PROCESSOverview
GOALS OF THE INVESTMENT MENU
• Thoughtfully structure the DC Plan investment menu to help participants improve retirement security by:
- Utilizing a default income solution,- Helping overcome behavioral biases through a simplified menu, and - Improving diversification opportunities through broad mandate offerings.
• The default investment option, AllianceBernstein’s Lifetime Income Solution, aims to provide an age-appropriate asset allocation during the accumulation phase and provide replacement income during the decumulation phase.
• The core menu aims to encourage better decision-making through an easy-to-understand and simple investment menu that includes a set of broadly diversified investment options.
KEY ELEMENTS FOR CONSTRUCTING AN EFFECTIVE MENU
• Maintain a long-term perspective to retirement plan investing
• Consider participant demographics and evaluate the most appropriate asset classes to include in the array
• Active vs. passive management
Exhibit 7
Cammack Retirement Group | © 2020 All Rights Reserved | For Plan Sponsor Use Only
Active Approach
• Managers can choose certain securities and sectors and to re-orient their portfolios when economic conditions change
• Consider managers who can deliver risk-adjusted returns year after year that are consistent with their added cost and who deviate from the index (avoid closet indexers)
• Can be helpful in mitigating risk in volatile environments
• Utilize in less efficient asset classes where there are more opportunities for managers to add alpha:
− Multi-Sector Bond− High Yield − Inflation Protected Bond− SMID Value/Growth − Foreign Large Value/Growth
5
INVESTMENT SELECTION PROCESSOverview
SURS’ and Cammack Retirement Group’s philosophy is to incorporate a range of both active and passive investments within a defined contribution retirement plan lineup.
Passive Approach
• Assures the risk in portfolio will be commensurate with the risk of the benchmark, therefore substantially reducing tracking error
• Benefits from low cost, limited transaction costs, transparency
• Utilize index funds in broad asset classes so participants are able to create an all passive portfolio, if desired:
− Intermediate-Term Bond− U.S. Large/SMID Blend− Foreign Large Blend− REIT
Exhibit 7
Cammack Retirement Group | © 2020 All Rights Reserved | For Plan Sponsor Use Only
DEFAULT INVESTMENT OPTIONAllianceBernstein’s Lifetime Income Solution
CORE ARRAYCAPITAL PRESERVATIONFIXED/STABLE MONEY MARKETVoya Fixed Plus Account III Vanguard Federal Money Market (VMFXX)1
CORE AND DIVERSIFYING FIXED INCOMEINTERMEDIATE MULTI-SECTOR HIGH YIELDState St U.S. Bond Index PIMCO Income Instl (PIMIX) PGIM High Yield R6 (PHYQX)
DOMESTIC EQUITYLARGE BLEND BlackRock Equity Index F
SMALL/MID VALUE SMALL/MID BLEND SMALL/MID GROWTHJanus Henderson Small-Mid Cap Value N (JVSNX) BlackRock Extended Equity Market F Delaware Smid Cap Growth R6 (DFZRX)
INTERNATIONAL/GLOBAL EQUITYFOREIGN LARGE VALUE FOREIGN LARGE BLEND FOREIGN LARGE GROWTHColumbia Overseas Value Class R State St Global All Cap Equity Ex U.S. Index Vanguard International Growth Fund Adm (VWILX)
INFLATION HEDGE INFLATION PROTECTED BOND REAL ESTATE/REITVanguard Inflation-Protected Secs Adm (VAIPX) Vanguard Real Estate Index Admiral (VGSLX)
SOCIALLY RESPONSIBLE ARRAYTIAA-CREF Social Choice Bond Instl (TSBIX)BlackRock MSCI ACWI ESG Index Fund F
1The fund will be used as the default fund for forfeitures and stale dated checks, and not for participant activity.
PROPOSED INVESTMENT MENUInvestment Managers
6
Exhibit 7
Cammack Retirement Group | © 2020 All Rights Reserved | For Plan Sponsor Use Only 7
• Cammack Retirement Group conducted an analysis of leading insurers whom could provide annuity services to the Self-Managed Plan (SMP) and Supplemental Plan (SP). The annuity providers included:
- Lincoln National Life Insurance Company- Metropolitan Tower Life Insurance Company- New York Life Insurance Company- Principal Life Insurance Company (current provider)
• The analysis included a comparison of key factors including the providers’ current financial strength ratings, compensation and incentive strategy, income illustrations and historical payment amounts as well as important elements unique to SURS’ operations, including the providers’ ability to:
- “Back pay” to the retirement date- Process QILDROS- Provide reporting to SURS
• Based on the review of these factors, Principal Life Insurance Company is recommended to be retained as the provider of annuity services to the Self-Managed Plan (SMP) and Supplemental Plan (SP).
ANNUITY PROVIDER RECOMMENDATIONOverview
Exhibit 7
Cammack Retirement Group | © 2020 All Rights Reserved | For Plan Sponsor Use Only 8
• A per-participant (e.g. per-head) fee assessment structure is recommended to be utilized for the Self-Managed Plan (SMP) and Supplemental Plan (SP) to pay the costs of plan administration.
• This is the most feasible assessment method to use for the Supplemental Plan (SP) since it is a new plan and there will not be assets in the plan to start.
• Characteristics of a per-participant fee assessment structure include:
- Greater fee transparency which may be easier for participants to understand as everyone pays the same dollar amount
- Fee amount is typically deducted from participant accounts on a quarterly basis
- May be considered more equitable as the cost of plan administration is the same for each participant regardless of account balance
- Considered a regressive fee since participants with smaller balances pay a larger percentage of their overall account balance
- Ensures the recordkeeper's fees do not increase as the plans' assets increase
FEE ASSESSMENT RECOMMENDATIONPer-Participant Fee Structure
Exhibit 7
Cammack Retirement Group | © 2020 All Rights Reserved | For Plan Sponsor Use Only 9
Appendix
Exhibit 7
Cammack Retirement Group | © 2020 All Rights Reserved | For Plan Sponsor Use Only 10
INVESTMENT SELECTION PROCESSOverview
SELECTION PROCESS
• Apply a proprietary screening process to focus on larger asset managers with the capital to invest in talent, technology, and risk management in order to sustain long-term capital gains
- Select investments based on investment objectives in accordance with the DC Investment Policy- Conduct both a quantitative and qualitative evaluation of the investments
• Consider reversion to the mean – Degree of excess returns for top quartile managers is highly volatile- Even if managers can generate substantial short-term outperformance, they often revert to the mean over time - No individual fund routinely outperforms its peers indefinitely
• Focus on the investment selection process and stay disciplined− Consider that investment options can go through periods of performance fluctuation and it may not be prudent to
immediately replace an investment option upon failing to meet the quantitative criteria
− Past performance is not a reliable indicator of future results
• Consider the process of making changes to the investment lineup− Avoid market timing – If determined it is necessary to replace or eliminate an investment option under the plans,
participant notifications and recordkeeper capabilities limit the plan sponsor’s ability to make rapid fund changes
− Best practice requires at least 30 days’ advance notice to participants of investments changes. Recordkeepers may take 8-10 weeks to make changes once the request is received from the plan sponsor.
Exhibit 7
Cammack Retirement Group | © 2020 All Rights Reserved | For Plan Sponsor Use Only 11
INVESTMENT ANALYSISOverview
Quantitative Analysis
• Performance vs. Peers
• Performance vs. Indices
• Risk Characteristics
• Risk-Adjusted Return
• Expenses vs. Peers
• Correlations and tracking error
• Style Purity
• Manager Tenure
Qualitative Analysis
• Investment research process and philosophy
• Fund strategy and objectives
• Consistency of stated strategy
• Portfolio manager and key personnel interviews
• Performance relative to economic conditions
• Portfolio risk management, controls, and operations
SURS and Cammack Retirement Group collaborated to conduct rigorous due diligence and research for all the recommended funds. The key metrics that were considered during the evaluation and selection process include, but are not limited to, the following:
Exhibit 7
Cammack Retirement Group | © 2020 All Rights Reserved | For Plan Sponsor Use Only
INVESTMENT ANALYSISPerformance vs. Benchmarks
Source: Morningstar as of 12.31.2019
Peergroup/ Investment Name Ticker Manager Tenure
TotalReturn Risk Risk Adj Return
R-Squared
Expense Ratiovs-
Peers
OverallMstarRating1 Year 3 Year 5 Year 10 Year
Intermediate Core-Plus Bond
TSBIX 7.25 8.73 4.47 3.55 - 2.70 1.05 97.86 0.37 4TIAA-CREF Social Choice Bond Instl
Category Average
BBgBarc US Agg Bond TR USD
8.94
8.72
4.12
4.03
3.14
3.05
4.27
3.75
2.59
2.91
0.97
0.82
82.30
100
0.78
-
3
-
Money Market-Taxable
VMFXX 12.00 2.14 1.58 1.01 0.51 0.18 -1.84 93.52 0.11 -Vanguard Federal Money Market Investor
Category Average
FTSE Treasury Bill 3 Mon USD
1.78
2.25
1.23
1.65
0.75
1.05
0.38
0.56
0.18
0.19
-7.05
-0.39
71.41
100
0.46
-
-
-
Inflation-Protected Bond
VAIPX 8.33 8.16 3.15 2.45 3.25 2.95 0.52 98.43 0.10 4Vanguard Inflation-Protected Secs Adm
Category Average
BBgBarc US Treasury US TIPS TR USD
7.92
8.43
2.90
3.32
2.15
2.62
2.80
3.36
2.85
3.00
0.41
0.56
82.80
100
0.70
-
2
-
Intermediate Core Bond
25.00State St US Bnd Indx SL Cl XIV
Category Average
BBgBarc US Agg Bond TR USD
8.74
8.05
8.72
4.04
3.59
4.03
3.05
2.72
3.05
3.73
3.55
3.75
2.92
2.68
2.91
0.83
0.72
0.82
99.99
94.05
100
0.022
0.65
-
4
3
-
Multisector Bond
PIMIX 12.75PIMCO Income Instl
Category Average
BBgBarc US Agg Bond TR USD
8.05
9.80
8.72
5.68
4.78
4.03
5.66
3.79
3.05
8.76
5.09
3.75
1.92
2.72
2.91
1.99
1.23
0.82
2.41
18.24
100
1.05
1.09
-
5
3
-
High Yield Bond
PHYQX 12.17PGIM High Yield R6
Category Average
BBgBarc US HY 2% Issuer Cap TR USD
16.26
12.64
14.32
7.36
5.32
6.36
6.84
4.91
6.14
7.65
6.44
7.55
4.19
3.95
4.07
1.32
0.95
1.13
96.89
87.70
100
0.40
0.98
-
5
3
-
2Collective trust fund where the total expense ratio is a gross-of-fee structure
12
Exhibit 7
Cammack Retirement Group | © 2020 All Rights Reserved | For Plan Sponsor Use Only
INVESTMENT ANALYSISPerformance vs. Benchmarks
Mid-CapValue
JVSNX 0.33 27.09 10.45 10.04 - 11.17 0.80 95.79 0.96 5Janus Henderson Small-MidCap Value N
Category Average
Russell Mid Cap Value TR USD
25.18
27.06
7.33
8.10
6.90
7.62
10.86
12.41
14.28
12.97
0.46
0.54
92.58
100
1.04
-
3
-
Mid-CapBlend
25.91 28.23 11.27 9.17 13.03 14.71 0.69 96.74 0.01842 4BlackRock Extended Equity Market FCategory Average
S&P MidCap 400 TR26.21
26.20
9.15
9.26
7.15
9.03
11.09
12.72
13.82
14.67
0.60
0.57
91.46
100
0.99
-
3
-
Mid-CapGrowth
DFZRX 3.50Delaware Smid Cap Growth R6
Category Average
Russell Mid Cap Growth TR USD
35.77
32.52
35.47
22.74
15.57
17.36
13.67
10.45
11.60
16.03
12.79
14.24
21.83
14.88
14.07
0.98
0.95
1.10
80.40
89.51
100
0.80
1.14
-
4
3
-
34.75BlackRock Equity Index F
Category Average
S&P 500 TR USD
31.55
28.79
31.49
15.32
13.25
15.27
11.75
9.76
11.70
13.63
12.03
13.56
12.11
12.27
12.10
1.11
0.96
1.10
100.00
94.12
100
0.00872
0.88
-
5
3
-
World Large Stock
- 26.87 - - - - - - 0.092 -BlackRock MSCI ACWI ESG Focus Index Fund F
Category Average
MSCI ACWI ESG Focus USD25.71
28.17
12.09
-
8.09
-
8.64
-
11.77
-
0.90
-
89.72
100
1.10
-
3
-
Foreign Large Value
COSYX 11.75Columbia Overseas Value Inst33
Category Average
MSCI EAFE Value NR USD
22.61
17.84
16.09
10.11
6.82
6.31
7.15
3.76
3.54
5.99
4.23
3.98
12.52
11.80
11.80
0.70
0.48
0.44
92.44
88.74
100
0.83
1.07
-
5
2
-
Peergroup/ Investment Name Ticker Manager Tenure
Total Return Risk Risk Adj Return
R-Squared
Expense Ratiovs-
Peers
OverallMstarRating1 Year 3 Year 5 Year 10 Year
Large Blend
Source: Morningstar as of 12.31.2019
2Collective trust fund where the total expense ratio is a gross-of-fee structure3The mutual fund version is shown for comparative purposes due to the lack of historical data for the collective trust fund, which has an expense ratio of 0.58
13
Exhibit 7
Cammack Retirement Group | © 2020 All Rights Reserved | For Plan Sponsor Use Only
INVESTMENT ANALYSISPerformance vs. Benchmarks
5.25State Street Glb All Cap Eq ex-US Idx K4
Category Average
MSCI ACWI Ex USA NR USD
Foreign Large Growth
VWILX 16.84 31.48 18.06 10.76 8.84 15.38 1.05 88.18 0.32 5Vanguard International Growth Adm
Category Average
MSCI ACWI Ex USA NR USD
27.83
21.51
12.69
9.87
7.25
5.51
6.88
4.97
12.07
11.50
0.85
0.73
84.21
100
1.11
-
3
-
Real Estate
VGSLX 23.58 28.94 8.37 7.17 11.97 12.06 0.59 98.75 0.12 4Vanguard Real Estate Index AdmiralCategory Average
MSCI US REIT GR USD27.18
25.84
8.39
8.06
6.78
7.03
11.25
11.93
11.80
12.22
0.62
0.56
90.75
100
1.12
-
3
-
21.49 9.90 5.58 - 11.51 0.73 99.13 0.07 3
21.59
21.63
9.09
9.84
5.37
5.71
5.19
5.21
11.49
11.50
0.68
0.73
92.68
100
0.95
-
3
-
SSGLX
Peergroup/ Investment Name Ticker Manager Tenure
TotalReturn Risk Risk Adj Return
R-Squared
Expense Ratiovs-
Peers
OverallMstarRating1 Year 3 Year 5 Year 10 Year
Foreign Large Blend
Source: Morningstar as of 12.31.2019
4The mutual fund version is shown for comparative purposes due to the lack of historical data for the collective trust fund, which has an expense ratio of 0.045
14
Exhibit 7
Cammack Retirement Group | © 2020 All Rights Reserved | For Plan Sponsor Use Only 15
INVESTMENT ANALYSISAsset Class Investment Option Strategy Overview
Fixed AccountVoya Fixed Plus Account III
• Primary objective is stability of principal • Guarantees principal and offers a guaranteed minimum interest rate for the life of the contract• Interest is credited using a portfolio method of interest rate crediting, where credited rates are
set monthly but may change at any time, subject to guaranteed minimums
Money MarketVanguard Federal Money Market (VMFXX)
• Invests primarily in U.S. government agency obligations• Invests at least 99.5% of its total assets in cash, government securities, and/or repurchase
agreements that are collateralized solely by government securities or cash (collectively, government securities)
• To be used for forfeiture account/suspense accounts and not used for participant activity
Intermediate Core Bond
State Street U.S. Bond Index(85744W226)
• Seeks to track the Bloomberg Barclays US Aggregate Bond index• 70% of the income generated from the lending program is allocated to the fund; 30%
allocated to State Street Global Markets as the lending agent• Loans of USD denominated securities are collateralized at 102% and accepts US Treasuries,
US agencies, and cash as collateral• Average on-loan % as of Q3 2019 was 6.5% with a yield of 0.3 bps • Low expense ratio of 2.0 bps
Multi-Sector Bond
PIMCO Income Instl (PIMIX)
• Seeks to maximize current income with ability to tactically shift portfolio weightings as a multi-sector, income-oriented strategy
• Managers have considerable flexibility to implement this mandate – They will opportunistically allocate across the credit spectrum and can invest in out-of-benchmark sectors, such as high yield, emerging markets, non-U.S. securities, and currencies. Like other PIMCO strategies, the manager can invest without limitation in derivatives.
• In recent years, securitized debt has featured prominently in the portfolio, with nearly two-thirds of the fund’s assets allocated to the sector. While performance has lagged over the last few quarters, primarily due to the strategy’s out-of-benchmark positioning and duration posture, the fund’s longer-term record remains intact.
Data analysis as of 12.31.2019
Exhibit 7
Cammack Retirement Group | © 2020 All Rights Reserved | For Plan Sponsor Use Only 16
INVESTMENT ANALYSISAsset Class Investment Option Strategy Overview
High-Yield BondPGIM High Yield R6 (PHYQX)
• Seeks to maximize current income by investing primarily in high-yield bonds rated Ba or lower by Moody's or BB or lower by Standard & Poor’s
• Boasts a well-designed process, a large experienced staff, robust analytics platform, and an overall impressive track record.
• Employs a rigorous fundamentally-driven process of evaluating companies, with a strong risk-controlled approach to portfolio construction. The manager’s focus on downside protection has led to outperformance during periods of heightened uncertainty, such as 2008, 2015 and 2018. These characteristics have led to strong risk-adjusted returns over a full market cycle.
• Does not have extreme sector bets relative to the index, with the largest over-/underweights around 3%
Large BlendBlackRock Equity Index F (06739T663)
• Seeks to track the S&P 500 using a replication indexing strategy• Loans