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MINUTES
Quarterly Meeting of the Investment Committee
of the State Universities Retirement System Thursday, June 6, 2019, 9:00 a.m.
Northern Trust Global Conference Center – 1st Floor
50 S. LaSalle St., Chicago, IL
The following trustees were present: Dr. John Engstrom, Mr. Richard Figueroa, Ms. Jamie-Clare Flaherty (via conference call), Dr. Fred Giertz, Mr. John Lyons, Dr. Steven Rock, Mr. Collin Van Meter and Mr. Antonio Vasquez. Others present: Mr. Martin Noven, Executive Director; Mr. Douglas Wesley, Chief Investment Officer; Ms. Ellen Hung, Deputy CIO; Ms. Kim Pollitt, Mr. Joe Duncan and Mr. Shane Willoughby, Senior Investment Officers; Ms. Bianca Green, General Counsel; Ms. Kristen Houch, Head of Legislative Affairs; Ms. Suzanne Mayer, Chief Benefits Officer; Ms. Kelly Carson and Ms. Annette Ackerman, Executive Assistants; Mr. Neil Rue, Mr. David Sancewich and Mr. Collin Bebee of Meketa; Ms. Barb Bernard and Ms. Sally Haskins of Callan; Mr. Tim Irvin of Cammack; Ms. Angela Myers of Loop Capital and Mr. Matt Pruitt and Mr. Cory Slaglione of ICMA-RC. Investment Committee roll call attendance was taken. Trustee Figueroa, present; Trustee Giertz, present; Trustee Rock, present; Trustee Van Meter, present; Trustee Vasquez, present. Trustee Rock made the following motion:
• That the trustees be allowed to participate via conference call for all meetings on June 6-7, 2019, pursuant to Section 7(a) of the Open Meetings Act due to their unavailability because of personal illness, employment purposes or family or other emergencies.
Trustee Engstrom seconded and the motion carried with all trustees present voting in favor.
APPROVAL OF MINUTES
Trustee Vasquez presented the minutes from the Investment Committee meetings of March 7, 2019. Trustee Rock made the following motion:
• That the minutes from the March 7, 2019 Investment Committee meeting be approved as presented.
Trustee Van Meter seconded and the motion carried with all trustees present voting in favor.
APPROVAL OF CLOSED SESSION MINUTES
Trustee Vasquez presented the closed session minutes from the Investment Committee meetings of March 7, 2019. Trustee Rock made the following motion:
• That the closed session minutes from the March 7, 2019 Investment Committee be approved and be opened.
Trustee Engstrom seconded and the motion carried with all trustees present voting in favor.
CHAIRPERSON’S REPORT There was no chairperson’s report.
CHIEF INVESTMENT OFFICER REPORT
Mr. Doug Wesley provided an update on the status report regarding approved action items for the Investment Committee. Mr. Wesley stated there is a delay on the full redemption from UBS Trumbull Property that was approved in December 2017. SURS has received quarterly distributions beginning in April 2018. However, distribution amounts have declined as the redemption queue has increased significantly. Our expectation is that the remaining proceeds, approximately $120 million, will likely not be received for another 12-18 months. Mr. Wesley indicated that the hedge fund-of-fund redemption is on pace with expectations stated in the manager guidelines. Finally, Mr. Wesley noted that staff and Meketa continue to work on implementing the approved strategic policy allocation targets. Any future updates will be discussed in regular committee materials.
CLOSED SESSION
Trustee Van Meter 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 Figueroa - aye Trustee Giertz - aye Trustee Rock - aye Trustee Van Meter - aye Trustee Vasquez - aye
RETURN TO OPEN SESSION
Upon motion by Trustee Rock, seconded by Trustee Giertz, the motion carried and the Investment Committee resumed its meeting in open session.
Trustee Van Meter made the following motion:
• That based on the recommendation of SURS staff and Meketa, the Investment Committee approve Torrey Cove as the discretionary private equity advisor for a five-year term, subject to successful completion of contract negotiations.
Trustee Rock seconded the motion which led to a roll call vote.
Trustee Ammons - absent Trustee Cross - absent Trustee Engstrom - aye Trustee Figueroa - abstain Trustee Flaherty - aye Trustee Giertz - aye Trustee Lyons - aye Trustee Rock - nay Trustee Van Meter - aye Trustee Vasquez - aye
The motion passed.
CLOSED SESSION Trustee Van Meter 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 Figueroa - aye Trustee Giertz - aye Trustee Rock - aye Trustee Van Meter - aye Trustee Vasquez - aye
RETURN TO OPEN SESSION
Upon motion by Trustee Rock and second by Trustee Figueroa, the motion carried and the Investment Committee resumed its meeting in open session.
ACTIVE PASSIVE EDUCATION
Mr. Colin Bebee of Meketa presented an educational overview of active vs. passive management. As part of the presentation, he explained the management styles and included the advantages and disadvantages of each. Mr. Bebee also discussed how to identify managers, the attributes of a good benchmark, and considerations for active management.
A copy of Meketa’s presentation titled “Active vs. Passive” is incorporated as part of these minutes as Exhibit 1. The education session lasted for 30 minutes; ending at 11:00 a.m.
CONSIDERATION OF PRINCIPAL PROTECTION AND CREDIT INVESTMENT
POLICY LANGUAGE AND BASIC STRUCTURE
Mr. David Sancewich of Meketa presented an overview of principal protection and credit structure. Mr. Sancewich reviewed the SURS fixed income allocation and discussed the goals for restructuring into credit and principal protection classes. After further discussion including an in-depth analysis of principal protection and credit structure, Mr. Sancewich discussed the SURS Investment Policy Statement and explained how to begin restructuring the fixed income portfolio. Trustee Rock made the following motions:
• That based on the recommendation of SURS staff and Meketa, the Investment Committee
approve the proposed amendments to the Investment Policy, as presented.
• That based on the recommendation of SURS staff and Meketa, the Investment Committee grant authority to staff to restructure the fixed income portfolio to implement the agreed upon goals for the principal protection and credit portfolios, subject to successful completion of contract negotiations.
Trustee Van Meter seconded and the motions carry with all trustees present voting in favor. A copy of Meketa’s presentation titled “SURS Principal Protection and Credit Review,” Meketa’s memorandum titled “SURS Investment Policy Statement” and SURS redline Investment Policy are incorporated as part of these minutes as Exhibit 2, Exhibit 3 and Exhibit 4.
CLOSED SESSION
Trustee Rock 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 Figueroa seconded and the motion carried in a roll call vote.
Trustee Figueroa - aye Trustee Giertz - aye Trustee Rock - aye Trustee Van Meter - aye Trustee Vasquez - aye
RETURN TO OPEN SESSION
Upon motion by Trustee Van Meter and second by Trustee Giertz, the motion carried and the Investment Committee resumed its meeting in open session.
DISCUSSION OF TRADITIONAL GROWTH STRATEGIC CLASS (Education Session)
Mr. Neil Rue of Meketa provided a recap of traditional growth allocations and a review of the current traditional growth class. He explained that the traditional growth class is currently SURS’ largest allocation. Mr. Rue discussed the current structure and the characteristics of a successful traditional growth program. Recommendations and next steps were discussed amongst trustees and staff. A copy of Meketa’s presentation titled “SURS Traditional Growth Review” is incorporated as part of these minutes as Exhibit 5. The education session lasted for 60 minutes; ending at 1:45 p.m.
QUARTERLY PERFORMANCE REVIEW
Mr. Sancewich presented an overview of financial markets, as of March 31, 2019, including total plan investment performance. A copy of Meketa’s presentation titled “SURS Quarterly Report” and a copy of the SURS presentation titled “SURS Board Report 3.31.19” are incorporated as part of these minutes as Exhibit 6 and Exhibit 7.
REAL ASSETS PERFOMANCE REPORT
Ms. Sally Haskins and Ms. Barbara Bernard of Callan provided a real assets performance summary, which included a market overview and performance report. Ms. Bernard also discussed the portfolio, diversification and returns for both real estate and infrastructure. In the review, Ms. Bernard discussed where the portfolio currently stands and provided historical and current context for various facets of the portfolio, including performance. A copy of Callan’s presentation titled “Real Assets Performance Review” is incorporated as part of these minutes as Exhibit 8.
REAL ESTATE MANAGER ALLOCATION ADJUSTEMENT
Mr. Shane Willoughby discussed the real asset allocation and current commitment to Dune Real Estate Fund IV. Mr. Willoughby stated that last year during the asset allocation discussion, the allocation amount to the real asset portfolio increased. As part of the review, staff and Callan are recommending an increased allocation to Dune Real Estate Fund IV, a non-core real estate fund that was originally approved for a $20 million commitment in September 2017. Ms. Bernard stated that Callan conducted a detailed due diligence of Dune. She further explained the evaluation process and strategy of Dune Real Estate Fund IV. Trustee Engstrom made the following motion:
• That based on the recommendation of SURS staff and Callan, the Investment Committee approve an add-on a commitment of $30 million to Dune Real Estate Fund IV, subject to successful completion of contract negotiations.
Trustee Rock seconded and the motion carried with all trustees present voting in favor.
A copy of SURS presentation titled “Non-Core Real Estate Recommendation,” Callan’s presentation titled “Dune Real Estate Fund IV,” and disclosure statements are incorporated as part of these minutes as Exhibit 9, Exhibit 10 and Exhibit 11.
INFORMATIONAL ITEMS NOT REQUIRING COMMITTEE ACTION The following items were provided for reference and are incorporated as part of these minutes:
1. Exhibit 12 – Projected Funding Status 2. Exhibit 13 – Private Equity Class Review June 2019 3. Exhibit 14 – U.S. Long Treasury Search Update 4. Exhibit 15 – Systematic Trend Following Search Update 5. Exhibit 16 – Alternative Risk Premia Search Update 6. Exhibit 17 – SURS Executive Summary Risk Memo 3.31.19 7. Exhibit 18 – SURS Executive Summary Risk Report 3.31.19 8. Exhibit 19 – SURS Summary Work Plan FY19-20
PUBLIC COMMENT
There were no public comments presented to the Investment Committee. There was no further business brought before the committee and Trustee Van Meter moved that the meeting be adjourned. The motion was seconded by Trustee Rock and carried with all trustees present voting in favor.
Respectfully submitted,
Mr. Martin Noven
Secretary, SURS Board of Trustees
MMN:kc
M E K E T A I N V E S T M E N T G R O U P
www.meketagroup.com
B O STONM A S S A CHU S E T T S
C H I C AGOI L L I N O I S
M I AM I
F L O R I DA
N EW Y ORKN EW Y ORK
P ORTLANDO R E GON
S AN D I E GO
C A L I F O RN I AL ONDON
U N I T E D K I N G DOM
State Universities Retirement SystemActive vs. Passive Discussion - 2019
June 2019
Colin Bebee, CFANeil Rue, CFA
Exhibit 1
Active vs. Passive Discussion 2019
Prepared by Meketa Investment Group
State Universities Retirement System
2
Executive Summary
• In the majority of market segments, active management has not added consistent value
• Difficult to identify persistent long-term outperforming managers before the fact
• Active management can add value in certain market segments
- Research shows outperformance in certain segments is persistent (e.g. Non-U.S. Equityand Core/Core Plus Fixed Income)
• Successful manager selection requires multi-tiered analysis
- e.g., factoring macroeconomic trends
- examining trends in fundamental characteristics
- portfolio holding analysis
- not based solely on (or over-emphasize) past performance
Exhibit 1
Active vs. Passive Discussion 2019
Prepared by Meketa Investment Group
State Universities Retirement System
3
Management
Style Definition Tracking Error Range
Active Attempting to add value over the returns of an index by selecting
securities within that index based on qualitative models and/or
fundamental research.>1.50%
Passive Attempting to replicate the returns of an index or benchmark by owning
the same securities, in the same proportions, as the index. 0% - 0.75%
Hybrid-Passive Very low-cost strategies that attempt to mirror rule-based (not buy-and-
hold) indices. Also, strategies that implement alternative weighting
schemes in order to provide returns that are meaningfully different from,
yet track very close to, an index.
0.50% - 1.50%
Management Styles Defined
Exhibit 1
Active vs. Passive Discussion 2019
Prepared by Meketa Investment Group
State Universities Retirement System
4
Advantages Disadvantages
Active • Potential to beat the index
• Potential for down market protection
• Higher costs and fees
• Risk and unpredictability
• People/organization risk
Passive • Reduced active management risk – no
underperformance surprise risk
• Close correlation to the policy benchmark
• Low fees and low monitoring costs
• No possibility for positive alpha
• Possibility of underperforming the index due to
implementation/fees
• No downside protection
Hybrid-
Passive
• Low cost relative to active management
• Potential for alpha
• Increased transparency
• Potential to underperform
• Modest organizational risk
Management Styles Defined
Exhibit 1
Active vs. Passive Discussion 2019
Prepared by Meketa Investment Group
State Universities Retirement System
5
Representative Benchmark is appropriate and relevant to the portfolio’s investment strategy
Investable Should be able to invest in all of the securities included in the benchmark
Transparent Names and weights of securities comprising the benchmark are available and understandable
Measurable Benchmark is readily calculable on a frequent basis
Independent Calculated by an independent third party to ensure a fair comparison
Preferred Attributes of Good Benchmarks
Exhibit 1
Active vs. Passive Discussion 2019
Prepared by Meketa Investment Group
State Universities Retirement System
6
• Added value by active management can vary depending on market segment
• In the public investment markets, outperformance occurring more than 60% of the time is rare
• Empirical public-market evidence shows past winners have difficulty repeating success
- Ability for active managers to outperform benchmarks is often cyclical
- On average, it has been extremely difficult to capture persistent outperformance
Key Considerations for Active Management
Exhibit 1
Active vs. Passive Discussion 2019
Prepared by Meketa Investment Group
State Universities Retirement System
7
• Selecting active managers that will consistently outperform is extremely difficult
Active/Hybrid Passive Management
Are you able to identify those managers?
Yes
Do you have confidence there are managers who can consistently beat the benchmark?
Yes
Do you believe that certain segments of the market are generally inefficient?
Yes
No Passive
No Passive
No Passive
Active vs. Passive Decision Making
Exhibit 1
Active vs. Passive Discussion 2019
Prepared by Meketa Investment Group
State Universities Retirement System
8
• Hybrid Passive space offers modest excess return potential with limited downside surprise risk
Passive – Hybrid-Passive – Active Spectrum
-7.0
-6.0
-5.0
-4.0
-3.0
-2.0
-1.0
0.0
1.0
2.0
Ann
ualiz
ed E
xces
s
0.0 1.0 2.0 3.0 4.0 5.0 6.0 7.0 8.0
Annualized TE
Created with MPI Analytics
-4.0
-3.0
-2.0
-1.0
0.0
1.0
2.0
3.0
4.0
5.0
6.0
Ann
ualiz
ed E
xces
s0.0 1.0 2.0 3.0 4.0 5.0 6.0 7.0
Annualized TE
Created with MPI Analytics
Passive Active
Hybrid Passive
US Core Equity* Non-US Core Equity*
*Source: eVestmentAlliance database; last 5 years as of 3/31/2019
Exhibit 1
Active vs. Passive Discussion 2019
Prepared by Meketa Investment Group
State Universities Retirement System
9
• Some market segment benchmarks do notexhibit good benchmark attributes
• Benchmark replication is not realistic
• Underperformance surprise risk
• People/organizational risks
• Potential for strategy drift
• Universe data has survivorship bias
• Universe returns are typically overstated
• Lack of transparency among managers
• Monitoring managers is costly
Data Benchmarking
Risk Tolerance
• Confidence that active managers canprovide consistent outperformance net offees
Conviction
Other Considerations for Active Management
Exhibit 1
Active vs. Passive Discussion 2019
Prepared by Meketa Investment Group
State Universities Retirement System
10
Good Benchmark*
Poor Benchmark*
Inconsistent active
management*
Confidence in active management*
The availability/quality of an investable benchmark as well as the efficiency of the market segmentinform where market segments lie on the active to passive spectrum
(Go Passive) (Go Active)
* CFA Institute; Mid-Year 2018 Standard & Poor’s Indices Versus Active Funds Scorecard (SPIVA®); Meketa; eVesmentAlliance
US Large Cap
REITS Core Fixed Income
Global Equity
Options
US Small Cap
Micro Cap
Alternative Risk Premia
International Equity
Emerging MarketsTrend FollowingTIPS
Traditional Hedge Funds
Active Management Spectrum
Exhibit 1
Active vs. Passive Discussion 2019
Prepared by Meketa Investment Group
State Universities Retirement System
11
• Active vs. Passive management is not binary; it should be viewed on a continuum
- As such, portfolio construction should not be entirely active or entirely passive
• Sometimes active management is the only reasonable/prudent solution
• Many view basic tilts (rules based investment strategy used to deviate from a given index in
order to provide excess returns) away from traditional benchmarks as active management; thatshould not be the default position
• DO NOT overdiversify with and overpay for active management
Active Management Spectrum
Exhibit 1
Active vs. Passive Discussion 2019
Prepared by Meketa Investment Group
State Universities Retirement System
12
Source: MPI, eVestment Alliance, Lipper, Meketa
Returns are presented gross of fees, except for REITs
• Added value trends pose significant challenges for plan sponsors when selecting the next set of successful active managers• While observations show the median manager outperforming the benchmark around 60% or more in certain mandates, individual
managers can move from one quartile to another over time (i.e. drop from top quartile to bottom quartile)
Meketa Summary of Observed Trends of Added Value Results over the Last 10 Years% of Time Median
Outperformed (Qtrs) Results: Rolling 36-months
Manager Mandate
Last
10 Years
Last
3 Years Trend of Distribution Median vs. Benchmark 3rd Quartile vs. Benchmark
Large Core Equity 38% 42% Tightening; Lower Recent Underperformance Recent Underperformance
Large Value Equity 50% 67% Tightening; Lower Mixed Mixed
Large Growth Equity 43% 33% Consistent; Lower Underperformance Competitive
Mid Cap Equity 48% 33% Consistent; Flat Recent Outperformance In-line
Small Core Equity 70% 58% Consistent; Flat Competitive Competitive
Small Value Equity 73% 58% Tightening; Lower Somewhat Competitive Mixed
Small Growth Equity 65% 75% Widening; Higher Recent Outperformance Mixed
Global Equity 60% 25% Widening; Lower Competitive Mixed
International Equity 60% 58% Consistent; Flat Recent Outperformance Mixed
Emerging Markets Equity 63% 33% Consistent; Flat Competitive Mixed
Core Fixed Income 80% 83% Tightening; Flat Competitive Competitive
Core Plus Fixed Income 80% 83% Tightening; Flat Competitive Competitive
High Yield 43% 33% Tightening; Lower Underperformance Underperformance
TIPS 40% 50% Tightening; Flat Underperformance Underperformance
REITS 38% 50% Tightening; Higher Recent Outperformance Underperformance
Added Value Trends of Active Management
Exhibit 1
Active vs. Passive Discussion 2019
Prepared by Meketa Investment Group
State Universities Retirement System
13
-6-5-4-3-2-10123456789
101112
Exc
ess
Ann
ualiz
ed R
etur
n, %
Mar-09 Mar-11 Mar-13 Mar-15 Mar-17 Dec-18
Excess
5th to 25th Percentile25th to MedianMedian to 75th Percentile75th to 95th Percentile
• Median small cap manager hasoutperformed 70% of the time over thelong-term
• Median manger outperformed in 7 oflast 12 quarters
• Distribution among managers hastightened since 2009
• Median manager’s ability to add valuehas been relatively consistent
Quarterly Excess Performance vs. Russell Small Cap Index
36 Month Rolling Performance
Source: MPI, eVestmentAlliance
-2.0
-1.5
-1.0
-0.5
0.0
0.5
1.0
1.5
2.0
2.5
3.0
Exc
ess
Ann
ualiz
ed R
etur
n, %
Mar-09 Mar-11 Mar-13 Mar-15 Mar-17 Dec-18
Small Core Median
Excess
Added Value Trends: Small Core Equity Managers
Exhibit 1
Active vs. Passive Discussion 2019
Prepared by Meketa Investment Group
State Universities Retirement System
14
-8-7-6-5-4-3-2-10123456789
10
Exc
ess
Ann
ualiz
ed R
etur
n, %
Mar-09 Mar-11 Mar-13 Mar-15 Mar-17 Dec-18
Excess
5th to 25th Percentile25th to MedianMedian to 75th Percentile75th to 95th Percentile
• Median global equity manageroutperformed roughly 60% of the timeover the long-term
• Median manager outperformed in 3 oflast 12 quarters
• Distribution among managers haswidened recently
• Median manager has historically addedvalue, but has struggled in recentperiods
Quarterly Excess Performance vs. MSCI ACWI
36 Month Rolling Performance
-1.5
-1.0
-0.5
0.0
0.5
1.0
1.5
Exce
ss A
nnua
lized
Retu
rn, %
Mar-09 Mar-11 Mar-13 Mar-15 Mar-17 Dec-18
Global Equity Universe Median
Excess
Added Value Trends: Global Equity Managers
Source: MPI, eVestmentAlliance
Exhibit 1
Active vs. Passive Discussion 2019
Prepared by Meketa Investment Group
State Universities Retirement System
15
-6-5-4-3-2-10123456789
101112
Exc
ess
Ann
ualiz
ed R
etur
n, %
Mar-09 Mar-11 Mar-13 Mar-15 Mar-17 Dec-18
Excess
5th to 25th Percentile25th to MedianMedian to 75th Percentile75th to 95th Percentile
• Median international equity manageroutperformed roughly 60% of the timeover the long-term
• Median manager outperformed in 7 oflast 12 quarters
• Distribution among managers hastightened
• Median manager has historically addedvalue
Quarterly Excess Performance vs. MSCI EAFE Index
36 Month Rolling Performance
Source: MPI, eVestmentAlliance
-2.0
-1.5
-1.0
-0.5
0.0
0.5
1.0
1.5
2.0
Exc
ess
Ann
ualiz
ed R
etur
n, %
Mar-09 Mar-11 Mar-13 Mar-15 Mar-17 Dec-18
Intl Equity Median
Excess
Added Value Trends: International Equity Managers
Exhibit 1
Active vs. Passive Discussion 2019
Prepared by Meketa Investment Group
State Universities Retirement System
16
-10
-7
-5
-3
-1
1
3
5
7
9
11
13
15
Exc
ess
Ann
ualiz
ed R
etur
n, %
Mar-09 Mar-11 Mar-13 Mar-15 Mar-17 Dec-18
Excess
5th to 25th Percentile25th to MedianMedian to 75th Percentile75th to 95th Percentile
• Median emerging markets manageroutperformed roughly 63% of the timeover the long-term
• Median manager outperformed in 4 oflast 12 quarters
• Median manager has added value invarious cycles
• Distribution among managers hastightened
• Median manager added value has beenrelatively consistent
Quarterly Excess Performance vs. MSCI Emerging Markets Index
36 Month Rolling Performance
-2.0
-1.5
-1.0
-0.5
0.0
0.5
1.0
1.5
2.0
2.5
3.0
Exc
ess
Ann
ualiz
ed R
etur
n, %
Mar-09 Mar-11 Mar-13 Mar-15 Mar-17 Dec-18
Emg Mkts Median
Excess
Added Value Trends: Emerging Markets Equity Managers
Source: MPI, eVestmentAlliance
Exhibit 1
Active vs. Passive Discussion 2019
Prepared by Meketa Investment Group
State Universities Retirement System
17
-6-5-4-3-2-1012345678
Exc
ess
Ann
ualiz
ed R
etur
n, %
Mar-09 Mar-11 Mar-13 Mar-15 Mar-17 Dec-18
Excess
5th to 25th Percentile25th to MedianMedian to 75th Percentile75th to 95th Percentile
• Median core fixed income manageroutperformed 80% of the time over thelong-term
• Median manager outperformed in 10 oflast 12 quarters
• Median manager added value has beencyclical
• Distributions among managers hastightened
• The median manager has consistentlyadded since 2009
Quarterly Excess Performance vs. BB Aggregate Index
36 Month Rolling Performance
-1.0
-0.5
0.0
0.5
1.0
1.5
2.0
Exce
ss A
nnua
lized
Ret
urn,
%
Mar-09 Mar-11 Mar-13 Mar-15 Mar-17 Dec-18
Core Fixed Inc Median
Excess
Added Value Trends: Core Fixed Managers
Source: MPI, eVestmentAlliance
Exhibit 1
Active vs. Passive Discussion 2019
Prepared by Meketa Investment Group
State Universities Retirement System
18
-8-7-6-5-4-3-2-10123456789
101112
Exc
ess
Ann
ualiz
ed R
etur
n, %
Mar-09 Mar-11 Mar-13 Mar-15 Mar-17 Dec-18
Excess
5th to 25th Percentile25th to MedianMedian to 75th Percentile75th to 95th Percentile
• Median core plus fixed income manageroutperformed roughly 80% of the timeover the long-term
• Median manager outperformed in 10 oflast 12 quarters
• Median manager added value has beencyclical
• Dislocation in credit markets during 2008widened the distribution of returns
• Results of above median managers hastightened in recent periods
Quarterly Excess Performance vs. BB Universal Index
36 Month Rolling Performance
-2.0
-1.5
-1.0
-0.5
0.0
0.5
1.0
1.5
2.0
2.5
3.0
Exce
ss A
nnua
lized
Retu
rn, %
Mar-09 Mar-11 Mar-13 Mar-15 Mar-17 Dec-18
Core Plus Fixed Inc Median
Excess
Added Value Trends: Core Plus Fixed Managers
Source: MPI, eVestmentAlliance
Exhibit 1
Appendix
Exhibit 1
Active vs. Passive Discussion 2019
Prepared by Meketa Investment Group
State Universities Retirement System
20
• Median manager outperformed in 8 outof the 9 months during the recession of2001
• Median manager outperformed in 11out of the 19 months during the GFC
Monthly Excess Performance vs. Russell 2000 (3/2001 - 11/2001)
Monthly Excess Performance vs. Russell 2000 (12/2007 - 6/2009)
-1.0
-0.50.0
0.5
1.01.5
2.0
2.53.0
3.54.0
4.5
5.05.5
6.0
Exc
ess
Ann
ualiz
ed R
etur
n, %
Mar-01 Jun-01 Jul-01 Sep-01 Nov-01
Small Core Median
Excess
-3.0
-2.5
-2.0
-1.5
-1.0
-0.5
0.0
0.5
1.0
1.5
2.0
2.5
3.0
Exc
ess
Ann
ualiz
ed R
etur
n, %
Dec-07 Mar-08 Jun-08 Sep-08 Dec-08 Mar-09 Jun-09
Small Core Median
Excess
Downside Protection: Small Cap Core Managers
Source: MPI, eVestmentAlliance
Exhibit 1
Active vs. Passive Discussion 2019
Prepared by Meketa Investment Group
State Universities Retirement System
21
• Median manager outperformed in 8 outof the 9 months during the recession of2001
• Median manager outperformed in 14out of the 19 months during the GFC
Monthly Excess Performance vs. MSCI ACWI (3/2001 - 11/2001)
Monthly Excess Performance vs. MSCI ACWI (12/2007 - 6/2009)
-1.0
-0.5
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
Exc
ess
Ann
ualiz
ed R
etur
n, %
Mar-01 Jun-01 Sep-01 Nov-01
Global Equity Universe Median
Excess
-4.0
-3.5-3.0
-2.5
-2.0-1.5
-1.0
-0.50.0
0.51.0
1.5
2.02.5
3.0
Exc
ess
Ann
ualiz
ed R
etur
n, %
Dec-07 Mar-08 Jun-08 Sep-08 Dec-08 Mar-09 Jun-09
Global Equity Universe Median
Excess
Downside Protection: Global Equity Managers
Source: MPI, eVestmentAlliance
Exhibit 1
Active vs. Passive Discussion 2019
Prepared by Meketa Investment Group
State Universities Retirement System
22
• Median manager outperformed in 7 outof the 9 months during the recession of2001
• Median manager outperformed in 9 outof the 19 months during the GFC
Monthly Excess Performance vs. MSCI EAFE (3/2001 - 11/2001)
-1.0
-0.5
0.0
0.5
1.0
1.5
2.0
2.5
3.0
Exc
ess
Ann
ualiz
ed R
etur
n, %
Mar-01 Jun-01 Jul-01 Sep-01 Nov-01
Intl Equity Median
Excess
-1.0
-0.5
0.0
0.5
1.0
1.5
2.0
2.5
3.0
Exc
ess
Ann
ualiz
ed R
etur
n, %
Dec-07 Mar-08 Jun-08 Sep-08 Dec-08 Mar-09 Jun-09
Intl Equity Median
Excess
Monthly Excess Performance vs. MSCI EAFE (12/2007 - 6/2009)
Downside Protection: International Equity Managers
Source: MPI, eVestmentAlliance
Exhibit 1
Active vs. Passive Discussion 2019
Prepared by Meketa Investment Group
State Universities Retirement System
23
• Median manager outperformed in 8 outof the 9 months during the recession of2001
• Median manager outperformed in 11out of the 19 months during the GFC
Monthly Excess Performance vs. MSCI EM (3/2001 - 11/2001)
Monthly Excess Performance vs. MSCI EM (12/2007 - 6/2009)
-1.0
-0.5
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
Exc
ess
Ann
ualiz
ed R
etur
n, %
Mar-01 Jun-01 Jul-01 Sep-01 Nov-01
Emg Mkts Median
Excess
-2.0
-1.5
-1.0
-0.5
0.0
0.5
1.0
1.5
2.0
2.5
3.0
Exc
ess
Ann
ualiz
ed R
etur
n, %
Dec-07 Mar-08 Jun-08 Sep-08 Dec-08 Mar-09 Jun-09
Emg Mkts Median
Excess
Downside Protection: Emerging Markets Managers
Source: MPI, eVestmentAlliance
Exhibit 1
Active vs. Passive Discussion 2019
Prepared by Meketa Investment Group
State Universities Retirement System
24
• Median manager outperformed in 8 outof the 9 months during the recession of2001
• Median manager outperformed in 7 outof the 19 months during the GFC
Monthly Excess Performance vs. BB Aggregate (3/2001 - 11/2001)
Monthly Excess Performance vs. BB Aggregate (12/2007 - 6/2009)
-0.5
0.0
0.5
Exc
ess
Ann
ualiz
ed R
etur
n, %
Mar-01 Jun-01 Sep-01 Nov-01
Core Fixed Inc Median
Excess
-2.0
-1.5
-1.0
-0.5
0.0
0.5
1.0
1.5
2.0
Exc
ess
Ann
ualiz
ed R
etur
n, %
Dec-07 Mar-08 Jun-08 Sep-08 Dec-08 Mar-09 Jun-09
Core Fixed Inc Median
Excess
Downside Protection: Core Fixed Income
Source: MPI, eVestmentAlliance
Exhibit 1
Active vs. Passive Discussion 2019
Prepared by Meketa Investment Group
State Universities Retirement System
25
• Median manager outperformed in 6 outof the 9 months during the recession of2001
• Median manager outperformed in 6 outof the 19 months during the GFC
Monthly Excess Performance vs. BB Universal (3/2001 - 11/2001)
Monthly Excess Performance vs. BB Universal (12/2007 - 6/2009)
-0.5
0.0
0.5
Exc
ess
Ann
ualiz
ed R
etur
n, %
Mar-01 Jun-01 Sep-01 Nov-01
Core Plus Fixed Inc Median
Excess
-3.0
-2.5
-2.0
-1.5
-1.0
-0.5
0.0
0.5
1.0
1.5
2.0
2.5
3.0
Exc
ess
Ann
ualiz
ed R
etur
n, %
Dec-07 Mar-08 Jun-08 Sep-08 Dec-08 Mar-09 Jun-09
Core Plus Fixed Inc Median
Excess
Downside Protection: Core Plus Fixed Income
Source: MPI, eVestmentAlliance
Exhibit 1
Active vs. Passive Discussion 2019
Prepared by Meketa Investment Group
State Universities Retirement System
26
• Median large core manager hasoutperformed 38% of the time over thelong-term
• Median manager outperformed in 5 oflast 12 quarters
• Range of over/underperformance withinapproximately +/- 1.5%
• Median manager’s ability to add valuehas diminished since 2009
• Slight uptick in median manager’sperformance since period low; but stillbelow the benchmark
Quarterly Excess Performance vs. Russell 1000 Index
36 Month Rolling Performance
-1.5
-1.0
-0.5
0.0
0.5
1.0
1.5
Exc
ess
Ann
ualiz
ed R
etur
n, %
Mar-09 Mar-11 Mar-13 Mar-15 Mar-17 Dec-18
Large Core Median
Excess
-8-7-6-5-4-3-2-1012345678
Exc
ess
Ann
ualiz
ed R
etur
n, %
Mar-09 Mar-11 Mar-13 Mar-15 Mar-17 Dec-18
Excess
5th to 25th Percentile25th to MedianMedian to 75th Percentile75th to 95th Percentile
Added Value Trends: Large Core Equity Managers
Source: MPI, eVestmentAlliance
Exhibit 1
Active vs. Passive Discussion 2019
Prepared by Meketa Investment Group
State Universities Retirement System
27
-6-5-4-3-2-10123456789
10
Exc
ess
Ann
ualiz
ed R
etur
n, %
Mar-09 Mar-11 Mar-13 Mar-15 Mar-17 Dec-18
Excess
5th to 25th Percentile25th to MedianMedian to 75th Percentile75th to 95th Percentile
• Median large value manager hasoutperformed 50% of the time over thelong-term
• Median manager outperformed in 8 oflast 12 quarters
• Three-year rolling added value iscyclical and volatile
• Distribution among managers hastightened
• Median manager’s ability to add valuehas diminished over time
Quarterly Excess Performance vs. Russell 1000 Value Index
36 Month Rolling Performance
-1.5
-1.0
-0.5
0.0
0.5
1.0
1.5
Exc
ess
Ann
ualiz
ed R
etur
n, %
Mar-09 Mar-11 Mar-13 Mar-15 Mar-17 Dec-18
Large Value Median
Excess
Added Value Trends: Large Value Equity Managers
Source: MPI, eVestmentAlliance
Exhibit 1
Active vs. Passive Discussion 2019
Prepared by Meketa Investment Group
State Universities Retirement System
28
-8-7-6-5-4-3-2-10123456
Exc
ess
Ann
ualiz
ed R
etur
n, %
Mar-09 Mar-11 Mar-13 Mar-15 Mar-17 Dec-18
Excess
5th to 25th Percentile25th to MedianMedian to 75th Percentile75th to 95th Percentile
• Median large growth manager hasoutperformed 43% of the time overthe long-term
• Median manager outperformed in 4 of12 quarters
• Distribution among managers hastightened
• Median manager’s ability to add valuehas declined since 2009
• Median manager has lagged thebenchmark since 2015
Quarterly Excess Performance vs. Russell 1000 Growth Index
36 Month Rolling Performance
-3.0
-2.5
-2.0
-1.5
-1.0
-0.5
0.0
0.5
1.0
1.5
2.0
Exc
ess
Ann
ualiz
ed R
etur
n, %
Mar-09 Mar-11 Mar-13 Mar-15 Mar-17 Dec-18
Large Growth Median
Excess
Added Value Trends: Large Growth Equity Managers
Source: MPI, eVestmentAlliance
Exhibit 1
Active vs. Passive Discussion 2019
Prepared by Meketa Investment Group
State Universities Retirement System
29
-8-7-6-5-4-3-2-1012345678
Exc
ess
Ann
ualiz
ed R
etur
n, %
Mar-09 Mar-11 Mar-13 Mar-15 Mar-17 Dec-18
Excess
5th to 25th Percentile25th to MedianMedian to 75th Percentile75th to 95th Percentile
• Median midcap manager hasoutperformed 48% of the time over thelong-term
• Median manager outperformed in 4 oflast 12 quarters
• Three-year rolling added value iscyclical and volatile
• Distribution among above medianmanagers has tightened
• Median manager’s ability to add valueis trending higher over the last 3 years
Quarterly Excess Performance vs. Russell Midcap Index
36 Month Rolling Performance
-3.0
-2.5
-2.0
-1.5
-1.0
-0.5
0.0
0.5
1.0
1.5
2.0
2.5
3.0
Exc
ess
Ann
ualiz
ed R
etur
n, %
Mar-09 Mar-11 Mar-13 Mar-15 Mar-17 Dec-18
Mid Cap Median
Excess
Added Value Trends: Mid Cap Equity Managers
Source: MPI, eVestmentAlliance
Exhibit 1
Active vs. Passive Discussion 2019
Prepared by Meketa Investment Group
State Universities Retirement System
30
-10-8-6-4-202468
101214161820
Exc
ess
Ann
ualiz
ed R
etur
n, %
Mar-09 Mar-11 Mar-13 Mar-15 Mar-17 Dec-18
Excess
5th to 25th Percentile25th to MedianMedian to 75th Percentile75th to 95th Percentile
• Median small value manager hasoutperformed 73% of the time over thelong-term
• Median manager outperformed in 7 oflast 12 quarters
• Distribution among managers hassignificantly tightened
• Median manager has added valuethrough various cycles
Quarterly Excess Performance vs. Russell Small Cap Value Index
36 Month Rolling Performance
-3.0-2.5-2.0-1.5-1.0-0.50.00.51.01.52.02.53.03.54.04.55.05.56.0
Exc
ess
Ann
ualiz
ed R
etur
n, %
Mar-09 Mar-11 Mar-13 Mar-15 Mar-17 Dec-18
Small Value Median
Excess
Added Value Trends: Small Value Equity Managers
Source: MPI, eVestmentAlliance
Exhibit 1
Active vs. Passive Discussion 2019
Prepared by Meketa Investment Group
State Universities Retirement System
31
-10-8-6-4-202468
101214161820
Exc
ess
Ann
ualiz
ed R
etur
n, %
Mar-09 Mar-11 Mar-13 Mar-15 Mar-17 Dec-18
Excess
5th to 25th Percentile25th to MedianMedian to 75th Percentile75th to 95th Percentile
• Median small growth manageroutperformed roughly 65% of the timeover the long-term
• Median manager outperformed in 9 oflast 12 quarters
• Distribution among above medianmanagers has widened significantly
• Median manager added value has beenincreasing over the last year
Quarterly Excess Performance vs. Russell Small Cap Growth Index
36 Month Rolling Performance
-3.0
-2.5
-2.0
-1.5
-1.0
-0.5
0.0
0.5
1.0
1.5
2.0
2.5
3.0
Exce
ss A
nnua
lized
Ret
urn,
%
Mar-09 Mar-11 Mar-13 Mar-15 Mar-17 Dec-18
Small Growth Median
Excess
Added Value Trends: Small Growth Equity Managers
Source: MPI, eVestmentAlliance
Exhibit 1
Active vs. Passive Discussion 2019
Prepared by Meketa Investment Group
State Universities Retirement System
32
-10
-8
-6
-4
-2
0
2
4
6
8
10
12
Exce
ss A
nnua
lized
Ret
urn,
%
Mar-09 Mar-11 Mar-13 Mar-15 Mar-17 Dec-18
Excess
5th to 25th Percentile25th to MedianMedian to 75th Percentile75th to 95th Percentile
• Median European equity manageroutperformed roughly 50% of the timeover the long-term
• Median manager outperformed in 4 oflast 12 quarters
• Distribution of managers has narrowedsince 2009
• Median manager has historically addedvalue
Quarterly Excess Performance vs. MSCI Europe
36 Month Rolling Performance
-3.0
-2.5-2.0
-1.5-1.0
-0.50.0
0.51.0
1.52.0
2.53.0
3.54.0
Exce
ss A
nnua
lized
Ret
urn,
%
Mar-09 Mar-11 Mar-13 Mar-15 Mar-17 Dec-18
Pan-Europe Equity Median
Excess
Added Value Trends: European Equity Managers
Source: MPI, eVestmentAlliance, Nelson
Exhibit 1
Active vs. Passive Discussion 2019
Prepared by Meketa Investment Group
State Universities Retirement System
33
-6
-4
-2
0
2
4
6
8
10
12
14
16
Exc
ess
Ann
ualiz
ed R
etur
n, %
Mar-09 Mar-11 Mar-13 Mar-15 Mar-17 Dec-18
Excess
5th to 25th Percentile25th to MedianMedian to 75th Percentile75th to 95th Percentile
• Median Japanese equity manageroutperformed roughly 53% of the timeover the long-term
• Median manager outperformed in 7 oflast 12 quarters
• Distribution among managers haswidened since 2009
• Median manager has added valuethrough various cycles
Quarterly Excess Performance vs. MSCI Japan (Net)
36 Month Rolling Performance
-3.0
-2.5
-2.0
-1.5
-1.0
-0.5
0.0
0.5
1.0
1.5
2.0
2.5
3.0
Exc
ess
Ann
ualiz
ed R
etur
n, %
Mar-09 Mar-11 Mar-13 Mar-15 Mar-17 Dec-18
Japan Equity Median
Excess
Added Value Trends: Japanese Equity Managers
Source: MPI, Lipper
Exhibit 1
Active vs. Passive Discussion 2019
Prepared by Meketa Investment Group
State Universities Retirement System
34
-10-9-8-7-6-5-4-3-2-10123456
Exc
ess
Ann
ualiz
ed R
etur
n, %
Mar-09 Mar-11 Mar-13 Mar-15 Mar-17 Dec-18
Excess
5th to 25th Percentile25th to MedianMedian to 75th Percentile75th to 95th Percentile
• Median high yield fixed income manageroutperformed 43% of the time over thelong-term
• Median manager outperformed in 4 oflast 12 quarters
• Distribution amongst above medianmanagers has narrowed significantly
• Median manager has not provided addedvalue in recent periods
• Upward trend from period lows in 2012
Quarterly Excess Performance vs. BC High Yield Index
36 Month Rolling Performance
-7.0-6.5-6.0-5.5-5.0-4.5-4.0-3.5-3.0-2.5-2.0-1.5-1.0-0.50.00.51.0
Exce
ss A
nnua
lized
Retu
rn, %
Mar-09 Mar-11 Mar-13 Mar-15 Mar-17 Dec-18
High Yield Universe Median
Excess
Added Value Trends: High Yield Fixed Managers
Source: MPI, eVestmentAlliance
Exhibit 1
Active vs. Passive Discussion 2019
Prepared by Meketa Investment Group
State Universities Retirement System
35
-3
-2
-1
0
1
2
3
Exc
ess
Ann
ualiz
ed R
etur
n, %
Mar-09 Mar-11 Mar-13 Mar-15 Mar-17 Dec-18
Excess
5th to 25th Percentile25th to MedianMedian to 75th Percentile75th to 95th Percentile
• Median TIPS manager outperformed40% of the time over the long-term
• Median manager outperformed in6 of last 12 quarters
• Distribution of managers hassignificantly narrowed in recent periods
• Median manager has not added valuesince 2012
Quarterly Excess Performance vs. BC TIPS Index
36 Month Rolling Performance
-1.0
-0.5
0.0
0.5
Exc
ess
Ann
ualiz
ed R
etur
n, %
Mar-09 Mar-11 Mar-13 Mar-15 Mar-17 Dec-18
TIPS Universe Median
Excess
Added Value Trends: TIPS Managers
Source: MPI, eVestmentAlliance
Exhibit 1
Active vs. Passive Discussion 2019
Prepared by Meketa Investment Group
State Universities Retirement System
36
-8-7-6-5-4-3-2-10123456
Exc
ess
Ann
ualiz
ed R
etur
n, %
Mar-09 Mar-11 Mar-13 Mar-15 Mar-17 Dec-18
Excess
5th to 25th Percentile25th to MedianMedian to 75th Percentile75th to 95th Percentile
• Median REIT manager matched oroutperformed 38% of the time over thelong-term
• Median manager outperformed in6 of last 12 quarters
• Distribution of managers has tightenedin recent periods
• Median manager’s ability to add value istrending slightly upwards
Quarterly Excess Performance vs. MSCI US REIT Index
36 Month Rolling Performance
-3.0
-2.5
-2.0
-1.5
-1.0
-0.5
0.0
0.5
1.0
1.5
2.0
Exc
ess
Ann
ualiz
ed R
etur
n, %
Mar-09 Mar-11 Mar-13 Mar-15 Mar-17 Dec-18
REIT Universe Median
Excess
Added Value Trends: REIT Managers
Source: MPI, Lipper
Exhibit 1
Active vs. Passive Discussion 2019
Prepared by Meketa Investment Group
State Universities Retirement System
37
• Recent research conducted by Standard & Poor’s reveals interesting findings- As of June 30, 2018 it has been difficult for active management to outperform across most major asset classes- On average, approximately 78% of the actively managed funds lagged their benchmark over the recent 5-year period- Over the 1-year period, in excess of 50% of actively managed funds with the exception of investment grade fixed income,trailed their respective benchmarks- Over the 3- and 5-year periods actively managed investment grade fixed funds performed well versus their benchmarks
% of Funds Outperformed by Benchmarks (As of 6/30/18)
Fund Category Comparison Index One Year Three Years Five Years
All Large Cap Funds S&P 500 63.46 78.64 76.49
All Mid Cap Funds S&P MidCap 400 54.18 83.28 81.74
All Small Cap Funds S&P SmallCap 600 72.88 93.59 92.90
Global Equity Funds S&P Global 1200 62.13 75.42 75.44
International Equity Funds S&P 700 68.60 76.78 74.05
International Sm Eq Funds S&P Developed Ex-US Small Cap 58.33 67.53 71.93
Emerging Markets Funds S&P/IFCI Composite 72.02 73.89 86.19
Investment Grade Inter Funds BB Intermediate Govt/Credit 47.98 31.61 39.37
High Yield Fixed Income Funds BB High Yield 73.33 92.79 94.27
Emerging Market Debt Funds BB Emerging Markets 88.14 69.64 94.87
Real Estate Funds S&P United States REIT 53.66 74.12 67.09
Source: Mid-Year 2018 Standard & Poor’s Indices Versus Active Funds Scorecard (SPIVA®); https://us.spindices.com/spiva/#/reports
Persistence of Performance of Active Management
Study Overview
• Analysis of mutual fund net-of-fee performance equal-weighted and corrected for survivor bias• Underlying data is obtained from the CRSP Survivor-Bias-Free U.S. Mutual Fund Database
Exhibit 1
Active vs. Passive Discussion 2019
Prepared by Meketa Investment Group
State Universities Retirement System
38
• From a style perspective- Active mid growth funds have been the most successful in beating the benchmark over the 1-year- Active management struggled over the 3-year period; on average only 15% of the funds outperformed- Active large and mid growth funds proved relatively successful over the 5-year period
% of Equity Funds Outperformed by Benchmarks
Fund Category Comparison Index One Year Three Years Five Years
Large Cap Growth Funds S&P 500 Growth 36.29 66.67 66.31
Large Cap Core Funds S&P 500 71.38 89.67 88.10
Large Cap Value Funds S&P 500 Value 42.01 68.73 75.08
Mid Cap Growth Funds S&P MidCap 400 Growth 31.54 81.13 73.08
Mid Cap Core Funds S&P MidCap 400 77.59 88.98 91.06
Mid Cap Value Funds S&P MidCap 400 Value 75.47 87.93 87.88
Small Cap Growth Funds S&P SmallCap 600 Growth 42.05 86.60 86.49
Small Cap Core Funds S&P SmallCap 600 93.31 99.15 99.56
Small Cap Value Funds S&P SmallCap 600 Value 90.72 93.16 100.00
Source: Mid-Year 2018 Standard & Poor’s Indices Versus Active Funds Scorecard (SPIVA®); https://us.spindices.com/spiva/#/reports
Persistence of Performance of Active Management
Exhibit 1
Active vs. Passive Discussion 2019
Prepared by Meketa Investment Group
State Universities Retirement System
39
• Persistent above-median performers are isolated to a small sub-set of the Fund universe- Essentially no Funds were able to maintain top-quartile performance in year three- Few Funds manage to consistently repeat top-half performance in year three
Performance Persistence over Five Consecutive 12-Month Periods
Fund Category Fund Count at Start % Remaining in Top
March 2016 March 2017 March 2018
Top Quartile
All Domestic Funds 557 8.08 2.33
All Large Cap Funds 214 5.61 0.93
All Mid Cap Funds 79 16.46 0.00
All Small Cap Funds 130 16.92 3.85
All Multi Cap Funds 134 17.16 2.24
Top Half
All Domestic Funds 1,114 34.56 16.25
All Large Cap Funds 428 38.32 21.96
All Mid Cap Funds 158 42.41 7.59
All Small Cap Funds 260 49.62 13.46
All Multi Cap Funds 268 42.54 20.90
Source: Mid-Year 2018 Standard & Poor’s Indices Versus Active Funds Scorecard (SPIVA®); https://us.spindices.com/spiva/#/reports
Persistence of Performance of Active Management
Exhibit 1
Active vs. Passive Discussion 2019
Prepared by Meketa Investment Group
State Universities Retirement System
40
• The odds of a Fund remaining first-quartile over a five year period is no better than chance- It is difficult to identify persistent long-term outperformers;- Conversely there is consistency in the death rate of 4th quartile funds
Source: Mid-Year 2018 Standard & Poor’s Indices Versus Active Funds Scorecard (SPIVA®); https://us.spindices.com/spiva/#/reports
Performance over Two Non-Overlapping Five-Year Periods (Based on Quartiles)
Fund Count at Start % Remaining in Top
March 2013 1st Quartile 2nd Quartile 3rd Quartile 4th Quartile
Merged/
Liquidated Style Change Total
Large Cap Funds
1st Quartile 133 28.57 20.30 18.80 17.29 6.02 9.02 100
2nd Quartile 133 15.04 18.80 16.54 18.80 18.05 12.78 100
3rd Quartile 132 12.12 15.15 11.36 15.15 24.24 21.97 100
4th Quartile 133 9.02 10.53 18.05 13.53 33.83 15.04 100
Mid Cap Funds
1st Quartile 53 11.32 16.98 18.87 20.75 7.55 24.53 100
2nd Quartile 53 18.87 13.21 20.75 15.09 15.09 16.98 100
3rd Quartile 52 15.38 15.38 13.46 9.62 23.08 23.08 100
4th Quartile 53 13.21 13.21 5.66 13.21 33.96 20.75 100
Small Cap Funds
1st Quartile 87 22.99 20.69 21.84 22.99 8.05 3.45 100
2nd Quartile 86 23.26 23.26 15.12 22.09 15.12 1.16 100
3rd Quartile 87 13.79 24.14 24.14 18.39 16.09 3.45 100
4th Quartile 86 19.77 12.79 18.60 16.28 29.07 3.49 100
Persistence of Performance of Active Management
Exhibit 1
Active vs. Passive Discussion 2019
Prepared by Meketa Investment Group
State Universities Retirement System
41
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 describedherein. Information contained herein may have been provided by third parties, including investment firms providing information on returns and assets undermanagement, and may not have been independently verified. The past performance information contained in this report is not necessarily indicative of future resultsand 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 achieveits 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 fromthe 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 ofthe information contained in this document or any oral information provided in connection herewith, or any data subsequently generated herefrom, and accept noresponsibility, 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 norany 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 theterms or in the manner stated in this document, or as to the achievement or reasonableness of future projections, management targets, estimates, prospects orreturns, 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 dateof 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 otherfactors beyond the control of the Firm, which may result in material differences in actual results, performance or other expectations. The opinions, estimates andanalyses 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 periodsshown. 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 orthe 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-HillCompanies, 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 BoardOptions 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 theCBOE S&P 500 BuyWrite Index is owned by CBOE and may be covered by one or more patents or pending patent applications.
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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 inFTSE and/or its licensors. No further distribution of FTSE data is permitted with FTSE’s express written consent.
Exhibit 1
M E K E T A I N V E S T M E N T G R O U P
www.meketagroup.com
B O S T O NM A S S A C H U S E T T S
C H I C A G OI L L I N O I S
M I A M IF L O R I D A
N E W Y O R KN E W Y O R K
P O R T L A N DO R E G O N
S A N D I E G OC A L I F O R N I A
L O N D O NU N I T E D K I N G D O M
State Universities Retirement System (SURS)
Principal Protection and Credit Review
Exhibit 2
Principal Protection and Credit Structure
Prepared by Meketa Investment Group
State Universities Retirement System (SURS)
1. Review of SURS Fixed Income Allocation
2. Principal Protection Class Structure
3. Credit Class Structure
4. Appendix
5. Disclaimer, Glossary, and Notes
Exhibit 2
Review of SURS Fixed Income Allocation
Exhibit 2
Principal Protection and Credit Structure
Prepared by Meketa Investment Group
State Universities Retirement System (SURS)
• In September 2018, Board approved a new long-term allocation policy…
Crisis Risk Offset20%
Principal Protection8%
Inflation Sensitive6%
Traditional Growth25%
Stabilized Growth
26%Non-Traditional
Growth15%
SURS New Long-term Allocation Policy
Includes 53% Credit-based fixed income
• …and current SURS Fixed Income portfolio needs to be restructured into new policy allocations
Exhibit 2
Principal Protection and Credit Structure
Prepared by Meketa Investment Group
State Universities Retirement System (SURS)
• In September 2018, the Board approved segregating the SURS Fixed Income portfolio intomore purpose-driven strategic classes:
- Two segments:
Return-oriented strategies => Global Credit (Stabilized Growth component)
Protection-oriented strategies => Principal Protection class
Objective: increase risk transparency; better clarify roles
• Rationale: improved visibility into major fixed income risk drivers; clearer delineationof fixed-incomes roles: principal protection, income production
• Credit is set to have a 14% long-term target allocation (role: income production)
• Principal Protection is set to have an 8% long-term allocation (role: continual availability ofliquidity)
Exhibit 2
Principal Protection and Credit Structure
Prepared by Meketa Investment Group
State Universities Retirement System (SURS)
• 13 mandates; 6 are managed by Diverse* firms• Mandates range from Principal Protection-like to Stabilized Growth-like• Mixture of overlapping and competing mandates (Core, Core-Plus, EMD)
Garcia Hamilton Associates*
Pugh Capital*
Smith Graham*
LM Capital Group*
SSGA
Progress Active Fixed*
PIMCO UnconstrainedPIMCO Total Return
Neuberger Berman
TCW
Progress EMD*
Colchester EMD
Prudential EMD
SURS Fixed Income Allocation - March 2019
Principal Protection Managers
Stabilized Growth Managers
Exhibit 2
Principal Protection and Credit Structure
Prepared by Meketa Investment Group
State Universities Retirement System (SURS)
• There are several goals with regard to restructuring the Credit and Principal Protection- Alignment of strategic classes with SURS long-term policy allocation- Clearly defined roles of classes within each segment- Reduction of the overall number of managers- Potential for lower fees by increasing the allocation size of manager portfolios
• Restructuring of both class benchmarks to represent the broad fixed income segments
Exhibit 2
Principal Protection Class Structure
Exhibit 2
Principal Protection and Credit Structure
Prepared by Meketa Investment Group
State Universities Retirement System (SURS)
• As SURS shifts to Principal Protection, core-like managers are expected to provide safety, liquidity, and provide an “anchor” to the portfolio
• Meketa believes the Bloomberg Barclays U.S. Intermediate Aggregate ex. Credit Index is most appropriate for the Principal Protection class benchmark
• This index is a subset of the broader U.S. Aggregate Index- Roughly 65% overlap between the two indices- Corporate Investment Grade and Long Duration (10+ years) are removed
• Characteristics of the BB U.S. Intermediate Aggregate ex. Credit Index:- Shorter maturity (bonds with up to 10 years to maturity)- Higher credit quality (Includes roughly 50% Treasuries and excludes credit-oriented
bonds)- Less volatility- Less interest rate sensitivity- Comparable yield/income
Exhibit 2
Principal Protection and Credit Structure
Prepared by Meketa Investment Group
State Universities Retirement System (SURS)
• BB U.S. Intermediate Aggregate ex. Credit Index is a reasonable benchmark for SURS’sPrincipal Protection mandates
12/31/201 Composition (BB U.S. Int. Agg. ex. Credit Index)
*Definitions in the glossary
Source: Bloomberg
Treasury50%
Gov't Related2%
MBS44%
Securitized ex. MBS4%
Sector Weights0 - 1 yr
1%
1 - 3 yr24%
3 - 5 yr20%
5 - 7 yr20%
7 - 10 yr35%
Bond Maturities
Characteristics*
Yield 2.97
Coupon 2.90
Duration 4.28
Average Credit Quality AA+
Market Capitalization $13.2 Trillion
Exhibit 2
Credit Class Structure
Exhibit 2
Principal Protection and Credit Structure
Prepared by Meketa Investment Group
State Universities Retirement System (SURS)
• A Stabilizer
- Exposure to Credit helps stabilize equity-oriented returns
During normal times – credit can be complimentary to equities
During bad times – essentially the same risk
• Higher Yield and Return than other major fixed income segments
• Provides Yield and Income
• Major segments of publicly-traded Global Credit Market:
- Investment-grade Credit
- High Yield
- Emerging Market Debt
- Bank Loans
Exhibit 2
Principal Protection and Credit Structure
Prepared by Meketa Investment Group
State Universities Retirement System (SURS)
• While roughly 60% of the market, investment grade credit has yield of only 2.8%• A reasonably constructed credit portfolio should seek a higher yield• Therefore a lower policy allocation to investment grade credit
Yield: 2.8%
$1.8 T
$2.4 T
$2.4 T$9.82 T
Representative Credit Opportunity Set - $16.4 Trillion
Bank Loans
High Yield
EMD
Inv. Grade
Exhibit 2
Principal Protection and Credit Structure
Prepared by Meketa Investment Group
State Universities Retirement System (SURS)
• To increase yield within Credit, IG’s policy allocation needs to be significantly reduced
30%
30%
30%
10%
Yield-oriented Opportunity Set
11%
15%
15%60%
Representative Opportunity Set
Bank Loans High Yield EMD Inv. Grade
Yield: 2.8% 5.8%
Exhibit 2
Principal Protection and Credit Structure
Prepared by Meketa Investment Group
State Universities Retirement System (SURS)
15%
30%
30%
25%
SURS Implementable Opportunity Set
30%
30%
30%
10%
Yield-oriented Opportunity Set
Bank Loans High Yield EMD Inv. Grade
• Investment Grade Credit, while lower-yielding, provides quality and should be included atsome level
• A reasonable and implementable allocation should balance the objective of increased yield,provide reasonable diversification, and reflect current capabilities
Yield: 5.8% 5.4%
Exhibit 2
Principal Protection and Credit Structure
Prepared by Meketa Investment Group
State Universities Retirement System (SURS)
• As SURS shifts to a Credit specific mandate, Core-plus and Emerging Market Debt (EMD) likemanagers are expected to provide yield, risk, and a “return” to the portfolio
• Meketa believes a weighted combination of the following benchmarks is reasonable- BB Global High Yield- S&P LSTA Global Leverage Loan- BB Global Agg. Credit Index- Emerging Market Debt – (12.5% JPM GBI-EM Div, 6.3% JPM EMBI GD, 6.3% JPM CEMBI Broad)
• These indices are global and represent the broad investable credit markets
• Unlike the equity markets, there is no benchmark that perfectly defines the investable universeof credit-oriented securities.
- This is one of the reasons active investment managers outperform the markets more consistentlythan their equity peers.
Exhibit 2
Principal Protection and Credit Structure
Prepared by Meketa Investment Group
State Universities Retirement System (SURS)
• Meketa modeled various benchmark policies with regard to the Credit Class:
SURS Implementable Benchmark - Credit
(15% Bank Loans, 30% High Yield, 30% EMD, 25% Inv. Grade)Global Bank
Loans
High
Yield
Emerging Market
Debt*
Investment
Grade
Total
Policy
Yield 6.27 6.41 6.00 2.86 5.38
Duration 0.34 4.24 5.39 6.60 4.59
# holdings 1,819 3,288 634 12,042 17,783
Mkt Cap $1.8T $2.4 T $2.4 T $9.8T 16.4 T
*Current SURS blended Benchmark (50% JPM EM GD, 25% GBI-EM Div, 25% Corp Broad)
• Meketa believes the combination of the blended benchmark above represents animplementable policy, given market opportunities in bank loan investing
• The policy benchmark above should reasonably target a yield of 5-6%
Exhibit 2
Principal Protection and Credit Structure
Prepared by Meketa Investment Group
State Universities Retirement System (SURS)
Next Steps
• Approve updated Investment Policy Statement
• Edits to Section VI – Portfolio Construction and Performance Benchmarks
• Defines Roles and Structure of Principal Protection and Credit segments
• Identifies appropriate benchmarks for each segment
• Minor edits to create Inflation Sensitive class, discussed in following memo
• Begin Restructuring of Fixed Income Portfolio
• Staff and Meketa will negotiate updated manager guidelines and fee schedules toimplement principal protection and credit portfolios as described
Exhibit 2
Appendix
Exhibit 2
Principal Protection and Credit Structure
Prepared by Meketa Investment Group
State Universities Retirement System (SURS)
• Investment Grade Definition: Global securities of companies and governmental entities oragencies with a rating at least a “BBB” or equivalent by a credit rating agency are known as ainvestment grade bonds
• Characteristics: - Relatively High Liquidity- High Quality- Large Opportunity set
• Risks:- Loss of Capital- Duration Risk- Default on the bond
Investment Grade
Exhibit 2
Principal Protection and Credit Structure
Prepared by Meketa Investment Group
State Universities Retirement System (SURS)
• Combining the Bloomberg Barclays Global Aggregate Corporate Index and the BB Global CreditIG index broadly represents global investment grade opportunity set
12/31/2018 Composition (BB Global Aggregate Corp. and Global IG Credit Index)
*Definitions in the glossary
Source: Bloomberg
Yield 3.19
Coupon 3.72
Duration 6.85
Market Capitalization $15.9 Trillion
Characterisitics*
Financial
Utilities
Industrials
Sector Weights
Financial
Utilities
Industrials
Investment Grade
Market Overview
Exhibit 2
Principal Protection and Credit Structure
Prepared by Meketa Investment Group
State Universities Retirement System (SURS)
• High Yield Definition: Global securities of companies and governmental entities or agencieswith finite lives that exhibit relatively high levels of credit (default) risk
• Characteristics:- Below investment grade (BBB) rating- Typically sold with a list of covenants that are lower priority than investment grade debt
• Risks:- Loss of Capital- Increased volatility- Default on the bond- High correlation to equities relative to treasuries and agency backed bonds
High Yield
Exhibit 2
Principal Protection and Credit Structure
Prepared by Meketa Investment Group
State Universities Retirement System (SURS)
• Bloomberg Barclays Global High Yield Index is a widely regarded proxy for the High Yieldmarket.
- Broadly represents Global High Yield Fixed Income
12/31/2018 Composition (BB Global High Yield Index)
*Definitions in the glossary
Source: Bloomberg
Africa/Mid East6%
Asia Pacif ic4%
Central Asia1%
Eastern Europe6%
North America51%
South & Central America
9%
Western Europe23%
County Allocation
Characteristics*
Yield 6.41
Duration 4.24
# of holdings 3288
Market Cap $2.4 Trillion
High Yield
Exhibit 2
Principal Protection and Credit Structure
Prepared by Meketa Investment Group
State Universities Retirement System (SURS)
• Definition: Emerging Market Debt (EMD) is bonds that are issued by less-developed (emerging)countries.
• Characteristics (relative to developed countries):- Low-income per capita- Often comprised of a local regulatory body
• Risks:- Loss of Capital- Currency- Increased volatility- Default on the bond- Headline Risk- Transparency
• Hard versus local currency: Emerging Market Debt is classified as hard currency (U.S. dollardenominated) and Local currency (bonds that are denominated in the particular countriescurrency).
Emerging Market Debt
Exhibit 2
Principal Protection and Credit Structure
Prepared by Meketa Investment Group
State Universities Retirement System (SURS)
Source: JP Morgan
• SURS currently utilizes a combination of Indices with both hard and local currency- 50% - JPM EMBI Global Diversified (Hard Currency)- 25% - JPM GBI – EM Diversified (Local Currency)- 25% - JPM CEMBI Broad (Hard Currency)
EMD Market Composition (SURS Blended benchmark)
• SURS EMD policy allocation varies from market-weighted exposures
JPM GBI - EM
Diversified
JPM CEMBI
Broad
JM EMBI
Global
Diversified
SURS
EMD Agg.
Yield 6.20 5.50 6.10 6.00
Quality Rating BBB BBB- BB+ BBB
Duration 5.12 4.43 6.83 5.38
Market Capitalization 887 955 535 $2.4T
Emerging Market Debt
Exhibit 2
Principal Protection and Credit Structure
Prepared by Meketa Investment Group
State Universities Retirement System (SURS)
Africa
Asia
Europe
Latin America
Middle East
Other
Regional EMD Exposure
Africa
Asia
Europe
Latin America
Middle East
Other
• A Majority of the current SURS EMD (blended) Index is BB rated
• SURS current EMD policy represents broad regional exposure
Emerging Market Debt
Exhibit 2
Principal Protection and Credit Structure
Prepared by Meketa Investment Group
State Universities Retirement System (SURS)
• Definition: As the name implies, Bank Loans are loans made by banks to individual companiesand then sold to institutional investors or mutual funds.
• Characteristics:- Floating rate – yields on loans will rise and fall with the interest rate markets- Pre-payable at any time without penalty- Secured by borrower collateral- Generally involve some financial covenants- Generally 5-7 years in maturity
• Risks:- Loss of Capital- Increased volatility- Default- Callable- Will underperform in a falling interest rate environment
• Market size: Recent estimates put the Global bank loan market slightly larger than the U.S.high yield bonds ($1.2 trillion in the U.S.). However, Bank Loans are generally bundled intoCLO structures, making less available for direct institutional investment.
Bank Loans
Exhibit 2
Principal Protection and Credit Structure
Prepared by Meketa Investment Group
State Universities Retirement System (SURS)
Attribute Bank Loans High Yield Bonds
Coupon Floating Rate Fixed Rate
Ranking Senior Senior Subordinated
Security Secured Unsecured
Covenants Maintenance and Incurrence Incurrence
Callability Callable Not Callable
Coupon LIBOR+ 4.0% 7.5%
[1] Occasionally companies will issue unsecured bank loans or secured high yield bonds.[2]Typically, bank loans are callable for the life of the loan. High yield bonds generally have a maturity of 8 to 10 years and are non-callable for the first 3 to 5 years.
Bank Loans vs. High Yield Bonds
• Compared to high yield bonds, bank loans have a more senior position in the capitalstructure, are secured by company assets and cash flows, and have maintenance covenants.As a result, bank loans are considered less risky than high yield bonds.
• Historically the recovery rate for defaulted bank loans has averaged 69%, while the recoveryrate for high yield bonds has averaged 43%.
• Most bank loans carry a floating interest rate based on LIBOR plus a spread. The spread isbased on the riskiness of the loan. Spreads typically range from 3.0% to 6.0% over LIBOR.
Exhibit 2
Principal Protection and Credit Structure
Prepared by Meketa Investment Group
State Universities Retirement System (SURS)
Bank Loans High Yield
Investment
Grade Bonds
Intermediate
Treasuries Stocks
Bank Loans 1.00
High Yield 0.74 1.00
Investment Grade Bonds -0.02 0.22 1.00
Intermediate Treasuries -0.32 -0.12 0.90 1.00
Stocks 0.42 0.61 0.04 -0.18 1.00
Historical Correlations
Data shown is from January 1992 – September 2018.
• Compared to equities and treasuries, bank loans and high yield bonds have offereddiversification benefits.
Exhibit 2
Disclaimer, Glossary and Notes
Exhibit 2
Principal Protection and Credit Structure
Prepared by Meketa Investment Group
State Universities Retirement System (SURS)
Yield: The yield-to-maturity (YTM) of a bond given potential optionality (e.g., callable, puttable, exchangeable, etc.). YTM represents the total return (i.e., IRR) of a bond over its remaining life. Coupon: The annual interest payment based on a bond’s par value. Average Credit Quality: Bloomberg’s composite rating based on S&P, Fitch, Moody’s, and DBRS. Credit Risk: Refers to the risk that the issuer of a fixed income security may default (i.e., the issuer will be unable to make timely principal and/or interest payments on the security.) Government Related: A bond sector that primarily consists of debt from agency, local authority, and supranational entities. MBS: Mortgage-backed securities. A type of asset-backed debt instrument that is secured by a collection of mortgages. The corresponding coupon payments are driven by pass-through payments from the underlying mortgages. In investment grade bond markets, MBS are typically explicitly or implicitly guaranteed by the U.S. government (i.e., agency MBS). Securitized ex. MBS: A broader collection of asset-backed debt that can be collateralized by items such as commercial real estate debt, credit card receivables, and auto loans, among others. Duration: Measure of the sensitivity of the price of a bond to a change in its yield to maturity. Duration summarizes, in a single number, the characteristics that cause bond prices to change in response to a change in interest rates. For example, the price of a bond with a duration of three years will rise by approximately 3% for each 1% decrease in its yield to maturity. Conversely, the price will decrease 3% for each 1% increase in the bond’s yield. Price changes for two different bonds can be compared using duration. A bond with a duration of six years will exhibit twice the percentage price change of a bond with a three-year duration. The actual calculation of a bond’s duration is somewhat complicated, but the idea behind the calculation is straightforward. The first step is to measure the time interval until receipt for each cash flow (coupon and principal payments) from a bond. The second step is to compute a weighted average of these time intervals. Each time interval is measured by the present value of that cash flow. This weighted average is the duration of the bond measured in years. Information Ratio: This statistic is a measure of the consistency of a portfolio’s performance relative to a benchmark. It is calculated by subtracting the benchmark return from the portfolio return (excess return), and dividing the resulting excess return by the standard deviation (volatility) of this excess return. A positive information ratio indicates outperformance versus the benchmark, and the higher the information ratio, the more consistent the outperformance. Jensen’s Alpha: A measure of the average return of a portfolio or investment in excess of what is predicted by its beta or “market” risk. Portfolio Return- [Risk Free Rate+Beta*(market return-Risk Free Rate)].
Exhibit 2
Principal Protection and Credit Structure
Prepared by Meketa Investment Group
State Universities Retirement System (SURS)
Market Capitalization: For a firm, market capitalization is the total market value of outstanding common stock. For a portfolio, market capitalization is the sum of the capitalization of each company weighted by the ratio of holdings in that company to total portfolio holdings; thus it is a weighted-average capitalization. Meketa Investment Group considers the largest 65% of the broad domestic equity market as large capitalization, the next 25% of the market as medium capitalization, and the smallest 10% of stocks as small capitalization. Maturity: The date on which a loan, bond, mortgage, or other debt/security becomes due and is to be paid off. Prepayment Risk: The risk that prepayments will increase (homeowners will prepay all or part of their mortgage) when mortgage interest rates decline; hence, investors’ monies will be returned to them in a lower interest rate environment. Also, the risk that prepayments will slow down when mortgage interest rates rise; hence, investors will not have as much money as previously anticipated in a higher interest rate environment. A prepayment is any payment in excess of the scheduled mortgage payment. Price-Book Value (P/B) Ratio: The current market price of a stock divided by its book value per share. Meketa Investment Group calculates P/B as the current price divided by Compustat's quarterly common equity. Common equity includes common stock, capital surplus, retained earnings, and treasury stock adjusted for both common and nonredeemable preferred stock. Similar to high P/E stocks, stocks with high P/B’s tend to be riskier investments. Price-Earnings (P/E) Ratio: A stock’s market price divided by its current or estimated future earnings. Lower P/E ratios often characterize stocks in low growth or mature industries, stocks in groups that have fallen out of favor, or stocks of established blue chip companies with long records of stable earnings and regular dividends. Sometimes a company that has good fundamentals may be viewed unfavorably by the market if it is an industry that is temporarily out of favor. Or a business may have experienced financial problems causing investors to be skeptical about is future. Either of these situations would result in lower relative P/E ratios. Some stocks exhibit above-average sales and earnings growth or expectations for above average growth. Consequently, investors are willing to pay more for these companies’ earnings, which results in elevated P/E ratios. In other words, investors will pay more for shares of companies whose profits, in their opinion, are expected to increase faster than average. Because future events are in no way assured, high P/E stocks tend to be riskier and more volatile investments.
Exhibit 2
Principal Protection and Credit Structure
Prepared by Meketa Investment Group
State Universities Retirement System (SURS)
Quality Rating: The ratings assigned a security by such rating services as Fitch, Moody’s, and Standard & Poor’s. The rating may be determined by such factors as (1) the likelihood of fulfillment of dividend, income, and principal payment of obligations; (2) the nature and provisions of the issue; and (3) the security’s relative position in the event of liquidation of the company. Bonds assigned the top four grades (AAA, AA, A, BBB) are considered investment grade because they are eligible bank investments as determined by the controller of the currency. Sharpe Ratio: A commonly used measure of risk-adjusted return. It is calculated by subtracting the risk free return (usually three-month Treasury bill) from the portfolio return and dividing the resulting excess return by the portfolio’s total risk level (standard deviation). The result is a measure of return per unit of total risk taken. The higher the Sharpe ratio, the better the fund’s historical risk adjusted performance. Standard Deviation: A measure of the total risk of an asset or a portfolio. Standard deviation measures the dispersion of a set of numbers around a central point (e.g., the average return). If the standard deviation is small, the distribution is concentrated within a narrow range of values. For a normal distribution, about two thirds of the observations will fall within one standard deviation of the mean, and 95% of the observations will fall within two standard deviations of the mean. STIF Account: Short-term investment fund at a custodian bank that invests in cash-equivalent instruments. It is generally used to safely invest the excess cash held by portfolio managers. Style: The description of the type of approach and strategy utilized by an investment manager to manage funds. For example, the style for equities is determined by portfolio characteristics such as price-to-book value, price-to-earnings ratio, and dividend yield. Equity styles include growth, value, and core. Yield to Maturity: The yield, or return, provided by a bond to its maturity date; determined by a mathematical process, usually requiring the use of a “basis book.” For example, a 5% bond pays $5 a year interest on each $100 par value. To figure its current yield, divide $5 by $95—the market price of the bond—and you get 5.26%. Assume that the same bond is due to mature in five years. On the maturity date, the issuer is pledged to pay $100 for the bond that can be bought now for $95. In other words, the bond is selling at a discount of 5% below par value. To figure yield to maturity, a simple and approximate method is to divide 5% by the five years to maturity, which equals 1% pro rata yearly. Add that 1% to the 5.26% current yield, and the yield to maturity is roughly 6.26%.
5% (discount) = 1% pro rata, plus
5.26% (current yield) = 6.26% (yield to maturity) 5 (yrs. to maturity)
Sources: Investment Terminology, International Foundation of Employee Benefit Plans, 1999. The Handbook of Fixed Income Securities, Fabozzi, Frank J., 1991.
Exhibit 2
Principal Protection and Credit Structure
Prepared by Meketa Investment Group
State Universities Retirement System (SURS)
WE HAVE PREPARED THIS REPORT (THIS “REPORT”) FOR THE SOLE BENEFIT OF THE INTENDED RECIPIENT(THE “RECIPIENT”).
SIGNIFICANT EVENTS MAY OCCUR (OR HAVE OCCURRED) AFTER THE DATE OF THIS REPORT AND THAT IT IS NOTOUR FUNCTION OR RESPONSIBILITY TO UPDATE THIS REPORT. ANY OPINIONS OR RECOMMENDATIONSPRESENTED HEREIN REPRESENT OUR GOOD FAITH VIEWS AS OF THE DATE OF THIS REPORT AND ARE SUBJECTTO CHANGE AT ANY TIME. ALL INVESTMENTS INVOLVE RISK. THERE CAN BE NO GUARANTEE THAT THESTRATEGIES, TACTICS, AND METHODS DISCUSSED HERE WILL BE SUCCESSFUL.
INFORMATION USED TO PREPARE THIS REPORT WAS OBTAINED FROM INVESTMENT MANAGERS, CUSTODIANS,AND OTHER EXTERNAL SOURCES. WHILE WE HAVE EXERCISED REASONABLE CARE IN PREPARING THIS REPORT,WE CANNOT GUARANTEE THE ACCURACY OF ALL SOURCE INFORMATION CONTAINED HEREIN.
CERTAIN INFORMATION CONTAINED IN THIS REPORT MAY CONSTITUTE “FORWARD - LOOKING STATEMENTS,”WHICH CAN BE IDENTIFIED BY THE USE OF TERMINOLOGY SUCH AS “MAY,” “WILL,” “SHOULD,” “EXPECT,” “AIM”,“ANTICIPATE,” “TARGET,” “PROJECT,” “ESTIMATE,” “INTEND,” “CONTINUE” OR “BELIEVE,” OR THE NEGATIVESTHEREOF OR OTHER VARIATIONS THEREON OR COMPARABLE TERMINOLOGY. ANY FORWARD - LOOKINGSTATEMENTS, FORECASTS, PROJECTIONS, VALUATIONS, OR RESULTS IN THIS PRESENTATION ARE BASED UPONCURRENT ASSUMPTIONS. CHANGES TO ANY ASSUMPTIONS MAY HAVE A MATERIAL IMPACT ONFORWARD - LOOKING STATEMENTS, FORECASTS, PROJECTIONS, VALUATIONS, OR RESULTS. ACTUAL RESULTSMAY THEREFORE BE MATERIALLY DIFFERENT FROM ANY FORECASTS, PROJECTIONS, VALUATIONS, OR RESULTSIN THIS PRESENTATION.
PERFORMANCE DATA CONTAINED HEREIN REPRESENT PAST PERFORMANCE. PAST PERFORMANCE IS NOGUARANTEE OF FUTURE RESULTS.
Exhibit 2
M E M O R A N D U M
M E K E T A I N V E S T M E N T G R O U P 411 PARK AVENUE SUITE 401 PORTLAND, OR 97209
503 226 1050 fax 503 226 3304 www.meketagroup.com
To: Doug Wesley, CFA – CIO; Ellen Hung, CFA – Deputy CIO SURS Board of Trustees
From: Neil Rue, CFA; Colin Bebee, CFA; David Sancewich Meketa Investment Group (MIG)
Date: June 6, 2019
Re: Recommendations to Add Principal Protection, Credit, and Inflation Sensitive to SURS’ Investment Policy Statement
SUMMARY & RECOMMENDATION Over the last several months, extending back into mid-2018, the SURS Board has approved several material changes to its long-term investment strategy. In September 2018, the Board approved a new long-term strategic allocation policy that created three new elements, Principal Protection, Inflation Sensitive and Credit (which is a segment of Stabilized Growth). This memo summarizes and discusses language changes to the SURS Investment Policy Statement (IPS) to reflect these decisions. Both Staff and MIG recommend that the Investment Committee/Board approve the requested changes to the SURS IPS.
DISCUSSION The attached changes to the IPS incorporate and memorialize all of the above prior Board approvals. As highlighted in the attachments the key changes to the IPS are:
Making major edits to the current Fixed Income class structure: - The Current Fixed Income class is being split into two different segments:
Principal Protection and Credit. As a result, current fixed income language was removed and replaced by the two new segments above.
Creating an Inflation Sensitive class structure: - As a result of the changes to the current Fixed Income portfolio, “TIPS” which
are currently listed under this class were moved into its new strategic class – Inflation Sensitive.
- Additionally, we eliminated Commodities as a stand-alone class and moved them under their new strategic class: Inflation Sensitive.
Exhibit 3
STATE UNIVERSITIES RETIREMENT SYSTEM OF ILLINOIS
INVESTMENT POLICY
Adopted by the Board of Trustees April 18, 2019
Exhibit 4
Investment Policy April 2019
Page 2
INVESTMENT POLICY
Table of Contents Section / Page No. Description I / 3 Statement of Purpose of Investment Policy II / 4 Strategic Objectives III / 5 Role Definitions
• Board of Trustees • Investment Committee • Executive Director • Internal Investment Staff • External Investment Consultant(s) • External Investment Managers • Custodian • General Counsel’s Office • External Counsel
IV / 8 Strategic Allocation and Rebalancing Strategy V / 10 Investment Risk Management VI / 11 Portfolio Construction and Performance Benchmarks
• Public Equity • Fixed Income • Principal Protection • Credit • Inflation Sensitive • Private Equity • Real Estate • Opportunity Fund • Hedged Strategies • Commodities • Crisis Risk Offset
VII / 19 Selection and Retention • Investment Manager and Fund Monitoring
VIII / 21 Investment Manager Termination Guidelines IX / 23 Performance Evaluation and Reporting X / 25 Safeguard of Assets XI / 27 General Investment Restrictions and/or Guidelines XII / 28 Corporate Governance
• Proxy Voting Policy • Securities Litigation Policy
XIII / 31 Emerging Investment Managers, MFDB Managers and Minority-Owned Broker/Dealers • Goals for Utilization of Emerging Investment Managers and MFDB
Managers • Goals for Utilization of Minority-Owned Broker/Dealers • Manager-of-Managers Program
Exhibit I / 34 Glossary of Terms Appendices / 45
Exhibit 4
Investment Policy April 2019
Page 12
Public Equity Structure A. Role
The public Equity portfolio is expected to generate attractive absolute returns in a relatively low cost manner. The public Equity portfolio may also serve as a source of Liquidity.
B. Investment Structure
1. The public Equity allocation consists of a highly diversified mix of publicly traded global Equities. Common stocks, preferred stocks, or other Equity securities are typically utilized.
2. The public Equity portfolio is composed of U.S., non-U.S. and global Equity segments. o U.S. Equities
Managers invest primarily in publicly traded Equity securities of U.S. companies.
Certain Managers may utilize an exchange-traded, U.S. equity index options-based strategy.
o Non-U.S. Equities Managers invest primarily in publicly traded Equity securities of non-
U.S. companies, in both developed and emerging markets. o Global Equities
Managers make the allocation decisions between U.S. and non-U.S. companies, in both developed and emerging markets.
3. Allocation The current policy targets for the subcomponents of the public Equity portfolio are set forth in Appendix 4.
4. Assets may be held in Commingled Funds or privately managed Separate Accounts.
5. Use of leverage will be controlled as appropriate in the Manager’s Guidelines. 6. Implementation of the public Equity portfolio is via a combination of Active
Management and Passive Management. Passive Management is currently most prevalent in U.S. public Equities, which is a highly efficient market, but is also employed significantly in the non-U.S. Equity portfolio. The global Equity portfolio is currently implemented entirely via Active Management.
C. Benchmarks and Performance Targets
Benchmarks and Performance Targets for subcomponents of the Equity portfolio are set forth in Appendix 5.
Principal Protection Fixed Income Structure
A. Role The public Fixed Incomeprincipal protection portfolio is expected to provide steady income a modest absolute return, be an anchor to the overall portfolio and significant diversification to the total Portfolio due to low correlation with other Asset Classes. In addition, the public Fixed Incomeprincipal protection portfolio is expected to provide capital preservation, a source of Liquidity, lower volatility and competitive returns relative to an appropriate performance Benchmark.
Exhibit 4
Investment Policy April 2019
Page 13
B. Investment Structure
1. The Fixed Incomeprincipal protection allocation consists of a diversified mix of publicly traded Fixed Income securities, invested across multiple asset types.
o Quality standards, such as credit, concentration, duration, liquidity, etc., will be specifically set forth in each Manager’s Guidelines, as applicable. In the event a security no longer meets the quality standards referenced above, the Manager may continue to hold such security if it believes doing so is in the best interest of SURS. The Manager shall provide written justification of the action to Staff [and Consultant] as soon as practicable.
2. The public Fixed Incomeprincipal protection portfolio is composed largely of Treasuries, Agency backed mortgage securities, and other agency backed bonds.Core, Treasury Inflation-Protected Securities (“TIPS”) and Emerging Market Debt (“EMD”) segments.
o Core Fixed Income – This segment is further broken down as follows: Core Managers invest primarily in investment grade Fixed Income
issues, including Treasuries, agencies, corporate and mortgage securities, with sector allocations and risk profiles similar to those of the applicable Benchmarks.
Core Plus managers are given additional flexibility to add instruments with greater risk and greater potential return, such as high yield, global and emerging market debt and asset-backed securities for example, to Core portfolios.
Unconstrained Managers are less restricted in their ability to allocate between sectors and are not anchored to a traditional Fixed Income Benchmark.
o Mortagage Backed Securities - AgencyTIPS Managers invest primarily in inflation-linked, Fixed Income
securities in an effort to provide a hedge against unanticipated inflation.Mortgage backed Securities (MBS) issued by the U.S. government agencies (Fannie Mae, Freddie Mac, or Ginnie Mae).
o TreasuriesEMD Managers invest in treasurydebt securities of emerging market
countries, in both U.S. dollar and local currency terms, providing additional diversification and opportunities for higher yieldthe U.S. government.
o Other Managers may invest in other high quality segments as clarified in
manager specific guidelines, however these must be Investment Grade credit that is rated “BBB” or higher by two or more of the credit rating agencies
3. Allocation o The policy targets for the subcomponents of the portfolio are set forth in
Appendix 4. 4. Assets may be held in Commingled Funds or privately managed Separate
Accounts. 5. Use of leverage and short sales will be controlled as appropriate in the Manager’s
Guidelines.
Exhibit 4
Investment Policy April 2019
Page 14
6. Implementation of the Principal ProtectionFixed Income portfolio is primarily via Active Management., although Passive Management is utilized for TIPS and to a modest extent in the Core segment for Liquidity purposes. The EMD segment is implemented entirely via Active Management.
C. Benchmarks and Performance Targets
Benchmarks and Performance Targets for subcomponents of the Fixed Income portfolio are set forth in Appendix 5.
Credit Structure A. Role
The public credit portfolio is expected to provide income, yield and diversification to the total Portfolio due to a moderate correlation with other Asset Classes. In addition, the public Credit portfolio is expected to provide return, a source of Liquidity, and positive returns relative to an appropriate performance Benchmark.
B. Investment Structure 1. The Credit allocation consists of a diversified mix of publicly traded Credit
securities, invested across multiple asset types. o Quality standards, such as credit, concentration, duration, liquidity, etc., will
be specifically set forth in each Manager’s Guidelines, as applicable. In the event a security no longer meets the quality standards referenced above, the Manager may continue to hold such security if it believes doing so is in the best interest of SURS. The Manager shall provide written justification of the action to Staff [and Consultant] as soon as practicable.
2. The public credit portfolio is composed of Global Investment Grade, High Yield, Global Bank Loans and Emerging Market Debt (“EMD”) segments.
o Global Investment Grade Managers may invest primarily in global investment grade securities
of corporation and governmental agencies. Global Investment Grade is defined as those with a rating of at least
“BBB-” or equivalent by two or more of the credit rating agencies. o High Yield
Managers are permitted to invest in high yield bonds with an understanding that these bonds provide greater risk, potential for capital loss but with greater potential yield/return.
High Yield bonds are defined as those that are rated lower than “BBB-” by at least one of the credit rating agencies.
o Global Bank Loans Managers may invest in global bank loan debt
o EMD Managers invest in Investment Grade corporate and high yield debt
securities of emerging market countries, in both U.S. dollar and local currency terms, providing additional diversification and opportunities for higher yield.
3. Allocation
Exhibit 4
Investment Policy April 2019
Page 15
o The policy targets for the subcomponents of the portfolio are set forth in Appendix 4.
4. Assets may be held in Commingled Funds or privately managed Separate Accounts.
5. Use of leverage and short sales will be controlled as appropriate in the Manager’s Guidelines.
6. Implementation of the Credit portfolio is via Active Management.
C. Benchmarks and Performance Targets Benchmarks and Performance Targets for subcomponents of the Fixed Income portfolio are set forth in Appendix 5.
Inflation Sensitive Structure A. Role
The Inflation Sensitive portfolio is expected to provide the portfolio with a hedge against structural and unanticipated inflation. In addition, the inflation sensitive portfolio is expected to provide competitive returns relative to an appropriate performance Benchmark.
o Quality standards, such as credit, concentration, duration, liquidity, etc., will
be specifically set forth in each Manager’s Guidelines, as applicable. In the event a security no longer meets the quality standards referenced above, the Manager may continue to hold such security if it believes doing so is in the best interest of SURS. The Manager shall provide written justification of the action to Staff [and Consultant] as soon as practicable.
B. Investment Structure
Treasury Inflation Protected Securities – “TIPS” • The inflation sensitive allocation consists of Treasury Inflation Protection
Securities (“TIPS”). • Implementation of the TIPS portfolio is currently via Passive Management.
Commodities 1. The Commodities portfolio consists primarily of liquid positions in Commodity
Options, Futures, Swaps, and other financial instruments that provide direct or indirect exposure to Commodity markets. As collateral for the Commodity positions, cash, cash equivalents and other Fixed Income instruments may be held as required by exchanges or counterparties.
2. The Commodities portfolio is composed of Long-Only and Long/Short segments. o Long-Only
• Long-only strategies manage Commodities through key value drivers, including term structure weighting, optimal roll yield, and tactical allocation among different sectors and individual commodities. Some long-only Managers pursue strategies that equalize risk among the four primary commodity complexes: precious metals, industrial metals,
Exhibit 4
Investment Policy April 2019
Page 16
energy, and agriculture/livestock. Long-only strategies are expected to provide Beta exposure consistent with applicable Benchmarks.
o Long/Short • Long/short Managers have an absolute return objective, whereby they
can invest in both long and short commodities positions depending on market conditions. The Beta of long/short strategies tends to be quite low compared to the applicable Benchmark. Long/short Managers may invest in Commodities not typically represented in traditional Commodities’ Benchmarks.
3. Diversification While the Commodities portfolio’s positions are generally expected to be held across Commodity sectors, exposure to a particular Commodity sector (or to a particular Commodity within such sector) may be concentrated.
4. Within the portfolio, commitments have been made via a fund structure. 5. Leverage may be present in Commodities portfolios and is determined on a fund-
level basis. 6. Implementation of the commodities portfolio is currently via Active Management.
C. Benchmarks and Performance Targets
Benchmarks and Performance Targets for the Commodities portfolio are set forth in Appendix 5.
Private Equity Structure
A. Role The Private Equity portfolio is expected to earn Risk-Adjusted Returns in excess of the public Equity markets, primarily due to the Liquidity Premium demanded by investors. The Private Equity portfolio is also expected to decrease the volatility of the Portfolio, through the diversification benefits of having lower correlations with other Asset Classes.
• Investment Structure
1. The Private Equity allocation generally consists of investments into private companies, either directly or through buyouts of public companies that result in a delisting of public Equity.
2. The Private Equity portfolio is composed of three major subcomponents. o Venture Capital/Growth
Venture capital partnerships primarily invest in businesses still in the conceptual stage (start-up or seed) or where products may not be fully developed, and where revenues and/or profits may be several years away.
Growth/later-stage venture capital partnerships typically invest in more mature companies in need of growth or expansion capital.
o Buyout These partnerships provide the equity capital for acquisition
transactions either from a private seller or the public, which may represent the purchase of an entire company, or a refinancing or recapitalization transaction where Equity is purchased.
o Other
Exhibit 4
Investment Policy April 2019
Page 21
4. Within the portfolio, the account structure utilized may be a blend of separate account(s) and fund(s), depending on the assigned strategy/mandate.
5. Leverage is not typically employed in Options Strategies. Any degree of leverage requires SURS Board approval.
6. Implementation of the Options Strategies portfolio is via Active Management.
C. Benchmarks and Performance Targets Benchmarks and Performance Targets for the Hedged Strategies portfolio are set forth in Appendix 5.
Commodities
A. Role The Commodities portfolio is expected to provide protection against the risks associated with inflation or deflation. In addition, the Commodities portfolio is expected to enhance the diversification of the total Portfolio and provide a source of Liquidity when other Asset Class portfolios are experiencing lower real returns due to unanticipated inflation. The Commodities portfolio generates no current income.
B. Investment Structure 1. The Commodities portfolio consists primarily of liquid positions in Commodity
Options, Futures, Swaps, and other financial instruments that provide direct or indirect exposure to Commodity markets. As collateral for the Commodity positions, cash, cash equivalents and other Fixed Income instruments may be held as required by exchanges or counterparties.
2. The Commodities portfolio is composed of Long-Only and Long/Short segments. o Long-Only
• Long-only strategies manage Commodities through key value drivers, including term structure weighting, optimal roll yield, and tactical allocation among different sectors and individual commodities. Some long-only Managers pursue strategies that equalize risk among the four primary commodity complexes: precious metals, industrial metals, energy, and agriculture/livestock. Long-only strategies are expected to provide Beta exposure consistent with applicable Benchmarks.
o Long/Short • Long/short Managers have an absolute return objective, whereby they
can invest in both long and short commodities positions depending on market conditions. The Beta of long/short strategies tends to be quite low compared to the applicable Benchmark. Long/short Managers may invest in Commodities not typically represented in traditional Commodities’ Benchmarks.
3. Diversification While the Commodities portfolio’s positions are generally expected to be held across Commodity sectors, exposure to a particular Commodity sector (or to a particular Commodity within such sector) may be concentrated.
4. Within the portfolio, commitments have been made via a fund structure. 5. Leverage may be present in Commodities portfolios and is determined on a fund-
level basis. 6. Implementation of the commodities portfolio is currently via Active Management.
Exhibit 4
Investment Policy April 2019
Page 22
C. Benchmarks and Performance Targets
Benchmarks and Performance Targets for the Commodities portfolio are set forth in Appendix 5.
Crisis Risk Offset Structure A. Role
The Crisis Risk Offset (CRO) portfolio is expected to produce significant positive returns during an extended recessionary-type equity market crisis, while maintaining purchasing power during more normal market environments. In this respect, the CRO portfolio is expected to enhance the long-term risk-adjusted performance of the Total Portfolio, by substantially mitigating significant drawdowns that the Total Portfolio might experience.
B. Investment Structure
1. The CRO allocation generally consists of investments in highly-liquid portfolios that are meant to capture key risk premia that should prove largely beneficial during an equity-related market crisis. Along these lines, the underlying investments and strategies may utilize both long positions and short-selling positions to capture the desired return patterns/behavior.
2. The CRO portfolio is composed of three major subcomponents. a. Long U.S. Treasury Duration
i. U.S.Treasuries represent the leading “flight-to-quality” investment since they are backed by the U.S. Government. The U.S. Dollar (the base denomination of U.S. Treasuries) is also considered the world’s highest-quality reserve currency.
ii. Exposure to U.S. Treasury Duration can take place via cash markets (i.e., actual bonds) or the futures markets (virtual bond proxies).
b. Systematic Trend Following i. Long-short portfolios utilizing derivatives-based instruments to capture
both periodic appreciation and periodic depreciation trends that evolve and dissipate across a very wide array of liquid global markets. Risk/volatility is calibrated to a pre-determined level derivatives-based leverage.
ii. Assets will be invested in highly liquid underlying securities (cash, futures, forwards, etc.), allowing for relatively rapid access for rebalancing and liquidity purposes.
iii. In order to appropriately calibrate the expected volatility of this component and the overall CRO class, significant levels of derivatives-based leverage may be applied. Effects of leverage are adjusted daily through market-based exchanges/facilities, ensuring appropriate and timely mark-to-market valuations.
c. Alternative Risk Premia i. Long-short portfolios utilizing both cash and derivatives-based
instruments to capture well-researched/documented non-market risk premiums (e.g., momentum, carry, value, low-volatility, etc.) on a continuous basis, utilizing an array of liquid global markets.
Exhibit 4
Investment Policy April 2019
Page 50
Appendix 1
System Assumed Rates of Return
Year Ending Assumed Rate of Return
8-31-02 8.50% 8-31-03 8.50% 8-31-04 8.50% 6-30-05 8.50% 6-30-06 8.50% 6-30-07 8.50% 6-30-08 8.50% 6-30-09 8.50% 6-30-10 7.75% 6-30-11 7.75% 6-30-12 7.75% 6-30-13 7.75% 6-30-14 7.25% 6-30-15 7.25% 6-30-16 7.25% 6-30-17 7.25% 6-30-18 6.75%
Exhibit 4
Investment Policy April 2019
Page 54
Appendix 5 Benchmarks and Active Manager Performance Targets
As of 3-31-19 ASSET CLASS POLICY MIX
BENCHMARK
PERFORMANCE TARGET
Total Broad Growth Aggregate Blend of Blends Traditional Growth Blend
U.S. Equity Dow Jones U. S. Total Stock Market Index
Large Cap BM+0.50% Large Cap Structured Active BM+0.75% Mid Cap (Core, Growth, Value) BM+1.0% Small Cap (Core, Growth, Value)
BM+2.0%
Non-U.S. Equity MSCI ACW Ex-US Large Cap Non-US Developed MSCI EAFE BM+2.0% All Cap Non-US Equity MSCI ACW Ex-US BM+2.0% Structured Active Non-US Equity MSCI ACW Ex-US BM+1.50% Emerging Markets MSCI Emerging Markets Index BM+2.0% Global Equity MSCI All Country World BM+2.0% REITS FTSE EPRA/NAREIT Developed
Index BM+1.0%
Stabilized Growth Blend
Hedged Strategies LIBOR Secondary Benchmark may include
HFRI Fund of Funds Composite Index
BM+5.0%
Options Strategies Blend of two benchmarks: Bench 1: [25% CBOE S&P 500 PutWrite / 25% CBOE S%P 500
BuyWrite / 25% MSCI ACWI ex US ND / 25% 3-month T-bill]
Bench 2: [CBOE S&P 500 PutWrite]
BM%
Total Credit Emerging Market Debt
25%IG+30%HY+30%EMD+15%BL Blend50% - JP Morgan Government
Bond Index – Emerging Markets Global Diversified
25% - JP Morgan Emerging Markets Bond Index - Global Diversified
25% - JP Morgan Corporate Emerging Markets Bond Index – Broad
BM + 0.50%BM+0.50%
Investment Grade BB Global Agg Credit Index BM + 0.50% High Yield BB Global High Yield BM + 0.50%
Emerging Market Debt (EMD) 50 % JPM Gov. Bond Index - EM Global Div. + 25% JPM EM Bond Index - Global Diversified + 25%
JPM Corp. EM Bond Index - Broad
BM + 0.50%
Bank Loans S&P LSTV Global Leveraged Loan BM + 0.50% Real Assets Blend
Exhibit 4
Investment Policy April 2019
Page 55
Core Real Estate NFI-ODCE Value Weight Net BM%
Infrastructure Weighted Average of the Underlying Investment Benchmarks
BM%
Non-Traditonal Growth Blend Private Equity Dow Jones U.S. Total Stock Market
Index Secondary Benchmarks may include:
peer group comparison, return multiple or public market equivalent
comparisons.
BM+3.0%
Non-core Real Assets NFI-ODCE Value Weight Net BM+1.5% Principal ProtectionTotal Fixed Income
Bloomberg Barclays Intermediate Agg. Ex CreditBlend
BM%
Total Inflation Sensitive Blend TIPS Barclays Capital U.S. TIPS Index BM+0.30% Commodities Bloomberg Commodity Index BM+1.0%
Total Crisis Risk Offset 35%LD+40%STF+25%ARP Blend BM Long Duration BB Long Government Index BM Systematic Trend Following CS Managed Futures (15%Vol) BM Alternative Risk Premia 90 Day Treasury Bills + 2.0% BM
Grand Total Policy Portfolio
Exhibit 4
Investment Policy April 2019
Page 56
Appendix 6
*Includes allocations to Principal Protection, Credit, Tips, and Long Duration SURS Utilization Goals for Active Emerging Investment Managers
Aspirational Goals per 40 ILCS 5/1-109.1
Group Goal Emerging Investment Managers Not less than 20% of Assets Under Management MFDB Managers Not less than 20% of Managers
Asset Class
Goal for Minorities
Goal for Females
Goal for Persons with a Disability
Overall Active Goal
Equities 20% 10% 0-2% 30% Fixed Income
(includesTIPS)* 12% 8% 0-1% 20%
Alternative Investments
0-20% of new allocations
0-20% of new allocations
0-20% of new allocations
20% of new allocations
Total Fund 16% 8% 1% 25%
Exhibit 4
Investment Policy April 2019
Page 58
Appendix 8
Manager(1) Utilization Goals for Minority-owned Broker/Dealers
ASSET CLASS
MINIMUM
EXPECTATION
ELIGIBLE TRADE
VOLUME
ELIGIBLE
COMMISSIONS Equity: Active U.S. Equity 30.0% X (1)(2) Passive U.S. Equity 35.0% X (1)(2) Structured Active U.S. Equity 20.0% X (1)(2) Non-U.S. Equity 15.0% X (1)(2)(3) Global Equity 20.0% X (1)(2)(3) REITS 15.0% X (1)(2)(3) Fixed Income*: (including TIPS) 20.0% X (1)(2)(3)
*Includes allocations to Principal Protection, Credit, Tips, and Long Duration ‘(1) Separate account managers. ‘(2) Exception for electronic trading. ‘(3) Exception for emerging markets, as defined by Morgan Stanley Capital International.
Exhibit 4
M E K E T A I N V E S T M E N T G R O U P
www.meketagroup.com
B O STONM A S S A CHU S E T T S
C H I C AGOI L L I N O I S
M I AM I
F L O R I DA
N EW Y ORKN EW Y ORK
P ORTLANDO R E GON
S AN D I E GO
C A L I F O RN I AL ONDON
U N I T E D K I N G DOM
August 2018
State Universities Retirement System Traditional Growth Review
Structure DiscussionJune 2019
Neil Rue, CFAColin Bebee, CFA
Ryan Lobdell, CAIA
Exhibit 5
Review of Traditional Growth Allocation
Prepared by Meketa Investment Group
State Universities Retirement System
2
Section
Recap of Traditional Growth Allocation & Latest Decisions 1
Review of Current Traditional Growth Class 2
Recommendations & Next Steps 3
Agenda
Exhibit 5
Recap
Exhibit 5
Review of Traditional Growth Allocation
Prepared by Meketa Investment Group
State Universities Retirement System
4
In September 2018 the Board approved a new long-term policy for allocating SURS’ assets
Last few meetings: Board has given direction/approvals to begin policy implementation:
• Crisis Risk Offset class: approved class design, revised policy, searching for managers
• Credit & Principal Protection segments: reviewed segment framework, approving class design & policy,preparing to restructure managers
This presentation reviews SURS’ Traditional Growth class, SURS’ largest allocationcurrently
Recap
Exhibit 5
Review of Traditional Growth Allocation
Prepared by Meketa Investment Group
State Universities Retirement System
5
Long-term allocation policy recently approved by Board:
Recap
Crisis Risk Offset20%
Principal Protection8%
Inflation Sensitive6%
Traditional Growth25%
Stabilized Growth26%
Non-Traditional Growth15%
Broad Growth66%
Broad Growth Components
SURS Long-term Allocation Policy
Exhibit 5
Review of Traditional Growth Allocation
Prepared by Meketa Investment Group
State Universities Retirement System
6
0
10
20
30
40
50
60
70
80
90
100
Current 7/1/2019 7/1/2020 7/1/2021 7/1/2022 Long-Term
% o
f Tot
al A
sset
s
8781
76
66 66 66
Overall Broad Growth Class being reduced over time
Recap
SURS Projected Allocation to Growth-risk Assets - % of Total Assets
Exhibit 5
Review of Traditional Growth Allocation
Prepared by Meketa Investment Group
State Universities Retirement System
7
SURS Allocation to Growth-risk Assets - % of Total Assets
8 8 9 11 13 15
25 26 2626
2626
5447
4129 27 25
0
10
20
30
40
50
60
70
80
90
100
Current 7/1/2019 7/1/2020 7/1/2021 7/1/2022 Long-Term
% o
f Tot
al A
sset
s
Non-Traditional Stabilized Traditional
Focus of Presentation: Restructuring Traditional Growth
Over time, less reliance on Traditional Growth segment; diversify across growth assets
Key opportunity: streamlining Traditional Growth structure in light of upcoming reduction(s)
Exhibit 5
Traditional Growth Structural Review
Exhibit 5
Review of Traditional Growth Allocation
Prepared by Meketa Investment Group
State Universities Retirement System
9
Pertinent SURS Investment Beliefs
• Diversification within strategic classes helps to mitigate the risks of the class.
• Utilization of passive approaches in highly-efficient publicly-traded markets should take priority
• Active management can prove beneficial in certain market segments
• Investment costs directly impact investment returns and should be monitored and managed carefully
• SURS is committed to enhancing diversity by including diverse-owned investment managers
Exhibit 5
Review of Traditional Growth Allocation
Prepared by Meketa Investment Group
State Universities Retirement System
10
Current* Structure of Traditional Growth Component
$9.8B19 Managers
22 Accounts
Diversity38% of AUM
11 of 19 Managers
Active / Passive / Hybrid
44% / 38% / 18%U.S. / Non-U.S.
54% / 46%
*as of 3/31/2019
Exhibit 5
Review of Traditional Growth Allocation
Prepared by Meketa Investment Group
State Universities Retirement System
11
Overall Portfolio AUM$ organized by Active / Passive Mandates
as of 3/31/2019
Exhibit 5
Review of Traditional Growth Allocation
Prepared by Meketa Investment Group
State Universities Retirement System
12
Overall Portfolio AUM$ organized by Diversity status
as of 3/31/2019
Exhibit 5
Review of Traditional Growth Allocation
Prepared by Meketa Investment Group
State Universities Retirement System
13
Overall Portfolio AUM$ organized by Major Regional Mandate
as of 3/31/2019
Exhibit 5
Review of Traditional Growth Allocation
Prepared by Meketa Investment Group
State Universities Retirement System
14
Portfolio Performance Summary(SURS class results are net of fees)
Class/Segment
Value as of 3/31/2019
($millions) 3/31 Qtr 1 YR 3 YR 5 YR
SURS Total Public Equity (Traditional Growth) $9,837.2 13.3 3.0 11.8 7.6
MSCI ACWI IMI 12.4 2.4 11.2 6.9MSCI ACWI 12.3 3.2 11.3 7.0
Excess vs. ACWI IMI 0.9 0.6 0.6 0.7Excess vs. ACWI 1.0 (0.2) 0.5 0.6
SURS US Equity $4,370.9 14.0 7.3 13.1 9.9
DJ Total US Eq Index 14.0 8.7 13.4 10.3Excess 0.0 (1.4) (0.3) (0.4)
SURS Non US Equity $3,680.6 10.6 -4.6 7.9 3.0
MSCI ACWI ex-US 10.3 -4.2 8.1 2.6
Excess 0.3 (0.4) (0.2) 0.4
SURS Global Equity $1,785.7 15.0 5.3 13.5 8.6
MSCI ACWI 12.3 3.2 11.3 7.0
Excess 2.7 2.1 2.2 1.6
Overall portfolio has added value vs. standard indices; due to U.S. home bias (next slide)
Performance among segments has been mixed
For reference, not yet policy
as of 3/31/2019
Exhibit 5
Review of Traditional Growth Allocation
Prepared by Meketa Investment Group
State Universities Retirement System
15
Portfolio Performance Analysis – Last 5 Years*
Home bias was a contributor; aggregate managers’ selection capabilities were detractors
-15.0
-10.0
-5.0
0.0
5.0
10.0
15.0
U.S. Non-U.S
Exce
ss W
eigh
t (%
)
1.0
-0.3
0.6
-0.6
-0.3
0.0
0.3
0.6
0.9
1.2
Contribution dueto Home Bias
SelectionContribution
Total ExcessReturn
Annu
aliz
ed R
etur
n (%
)
Average Relative U.S. vs. Non-U.S. Weighting Sources of Added Value – Last 5 Years
*SURS Total Public Equity vs. MSCI ACWI; returns-based attribution. as of 3/31/2019
Exhibit 5
Review of Traditional Growth Allocation
Prepared by Meketa Investment Group
State Universities Retirement System
16
Add value – must have reasonable probability of success
Broad Exposure – wide breadth of opportunities; no unnecessary concentration
Minimize surprise risk – complementary strategies; appropriately scaled
Cost effective – review mandates/fees to ensure appropriate costs
Diversity – enhance/improve diverse managers’ contributions
Streamline – minimize redundancy/overdiversification
Characteristics of a Successful SURS Traditional Growth Program
Exhibit 5
Review of Traditional Growth Allocation
Prepared by Meketa Investment Group
State Universities Retirement System
17
Broad Exposure to Global Equity Risk Premium
Portfolio # of holdings
SURS Traditional Growth 5,731
Benchmark (MSCI ACW IMI) 8,655
Opportunity Set 16,272
Ex Ante Risks
SURS
Traditional
Growth
MSCI
ACWI
IMI
Tracking
Error
Total (Std. Dev.) 11.4% 11.1% 1.0%
Beta to Benchmark 1.06
% of Total Risk
Systematic 99.4% 99.4% 40.0%
Residual/Security Selection 0.6% 0.6% 60.0%
Total 100.0% 100.0% 100.0%
% of Systematic (based on TE)
10-year yield (interest rates) 0.1% 0.0% 17.5%
EUR/USD (currency) 0.3% 0.7% 17.5%
Credit 47.4% 47.3% 12.5%
Global Market 40.5% 40.4% 10.0%
United States 2.0% 3.0% 3.0%
Health Care Sector 0.5% 0.4% 2.5%
Canada 0.0% 0.0% 2.5%
Breadth
Risk Profile
Sector Coverage
Region Coverage
SURS Portfolio effectively capturing global equity risk premium
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
SURS Traditional Growth MSCI ACWI IMI
Utilities
Telecomm. Services
Information Technology
Financials
Health Care
Consumer Staples
Consumer Discretionary
Industrials
Materials
Energy
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
SURS Traditional Growth MSCI ACWI IMI
S AMERICA
N AMERICA
EURO
AUST
ASIA
AFRICA
as of 3/31/2019
Exhibit 5
Review of Traditional Growth Allocation
Prepared by Meketa Investment Group
State Universities Retirement System
18
Potential for Added Value vs. Negative Surprise Risk
Domestic Equity Portfolio – Recent Track Record
Quarterly Excess Returns CAPM Measures – rolling 3 Yrs.
Annualized Excess Return: -0.53%
Annualized Tracking Error: 0.79%
Batting Average: 0.412
Avg. 3-Yr. Beta: 1.02
Annualized 12-qtr Alpha: -0.85
Lack of positive alpha/excess return consistency argues for consideration of passive options
-2.00
-1.50
-1.00
-0.50
0.00
0.50
1.00
1.50
2.00
2.50
12/10 06/11 12/11 06/12 12/12 06/13 12/13 06/14 12/14 06/15 12/15 06/16 12/16 06/17 12/17 06/18 12/18
-3.00
-2.00
-1.00
0.00
1.00
2.00
3.00
12-qtr beta
Annlzd 12-qtr alpha
through 3/31/2019
Exhibit 5
Review of Traditional Growth Allocation
Prepared by Meketa Investment Group
State Universities Retirement System
19
Potential for Added Value vs. Negative Surprise Risk
International Equity Portfolio – Recent Track Record
Annualized Excess Return: 0.48%
Annualized Tracking Error: 1.00%
Batting Average: 0.559
Avg. 3-Yr. Beta: 0.99
Annualized 12-qtr Alpha: 0.60
Quarterly Excess Returns CAPM Measures – rolling 3 Yrs.
-2.00
-1.50
-1.00
-0.50
0.00
0.50
1.00
1.50
2.00
2.50
12/10 06/11 12/11 06/12 12/12 06/13 12/13 06/14 12/14 06/15 12/15 06/16 12/16 06/17 12/17 06/18 12/18
-3.00
-2.00
-1.00
0.00
1.00
2.00
3.00
12-qtr beta
Annlzd 12-qtr alpha
through 3/31/2019
Favorable history; recent decline in added value and tight tracking suggests passive consideration
Exhibit 5
Review of Traditional Growth Allocation
Prepared by Meketa Investment Group
State Universities Retirement System
20
Potential for Added Value vs. Negative Surprise Risk
Global Equity Portfolio – Recent Track Record
Quarterly Excess Returns CAPM Measures – rolling 3 Yrs.
Annualized Excess Return: 1.23%
Annualized Tracking Error: 1.88%
Batting Average: 0.588
Avg. 3-Yr. Beta: 0.99
Annualized 12-qtr Alpha: 1.33
Favorable/consistent added value: continue active, consider higher exposure
-2.00
-1.50
-1.00
-0.50
0.00
0.50
1.00
1.50
2.00
2.50
3.00
12/10 06/11 12/11 06/12 12/12 06/13 12/13 06/14 12/14 06/15 12/15 06/16 12/16 06/17 12/17 06/18 12/18
-3.00
-2.00
-1.00
0.00
1.00
2.00
3.00
12-qtr beta
Annlzd 12-qtr alpha
through 3/31/2019
Exhibit 5
Review of Traditional Growth Allocation
Prepared by Meketa Investment Group
State Universities Retirement System
21
Diversity
SURS Diverse Traditional Growth Accounts
11 Diverse Managers, not including Progress
managers
Average account size is significant
Goals (where prudent and appropriate):
• “graduate” managers from Progress• increase overall diversity AUM• scale up smallest accounts
Manager 3/31/2019 AUM Mandate Approach
Rhumbline S&P/Wilshire Fund $1,047,427,692 USEQ Passive
Piedmont Investments $673,169,320 USEQ Active
Gladius Equity $441,493,968 USEQ Active
Strategic Global Advisors $325,265,841 NONUSEQ Active
GlobeFlex Capital $304,678,373 NONUSEQ Active
Ativo $283,840,575 NONUSEQ Active
Prog - Non US $220,281,148 NONUSEQ Active
Earnest Partners $165,610,492 USEQ Active
Matarin Cap Small Core $92,090,610 USEQ Active
Channing Cap SMID Value $90,188,182 USEQ Active
Denali Adv Large Value $48,466,324 USEQ Active
Total $3,692,512,525
Active Mandates $2,645,084,833
Passive Mandates $1,047,427,692
Avg. Active Account Size $264,508,483
Exhibit 5
Review of Traditional Growth Allocation
Prepared by Meketa Investment Group
State Universities Retirement System
22
Cost Effectiveness of Current Trad. Growth Program
SURS Estimated Cost*
28bp/year
Peer Costs*
30bp/year
*Source: 2017 CEM Survey, assume similarly structured
portfolio*Estimated 2017 Fees
Favorable vs. Peers
Total
Traditional
Growth
Domestic
Equity
Intl.
Equity
Global
Equity
Fees (basis points) 28 22 25 49 1
Active Risk (%) 1.12 0.78 1.00 1.71 0.15
Fees per Active Risk (FAR)* 25 28 25 29 7
Added Value Mixed No Mixed Yes None
Manager Portfolios Reference:
Domestic
Passive
Passive management is 4X more cost-
effective than current program(s); combined with marginal proof of
added value
Above is evidence to consider passive/hybrid passive approaches and consolidating accounts
Cost Effectiveness Analysis*
*Source: “What Free Lunch? The Cost of Overdiversification,” Financial Analysts Journal, CFA Institute, First Quarter 2018.
Exhibit 5
Review of Traditional Growth Allocation
Prepared by Meketa Investment Group
State Universities Retirement System
23
Potential for Added Value vs. Negative Surprise Risk
Aggregate Traditional Growth Portfolio – Current Risk Positioning
Risk/Added Value Analytics
Low expected active risk/tracking error implies “virtual indexing”; also indicates lower potential for significant +/- deviation from benchmark
Higher-quality active risk: emphasizes security selection
Broad benchmark includes more small-cap than current policy
Objectives:• Increase active risk by emphasizing security
selection and minimizing systematic biases;
• Consider broader benchmark with more complete coverage (switch to MSCI ACWI IMI)
Ex Ante Risks
SURS
Traditional
Growth
MSCI
ACWI
IMI
Tracking
Error
Total (Std. Dev.) 11.4% 11.1% 1.0%
Beta to Benchmark 1.06
% of Total Risk
Systematic 99.4% 99.4% 40.0%
Residual/Security Selection 0.6% 0.6% 60.0%
Total 100.0% 100.0% 100.0%
% of Systematic (based on TE)
10-year yield (interest rates) 0.1% 0.0% 17.5%
EUR/USD (currency) 0.3% 0.7% 17.5%
Credit 47.4% 47.3% 12.5%
Global Market 40.5% 40.4% 10.0%
United States 2.0% 3.0% 3.0%
Health Care Sector 0.5% 0.4% 2.5%
Canada 0.0% 0.0% 2.5%
as of 3/31/2019
Exhibit 5
Review of Traditional Growth Allocation
Prepared by Meketa Investment Group
State Universities Retirement System
24
Traditional Growth Class Benchmarking Planned EvolutionCurrent SURS Policy
3 separate class portfolios, with each with distinct benchmarksDomestic Equity: Dow Jones Total Stock Market Index (previously Wilshire 5000)Non US Equity: MSCI ACWI ex-USGlobal Equity: MSCI ACWI
Policy Evolution, Step 1
One aggregate global equity class (Traditional Growth) with a full-opportunity-set benchmark (MSCI ACWI IMI)
Keep 3 component portfolios for now
Policy Evolution, Later Step 2
One aggregate class, Traditional Growth, with a full-opportunity-set benchmark
Move toward Global structure, potentially eliminating regional components
Exhibit 5
Review of Traditional Growth Allocation
Prepared by Meketa Investment Group
State Universities Retirement System
25
Traditional Growth Class BenchmarkingProposed broad benchmark for aggregate Traditional Growth class:MSCI All Country World Index Investable Market Index (MSCI ACWI IMI)
Total Equity Universe Investable EquityUniverse
MSCI ACWI IMI MSCI ACWI
Not investable
Companies not meeting index requirements
Small Cap Companies
Opportunity Set & MSCI Benchmarks
Currently utilized by SURS Global
ManagersProposed/ Under
consideration
Selected institutional investors that have adopted the MSCI ACWI IMI as their public equity policy benchmark:
CalPERSCalSTRS
Washington SIBVirginia RSSBA FloridaHawaii ERS
Several others
$53.4T8,700 stocks
$54.0T16,300 stocks
$45.9T2,800 stocks
~$4.5B
~$450M
Size cuts as of Nov-18 re-constitution
Exhibit 5
Review of Traditional Growth Allocation
Prepared by Meketa Investment Group
State Universities Retirement System
26
Traditional Growth Class Benchmarking
Comparing Risk Profiles: MSCI ACWI vs. MSCI ACWI IMI
Ex Ante Risks
MSCI
ACWI
MSCI
ACWI
IMI
Tracking
Error
Total (Std. Dev.) 11.04% 11.05% 0.6%
Beta to Benchmark 1.00
% of Total Risk
Systematic 99.3% 99.4% 72.7%
Residual/Security Selection 0.7% 0.6% 27.3%
Total 100.0% 100.0% 100.0%
% of Systematic (based on TE)
Company Size 0.0% 0.1% 83.3%
Canada 0.0% 0.0% 8.3%
EM Yields 0.4% 0.3% 4.2%
Credit 46.6% 47.3% 4.2%
Very similar indices; key risk profile difference: ACWI IMI’s allocation to small companies, which ACWI does not hold
Benchmark Risk Profiles
as of 3/31/2019
Exhibit 5
Review of Traditional Growth Allocation
Prepared by Meketa Investment Group
State Universities Retirement System
27
$5.74 $5.68
$-
$1.00
$2.00
$3.00
$4.00
$5.00
$6.00
$7.00
05-94 02-95 11-95 08-96 05-97 02-98 11-98 08-99 05-00 02-01 11-01 08-02 05-03 02-04 11-04 08-05 05-06 02-07 11-07 08-08 05-09 02-10 11-10 08-11 05-12 02-13 11-13 08-14 05-15 02-16 11-16 08-17 05-18 02-19
Gro
wth
of $
1
MSCI ACWI MSCI ACWI IMI
Traditional Growth Class Benchmarking
Comparison of Performance Track Records: MSCI ACWI vs. MSCI ACWI IMI
Very Similar Results
Quarter 1-Year 3-Year 5-Year 10-Year Since InceptionMSCI ACWI 12.3% 3.2% 11.3% 7.0% 12.6% 7.3%
MSCI ACWI IMI 12.4% 2.4% 11.2% 6.9% 12.9% 7.2%
Quarter 1-Year 3-Year 5-Year 10-Year Since InceptionMSCI ACWI 3.5% 4.2% 10.0% 11.1% 13.9% 14.9%
MSCI ACWI IMI 3.7% 4.3% 10.2% 11.4% 14.1% 15.0%
Returns (Annlzd)
Risks (Annl SDs)
as of 3/31/2019
Exhibit 5
Review of Traditional Growth Allocation
Prepared by Meketa Investment Group
State Universities Retirement System
28
Traditional Growth – Findings/Potential Actions
Fewer, broader mandates
Increase use of passive/hybrid-passive approaches
Increase targeted exposures to Diversity
Fund/support selection-oriented active managers
Increase account sizes in order (i) capture fee breaks; (ii) have more impact
The Traditional Growth portfolio has produced modest outperformance, due entirely to home bias
SURS has paid active-management fees for benchmark-like results
Favorable systematic tilts have offset negative alphas (security selection)
Active management results vary; consistent in Global Equity segment
There is room to improve Diversity’s impact upon the portfolio
ACWI IMI captures broader opportunity, provides better policy representation of actual portfolio
Findings Potential Actions
Exhibit 5
Traditional Growth Structure Recommendations & Next Steps
Exhibit 5
Review of Traditional Growth Allocation
Prepared by Meketa Investment Group
State Universities Retirement System
30
Traditional Growth Structure Recommendations
Next Steps
• Approve MSCI ACWI IMI as policy benchmark for aggregate Traditional Growth class
• Expand diversity exposure: larger mandates for remaining diverse managers and consider “graduating” selected manager(s)
• Streamline overall manager mix: (i) larger mandates; (ii) use of passive/hybrid passive; (iii) increase global
• Update policy language to incorporate new policy benchmark
• Develop manager structuring recommendations for consideration at September IC meeting
• Between now and September, Staff and Meketa will review existing manager mandates and guidelines and make adjustments where appropriate, in-line with above recommendations
Exhibit 5
Appendix
Exhibit 5
Review of Traditional Growth Allocation
Prepared by Meketa Investment Group
State Universities Retirement System
32
Active Domestic Equity Portfolio – Recent Track Record
through 3/31/2019
Quarterly Excess Returns CAPM Measures – rolling 3 Yrs.
Annualized Excess Return: -0.72%
Annualized Tracking Error: 1.66%
Batting Average: 0.485
Avg. 3-Yr. Beta: 1.03
Annualized 12-qtr Alpha: -1.17
Exhibit 5
Review of Traditional Growth Allocation
Prepared by Meketa Investment Group
State Universities Retirement System
33
Active International Equity Portfolio – Recent Track Record
through 3/31/2019
Annualized Excess Return: 1.58%
Annualized Tracking Error: 2.07%
Batting Average: 0.647
Avg. 3-Yr. Beta: 0.97
Annualized 12-qtr Alpha: 1.95
Quarterly Excess Returns CAPM Measures – rolling 3 Yrs.
-2.00
-1.50
-1.00
-0.50
0.00
0.50
1.00
1.50
2.00
2.50
3.00
12/10 06/11 12/11 06/12 12/12 06/13 12/13 06/14 12/14 06/15 12/15 06/16 12/16 06/17 12/17 06/18 12/18
-3.00
-2.00
-1.00
0.00
1.00
2.00
3.00
4.00
5.00
12-qtr beta
Annlzd 12-qtr alpha
Exhibit 5
Review of Traditional Growth Allocation
Prepared by Meketa Investment Group
State Universities Retirement System
34
Active Portfolio Risk Profiles by Segment
Ex Ante Risks
SURS
Active US
Equity
MSCI
USA
Tracking
Error
Total (Std. Dev.) 13.79 13.06 1.51
Beta to Benchmark 1.12
% of Total Risk
Systematic 99.1 98.7 89.0%
Residual/Security Selection 0.9% 1.3% 11.0%
Total 100.0% 100.0% 100.0%
% of Systematic (based on TE)
Small Cap Premium 1.0% 0.1% 55.0%
Illiquidity 2.4% 1.6% 12.4%
Long Rates 0.4% 0.1% 5.4%
Credit Spread 27.4% 28.4% 4.0%
Residual Market 40.6% 43.1% 2.5%
Style Premium 0.2% 0.5% 2.0%
Inflation Shock
Dollar
Short Rates
0.0%
3.8%
0.2%
0.0%
4.8%
0.2%
1.0%
1.0%
0.5%
Risk Profile – Domestic Active Equity
as of 3/31/2019
Ex Ante Risks
SURS
Active
Non-US
MSCI
ACWI ex
US
Tracking
Error
Total (Std. Dev.) 10.32 10.32% 1.28%
Beta to Benchmark 1.00
% of Total Risk
Systematic 97.7% 98.2% 40.0%
Residual/Security Selection 2.3% 1.8% 60.0%
Total 100.0% 100.0% 100.0%
% of Systematic (based on TE)
EM Yield 0.8% 1.4% 14.1%
Global Credit 39.9% 37.1% 7.8%
10-yr Yield 0.4% 0.6% 4.7%
Oil 1.2% 1.0% 1.6%
Yen/USD (currency) 0.0% 0.0% 1.6%
Global Style 0.1% 0.2% 1.6%
Risk Profile – International Equity
• As expected, the Active US Equity portfolio has anincreased risk profile relative to the benchmark, whichis reflected in the standard deviation, beta, andtracking error
• Systematic risk is largely attributable to the Small Cappremium
• The Active Non-US Equity portfolio has a similar risk profile to the benchmark
• Emphasis on stock selection
Exhibit 5
Review of Traditional Growth Allocation
Prepared by Meketa Investment Group
State Universities Retirement System
DISCLOSURES: THIS DOCUMENT IS PROVIDED FOR INFORMATIONAL PURPOSES ONLY. IT DOES NOT CONSTITUTE AN OFFER OF SECURITIES OF ANY OF THE ISSUERS THAT MAYBE DESCRIBED HEREIN. INFORMATION CONTAINED HEREIN MAY HAVE BEEN PROVIDED BY THIRD PARTIES, INCLUDING INVESTMENT FIRMS PROVIDING INFORMATION ONRETURNS AND ASSETS UNDER MANAGEMENT, AND MAY NOT HAVE BEEN INDEPENDENTLY VERIFIED. THE PAST PERFORMANCE INFORMATION CONTAINED IN THIS REPORT ISNOT NECESSARILY INDICATIVE OF FUTURE RESULTS AND THERE IS NO ASSURANCE THAT THE INVESTMENT IN QUESTION WILL ACHIEVE COMPARABLE RESULTS OR THAT THEFIRM WILL BE ABLE TO IMPLEMENT ITS INVESTMENT STRATEGY OR ACHIEVE ITS INVESTMENT OBJECTIVES. THE ACTUAL REALIZED VALUE OF CURRENTLY UNREALIZEDINVESTMENTS (IF ANY) WILL DEPEND ON A VARIETY OF FACTORS, INCLUDING FUTURE OPERATING RESULTS, THE VALUE OF THE ASSETS AND MARKET CONDITIONS AT THETIME OF DISPOSITION, ANY RELATED TRANSACTION COSTS AND THE TIMING AND MANNER OF SALE, ALL OF WHICH MAY DIFFER FROM THE ASSUMPTIONS AND CIRCUMSTANCESON 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 ORCOMPLETENESS OF THE INFORMATION CONTAINED IN THIS DOCUMENT OR ANY ORAL INFORMATION PROVIDED IN CONNECTION HEREWITH, OR ANY DATA SUBSEQUENTLYGENERATED HEREFROM, AND ACCEPT NO RESPONSIBILITY, OBLIGATION OR LIABILITY (WHETHER DIRECT OR INDIRECT, IN CONTRACT, TORT OR OTHERWISE) IN RELATION TOANY OF SUCH INFORMATION. MEKETA AND MEKETA’S OFFICERS, EMPLOYEES AND AGENTS EXPRESSLY DISCLAIM ANY AND ALL LIABILITY THAT MAY BE BASED ON THISDOCUMENT AND ANY ERRORS THEREIN OR OMISSIONS THEREFROM. NEITHER PCA NOR ANY OF PCA’S OFFICERS, EMPLOYEES OR AGENTS, MAKE ANY REPRESENTATION OFWARRANTY, 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 THEACHIEVEMENT OR REASONABLENESS OF FUTURE PROJECTIONS, MANAGEMENT TARGETS, ESTIMATES, PROSPECTS OR RETURNS, IF ANY. ANY VIEWS OR TERMS CONTAINEDHEREIN ARE PRELIMINARY ONLY, AND ARE BASED ON FINANCIAL, ECONOMIC, MARKET AND OTHER CONDITIONS PREVAILING AS OF THE DATE OF THIS DOCUMENT AND ARETHEREFORE 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 OTHEREXPECTATIONS. THE OPINIONS, ESTIMATES AND ANALYSES REFLECT PCA’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 THEHISTORICAL PERIODS SHOWN. SUCH TABLES, GRAPHS AND CHARTS ARE NOT INTENDED TO PREDICT FUTURE PERFORMANCE AND SHOULD NOT BE USED AS THE BASIS FOR ANINVESTMENT DECISION.
ALL TRADEMARKS OR PRODUCT NAMES MENTIONED HEREIN ARE THE PROPERTY OF THEIR RESPECTIVE OWNERS. INDICES ARE UNMANAGED AND ONE CANNOT INVESTDIRECTLY 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 INCONNECTION 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 CHICAGOBOARD OPTIONS EXCHANGE ARE REGISTERED TRADEMARKS OF THE CBOE, AND SPX, AND CBOE S&P 500 BUYWRITE INDEX BXM ARE SERVICEMARKS OF THE CBOE. THEMETHODOLOGY 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.
Exhibit 5
State Universities Retirement System of
Illinois (SURS)
Quarterly Report
This report is solely for the use of client personnel. No part of it may be circulated, quoted, or reproduced for distribution outside the client organization without prior written approval fromMeketa Investment Group.
Nothing herein is intended to serve as investment advice, a recommendation of any particular investment or type of investment, a suggestion of purchasing or selling securities, or an invi-tation or inducement to engage in investment activity.
Q1 2019
Exhibit 6
TABLE OF CONTENTS
INTRODUCTION/PORTFOLIO REVIEW
ECONOMIC OVERVIEW
PORTFOLIO DETAILPerformance ResultsRiskAttribution
Exhibit 6
INTRODUCTION / PORTFOLIO REVIEW
Exhibit 6
3-YR Statistics (Rank)
5-YR Statistics (Rank)
· The SURS Total Portfolio matched or outperformed the Policy Benchmark over 5 of the 6 measured periods, net of fees. The Total Portfoliooutperformed the Median Public Fund over 3 of the 6 measured time periods, net of fees.
(1) Investment Metrics (IM) Median [Gross of Fees] - Public Fund >$1 Bilion Universe includes BNY Mellon Total Public Fund Greater than $1Billion Universe and IM client data.(2) Parametric Overlay program Inception Date: September 2014
3 Mo (Rank) 1 YR (Rank) 3 YR (Rank) 5 YR (Rank) 7 YR (Rank) 10 YR (Rank)
Total Fund w/ Overlay 8.1 (31) 4.0 (57) 8.3 (70) 6.1 (60) 7.7 (47) 10.7 (32)
Policy Benchmark 7.1 (55) 3.6 (71) 8.1 (75) 6.0 (60) 7.7 (45) 10.9 (14)
Excess Return vs. Policy Index 1.0 0.4 0.2 0.1 0.0 -0.2 Public Fund Median (1) 7.2 4.2 8.7 6.3 7.6 10.2
Total Fund ex Overlay 8.1 3.7 8.1 6.0 7.7 10.6
ReturnStandardDeviation
SharpeRatio
InformationRatio
8.3 (70) 5.9 (64) 1.2 (79) 0.2 (66)8.1 (75) 5.5 (57) 1.2 (67) -
Total Fund w/ OverlayPolicy BenchmarkPublic Fund Median (1) 8.7 5.3 1.3 0.4
Portfolio Valuation ($000's)
1Quarter
Total Fund w/ Overlay Beginning Market Value 17,803,896 Net Cash Flow -38,715 Fees/Expenses -9,358 Income 99,661 Gain/Loss 1,358,514 Ending Market Value 19,223,356Return
StandardDeviation
SharpeRatio
InformationRatio
6.1 (60) 6.7 (70) 0.8 (80) 0.1 (54)6.0 (60) 6.5 (65) 0.8 (76) -
Total Fund w/ OverlaySURS Policy Benchmark
Public Fund Median (1) 6.3 5.8 0.9 0.1
SURS Portfolio Review - Net-of-Fees
As of March 31, 2019
State Universities Retirement System of Illinois (SURS) 4
Exhibit 6
ECONOMIC OVERVIEW
Exhibit 6
Economic & Market Overview – 1Q 2019
Overview: Real U.S. GDP increased by 3.2% in the first quarter of 2019. Growth was driven by increases in personal consumption expenditures, private inventory investment, exports, state and local government spending, and nonresidential fixed investment, while a decrease in residential fixed investment detracted from GDP growth over the quarter. At quarter-end, the unemployment rate decreased to 3.8%. The seasonally adjusted Consumer Price Index for All Urban Consumers increased by 2.3% on an annualized basis during the quarter. Commodities were up in the first quarter, but the 1-year return for a basket of commodities was negative at -5.3%. Global equity returns were strong over the quarter as the MSCI ACWI was up 12.7%. The U.S. Dollar appreciated against the Euro and Yen by 2.2% and 1.1%, respectively, but depreciated against the Pound by 2.2%.
Economic Growth
Real GDP increased at an annualized rate of 3.2 percent in the first quarter of 2019.
Real GDP growth was driven by increases in personal consumption expenditures, private inventory investment, exports, state and local government spending, and nonresidential fixed investments.
GDP growth was partially offset during the quarter by a decrease in residential investment.
Inflation
The Consumer Price Index for All Urban Consumers (CPI-U) increased by 2.3 percent during the first quarter on an annualized basis after seasonal adjustment.
Quarterly percentage changes may be adjusted between data publications due to periodic updates in seasonal factors.
Core CPI-U increased by 2.0 percent for the quarter on an annualized basis after seasonal adjustment.
Over the last 12 months, core CPI-U increased by 2.0 percent after seasonal adjustment.
Unemployment
The U.S. economy gained approximately 541,000 jobs in the first quarter of 2019.
The unemployment rate decreased to 3.8% at quarter-end.
The majority of jobs gained occurred in education and health services, professional and business services, and leisure and hospitality. Job loss in temporary help services, retail trade, as well as manufacturing in motor vehicles and parts detracted from job growth over the quarter.
3.2%2.2%
3.4%4.2%
2.2%2.9%
0.0%
2.0%
4.0%
6.0%
2019 Q12018 Q42018 Q32018 Q22018 Q12017 Q4
Annualized Quarterly GDP Growth
2.3%
1.1%1.4%
2.6%2.6%2.4%
0.0%
1.0%
2.0%
3.0%
4.0%
2019 Q12018 Q42018 Q32018 Q22018 Q12017 Q4
CPI-U After Seasonal Adjustment
3.8%3.9%3.7%4.0%4.1%4.1%
0.0%1.0%2.0%3.0%4.0%5.0%
2019 Q12018 Q42018 Q32018 Q22018 Q12017 Q4
Unemployment Rate
6
Exhibit 6
Economic & Market Overview – 1Q 2019
Interest Rates & US Dollar
Treasury Yield Curve Changes
Certain parts of the yield curve remained slightly inverted over the quarter as longer term yields decreased more than shorter-term yields.
The Federal Fund Rate was unchanged in the first quarter. The current target is between 2.25 and 2.50 percent.
The U.S. Dollar appreciated against the Euro and Yen by 2.2% and 1.1%, respectively, but depreciated against the Pound by 2.2%.
Source: US Treasury Department
Fixed Income
Investment Grade bonds performed well over the quarter, generally producing returns between 2% and 5%. High Yield bonds provided the strongest performance as they were up 7.3% for the quarter.
Over the trailing 1-year period, all bonds sectors performed favorably as they were all in excess of 4%. High Yield led all other sectors as they were up nearly 6% over the 1-year period.
US Fixed Income Sector Performance (BB Aggregate Index)
Sector Weight QTR 1 Year
Governments* 42.3% 2.2% 4.2%
Agencies 2.7% 2.5% 3.8%
Inv. Grade Credit 24.7% 5.1% 4.9%
MBS 27.8% 2.2% 4.4%
ABS 0.5% 1.5% 3.7%
CMBS 2.0% 3.2% 5.4%
2.0%
3.0%
4.0%
3 m
o6
mo
1 y
r2
yr
3 y
r
5 y
r
7 y
r
10
yr
20
yr
30
yr
12/31/2018 3/29/2019
2.9%
4.5%
2.1%
4.2%4.
9%
4.9%
2.2%
4.4%
7.3%
5.9%
0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
QTR 1-Year
Fixed Income Returns
BB Agg BB Govt* BB Credit BB Mortgage BB High Yield
*U.S. Treasuries and Government Related *U.S. Treasuries and Agencies
7
Exhibit 6
Economic & Market Overview – 1Q 2019
10.4
%
-3.7
%
10.1
%
-3.2
%
11.0
%
-3.1
%
8.7%
-3.6
%
10.0
%
-7.1
%-10%-5%0%5%
10%15%20%
QTR 1-Year
International Equity Returns (GD in USD)
MSCI ACWI Ex U.S. MSCI EAFE MSCI Europe MSCI Pacific MSCI EM
U.S. Equities
U.S. equities experienced an exceptional first quarter as they provided double-digit returns across styles and market capitalizations. Growth stocks outperformed value stocks and small cap stocks outperformed large cap stocks. Small cap growth outperformed all other styles and capitalizations as they returned 17.3% over the quarter. Broad, large, and small cap value stocks each returned 11.9% over the quarter.
During the trailing 1-year period, U.S. equities were mixed as large cap growth stocks performed well returning 12.8% over the time period, while small cap value stocks
were essentially flat.
0.4%
U.S. Equity Sector Performance (Russell 3000 Index)
Sector Weight QTR 1 Year
Information Tech. 20.5% 20.8% 18.0%
Health Care 14.4% 8.2% 14.1%
Financials 13.8% 8.8% -4.7%
Industrials 10.4% 16.7% 2.1%
Consumer Disc. 10.2% 14.7% 10.5%
Comm. Services 9.1% 14.2% 10.5%
Consumer Staples 6.4% 11.7% 9.8%
Energy 5.0% 16.6% -0.2%
Real Estate 3.9% 17.3% 19.3%
Utilities 3.2% 11.4% 20.3%
Materials 3.0% 11.6% -2.3%
International Equities
International Equity Region Performance (GD in USD) (MSCI ACWI ex US)
Sector Weight QTR 1 Year
Europe Ex. UK 30.7% 10.7% -4.3%
Emerging Markets 26.1% 10.0% -7.1%
Japan 16.1% 6.9% -7.5%
United Kingdom 11.5% 11.9% 0.0%
Pacific Ex. Japan 8.5%
12.3% 4.7%
Canada 6.8% 15.6% 3.9%
International equities provided strong performance across the board during the first quarter. Europe led all major regions with a return of 11.0% while the Pacific trailed all other major regions with a return of 8.7%.
Over the trailing 1-year period, Europe led all other major regions with a return of -3.1%, while Emerging Markets trailed all other major regions with a -7.1% return.
14.0
%
8.8%
16.2
%
12.1
%
11.9
%
5.3%
14.0
%
9.3%
16.1
%
12.8
%
11.9
%
5.7%
14.6
%
2.1%
17.1
%
3.9%
11.9
%
0.2%
0%
5%
10%
15%
20%
25%
QTR 1-Year
U.S. Equity Returns
R3000 (Broad Core) R3000G (Broad Gr) R3000V (Broad Val)R1000 (Lg Core) R1000G (Lg Gr) R1000V (Lg Val)R2000 (Sm Core) R2000G (Sm Gr) R2000V (Sm Val)
8
Exhibit 6
Economic & Market Overview – 1Q 2019
*Performance is annualized for periods greater than one year
Market Summary – Multi-term Performance*
Indexes Month Quarter 1 Year 3 Years 5 Years 10 Years 20 Years
Global Equity
MSCI AC World Index 1.3% 12.3% 3.2% 11.3% 7.0% 12.6% 5.4%
Domestic Equity
S&P 500 1.9% 13.6% 9.5% 13.5% 10.9% 15.9% 6.0%
Russell 3000 1.5% 14.0% 8.8% 13.5% 10.4% 16.0% 6.5%
Russell 3000 Growth 2.5% 16.2% 12.1% 16.4% 13.1% 17.4% 5.6%
Russell 3000 Value 0.4% 11.9% 5.3% 10.5% 7.6% 14.5% 6.9%
Russell 1000 1.7% 14.0% 9.3% 13.5% 10.6% 16.0% 6.3%
Russell 1000 Growth 2.8% 16.1% 12.7% 16.5% 13.5% 17.5% 5.5%
Russell 1000 Value 0.6% 11.9% 5.7% 10.5% 7.7% 14.5% 6.7%
Russell 2000 -2.1% 14.6% 2.0% 12.9% 7.1% 15.4% 8.4%
Russell 2000 Growth -1.4% 17.1% 3.9% 14.9% 8.4% 16.5% 7.1%
Russell 2000 Value -2.9% 11.9% 0.2% 10.9% 5.6% 14.1% 9.4%
Russell Microcap -3.0% 13.1% -2.4% 12.3% 5.0% 15.0% ---
Alerian MLP Index 3.4% 16.8% 15.1% 5.7% -4.7% 10.1% 11.5%
CBOE BXM Index 1.8% 6.8% 3.3% 7.4% 5.9% 9.0% 5.0%
International Equity
MSCI AC World Index ex USA 0.7% 10.4% -3.7% 8.6% 3.0% 9.3% 5.0%
MSCI EAFE 0.7% 10.1% -3.2% 7.8% 2.8% 9.5% 4.4%
MSCI Pacific 0.8% 8.7% -3.6% 9.1% 5.2% 9.3% 4.4%
MSCI Europe 0.7% 11.0% -3.1% 7.2% 1.6% 9.6% 4.4%
MSCI EM (Emerging Markets) 0.9% 10.0% -7.1% 11.1% 4.1% 9.3% 8.7%
Fixed Income
BB Universal 1.8% 3.3% 4.5% 2.6% 3.0% 4.4% 5.0%
Global Agg. - Hedged 1.8% 3.0% 4.9% 2.8% 3.6% 4.1% 4.7%
BB Aggregate Bond 1.9% 2.9% 4.5% 2.0% 2.7% 3.8% 4.7%
BB Government 1.9% 2.1% 4.2% 1.1% 2.1% 2.4% 4.3%
BB Credit Bond 2.4% 4.9% 4.9% 3.5% 3.6% 6.2% 5.5%
BB Mortgage Backed Securities 1.5% 2.2% 4.4% 1.8% 2.6% 3.1% 4.6%
BB High Yield 0.9% 7.3% 5.9% 8.6% 4.7% 11.3% 6.8%
BB WGIL All Maturities - Hedged 3.1% 3.9% 4.0% 4.4% 4.5% 4.8% ---
Emerging Markets Debt 1.4% 5.4% 4.4% 5.4% 4.8% 8.5% 9.1%
Real Estate
NCREIF 0.5% 1.4% 7.5% 8.0% 10.2% 8.7% 8.5%
FTSE NAREIT All Equity Index 4.2% 16.7% 19.9% 8.1% 9.9% 18.3% 10.7%
Commodity Index
Bloomberg Commodity Index -0.2% 6.3% -5.3% 2.2% -8.9% -2.6% 1.8%
9
Exhibit 6
Economic & Market Overview – 1Q 2019
Annual Asset Class Performance
10
Exhibit 6
PORTFOLIO DETAIL
Performance Results RiskAttributionPrivate Markets
Exhibit 6
PERFORMANCE RESULTS
Exhibit 6
Total Fund w/ Overlay Policy Benchmark Actuarial Rate
($5.0)
$0.0
$5.0
$10.0
$15.0
$20.0
$25.0
$30.0
12/82 12/84 12/86 12/88 12/90 12/92 12/94 12/96 12/98 12/00 12/02 12/04 12/06 12/08 12/10 12/12 12/14 12/16 3/19
$15.8
$22.3
$23.9
Total Fund Growth of $1 Since Inception
As of March 31, 2019
State Universities Retirement System of Illinois (SURS) 13
Exhibit 6
Actual vs. Target Allocations
As of 3/31/2019
22.9%
19.3%
9.3%
17.5%
3.1%3.7%3.2%
5.7%
6.8%0.7%4.4%1.9% 1.4%
C U R R E N T A L L O C A T I O N
23.2%
19.4%
8.6%
18.5%
3.1%3.7%3.2%
5.7%
6.8%0.7%4.4%0.0% 0.2%
A LLO C A T I O N R E F LE C T I N G
O V E R L A Y
Policy Current Overlay Current Value
Cash & Transit ion 0.0% 1.4% 0.2% $270,764,382
Commodit ies 2.0% 1.9% 2.0% $359,526,478
Hedge Funds 5.0% 4.4% 4.4% $849,652,743
Opportunity Fund 1.0% 0.7% 0.7% $129,398,892
Private Equity 6.0% 6.8% 6.8% $1,306,056,173
Real Estate 6.0% 5.7% 5.7% $1,092,624,979
REITs 4.0% 3.2% 3.2% $619,076,163
TIPs 4.0% 3.7% 3.7% $708,183,797
Emerging Market Debt 3.0% 3.1% 3.1% $594,331,488
Fixed Income 19.0% 17.5% 18.5% $3,343,175,754
Global Equity 8.0% 9.3% 8.6% $1,785,676,601
Non US Equity 19.0% 19.3% 19.4% $3,680,605,410
Domestic Equity 23.0% 22.9% 23.2% $4,370,947,636
Overlay 0.0% 0.4% 0.0% $113,335,066
Total 100% 100% 100% $19,223,355,562
Asset Allocation vs. Target
14
Exhibit 6
MarketValue
($)
AssetAllocation
(%)
LowerRange
(%)
Target(%)
UpperRange
(%)Total Fund w/ Overlay 19,223,356 100.0 - 100.0 -Domestic Equity Composite w/ Overlay 4,370,948 22.7 20.0 23.0 26.0International Equity Composite w/ Overlay 3,680,605 19.1 16.0 19.0 22.0Global Equity Composite w/ Overlay 1,785,677 9.3 5.0 8.0 11.0Fixed Income Composite w/ Overlay 3,343,176 17.4 16.0 19.0 22.0Emerging Market Debt 594,331 3.1 0.0 3.0 6.0TIPS 708,184 3.7 1.0 4.0 7.0REITs 619,076 3.2 1.0 4.0 7.0Real Estate 1,092,625 5.7 3.0 6.0 9.0Private Equity 1,306,056 6.8 3.0 6.0 9.0Opportunity Fund 129,399 0.7 0.0 1.0 4.0Hedge Funds 849,653 4.4 2.0 5.0 8.0Commodities Composite w/ Overlay 359,526 1.9 0.0 2.0 5.0Cash 270,764 1.4 0.0 0.0 3.0Total Overlay 113,335 0.6 0.0 0.0 3.0
Target% Actual%
0.0% 10.0% 20.0% 28.0%
Asset Allocation vs. Target Allocation with OverlayAs of March 31, 2019
State Universities Retirement System of Illinois (SURS) 15
Exhibit 6
Cash Commodities Domestic Equity
Emerging Market Debt Fixed Income Global Equity
Hedge Funds International Equity Opportunistic
Overlay Private Equity Real Estate
REITs TIPS
0
15
30
45
60
75
90
All
oc
ati
on
(%)
Nov
2013Aug
2014
May
2015Feb
2016
Nov
2016Aug
2017
May
2018Mar
2019
Historical Asset Allocation
5 Years Ending March 31, 2019
State Universities Retirement System of Illinois (SURS) 16
Exhibit 6
Trailing Period Perfomance (annualized)
12-Month Period As of March 31, 2019
(1) Investment Metrics (IM) Median [Gross of Fees] - Public Fund Greater than $1 Billion Universe includes BNY Mellon Public Funds >$1 Billion Universe and IM client data.
Total Fund w/ Overlay - Gross Total Fund w/ Overlay - Net Policy Benchmark Public Fund Median (1)
0.0
3.0
6.0
9.0
12.0
Re
turn
1Quarter
FYTD 1Year
3Years
5Years
Since Inception
7.2
3.14.2
8.7
6.37.1
2.9 3.6
8.1
6.0
8.1
3.04.0
8.3
6.1
9.18.2
3.14.2
8.6
6.3
9.2
Total Fund w/ Overlay - Gross Total Fund w/ Overlay - Net Policy Benchmark Public Fund Median (1)
0.0
4.0
8.0
12.0
16.0
-4.0
Re
turn
2014 2015 2016 2017 2018
7.0
-0.6
11.2 11.0
4.27.3
-1.2
10.4 10.4
3.6
6.9
-1.1
10.3 10.7
4.0
7.2
-0.8
10.6 11.0
4.2
SURS Portfolio Relative Performance Results
As of March 31, 2019
State Universities Retirement System of Illinois (SURS) 17
Exhibit 6
(1) The Fixed Income composite returns consist of returns provided by NEPC through September 2017 and are calculated by Meketa beginning in October 2017.
MarketValue($000)
1Quarter
1Year
3Years
5Years
7Years
10Years
15Years
Total Fund w/ Overlay 19,223,356 8.1 4.0 8.3 6.1 7.7 10.7 6.9Policy Benchmark 7.1 3.6 8.1 6.0 7.7 10.9 6.9
Domestic Equity 4,370,948 14.0 7.3 13.1 9.9 12.3 16.2 8.5Dow Jones U.S. Total Stock Market Index 14.0 8.7 13.5 10.3 12.6 16.0 8.8
Total Non US Equity 3,680,605 10.6 -4.6 7.9 3.0 5.4 9.0 5.6International Equity Custom Benchmark 10.3 -4.2 8.1 2.6 4.7 8.8 5.6
Global Equity 1,785,677 15.0 5.3 13.5 8.6 9.9 13.1 7.2Global Equity Benchmark 12.2 2.6 10.7 6.5 8.4 12.0 6.7
Fixed Income(1) 3,343,176 3.4 4.7 2.8 2.9 2.9 4.9 4.5Fixed Income Custom Benchmark 2.9 4.5 2.0 2.7 2.5 3.8 4.0
Emerging Market Debt 594,331 4.9 -2.6 5.1 - - - -50% JPM GBI-EM GD / 25% JPM EMBI GD / 25% JPM Corp Broad 4.5 -1.6 4.7 - - - -
TIPS 708,184 3.3 2.7 1.9 1.8 1.3 3.9 4.0Bloomberg Barclays U.S. TIPS Index 3.2 2.7 1.7 1.9 1.2 3.4 3.7
REITs 619,076 14.9 14.6 6.1 7.9 8.4 16.5 7.8Total REITs Custom Benchmark 14.6 13.3 5.7 7.6 8.1 16.5 7.3
Real Estate 1,092,625 1.3 7.4 7.8 10.2 10.5 7.1 7.0SURS Real Estate Index 1.5 7.4 7.3 9.4 10.0 6.0 7.2
Private Equity 1,306,056 -0.2 12.5 11.9 9.7 10.9 10.8 11.2Dow Jones US Total Stock Market +3% Lag -13.7 -2.4 12.2 11.1 15.7 16.6 11.2
Opportunity Fund 129,399 0.8 4.2 3.0 5.4 8.2 11.9 8.7Opportunity Fund Custom Benchmark 0.7 7.0 7.2 6.7 6.7 - -
Hedge Funds 849,653 4.5 1.4 3.3 - - - -Hedge Funds Custom Benchmark 3.6 5.1 5.7 - - - -
Commodities 359,526 5.5 -2.2 - - - - -Bloomberg Commodity Index Total Return 6.3 -5.3 - - - - -
Cash 270,609 1.2 4.5 2.3 1.4 1.0 0.8 1.8FTSE 3 Month T-Bill 0.6 2.1 1.2 0.7 0.5 0.4 1.3
Asset Class Performance (Net-of-Fees)
As of March 31, 2019
State Universities Retirement System of Illinois (SURS)18
Exhibit 6
Private Markets PerformanceA As of 12/31/2018
A Real Estate information provided by Northern Trust.
Composite Level IRRs
1-Year 3-Year 5-Year 10-Year Since Inception
Real Estate 7.63% 7.84% 9.99% 7.83% 7.15% Infrastructure -2.3% 2.8% 4.7% -- 5.9% Private Equity 5.1% 9.4% 8.3% 10.5% 17.9%
Capital
Commitment ($) Draw Down ($) Distributed ($) Market Value ($) TVPI Multiple
Real Estate 1,410,825,445 1,183,280,296 776,562,958 951,490,121 1.5 Infrastructure 180,000,000 144,058,207 77,121,140 102,743,683 1.2 Private Equity 3,632,758,071 2,889,781,033 3,498,960,199 1,114,698,406 1.6
19
Exhibit 6
-1.0
2.0
5.0
8.0
11.0
14.0Re
turn
3 Mo (Rank) 1 YR (Rank) 3 YR (Rank) 5 YR (Rank) 7 YR (Rank) 10 YR (Rank)Total Fund w/ Overlay 8.2 (28) 4.2 (51) 8.6 (62) 6.3 (47) 8.0 (32) 11.0 (13)¢
Policy Benchmark 7.1 (55) 3.6 (71) 8.1 (75) 6.0 (60) 7.7 (45) 10.9 (14)�
5th Percentile 9.4 6.0 9.8 7.3 8.9 11.31st Quartile 8.3 4.9 9.2 6.8 8.2 10.8 Median 7.2 4.2 8.7 6.3 7.6 10.2
3rd Quartile 6.4 3.5 8.1 5.8 6.9 9.495th Percentile 4.4 1.9 5.1 3.9 5.9 7.7
Population 76 75 74 71 68 65
Plan Sponsor Peer Group AnalysisTotal Fund w/ Overlay vs. Investment Metrics Public Plans > $1B Gross
Calculation based on monthly periodicity.Median is the Investment Metrics(IM) Gross of Fees Total Public Fund Greater than $1 Billion Universe which includes BNY Mellon Public Fund >$1Bil Universe and IMclient data. 20
Exhibit 6
-20.0
-12.0
-4.0
4.0
12.0
20.0
28.0
36.0
Retu
rn
2009(Rank) 2010 2011 2012 2013 2014 2015 2016 2017 2018Total Fund w/ Overlay 23.4 (9) 14.0 (36) 0.3 (74) 14.2 (29) 17.3 (27) 6.8 (42) 0.4 (52) 6.9 (77) 16.5 (35) -4.0 (70)¢
SURS Policy Benchmark 23.1 (12) 13.5 (48) 0.2 (77) 14.7 (9) 16.4 (38) 7.2 (28) -0.6 (78) 7.8 (54) 15.5 (58) -3.4 (59)�
5th Percentile 23.6 16.2 6.8 14.9 19.9 8.7 2.6 9.5 18.2 0.61st Quartile 21.5 14.3 2.3 14.2 17.4 7.4 1.2 8.5 16.8 -1.5 Median 19.4 13.3 1.1 13.3 15.5 6.6 0.5 7.9 16.0 -3.03rd Quartile 15.7 12.3 0.3 12.1 11.6 5.4 -0.4 7.0 14.5 -4.295th Percentile 6.9 8.2 -0.8 8.2 4.4 4.5 -1.8 1.9 8.6 -6.2
Population 46 49 50 54 65 71 86 108 102 96
Calendar Year Returns
Plan Sponsor Peer Group AnalysisTotal Fund w/ Overlay vs. Investment Metrics Public Plans > $1B Gross
Parenthesis contain percentile rankings.Calculation based on quarterly periodicity.Median is the Investment Metrics(IM) Gross of Fees Public Fund Greater than $1 Billion Universe which includes BNY Mellon Public Fund > $1Bil Universe and IM client data. 21
Exhibit 6
-25.0
-10.0
5.0
20.0
35.0
50.0
65.0
80.0
Allo
catio
n (%
)
US Equity Intl. Equity US FixedIncome
Intl. FixedIncome Alternative Inv. Real Estate Cash
Total Fund w/ Overlay 24.8 (53) 28.7 (7) 21.8 (54) 2.4 (52) 8.9 (79) 8.9 (33) 2.0 (48)¢
5th Percentile 48.6 30.1 54.5 10.1 42.2 13.2 11.91st Quartile 33.9 22.6 26.6 5.3 26.0 9.1 3.6Median 25.7 18.5 22.4 2.5 18.1 6.2 1.93rd Quartile 19.7 14.1 16.5 0.6 11.7 4.2 1.295th Percentile 14.1 6.4 11.7 0.0 4.7 1.4 0.2
Population 75 74 76 48 65 60 62
Total Plan Allocation vs. Investment Metrics Public Plans > $1 BillionAs of March 31, 2019
Parentheses contain percentile rankings.Calculation based on monthly periodicity.Median is the Investment Metrics(IM) Gross of Fees Total Public Greater than $1 Billion Fund Universe which includes BNY Mellon Public Fund >$1Bil Universe and IM client data.Alternative Inv. class includes all funds not allocated to the other listed classes.
22
Exhibit 6
RISK
Exhibit 6
0.0
3.0
6.0
9.0
12.0
15.0
Re
turn
(%)
0.0 2.0 4.0 6.0 8.0 10.0 12.0 14.0 16.0 18.0 20.0Risk (Standard Deviation %)
Return(Rank)Standard
Deviation(Rank)Sharpe
Ratio(Rank)InformationRatio(Rank)
Total Fund w/ Overlay 10.7 (32) 8.6 (86) 1.2 (83) -0.2 (38) Public Fund Median (1) Median 10.2 7.6 1.2 -0.4Policy Benchmark 10.9 8.7 1.2 -
Total Fund Risk/Return - 10 YearsAs of March 31, 2019
State Universities Retirement System of Illinois (SURS)
(1) Investment Metrics (IM) Median [Gross of Fees] - Total Public Fund Greater than $1 Billion Universe includes BNY Mellon Total Public Fund >$1Bil Universe and IM client data.
24
Exhibit 6
0.0
3.0
6.0
9.0
12.0
15.0
Retu
rn (%
)
0.0 0.7 1.4 2.1 2.8 3.5 4.2 4.9 5.6 6.3 7.0 7.7 8.0Risk (Standard Deviation %)
Return (Rank) StandardDeviation (Rank)
SharpeRatio (Rank)
InformationRatio (Rank)
Total Fund w/ Overlay 6.1 (60) 6.7 (70) 0.8 (80) 0.1 (56) Policy Index 6.0 (60) 6.5 (65) 0.8 (76) - All Public Plans > $1B-Total Fund Median 6.3 5.8 0.9 0.1
Total Fund Risk/Return - 5 YearsAs of March 31, 2019
State Universities Retirement System of Illinois (SURS)
(1) Investment Metrics (IM) Median [Gross of Fees] - Total Public Fund Greater than $1 Billion Universe includes BNY Mellon Public Fund >$1Bil Universe and IM client data.
25
Exhibit 6
Return StandardDeviation
SharpeRatio
InformationRatio
SortinoRatio
TrackingError
Total Fund w/ Overlay 6.07 6.69 0.81 0.06 1.27 0.73Policy Index 6.05 6.48 0.83 - 1.33 0.00Domestic Equity 9.86 11.68 0.81 -0.54 1.23 0.69Dow Jones U.S. Total Stock Market Index 10.29 11.42 0.86 - 1.32 0.00Total Non US Equity 3.01 11.76 0.25 0.39 0.37 1.06International Equity Custom Benchmark 2.57 11.91 0.21 - 0.31 0.00Global Equity 8.58 11.41 0.72 1.07 1.13 1.91Global Equity Benchmark 6.45 10.97 0.56 - 0.84 0.00Fixed Income 2.92 2.41 0.91 0.21 1.56 0.79Fixed Income Custom Benchmark 2.74 2.83 0.72 - 1.17 0.00TIPS 1.83 3.62 0.32 -0.27 0.49 0.38Bloomberg Barclays U.S. TIPS Index 1.94 3.55 0.36 - 0.56 0.00REITs 7.90 12.29 0.62 0.89 1.03 1.62FTSE EPRA/NAREIT Developed Index (Net) 6.42 11.86 0.52 - 0.84 0.00Real Estate 10.22 2.28 3.85 0.35 285.17 2.20SURS Real Estate Index 9.41 0.77 8.85 - - 0.00Private Equity 9.66 4.28 2.04 -0.15 11.57 12.03Dow Jones US Total Stock Market +3% Lag 11.08 11.09 0.94 - 1.46 0.00Opportunity Fund 5.41 5.07 0.92 0.76 2.13 5.12CPI - All Urban Consumers (Unadjusted) Lag 1.51 1.01 0.76 - 1.25 0.00Cash 1.41 0.51 2.18 2.17 6.48 0.32FTSE 3 Month T-Bill 0.72 0.23 -0.08 - -0.03 0.00
Total Fund Risk Statistics (Net-of-Fees)5 Years
As of March 31, 2019
State Universities Retirement System of Illinois (SURS) 26
Exhibit 6
Return StandardDeviation
SharpeRatio
InformationRatio
SortinoRatio
TrackingError
Total Fund w/ Overlay 8.29 5.89 1.18 0.23 1.79 0.79Policy Index 8.12 5.54 1.23 - 1.88 0.00Domestic Equity 13.05 11.31 1.04 -0.42 1.50 0.75Dow Jones U.S. Total Stock Market Index 13.45 10.96 1.10 - 1.62 0.00Total Non US Equity 7.85 10.56 0.66 -0.19 0.99 1.05International Equity Custom Benchmark 8.09 10.41 0.69 - 1.04 0.00Global Equity 13.48 10.61 1.14 1.24 1.79 2.09Global Equity Benchmark 10.67 9.87 0.96 - 1.41 0.00Fixed Income 2.85 2.49 0.68 1.07 1.04 0.74Fixed Income Custom Benchmark 2.03 2.93 0.31 - 0.44 0.00Emerging Market Debt 5.14 8.14 0.51 0.40 0.72 1.3650% JPM GBI-EM GD / 25% JPM EMBI GD / 25% JPM Corp Broad 4.67 6.96 0.52 - 0.74 0.00TIPS 1.87 3.00 0.25 0.89 0.35 0.19Bloomberg Barclays U.S. TIPS Index 1.70 2.99 0.19 - 0.27 0.00REITs 6.06 11.08 0.48 0.84 0.76 0.43FTSE EPRA/NAREIT Developed Index (Net) 5.68 11.06 0.45 - 0.70 0.00Real Estate 7.77 1.48 4.16 0.33 82.21 1.44SURS Real Estate Index 7.27 0.19 18.00 - - 0.00Private Equity 11.94 4.52 2.28 -0.06 15.13 12.15Dow Jones US Total Stock Market +3% Lag 12.17 11.21 0.98 - 1.39 0.00Opportunity Fund 3.03 4.35 0.44 0.25 0.83 4.33CPI - All Urban Consumers (Unadjusted) Lag 2.03 0.80 0.98 - 1.91 0.00Cash 2.26 0.54 2.94 2.89 12.09 0.37FTSE 3 Month T-Bill 1.17 0.22 -0.04 - -0.01 0.00
Total Fund Risk Statistics (Net-of-Fees)3 Years
As of March 31, 2019
State Universities Retirement System of Illinois (SURS) 27
Exhibit 6
ATTRIBUTION
Exhibit 6
Total Fund Performance
0.0% 4.0% 8.0% 12.0%
Total Fund
Total Fund Benchmark
Total Value Added
8.1%
7.1%
1.1%
Total Value Added:1.1%
0.0% 2.0%-2.0 %
Other
Manager Value Added
Asset Allocation
-0.2 %
1.4%
-0.2 %
Average Active Weight
0.0% 2.0% 4.0%-2.0 %-4.0 %
Total OverlayCash & Transition
CommoditiesHedge Funds
Opportunity FundPrivate Equity
Real EstateREITsTIPS
Emerging Market DebtFixed IncomeGlobal Equity
Total Non US EquityDomestic Equity
0.6%1.5%
-0.1 %-0.6 %
-0.3 %0.9%
-0.4 %-0.9 %
-0.3 %0.1%
-1.4 %1.0%
-0.1 %0.0%
Total Asset Allocation:-0.2 %
0.0% 0.2%-0.2 %-0.4 %
0.0%0.0%0.0%0.0%
0.0%-0.2 %
0.0%-0.1 %
0.0%0.0%
0.0%0.0%
0.0%0.0%
Total Manager Value Added:1.4%
0.0% 0.6% 1.2% 1.8%-0.6 %
0.0%
0.0%
0.0%
0.0%
0.0%
1.0%
0.0%
0.0%
0.0%
0.0%
0.1%
0.2%
0.1%
0.0%
Total Fund Attribution1 Quarter Ending March 31, 2019
State Universities Retirement System of Illinois (SURS) 29
Exhibit 6
PortfolioWeight
PolicyWeight
ExcessWeight
PortfolioReturn
PolicyReturn Allocation Selection Interaction Total
Domestic Equity 23.0 23.0 0.0 14.0 14.0 0.0 0.0 0.0 0.0Total Non US Equity 18.9 19.0 -0.1 10.6 10.3 0.0 0.1 0.0 0.0Global Equity 9.0 8.0 1.0 15.0 12.2 0.0 0.2 0.0 0.3Fixed Income 17.6 19.0 -1.4 3.4 2.9 0.0 0.1 0.0 0.1Emerging Market Debt 3.1 3.0 0.1 4.9 4.5 0.0 0.0 0.0 0.0TIPS 3.7 4.0 -0.3 3.3 3.2 0.0 0.0 0.0 0.0REITs 3.1 4.0 -0.9 14.9 14.6 -0.1 0.0 0.0 -0.1Real Estate 5.6 6.0 -0.4 1.3 1.5 0.0 0.0 0.0 0.0Private Equity 6.9 6.0 0.9 -0.2 -13.7 -0.2 1.0 0.1 0.8Opportunity Fund 0.7 1.0 -0.3 0.8 1.5 0.0 0.0 0.0 0.0Hedge Funds 4.4 5.0 -0.6 4.5 3.6 0.0 0.0 0.0 0.0Commodities 1.9 2.0 -0.1 5.5 6.3 0.0 0.0 0.0 0.0Cash & Transition 1.5 0.0 1.5 0.0 0.6 0.0 0.0 0.0 0.0Total Overlay 0.6 0.0 0.6 0.0 0.6 0.0 0.0 0.0 0.0Total Fund w/ Overlay 100.0 100.0 0.0 8.1 7.1 -0.2 1.4 0.2 1.1
Total Fund Attribution1 Quarter Ending March 31, 2019
State Universities Retirement System of Illinois (SURS) 30
Exhibit 6
Total Fund Performance
0.0% 2.0% 4.0% 6.0%
Total Fund
Total Fund Benchmark
Total Value Added
4.0%
3.6%
0.3%
Total Value Added:0.3%
0.0% 2.0%-2.0 %
Other
Manager Value Added
Asset Allocation
0.1%
0.7%
-0.4 %
Average Active Weight
0.0% 2.0%-2.0 %-4.0 %
Total OverlayCash & Transition
CommoditiesHedge Funds
Opportunity FundPrivate Equity
Real EstateREITsTIPS
Emerging Market DebtFixed IncomeGlobal Equity
Total Non US EquityDomestic Equity
0.4%1.1%
-0.1 %-0.3 %
-0.4 %0.1%
-0.6 %-0.3 %-0.4 %
0.0%-1.8 %
1.1%-0.1 %
1.0%
Total Asset Allocation:-0.4 %
0.0% 0.2%-0.2 %-0.4 %
0.0%0.0%0.0%
0.0%0.0%
-0.2 %0.0%
-0.1 %0.0%
0.0%-0.1 %
0.0%0.0%
0.0%
Total Manager Value Added:0.7%
0.0% 0.8% 1.6%-0.8 %
0.0%
0.0%
0.1%
-0.2 %
0.0%
0.9%
0.0%
0.0%
0.0%
0.0%
0.0%
0.2%
-0.1 %
-0.3 %
Total Fund Attribution1 Year Ending March 31, 2019
State Universities Retirement System of Illinois (SURS) 31
Exhibit 6
PortfolioWeight
PolicyWeight
ExcessWeight
PortfolioReturn
PolicyReturn Allocation Selection Interaction Total
Domestic Equity 24.0 23.0 1.0 7.3 8.7 0.0 -0.3 0.0 -0.3Total Non US Equity 18.9 19.0 -0.1 -4.6 -4.2 0.0 -0.1 0.0 -0.1Global Equity 9.1 8.0 1.1 5.3 2.6 0.0 0.2 0.0 0.2Fixed Income 17.2 19.0 -1.8 4.7 4.5 -0.1 0.0 0.0 0.0Emerging Market Debt 3.0 3.0 0.0 -2.6 -1.6 0.0 0.0 0.0 0.0TIPS 3.6 4.0 -0.4 2.7 2.7 0.0 0.0 0.0 0.0REITs 3.7 4.0 -0.3 14.6 13.3 -0.1 0.0 0.0 0.0Real Estate 5.4 6.0 -0.6 7.4 7.4 0.0 0.0 0.0 0.0Private Equity 6.1 6.0 0.1 12.5 -2.4 -0.2 0.9 0.1 0.8Opportunity Fund 0.6 1.0 -0.4 4.2 7.0 0.0 0.0 0.0 0.0Hedge Funds 4.7 5.0 -0.3 1.4 5.1 0.0 -0.2 0.0 -0.2Commodities 1.9 2.0 -0.1 -2.2 -5.3 0.0 0.1 0.0 0.1Cash & Transition 1.1 0.0 1.1 0.8 2.1 0.0 0.0 0.0 0.0Total Overlay 0.4 0.0 0.4 0.0 2.1 0.0 0.0 0.0 0.0Total Fund w/ Overlay 100.0 100.0 0.0 4.0 3.6 -0.4 0.7 0.1 0.3
Total Fund Attribution1 Year Ending March 31, 2019
State Universities Retirement System of Illinois (SURS) 32
Exhibit 6
Portfolio CharacteristicsPortfolio Benchmark
Wtd. Avg. Mkt. Cap ($M) 179,120 191,476Median Mkt. Cap ($M) 1,473 1,646Price/Earnings ratio 19.2 19.8Price/Book ratio 3.2 3.35 Yr. EPS Growth Rate (%) 15.0 15.0Current Yield (%) 1.9 1.9Beta (5 Years, Monthly) 1.0 1.0Number of Stocks 3,495 2,977Debt to Equity 0.7 0.3
Top Ten Equity HoldingsPortfolioWeight
(%)
BenchmarkWeight
(%)
ActiveWeight
(%)
QuarterlyReturn
(%)Microsoft Corp 3.2 3.2 0.0 16.6Apple Inc 2.7 3.2 -0.5 20.9Amazon.com Inc 2.4 2.6 -0.2 18.6Facebook Inc 1.4 1.4 0.0 27.2Alphabet Inc 1.4 1.3 0.1 13.3Johnson & Johnson 1.3 1.3 0.0 9.0Berkshire Hathaway Inc 1.2 1.4 -0.2 -1.6Exxon Mobil Corp 1.2 1.2 0.0 19.8Procter & Gamble Co (The) 1.0 0.9 0.1 14.1Alphabet Inc 1.0 1.2 -0.2 12.6
% of Portfolio 16.8 17.7 -0.9
Sector Weights (%)
Domestic Equity Russell 3000 Index
0.0 5.0 10.0 15.0 20.0 25.0 30.0
OtherUtilities
Real EstateMaterials
Information TechnologyIndustrials
Health CareFinancials
EnergyConsumer Staples
Consumer DiscretionaryCommunication Services
0.0
3.2
4.1
3.2
21.2
10.7
13.9
13.3
4.9
6.4
10.4
8.7
0.0
3.2
4.0
3.0
21.1
10.1
14.3
13.2
5.1
6.5
10.4
9.1
Distribution of Market Capitalization (%)
Domestic Equity Russell 3000 Index
0.0
15.0
30.0
45.0
60.0
>100 Bil 75 Bil - 100 Bil
25 Bil - 75 Bil
15 Bil - 25 Bil
2 Bil - 15 Bil
0 - 2 Bil
44.5
5.2
21.3
8.0
17.6
3.4
41.4
4.4
20.9
9.1
19.8
4.2
Domestic Equity Portfolio CharacteristicsAs of March 31, 2019
State Universities Retirement System of Illinois (SURS) 33
Exhibit 6
Region
Domestic Equity Russell 3000 Index
0.0 25.0 50.0 75.0 100.0 125.0
Other
United Kingdom
Pacific ex Japan
North America
Middle East
Europe ex UK
EM Latin America
EM Asia
0.0
0.8
0.0
96.9
0.0
2.1
0.0
0.0
0.0
1.0
0.0
96.6
0.0
2.3
0.0
0.1
Top Ten ContributorsPortfolioWeight
(%)
BenchmarkWeight
(%)
ActiveWeight
(%)
QuarterlyReturn
(%)Apple Inc 2.4 3.0 -0.6 20.9Microsoft Corp 3.0 3.1 -0.1 16.6Amazon.com Inc 2.1 2.4 -0.3 18.6Facebook Inc 1.2 1.2 0.0 27.2Cisco Systems Inc 0.9 0.8 0.1 25.6Exxon Mobil Corp 1.1 1.1 0.0 19.8Alphabet Inc 1.3 1.3 0.0 13.3Mastercard Inc 0.7 0.7 0.0 25.0Visa Inc 0.8 0.9 -0.1 18.6Netflix Inc 0.4 0.4 0.0 33.2
% of Portfolio 13.9 14.9 -1.0
Top Ten DetractorsPortfolioWeight
(%)
BenchmarkWeight
(%)
ActiveWeight
(%)
QuarterlyReturn
(%)Cigna Corp 0.5 0.3 0.2 -15.3CVS Health Corp 0.4 0.3 0.1 -17.1AbbVie Inc 0.4 0.6 -0.2 -11.5Biogen Inc 0.2 0.2 0.0 -21.4The Kraft Heinz Co 0.1 0.1 0.0 -23.2Bristol-Myers Squibb Co 0.3 0.3 0.0 -7.4Walgreens Boots Alliance Inc 0.3 0.2 0.1 -6.8Pfizer Inc 1.1 1.0 0.1 -1.9CME Group Inc 0.2 0.3 -0.1 -12.1Berkshire Hathaway Inc 1.1 1.6 -0.5 -1.6
% of Portfolio 4.6 4.9 -0.3
Sector Allocation
Sector Number ofAssets
Market Value($000)
PortfolioWeight
(%)
BenchmarkWeight
(%)
ActiveWeight
(%)Communication Services 138 365,480 8.7 9.1 -0.4Consumer Discretionary 372 436,957 10.4 10.4 0.1Consumer Staples 114 269,192 6.4 6.5 -0.1Energy 192 206,099 4.9 5.1 -0.1Financials 600 558,135 13.3 13.2 0.2Health Care 562 580,406 13.9 14.3 -0.5Industrials 420 448,779 10.7 10.1 0.6Information Technology 409 888,453 21.2 21.1 0.1Materials 135 132,915 3.2 3.0 0.2Real Estate 202 170,947 4.1 4.0 0.0Utilities 76 132,106 3.2 3.2 -0.1Total 3,220 4,189,468 100.0 100.0 0.0
Domestic Equity Portfolio CharacteristicsAs of March 31, 2019
State Universities Retirement System of Illinois (SURS) 34
Exhibit 6
Portfolio CharacteristicsPortfolio Benchmark
Wtd. Avg. Mkt. Cap ($M) 59,274 66,550Median Mkt. Cap ($M) 6,811 7,841Price/Earnings ratio 13.2 13.7Price/Book ratio 2.2 2.25 Yr. EPS Growth Rate (%) 12.1 10.0Current Yield (%) 3.4 3.4Beta (5 Years, Monthly) 1.0 1.0Number of Stocks 2,400 2,148Debt to Equity 1.1 1.1
Top Ten Equity HoldingsPortfolioWeight
(%)
BenchmarkWeight
(%)
ActiveWeight
(%)
QuarterlyReturn
(%)Roche Holding AG 1.3 1.0 0.3 15.0Nestle SA 1.3 1.4 -0.1 17.5Tencent Holdings LTD 1.0 1.3 -0.3 14.7Samsung Electronics Co Ltd 1.0 0.9 0.1 13.8Alibaba Group Holding Ltd 0.9 1.2 -0.3 33.1Novartis AG 0.9 1.0 -0.1 16.3Taiwan Semiconductor 0.8 1.0 -0.2 8.0Diageo PLC 0.7 0.5 0.2 15.7Total SA Oil & Gas 0.7 0.7 0.0 6.4Koninklijke Ahold Delhaize NV 0.7 0.2 0.5 5.4
% of Portfolio 9.3 9.2 0.1
Sector Weights (%)
Total Non US Equity
MSCI AC World ex USA
0.0 5.0 10.0 15.0 20.0 25.0 30.0
UtilitiesReal Estate
MaterialsInformation Technology
IndustrialsHealth Care
FinancialsEnergy
Consumer StaplesConsumer Discretionary
Communication Services
3.2
4.6
7.5
8.1
12.7
9.5
19.9
7.0
9.6
10.5
7.5
3.3
3.5
7.6
8.4
11.7
8.4
21.6
7.4
9.9
11.1
7.1
Distribution of Market Capitalization (%)
Total Non US Equity MSCI AC World ex USA
0.0
10.0
20.0
30.0
40.0
>100 Bil 75 Bil - 100 Bil
25 Bil - 75 Bil
15 Bil - 25 Bil
2 Bil - 15 Bil
0 - 2 Bil
19.3
6.6
32.4
13.0
28.1
0.5
17.1
5.4
30.5
13.3
31.3
2.4
Non-U.S. Equity Portfolio CharacteristicsAs of March 31, 2019
State Universities Retirement System of Illinois (SURS) 35
Exhibit 6
Region
Total Non US Equity
MSCI AC World ex USA
0.0 8.0 16.0 24.0 32.0 40.0 48.0
OtherUnited Kingdom
Pacific ex JapanNorth America
Middle EastJapan
Frontier MarketsEurope ex UK
EM Mid East+AfricaEM Latin America
EM EuropeEM Asia
0.3
11.5
12.7
5.3
0.6
16.3
0.0
33.7
1.7
2.9
1.4
13.5
0.3
9.7
13.0
6.8
0.4
16.1
0.0
32.4
2.0
3.0
1.6
14.7
Top Ten ContributorsPortfolioWeight
(%)
BenchmarkWeight
(%)
ActiveWeight
(%)
QuarterlyReturn
(%)Alibaba Group Holding Ltd 0.8 1.0 -0.2 33.1Nestle SA 1.2 1.3 -0.1 17.5Roche Holding AG 1.3 0.9 0.4 15.0Novartis AG 0.9 1.0 -0.1 16.3Tencent Holdings LTD 1.0 1.2 -0.2 14.7Samsung Electronics Co Ltd 1.0 0.9 0.1 13.8Softbank Group Corp 0.3 0.3 0.0 45.93I Group PLC 0.4 0.1 0.3 30.1Diageo PLC 0.7 0.5 0.2 15.7SAP AG 0.6 0.5 0.1 16.2
% of Portfolio 8.2 7.7 0.5
Top Ten DetractorsPortfolioWeight
(%)
BenchmarkWeight
(%)
ActiveWeight
(%)
QuarterlyReturn
(%)Swedbank AB 0.2 0.1 0.1 -29.5TUI AG 0.1 0.0 0.1 -28.1Plus500 Ltd 0.1 0.0 0.1 -40.7KB Financial Group Inc 0.3 0.1 0.2 -11.9Eisai Co Ltd 0.1 0.1 0.0 -26.7Kddi Corp 0.3 0.2 0.1 -8.1Suzuki Motor Corp 0.2 0.1 0.1 -12.2Bayer AG 0.3 0.3 0.0 -6.8Seven & I Holdings Co Ltd 0.1 0.2 -0.1 -12.7Telefonica Deutschland Holding AG 0.1 0.0 0.1 -19.7
% of Portfolio 1.8 1.1 0.7
Sector Allocation
Sector Number ofAssets
Market Value($000)
PortfolioWeight
(%)
BenchmarkWeight
(%)
ActiveWeight
(%)Communication Services 148 255,530 7.5 7.1 0.4Consumer Discretionary 271 361,155 10.5 11.1 -0.6Consumer Staples 197 329,458 9.6 9.9 -0.3Energy 116 238,621 7.0 7.4 -0.4Financials 418 680,845 19.9 21.6 -1.7Health Care 153 326,204 9.5 8.4 1.1Industrials 374 433,959 12.7 11.7 1.0Information Technology 174 277,759 8.1 8.4 -0.3Materials 242 256,059 7.5 7.6 -0.2Real Estate 153 156,256 4.6 3.5 1.1Utilities 119 110,844 3.2 3.3 -0.1Total 2,365 3,426,690 100.0 100.0 0.0
Non-U.S. Equity Portfolio CharacteristicsAs of March 31, 2019
State Universities Retirement System of Illinois (SURS) 36
Exhibit 6
Portfolio CharacteristicsPortfolio Benchmark
Wtd. Avg. Mkt. Cap ($M) 141,767 148,668Median Mkt. Cap ($M) 19,989 9,844Price/Earnings ratio 19.4 16.7Price/Book ratio 3.2 2.85 Yr. EPS Growth Rate (%) 14.6 13.1Current Yield (%) 2.0 2.6Beta (5 Years, Monthly) 1.0 1.0Number of Stocks 394 2,771Debt to Equity 0.5 0.6
Top Ten Equity HoldingsPortfolioWeight
(%)
BenchmarkWeight
(%)
ActiveWeight
(%)
QuarterlyReturn
(%)Alphabet Inc 1.9 0.8 1.1 12.6Visa Inc 1.8 0.6 1.2 18.6Amazon.com Inc 1.8 1.6 0.2 18.6Facebook Inc 1.7 0.9 0.8 27.2Microsoft Corp 1.7 1.9 -0.2 16.6Apple Inc 1.4 2.0 -0.6 20.9Essity Aktiebolag 1.3 0.0 1.3 18.1Allergan PLC 1.3 0.1 1.2 10.1Alibaba Group Holding Ltd 1.2 0.5 0.7 33.1Johnson & Johnson 1.2 0.8 0.4 9.0
% of Portfolio 15.3 9.2 6.1
Sector Weights (%)
Global Equity
MSCI AC World Index (Net)
0.0 5.0 10.0 15.0 20.0 25.0
OtherUtilities
Real EstateMaterials
Information TechnologyIndustrials
Health CareFinancials
EnergyConsumer Staples
Consumer DiscretionaryCommunication Services
0.5
3.1
2.4
3.0
19.8
10.7
15.3
15.1
4.0
7.7
10.2
8.1
0.0
3.3
3.3
4.9
15.7
10.4
11.7
16.6
6.3
8.4
10.8
8.7
Distribution of Market Capitalization (%)
Global Equity MSCI AC World Index (Net)
0.0
15.0
30.0
45.0
60.0
>100 Bil 75 Bil - 100 Bil
25 Bil - 75 Bil
15 Bil - 25 Bil
2 Bil - 15 Bil
0 - 2 Bil
36.5
6.3
27.9
11.0
18.1
0.2
33.5
5.8
23.6
13.1
22.7
1.2
Global Equity Portfolio CharacteristicsAs of March 31, 2019
State Universities Retirement System of Illinois (SURS) 37
Exhibit 6
Region
Global Equity
MSCI AC World Index (Net)
0.0 15.0 30.0 45.0 60.0 75.0
OtherUnited Kingdom
Pacific ex JapanNorth America
Middle EastJapan
Frontier MarketsEurope ex UK
EM Mid East+AfricaEM Latin America
EM EuropeEM Asia
0.2
7.6
6.1
53.0
0.9
8.9
0.3
16.5
0.3
1.1
0.1
5.0
0.2
5.0
5.9
56.1
0.2
7.2
0.1
15.9
0.9
1.4
0.7
6.6
Top Ten ContributorsPortfolioWeight
(%)
BenchmarkWeight
(%)
ActiveWeight
(%)
QuarterlyReturn
(%)Alibaba Group Holding Ltd 1.1 0.4 0.7 33.1Stericycle Inc 0.7 0.0 0.7 48.3Amazon.com Inc 1.8 1.5 0.3 18.6WH Group Ltd 0.8 0.0 0.8 39.0Synchrony Financial 0.8 0.0 0.8 36.9Visa Inc 1.6 0.6 1.0 18.6Microsoft Corp 1.8 1.8 0.0 16.6Ctrip.com International Ltd 0.5 0.0 0.5 61.5Cisco Systems Inc 1.0 0.5 0.5 25.6Ascendis Pharma A/S 0.3 0.0 0.3 87.9
% of Portfolio 10.4 4.8 5.6
Top Ten DetractorsPortfolioWeight
(%)
BenchmarkWeight
(%)
ActiveWeight
(%)
QuarterlyReturn
(%)Eisai Co Ltd 0.3 0.0 0.3 -26.7Cigna Corp 0.5 0.2 0.3 -15.3CME Group Inc 0.4 0.2 0.2 -12.1G4S PLC 0.7 0.0 0.7 -4.8Bristol-Myers Squibb Co 0.4 0.2 0.2 -7.4Otsuka Holdings Co Ltd 0.5 0.0 0.5 -4.2Alaska Air Group Inc. 0.3 0.0 0.3 -7.3NMC Health Plc 0.1 0.0 0.1 -14.7Cboe Global Markets Inc 0.6 0.0 0.6 -2.1Kyushu Railway Co 0.6 0.0 0.6 -1.9
% of Portfolio 4.4 0.6 3.8
Sector Allocation
Sector Number ofAssets
Market Value($000)
PortfolioWeight
(%)
BenchmarkWeight
(%)
ActiveWeight
(%)Communication Services 23 137,971 8.1 8.7 -0.6Consumer Discretionary 34 173,982 10.2 10.8 -0.5Consumer Staples 17 131,058 7.7 8.4 -0.6Energy 26 67,918 4.0 6.3 -2.3Financials 64 255,995 15.1 16.6 -1.5Health Care 56 260,653 15.3 11.7 3.7Industrials 54 181,951 10.7 10.4 0.3Information Technology 63 337,092 19.8 15.7 4.1Materials 33 50,374 3.0 4.9 -1.9Real Estate 11 40,904 2.4 3.3 -0.9Utilities 8 52,409 3.1 3.3 -0.2Total 389 1,690,306 99.5 100.0 -0.5
Global Equity Portfolio CharacteristicsAs of March 31, 2019
State Universities Retirement System of Illinois (SURS) 38
Exhibit 6
Credit Quality Distribution (%)
Fixed Income
Blmbg. Barc. U.S. Aggregate Index
0.0
25.0
50.0
75.0
100.0
AAA/Aaa
AA/Aa A
BBB/
BaaBB/
Ba B
Not Ra
ted
Sector Distribution (%)
Fixed Income
Blmbg. Barc. U.S. Aggregate Index
0.0
20.0
40.0
60.0
-20.0
Treas
Agy MBS ABS
CMBSCorp
Non-$Other
Portfolio CharacteristicsPortfolio Benchmark
Avg. Maturity 7.1 8.1Effective Duration 4.8 5.8Yield To Maturity (%) 3.4 2.9
Fixed Income Portfolio Characteristics
As of March 31, 2019
State Universities Retirement System of Illinois (SURS) 39
Exhibit 6
SURS Manager Status Review Summary
Status Manager(s) Strategy Comments
Reassessment Fidelity Non-U.S. Equity Performance
# of Managers
Enhanced Review 15Good Standing 12
Good Standing: A Manager's three (3) year and five (5) year rolling Annualized Alpha (net of fees) each exceed their Active Manager Premiums (AMPs) for such periods. Managers with less than a five (5) year performance history will be consdier in Good Standing.
Enhanced Review: A Manager's three (3) year or five (5) year rolling Annualized Alphas (net of fees) are above their respective Benchmarks but below their AMPs.
Reassessment: A Manager’s (i) three (3) year and five (5) year rolling Annualized Alphas (net of fees) are below their respective Benchmarks for the preceding two consecutive quarters, and (ii) three (3) year and five (5) year Information Ratios are negative for the preceding two consecutive quarters; or other performance metrics reflect a significant negative trend.
Exhibit 7
SURS Manager Status Review
Manager Strategy Status
CastleArk U.S. Small Cap Growth Enhanced Review
T. Rowe Price Large Cap Structured Active U.S. Equity Enhanced Review
Matarin U.S. Small Cap Core Good Standing
Channing U.S. Small-Mid Cap Value Good Standing
Earnest U.S. Mid Cap Core Good Standing
Denali U.S. Large Cap Value Good Standing
Piedmont Large Cap Structured Active U.S. Equity Enhanced Review
Gladius U.S. Equity Good Standing
Manager Strategy Status
Ativo All Cap Non-U.S. Equity Enhanced Review
Strategic Global Advisors Large Cap Non-U.S. Developed Enhanced Review
BlackRock Structured Active Non-U.S. Equity Enhanced Review
Fidelity Structured Active Non-U.S. Equity Reassessment
GlobeFlex All Cap Non-U.S. Equity Enhanced Review
Progress Large Cap Non-U.S. Developed Good Standing
U.S. Equity Managers
Non-U.S. Equity Managers
Exhibit 7
SURS Manager Status Review
Manager Strategy Status
Mondrian Global Equity Enhanced Review
Wellington Global Equity Enhanced Review
T. Rowe Price Global Equity Good Standing
Manager Strategy Status
Pugh Core Fixed Income Enhanced Review
Smith Graham Core Fixed Income Enhanced Review
LM Core Plus Fixed Income Enhanced Review
PIMCO Total Return Core Plus Fixed Income Enhanced Review
TCW Core Plus Fixed Income Enhanced Review
Garcia Hamilton Core Fixed Income Enhanced Review
Progress Core Fixed Income Good Standing
Neuberger Berman Core Plus Fixed Income Good Standing
Manager Strategy Status
Colchester EM Debt Good Standing
Progress EM Debt Good Standing
Prudential EM Debt Good Standing
Global Equity Managers
Core Fixed Income Managers
Emerging Market Debt Managers
Exhibit 7
Performance Analysis (Net of Fees)
Description 1-Year 3-Year 5-Year 7-Year 10-Year Since Inc. Inception Date
Fidelity - Gross -5.47 7.40 2.84 5.25 --- 6.47 12/31/2011Fidelity - Net -5.67 7.11 2.49 4.90 --- 6.13
Annualized Fee 0.19 0.29 0.35 0.35 --- 0.34MSCI ACWI ex U.S. - Net -4.22 8.09 2.57 4.72 --- 5.87
Excess Return -1.45 -0.98 -0.07 0.18 --- 0.26
Annualized Alpha -1.36 -0.99 -0.03 0.27 --- 0.35Active Manager Premium 1.50 1.50 1.50 1.50 --- 1.50Excess Risk Adjusted Returns -2.86 -2.49 -1.53 -1.23 --- -1.15Risk and Regression
Description 1-Year 3-Year 5-Year 7-Year 10-Year Since Inc.
Standard Deviation 13.95 10.78 11.78 12.28 --- 12.43Standard Deviaiton - Benchmark 13.60 10.56 12.01 12.52 --- 12.63Beta 1.02 1.01 0.97 0.97 --- 0.98R-Squared 0.99 0.99 0.98 0.99 --- 0.99Efficiency Measures
Description 1-Year 3-Year 5-Year 7-Year 10-Year Since Inc.
Sharpe Ratio -0.56 0.55 0.15 0.35 --- 0.45Treynor Ratio -7.63 5.83 1.80 4.46 --- 5.72Sortino Ratio -0.65 0.87 0.30 0.59 --- 0.75Tracking Error 1.34 1.26 1.57 1.48 --- 1.49Information Ratio -1.08 -0.78 -0.05 0.12 --- 0.17Upside Market Capture 95.07 96.65 96.18 98.03 --- 98.56Downside Market Capture 103.85 102.84 96.62 96.72 --- 96.72
Status Evaluation:
3yr Alpha 5yr Alpha AMP
3yr Alpha vs.
AMP
5yr Alpha vs.
AMP Status
Current Quarter -0.99 -0.03 1.50 -2.49 -1.53Prior Quarter -1.81 -0.28 1.50 -3.31 -1.78
Fidelity Select Institutional Plus / Non-U.S. Equity
March 31, 2019
Reassessment
-4.00%
-2.00%
0.00%
2.00%
4.00%
Rolling 3-year Excess Return vs Benchmark
Fidelity - Excess Fidelity - Alpha 1.50%
-0.40%
0.00%
0.40%
0.80%
1.20%
1.60%
Rolling 5-year Excess Return vs Benchmark
Fidelity - Excess Fidelity - Alpha 1.50%
Exhibit 7
Real Assets Performance Review State Universities Retirement System of Illinois
Barbara Bernard Senior Vice President
Sally Haskins Senior Vice President
June 2019
Exhibit 8
2 Real Assets Performance Review Knowledge. Experience. Integrity.
Real Assets Performance Review
● Market Overview
● Performance
● Appendix
Exhibit 8
Market Overview
Exhibit 8
4 Knowledge. Experience. Integrity. Real Assets Performance Review
Real Estate Indicators
Exhibit 8
5 Knowledge. Experience. Integrity. Real Assets Performance Review
Return Expectations Continue to Moderate
Source: PREA, NCREIF, AEW Capital Management. Note: Retail definitions in appendix. Cap rate levels chart shows historic range (hi to low) with the average indicated by the diamond and the current cap rates shown. Red indicates cap rates at historic lows. Width of band represents cap rates over the last year.
4.4% 4.2% 4.2% 4.5% 4.7%
0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
12.0%
Total Apartment Office Industrial Retail
Appr
aisa
l Cap
Rat
es
NCREIF Cap Rates by Property Type 1982-2018
Average 4Q18
March 2019 Survey of Investors
Historical Annualized Returns for the NPI March 2019 Survey of Investors
Projected Annualized Returns for the NPI
2016 2017 2018 2014 to
2018 2019 2020 2021 2019 to
2023
NPI Total Return 8.0% 7.0% 6.7% 9.3% 6.1% 4.6% 4.0% 5.1%
Income Return 4.8% 4.7% 4.6% 4.9% 4.6% 4.6% 4.7% 4.7%
Capital Appreciation 3.1% 2.2% 2.1% 4.3% 1.5% 0.0% -0.7% 0.4%
Exhibit 8
6 Knowledge. Experience. Integrity. Real Assets Performance Review
2018 Volume Down Compared to 2017 With Consistent Pricing Transaction volume through 2018 was 23.2% below volume in 2017.
Source: NCREIF
$12
$20
$27 $24
$27
$10
$6
$13
$15
$22
$28 $26
$33
$40
$38
$29
$0
$5
$10
$15
$20
$25
$30
$35
$40
$45
0%
1%
2%
3%
4%
5%
6%
7%
8%
9%
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
Transaction Volume and Cap Rates 2003-2018
Transaction Volume ($ billions) Cap Rates (%)
Exhibit 8
7 Knowledge. Experience. Integrity. Real Assets Performance Review
Vacancy Rates Remain Low
Source: NCREIF
0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
12.0%
14.0%
16.0%
18.0%
2000 Q4 2002 Q4 2004 Q4 2006 Q4 2008 Q4 2010 Q4 2012 Q4 2014 Q4 2016 Q4 2018 Q4
Vacancy by Property Type
Apartment Industrial Office Retail
Exhibit 8
8 Knowledge. Experience. Integrity. Real Assets Performance Review
0
20
40
60
80
100
$0bn
$20bn
$40bn
$60bn
$80bn
$100bn
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
No.
of f
unds
Aggr
egat
e ca
pita
l rai
sed
Aggregate capital raised No. of funds
Infrastructure Fundraising Momentum Continues
● Open-end infrastructure managers secured substantial new commitments in 2018 and several new funds have been launched.
● The variety of closed-end infrastructure products continues to increase with new offerings in debt and Emerging Markets-focused strategies.
Infrastructure strategies are raising significant capital
Source: Preqin
Exhibit 8
Performance Review
Exhibit 8
10 Real Assets Performance Review Knowledge. Experience. Integrity.
$ Millions (%) Total Plan Assets $17,803.8 100.0%
Real Estate Target $1,780.4 10.0%
Plan's Real Estate Market Value $1,489.9 8.4%
Unfunded Commitments $354.9 1.9%
Market Value & Unfunded Commitments $1,844.8 11.3%
Real Estate Portfolio
● The real estate target was 10% of the overall portfolio. – 6% private real estate, 4% public real
estate
● A new asset allocation was approved in 2018 for Real Assets targeting: – 6% Stabilized Growth/Core – 4% Non-Traditional Growth/Non-Core – Liquidation of Traditional Growth/REITs
● The benchmark for real estate is the NFI-ODCE Index for core real estate and the NFI-ODCE Index plus 1.5% for non-core real estate.
● SURS is implementing a Real Assets Strategic Plan to achieve the asset allocation targets.
December 31, 2018
Core 41%, $611.0 mm
REITs 36%, $538.9 mm
SURS Total Real Estate Portfolio
Non-Core 23%, $340.1 mm
Exhibit 8
11 Real Assets Performance Review Knowledge. Experience. Integrity.
Real Estate Portfolio Summary
● Remaining Core commitment to Carlyle Property Investors ($100 million) was called in Q1 2019.
● Core commitment to Blackstone Property Partners is expected to be fully called by Q2 2019.
● Timing on redemption out of UBS difficult to project given a $2.2 billion redemption pool for the Fund.
● Dune Fund II will be liquidated in 2019 and Franklin Templeton Emerging Manager (EMREFF) is expected to be liquidated by 2020.
● Basis Fund I, Crow Holdings Fund VIII, Brookfield Strategic Fund III are investing capital. Balance of funds are implementing business plans. Dune Fund IV will begin calling capital in Q3 2019.
● Subsequent to quarter end, new commitments were made to: – Blackstone Real Estate Partners Europe Fund VI
($85 million) – Long Wharf Real Estate Partners VI ($40 million) –Westbrook Real Estate Partners XI ($75 million)
Market Value as of December 31, 2018 ($) Total Global REITS 538,892,112 Blackrock Global REIT Index Fund 538,892,112
Total Core Funds 610,990,149 Carlyle Property Investors 5,197,685 Heitman American Real Estate (HART) 219,515,312 JP Morgan Strategic Property Fund (SPF) 222,799,701
UBS Trumbull Property Fund (TPF) 163,477,452
Total Non-Core Funds 340,073,037 Basis Real Estate Debt Fund I 8,672,442 Blue Vista RE IV 31,391,726 Brookfield Strategic RE II 29,733,000 Brookfield Strategic RE III -322,000 Crow Holdings Realty VII 24,093,840 Crow Holdings Realty VIII 6,215,378 Dune RE II 22,539,504 Dune RE III 104,656,613 Franklin Templeton FTPREF 11,968,327 Franklin Templeton EMREFF 20,211,088 Franklin Templeton MDP RE 2015 40,317,207 Oaktree RE Debt Fund II 9,688,923
StepSt Glb Partner RE II (fka MFIRE) 30,906,989
Total Private Real Estate 951,063,186
Exhibit 8
12 Real Assets Performance Review Knowledge. Experience. Integrity.
Private Real Estate Diversification
● Portfolio is diversified with the highest weightings to the primary markets in the east and west coasts which have exhibited historically high growth relative to the middle of the county.
● Portfolio is diversified by property type. – Industrial is underweight to
the ODCE Index. Investment focus for 2019 is to add an industrial manager/s.
– “Other” at 12.4% is primarily comprised of health care (1.8%), land (1.9%), senior and student housing (1.9%), mixed use (1.9%) and “for sale” residential housing (3.3%)
ODCE is a real estate index consisting of open-end funds.
21.7% 22.7%
9.8%
19.2%
5.0% 8.9%
12.4%
25.9%
33.4%
19.5% 17.7%
0.0% 0.3% 3.1%
0.0%
5.0%
10.0%
15.0%
20.0%
25.0%
30.0%
35.0%
40.0%
Residential Office Industrial Retial Storage Hotel Other
SURS Portfolio
ODCE
25.8%
32.3%
22.9%
11.2% 7.8%
29.2%
41.4%
20.4%
10.4%
0.0%
5.0%
10.0%
15.0%
20.0%
25.0%
30.0%
35.0%
40.0%
45.0%
East West South Midwest Other/Intl
SURS Portfolio
ODCE
Geographic Diversification
Property Type Diversification
Exhibit 8
13 Real Assets Performance Review Knowledge. Experience. Integrity.
Real Estate Portfolio Returns
● JP Morgan Strategic Property Fund has underperformed benchmark in the near term while Heitman America Real Estate Trust underperformed in the last year and was on par with benchmark thereafter. The UBS Trumbull Property Fund continues to underperform. SURS is currently redeeming from this Fund, having received $275 million in redemptions thru April 2019.
● The Non-Core fund exposure has consistently outperformed benchmark. Performance from Step Stone Partner Real Estate Fund II is expected to be below the target 15% gross IRR, however, the Fund is expected to return investor capital.
● REIT portfolio has consistently out performed benchmark.
Exhibit 8
14 Real Assets Performance Review Knowledge. Experience. Integrity.
Looking Ahead-Real Estate
● Continue to implement the real assets strategic plan. Near term priorities include:
● Conclude the review and recommendation of industrial focused managers
● Source additional MWDO managers as they come to market
● Evaluate re-up opportunities with existing managers
● Liquidate REIT portfolio to fund new commitments.
Exhibit 8
15 Real Assets Performance Review Knowledge. Experience. Integrity.
$ Millions (%) Total Plan Assets $17,803.8 100.0%
Plan's Infrastructure Market Value $107.2 0.6%
Unfunded Commitments $48.6 0.3%
Market Value & Unfunded Commitments $151.3 0.9%
Infrastructure Portfolio Summary
● Infrastructure investments are part of the Opportunity Fund portfolio.
● There is manager concentration with Macquarie.
● Alinda Infrastructure Partners Fund II is expected to be liquidated by 2020.
● The new asset allocation combines infrastructure in the Broad Growth strategic asset class along with other Real Asset investments. The existing portfolio investments will be combined with other investments in the Non-Traditional Growth sub-class.
December 31, 2018
SURS Infrastructure Portfolio
Macquarie Infrastructure Partners III $43.4 mm, 42%
Macquarie Infrastructure Partners IV $3.5 mm, 3%
Macquarie Infrastructure Partners II $37.8 mm, 37%
Alinda Infrastructure Fund II $18.0 mm, 18%
Exhibit 8
16 Real Assets Performance Review Knowledge. Experience. Integrity.
Infrastructure Diversification
● Current portfolio is concentrated in North America
● Investment is concentrated in Transportation and Utilities and account for over half (54%) of the market value of the portfolio
– Other is primarily investment in the waste collection sector.
0.2% 6.1%
93.6%
0.0%
20.0%
40.0%
60.0%
80.0%
100.0%
Developed North America Europe US & Canada
Geographic Diversification
SURS Portfolio
2.6% 8.8%
14.0% 20.5%
26.2% 27.8%
0.0%5.0%
10.0%15.0%20.0%25.0%30.0%
Sector Diversification
SURS Portfolio
Exhibit 8
17 Real Assets Performance Review Knowledge. Experience. Integrity.
Infrastructure Portfolio Returns As of December 31, 2018
0.62%
4.42%
2.80%
4.95%
6.02%
0.53%
6.77% 6.98%
6.33% 6.63%
0.00%
1.00%
2.00%
3.00%
4.00%
5.00%
6.00%
7.00%
8.00%
Last Quarter Last Year Last 3 Years Last 5 Years Last 9 Years
Total InfrastructureCPI+5%
● The portfolio value, including unfunded commitments, is not contributing to diversification or return enhancement.
● Infrastructure is a developing asset class and to date, there is no industry standard benchmark for private infrastructure investors.
● Alinda is a 2008 vintage year fund and has consistently underperformed benchmark. Fund is expected to return $40 million investment but significantly underperform its 20% IRR target.
● Macquarie Infrastructure Partners II will wind down over the next several years and is expected to return $40 million investment but underperform its 10-12% IRR target.
● Macquarie Infrastructure Partners III and IV are implementing business plans and performing as expected.
Exhibit 8
18 Real Assets Performance Review Knowledge. Experience. Integrity.
Looking Ahead-Infrastructure
● Monitor investments in Macquarie Infrastructure Partners III and IV.
● Evaluate managers open for new investment in the next two to three years.
Exhibit 8
Appendix
Exhibit 8
20 Real Assets Performance Review Knowledge. Experience. Integrity.
Real Estate Stoplight Report Action Required
Open End Funds Quantitative Qualitative Comments Manager or Investor
Initiated Callan Identified
JP Morgan Strategic Property Fund Fund focuses on four main property types. Consistent benchmark like performance. Looking to increase Industrial exposure via Fund’s development bucket. Fund’s retail assets beginning to take write downs.
None None
Heitman American Realty Trust
Strong in-bound queue activity. Lower share of industrial exposure and increased capital expenditures in the retail sector negatively impacted Fund performance compared to ODCE.
None None
UBS Trumbull Property Fund Fund employs lower leverage than the rest of the ODCE universe, which negatively impacted returns in recent years. Property sector and asset selection have also lagged index and peers.
None None
Carlyle Property Investors
Since Fund inception in October 2015, it has acquired 70 properties. New investments in manufactured housing, apartment and medical office sectors are diversifying portfolio.
None None
Notes: Quantitative Color Code Qualitative Color Code
Ranked in first quartile vs ODCE for 5 year time period, or longest available if no 5 year history with fund Stable organization, no or minor issues
Ranked in second quartile vs ODCE for 5 year time period, or longest available if no 5 year history with fund Organizational or fund management issues
Ranked in third quartile vs ODCE for 5 year time period, or longest available if no 5 year history with fund Major organizational or fund management issues
Ranked in fourth quartile vs ODCE for 5 year time period, or longest available if no 5 year history with fund
Exhibit 8
21 Real Assets Performance Review Knowledge. Experience. Integrity.
Real Estate Stoplight Report
Action Required
Unfunded Core Commitments Quantitative Qualitative Comments Manager or Investor
Initiated Callan Identified
Blackstone Property Partners Portfolio is well occupied at 94%. Coastal market concentration is 84%. Focus is on driving NOI growth. 70% of the transactions have been acquired off market.
None None
Notes: Quantitative Color Code Qualitative Color Code
Ranked in first quartile vs ODCE for 5 year time period, or longest available if no 5 year history with fund
Stable organization, no or minor issues
Ranked in second quartile vs ODCE for 5 year time period, or longest available if no 5 year history with fund
Organizational or fund management issues
Ranked in third quartile vs ODCE for 5 year time period, or longest available if no 5 year history with fund
Major organizational or fund management issues
Ranked in fourth quartile vs ODCE for 5 year time period, or longest available if no 5 year history with fund
Exhibit 8
22 Real Assets Performance Review Knowledge. Experience. Integrity.
Real Estate Stoplight Report Action Required
Closed End Funds Quantitative Qualitative Comments Manager or Investor
Initiated Callan Identified Vintage Year 2009 Dune Real Estate Partners II
20 of the 22 investments had been fully or partially realized and Fund is on schedule to liquidate no latter than March 2020. Manager successfully negotiated 2015 property tax assessment appeal for Four Seasons Resort Orlando at Walt Disney Resort which will result in a significant tax refund. Fund projected to meet target return.
None None
Vintage Year 2010 Franklin Templeton Emerging Manager Real Estate Fund (EMREFF)
Two fund investments remain in the Fund. Final exits not likely until 2020. Performance meeting expectations.
None None
Vintage Year 2012 Franklin Templeton Private Real Estate Fund (FTPREF)
14 underlying fund investments were made, seven have been fully/partially realized to-date. The remaining investments are in the final stages of monetizing their positions.
None None
Real Estate Global Partnership Fund II (MFIRE II)
18 underlying fund investments made 2012-2015. Majority international exposure, poor performance for some regional funds (Mexico, Brazil) detracted from performance. Stepstone took over as manager from Courtland in 2018. Fund in the realization stage.
None None
Notes: Vintage Year is the first year SURS’ capital was called for each respective fund
Quantitative Color Code Qualitative Color Code Projected to meet original objectives Stable organization, no or minor issues Projected to return capital or better Organizational or fund management issues Projections range around return of capital or slight loss Major organizational or fund management issues Not projected to return capital
Exhibit 8
23 Real Assets Performance Review Knowledge. Experience. Integrity.
Real Estate Stoplight Report
Notes: Vintage Year is the first year SURS’ capital was called for each respective fund
Quantitative Color Code Qualitative Color Code
Projected to meet original objectives Stable organization, no or minor issues
Projected to return capital or better Organizational or fund management issues
Projections range around return of capital or slight loss Major organizational or fund management issues
Not projected to return capital
Action Required
Closed End Funds Quantitative Qualitative Comments Manager or Investor
Initiated Callan Identified Vintage Year 2013 Dune Real Estate Partners III Investment period completed in March of 2018
with 26 investments made and seven have been partially/fully realized. Hospitality, for-sale housing and office represent 23%, 18% and 12%, respectively of invested capital. Business plans are being implemented and fund is performing well.
None None
Vintage Year 2015 Brookfield Strategic Real Estate Partners II
27 investments. Globally diversified portfolio, including some China and India investments. Fund is performing well.
None None
Blue Vista Real Estate Partners IV Investment period ends in March of 2020 and 83% of capital has been called and invested in 56 properties. Portfolio is concentrated in office (38%) and multi-family (19%). Fund is projected to meet its target return.
None None
Franklin Templeton (MDP RE 2015) Final tranche of capital to be allocated in 2019. Fund has invested 15% of equity commitments. Portfolio concentrated in the Northeast and Pacific, largely in the office and leisure sectors.
None None
Exhibit 8
24 Real Assets Performance Review Knowledge. Experience. Integrity.
Action Required
Closed End Funds Quantitative Qualitative Comments Manager or Investor
Initiated Callan Identified Vintage Year 2015 Crow Holdings VII Multi-family (including student and senior
housing) and industrial comprise the bulk of the portfolio. Strong realizations activity, fund is performing well.
None None
Vintage Year 2017 Crow Holdings VIII
Fund held final close in Summer 2018 and is in the investment period. 36 investments (largely multi-family at 64%) have been made to date. Performance is too early to evaluate.
None None
Oaktree Real Estate Debt Fund II Early in the investment lifecycle. 65 investments made to-date. Fund exceeding 6-7% income target on net drawn capital. Investment period ends March 2020. Manager raised $2.1 billion. In March of 2019, Brookfield Asset Management announced it would acquire 62% minority controlling stake in Manger. Manager reported that no changes to the funds will be made as a result.
None None
Basis Investment Group Fund I Debt One-half of capital raised is deployed in 22 investments. Investment types are concentrated in mezzanine and preferred equity. Manger opened a new west coast office to facilitate originations.
None None
Real Estate Stoplight Report
Notes: Vintage Year is the first year SURS’ capital was called for each respective fund
Quantitative Color Code Qualitative Color Code Projected to meet original objectives Stable organization, no or minor issues Projected to return capital or better Organizational or fund management issues Projections range around return of capital or slight loss Major organizational or fund management issues Not projected to return capital
Exhibit 8
25 Real Assets Performance Review Knowledge. Experience. Integrity.
Real Estate Stoplight Report
Notes: Vintage Year is the first year SURS’ capital was called for each respective fund
Quantitative Color Code Qualitative Color Code Projected to meet original objectives Stable organization, no or minor issues Projected to return capital or better Organizational or fund management issues Projections range around return of capital or slight loss Major organizational or fund management issues Not projected to return capital
Action Required
Closed End Funds Quantitative Qualitative Comments Manager or Investor
Initiated Callan Identified Vintage Year 2017 Dune Real Estate Partners IV Manager expects final close in July 2019. Two
initial investments made. Manager opened a west coast office.
None None
Vintage Year 2018 Brookfield Strategic Real Estate Partners III
Manager raised hard-cap at final close in Fall 2018 to accommodate strong demand. Early in investment lifecycle.
None None
Exhibit 8
26 Real Assets Performance Review Knowledge. Experience. Integrity.
Infrastructure Stoplight Report
Notes: Vintage Year is the first year SURS’ capital was called for each respective fund
Quantitative Color Code Qualitative Color Code Projected to meet original objectives Stable organization, no or minor issues Projected to return capital or better Organizational or fund management issues Projections range around return of capital or slight loss Major organizational or fund management issues Not projected to return capital
Action Required
Closed End Funds Quantitative Qualitative Comments Manager or Investor
Initiated Callan Identified Vintage Year 2009 Alinda Capital Partners II Performance impacted by vintage year. Large,
remaining midstream asset will drive performance. Manager actively planning exits for five remaining investments which may take until 2020 or longer. Three investments were written down in 4th quarter.
None None
Vintage Year 2010 Macquarie Infrastructure Partners II
Monitor asset realizations. Five portfolio companies remain, sales process is active for largest.
None None
Vintage Year 2014 Macquarie Infrastructure Partners III Six investments remaining. Early, favorable exit
for garbage collection investment. Remaining portfolio diversified with ports, roads, power generation, utilities and communication exposure.
None None
Vintage Year 2018 Macquarie Infrastructure Partners IV Final close for this Fund occurred in 2018. Six
investments made. Active pipeline. None None
Exhibit 8
27 Real Assets Performance Review Knowledge. Experience. Integrity.
Real Estate and Infrastructure Portfolio As of December 31, 2018
DPI Realized Multiple: Distributions/Paid in Capital RVPI Residual Multiple: Net Asset Value/Paid in Capital TVPI Investment Multiple: Total Value (NAV + Distributions)/Paid in Capital
Exhibit 8
Glossary of Terms
Exhibit 8
29 Real Assets Performance Review Knowledge. Experience. Integrity.
Glossary of Terms
● Capital stack: Typically the combination of every type of funding which goes into the purchase and improvement of a particular project. This can include equity, preferred equity, mezzanine debt and senior debt.
● Capitalization rate: Commonly known as cap rate, is a rate that helps in evaluating a real estate investment. Cap rate = Net operating income / Current market value (Sales price) of the asset.
● Closed-End Fund: A commingled fund with a stated maturity (termination) date with few or no additional investors after the initial formation of the fund. Closed-end funds typically purchase a portfolio of properties to hold for the duration of the fund and, as sales occur, typically do not invest the sales proceeds. (Source: NCREIF PREA Reporting Standards).
● CMBS: Commercial Mortgage Backed Security (conduit) – debt securities collateralized by a pool of mortgages on commercial real estate in which all principal and interest from the mortgage flow to certificate holders in a defined sequence or manner.
● Co-lending: Two or more lenders providing financing to a borrower typically on a pari passu basis (e.g. Investor providing financing with a life insurance company).
● Commingled Funds: A term applied to all open-end and closed-end pooled investment vehicles designed for institutional tax-exempt investors. A commingled fund may be organized as a group trust, a partnership, a corporation, an insurance company separate account, or another multiple ownership entity.
● Conduit: The financial intermediary that functions as a link, or conduit, between the lender(s) originating loans and the ultimate investor(s). The conduit makes loans or purchase loans from third party correspondent lenders under standardized terms, underwriting and documents, and then, when sufficient volume has been accumulated, pools the loans for sale to investors in the CMBS market.
● Core CRE: Direct investments in operating, stabilized (80% plus leased), office, retail, industrial, or multifamily properties using little or no leverage (normally less than 50%).
● Debt Yield: The debt yield ratio is defined as the net operating income divided by the loan amount. Debt yield is a ratio low interest rate lenders use as a measure of how large a loan a property can support. Debt service coverage ratio, can be misleading, especially in a low interest rate environment.
Exhibit 8
30 Real Assets Performance Review Knowledge. Experience. Integrity.
Glossary of Terms
● Direct Investments: Investments that involve the outright purchase of properties or mortgage financing not done through other investment vehicles and include any co-investments. (1) Co-investment occurs when two or more pension funds or groups of funds share ownership of a real estate investment. There are several ways that co-investment can occur: (a) a commingled fund investing with a single investor, a group of investors, an individual fund, or a group of funds; or (b) operating companies (such as a qualified REIT or limited partnership) investing with commingled funds, individual funds, or other operating companies. (2) Also refers to an arrangement in which an investment manager or advisor co-invests its own capital alongside the investor, either on an equal (pari passu) or a subordinated basis. (Source: Institutional Real Estate, Inc.)
● First Loss (Equity) Position: The lowest class or tranche of a CMBS security which will absorb credit losses from a pool of mortgages first before any other classes are affected. Note, this would be senior to any subordinate lending and the borrower’s equity position.
● Investment Grade Security: Securities rated AAA through BBB-, generally safer tranches of securities with higher levels of subordination for regulated institutional investors.
● Joint Venture: A venture formed with an entity that is not an institutional investor but rather a developer or private party.
● Non-Core: Refers to Value-Added and Opportunistic equity investments.
● Open‐End Diversified Core Equity Index (“ODCE”): A core index that includes only open‐end diversified core strategy funds with at least 95% of their investments in U.S. markets. The ODCE is the first of the NCREIF Fund Database products, created in 1978, and is an index of investment returns reporting on both a historical and current basis (25 active vehicles). The ODCE Index is capitalization‐weighted and is reported gross and net of fees. Measurement is time‐weighted and includes leverage.
● Open-End Fund: A commingled fund with no finite life that allows continuous entry and exit of investors, typically on a quarterly basis, and engages in ongoing property operations as well as investment purchase and sale activities.
● Operating Company (REOC): A privately held real estate operating company.
● Opportunistic: Investments that take on additional risk in order to achieve a higher return. Typical sources of risks are: development, land investing, operating company investing, international exposure, high leverage, distressed properties.
● Public Real Estate Securities: A company that is publicly traded on one of the market stock exchanges where their primary business involves owning and operating real estate. The companies are typically C-Corporations or Real Estate Investment Trusts (REITs)
Exhibit 8
31 Real Assets Performance Review Knowledge. Experience. Integrity.
Glossary of Terms
● Retail - Community Center: In addition to convenience goods, provides for the sale of goods such as apparel or furniture. Typical area is 100,000 to 350,000 square feet with two or more anchor tenants (primarily Grocery and Drug).
● Retail - Neighborhood Center: Provides for the sale of daily living needs of the immediate area. Typical property is 30,000 to 150,000 square feet with at least one anchor tenant.
● Retail - Regional Center: Provides a variety of goods comparable to those of a central business district in a small city, including general merchandise, apparel and home furnishings, as well as a variety of services and perhaps recreational facilities. Two or more full-line department stores anchor a total area of 400,000 to 800,000 square feet.
● Retail - Super-Regional Center: Provides an extensive variety of shopping goods comparable to those of the central business district of a major metropolitan area. The anchors are three or more full-line department stores, with total area in excess of 800,000 square feet.
● Real Estate Investment Trust (REIT): A corporation or business trust that combines the capital of many investors to acquire or provide financing for all forms of income-producing real estate. (Source: National Association of Real Estate Investment Trusts)
● Value‐Added: Core returning investments that take on moderate additional risk from one or more of the following sources: leasing, re‐development, exposure to non‐traditional property types, the use of leverage.
Exhibit 8
32 Real Assets Performance Review Knowledge. Experience. Integrity.
NCREIF Region Map Geographic Regions and Divisions
Source: NCREIF
Exhibit 8
33 Real Assets Performance Review Knowledge. Experience. Integrity.
Disclaimers
This report is for informational purposes only and should not be construed as legal or tax advice on any matter. Any decision you make on the basis of this content is your sole responsibility. You should consult with legal and tax advisers before applying any of this information to your particular situation.
This report may consist of statements of opinion, which are made as of the date they are expressed and are not statements of fact.
Reference to or inclusion in this report of any product, service or entity should not be construed as a recommendation, approval, affiliation or endorsement of such product, service or entity by Callan.
Past performance is no guarantee of future results.
The statements made herein may include forward-looking statements regarding future results. The forward-looking statements herein: (i) are best estimations consistent with the information available as of the date hereof and (ii) involve known and unknown risks and uncertainties such that actual results may differ materially from these statements. There is no obligation to update or alter any forward-looking statement, whether as a result of new information, future events or otherwise. Undue reliance should not be placed on forward-looking statements.
Exhibit 8
Non-Core Real Estate Recommendation
June 2019
Exhibit 9
SURS Investment Program
• Non-Traditional Growth strategies include private equity and non-core real assets• Non-core real assets include assets requiring improvements (value add); opportunistic, distressed, and
developmental real assets; certain debt strategies; and newly-evolving property/sector types, among others• Non-Traditional Growth real assets investments seek relatively high returns by taking numerous risks, including
illiquidity, leverage, operational, and development risk
• Under new long-term policy, allocation to Non-Traditional Growth real assetsexpected to increase from current actual allocation of ~2.8% of total plan assets totarget of 4% in approximately five years
• Given the illiquidity of these assets, it is critical that a phased, deliberate approach be taken in funding the class• Paced funding (vintage year diversification) is a key risk mitigation tool utilized with these types of investments
Non-core real assets fits within Non-Traditional Growth asset class 2
Seeking approval for follow-on non-core real assets commitment
Asset Class WeightNon Traditional Growth 15% Private Equity 11% Non-Core Real Assets 4%Traditional Growth 25%Stabilized Growth 26% Options Strategies 6% Credit Fixed Income 14% Real Assets 6%Inflation Protection 6%Principal Protection 8%Crisis Risk Offset 20%
Exhibit 9
• Pacing study recently completed by Callan forecasts capital needed annually to keepreal assets portfolio close to target
• Model adjusted annually to reflect changes in total plan and real assets portfolio
• Real Assets is included in Broad Growth strategic class of new asset allocation• Examples of real assets include real estate, infrastructure, farmland, and timber
• Phase in commitments over time for vintage year diversification• Stabilized Growth commitments of approximately $450 million over next three years• Non-Traditional Growth commitments of $250 million-$350 million per year over next five years• REITs to be liquidated with proceeds used to fund future real assets and CRO commitments
• Recommended follow-on commitment of $30 million to a Non-Core real estate fund• Additional $30 million to Dune Real Estate Fund IV
• $20 million committed to Fund IV after September 2017 Investment Committee meeting (December2017 closing); additional commitment would bring total commitment to $50 million
Real Assets Pacing
Recommending additional commitment to a Non-Core real estate fund 3
Recommended commitment
Asset Class Area Sub-Class Area Real Assets TargetStabilized Growth Core Real Assets 6%Non-Traditional Growth Non-Core Real Assets 4%Traditional Growth REITs 0%
Exhibit 9
Real Assets Pacing, Cont.• Recommended commitment expected to enhance current portfolio
• Dune Real Estate Fund IV would provide geographic and property type diversification• Opportunistic strategy focused on distressed, deep value-add, and contrarian investments primarily in
US, but with exposure to Europe• Successful existing relationship with proven manager, providing opportunity to right-size commitment in
line with Strategic Plan recommendations
• Additional commitments anticipated to occur through remainder of year• Further Non-Traditional Growth (Non-Core), along with Stabilized Growth (Core)
Commitments would put the portfolio ~2/3rds to 2019 pacing goal 4
Exhibit 9
Real Assets Portfolio Statistics
• Recommended commitment helps achieve targeted portfolio composition
• Recommended additional commitment expected to further diversify bothgeographic and property type exposures
• Dune strategy is primarily US-focused, but does allow for European property investment
Recommended additional commitment to help achieve long-term targets 5
Exhibit 9
Non-Traditional Growth Recommendation• SURS staff and Callan recommend a commitment of $30 million to Dune Real Estate
Fund IV, as a follow-on to a $20 million Fund commitment in December 2017, subject to successful completion of contract negotiations
• Additional materials provided, including manager and fund information from Callan and diversity disclosures from the manager
Additional commitment would bring total Dune Fund IV commitment to $50 million 6
Exhibit 9
Information contained herein is the confidential and proprietary information of Callan and should not be used other than by the intended
recipient for its intended purpose or disseminated to any other person without Callan’s permission. Certain information herein has been
compiled by Callan and is based on information provided by a variety of sources believed to be reliable for which Callan has not necessarily
verified the accuracy or completeness of or updated. This content may consist of statements of opinion, which are made as of the date they
are expressed and are not statements of fact. This content is for informational purposes only and should not be construed as legal or tax
advice on any matter. Any decision you make on the basis of this content is your sole responsibility. You should consult with legal and tax
advisers before applying any of this information to your particular situation. Past performance is no guarantee of future results. For further
information, please see Appendix for Important Information and Disclosures.
May 20, 2019
State Universities Retirement System of Illinois
Dune Real Estate Fund IV, L.P.
Exhibit 10
Knowledge. Experience. Integrity. 2
Table of Contents
Evaluation Process 3
Executive Summary 4
Sponsorship 5
Track Record 9
Peer Group 12
Recommendation 12
Important Information and Disclosures 14
Exhibit 10
Knowledge. Experience. Integrity. 3
Evaluation Process The purpose of this evaluation is to provide State Universities Retirement System of Illinois with a recommendation regarding an add-on investment into Dune Real Estate Fund IV, L.P. which is managed by Dune Real Estate Partners LP. On September 14, 2017, SURS approved a $20 million commitment to Fund IV. In December 2018, Callan performed a pacing study resulting in additional capital being allocated to Real Assets in the Non-Traditional Growth asset class. As a result, this recommendation is to increase SURS’ investment in Fund IV from $20 million to $50 million in total, or an additional $30 million. SURS has a history of investment with Dune in the fund series. The following table details SURS’ current investments with Dune, as of March 31, 2019. Investment Vehicle Vintage Year Total Commitment Capital Contributions Net Asset Value Dune Real Estate Partners II 2008 $40 $40 $22.5
Dune Real Estate Partners III 2013 $100 $87 $104.7
Callan’s investment evaluation process included meetings with Dune in Callan’s San Francisco office on May 1, 2017, February 7, 2018, May 10, 2018 and October 22, 2018, attendance at the 2019 investor conference on April 10th and 11th, and the collection and review of various materials provided to Callan by the Sponsor, including the response to Callan’s due diligence questionnaire, private placement memorandum (“PPM”), Limited Partnership Agreement (“LPA”), as well as other offering documents and data requests. Callan conducted two on-site meetings with Dune on April 2, 2018 and July 30, 2018, with various Dune professionals participating, as detailed below. The on-site meetings focused on the Sponsor organization, investment strategy, investment process, team and track record.
April 2, 2018 meeting Name Title Name Title Ms. Cia Buckley Marakovits Partner, CIO Mr. Cory Elbaum Managing Director Ms. Julie Brenton Partner, Head of Investor
Relations Mr. Brad Caracausa Director
Mr. Eric Calder Partner Mr. Thomas Kinslow Director Mr. David Beznos Managing Director
July 30, 2018 meeting Name Title Name Title Mr. Dan Neidich Partner, CEO Mr. Darren Berk CFO Ms.Cia Buckley Marakovits Partner, CIO Mr. Michael Sherman General Counsel, Chief
Compliance Officer Mr. Russell Gimelstob Partner, Head of
Acquisitions Mr. Alexander Sadighi Director, Finance
Ms. Julie Brenton Partner, Head of Investor Relations
Callan had on-going communication and interaction with the Sponsor during the due diligence process, with Ms. Julie Brenton serving as the primary point of contact. The following evaluation is a product of the aforementioned process with the benefit of review by Callan’s Alternative Investment Review Committee on May 20, 2019. Callan provided SURS investment staff with the full diligence report.
Exhibit 10
Knowledge. Experience. Integrity. 4
Executive Summary1 Dune Real Estate Partners LP (“Dune”) is currently sponsoring Dune Real Estate Fund IV, L.P. (the “Fund” or “Fund IV”) the fourth non-core real estate commingled fund in its fund series. The Fund is targeting aggregate capital commitments of $1.25 billion, with a hard cap of $1.5 billion. The General Partner will contribute a minimum of $25.6 million and expects to increase their contribution to $30.5 million by the final close of the Fund, which is expected to occur in July of 2019. The Fund will target a net, levered internal rate of return (“IRR”) of 15-17%. Dune Real Estate Fund IV, L.P. will follow a similar investment strategy as its three predecessor funds and make opportunistic investments primarily in the U.S., across real estate sectors. Dune is a New York City-based firm that focuses solely on investing and managing its opportunistic real estate funds.
Fund Summary
General Partner Dune Real Estate Fund IV LLC (“General Partner” or “GP”)
Investment Manager Dune Real Estate Partners LP (“Dune”, the “Firm” or the “Sponsor”)
Fund Name Dune Real Estate Fund IV, L.P. (“Dune IV”, “Fund IV” or the “Fund”)
Target Size / Hard Cap Target size: $1.25 billion. Hard cap of $1.5 billion (excluding Dune commitment)
Sponsor Commitment Minimum of $20 million; however, Dune has committed $25.6 million to date, with an expected total of $30.5 million at the final close
Fundraise Timing First Close held on September 25, 2017 with $304 million in capital commitments Subsequent Closings raised $680 million in capital commitments Final Close: July 2019
Investment Period Four years
Management Fee 150 bps on Committed Capital during the Investment Period and on Invested Capital thereafter. As a result of participating in the first close for the initial investment of $20 million, SURS will receive the first close fee break (three months of no fee) on its entire commitment.
Incentive Fee First, return of capital (on a deal-by-deal basis), then, 9% preferred return to the Limited Partner (“LP”), then, 20% to the LP and 80% to the General Partner (“GP”), until GP has received 20% of aggregate distributions. Thereafter, 80% to the LP and 20% to the GP
Clawback Dune will be required to restore capital to meet any shortfall to Limited Partners resulting from the overpayment of carried interest. Dune will reserve 30% of carried interest distributions in a segregated reserve account that will be used for clawback amounts. Reserved distributions may be invested by the General Partner in one or more investments. In addition, each person receiving carried interest will be required to guaranty its repayment obligation, on a several and not joint basis, prior to the receipt of the carried interest.
Dune agreed to modify the Terms to include the following:
- maintaining the reserve/escrow account until the earlier of a) the disposition of the final fund investment or b) until there is no longer a possibility of a clawback, assuming no further recovery on remaining investments and; - giving the Advisory Committee the right at any time to require an independent valuation of an investment in the portfolio.
1 Includes quoted and paraphrased excerpts from representative materials provided to, and reviewed by, Callan.
Exhibit 10
Knowledge. Experience. Integrity. 5
Fund Term Eight years from final close, with two one-year extensions subject to LPAC approval
Key Persons Mr. Daniel Neidich and Ms. Cia Buckley Marakovits will remain actively involved and will during the Commitment Period devote substantially all of his or her time and attention to Fund IV. If either Key Person departs, the Commitment Period expires unless LPs approve continuation of Commitment Period and/or a replacement Key Person.
Strategy Summary
Overall Strategy Distressed, deep value-add and contrarian investing, primarily in the U.S. and across multiple property types. Focus on target institutional-quality real estate assets that may be illiquid for a variety of reasons, including a challenged or distressed capital structure, mismanagement of operations, ownership disputes and / or negative investor sentiment.
Target IRR 18%-22% Gross IRR, 15%-17% Net 1.9x-2.1x Gross Equity Multiple, 1.6x-1.8x Net Equity Multiple
Investment Type(s) Individual real estate properties, portfolios, operating companies and debt and debt securities.
Country/Region(s) Primarily in the U.S. Up to 30% in the European Union.
# Investments/Size 20-28/$50 million to $400 million gross asset value/$25 million-$100 million equity investment
Investment Limits Without Advisory Committee approval: No more than 20% of commitments in a single asset; No more than 30% of commitments in a single portfolio; No more than 20% of commitments in unentitled, undeveloped land; No investment in uncovered options, futures contracts or derivative securities other than to hedge non-U.S. currency or interest rate exposure; No investments in any blind-pool investment funds; No investments located outside North America and European Union; and No more than 30% of commitments in the European Union.
Leverage Limits Debt financing portfolio-wide cannot exceed 75% of the greater of cost or fair value of all investments.
Hold Period 5-6 years
Exit Mechanisms Individual asset sales and portfolio sales
Sponsorship2 Dune is a New York City-based real estate investment firm owned and led by Mr. Dan Neidich as Founder and CEO, Ms. Cia Buckley Marakovits as CIO and Mr. Gimelstob as leader of the West Coast region and Head of Acquisitions. The Firm was founded in 2005 by Mr. Neidich with the goal of bringing together a collaborative team of experienced real estate professionals dedicated to creating a portfolio of profitable investments through the execution of an opportunistic strategy. Mr. Neidich is the controlling owner of Dune Real Estate Partners LP, the investment manager, owning over 51%. Ms. Buckley Marakovits and Mr. Gimelstob own the balance of the management company with Mr. Neidich.
2 Includes quoted and paraphrased excerpts from representative materials provided to, and reviewed by, Callan.
Exhibit 10
Knowledge. Experience. Integrity. 6
Dune is a registered investment advisor under the U.S. Investment Advisers Act of 1940. The Firm’s main office is in New York; however, Dune opened a second office in Los Angeles in August 2017 to establish a west coast presence. The Los Angeles office is led by Russell Gimelstob. The following chart details Dune’s gross and net assets under management since 2009. Firm-wide Real Estate Assets Under Management ($ Millions, as of December 31, 2018 including commitments)
Senior Real Estate Team and Investment Committee
The Partners and Managing Directors of the Firm comprise the Investment Committee. The Investment Committee is supported by two non-voting members including Michael Sherman, the General Counsel/Chief Compliance Officer and Darren Berk, the Chief Financial Officer. Dune’s sole line of business is the management of its closed-end opportunistic real estate funds. The focus of the organization is on investment performance of its funds versus the aggregation of assets for a platform. Dune implements a Partner-driven investment model intended to ensure an intensive senior-level focus on all transactions. All investment professionals are responsible for all phases of the investment process, including sourcing, due diligence, acquisitions, dispositions, asset management and portfolio management. The legal, finance and tax teams work in partnership with the investment teams to structure investments, establish appropriate controls and reporting procedures, and perform ongoing monitoring and evaluation of investments. The Firm has 29 employees including 11 in Investments, one Partner in Investor Relations, two employees in Legal and Compliance, eight in Financial and six additional people that perform administrative functions. Additionally, Dune utilizes the services of a fund administrator, which is currently Real Estate Systems Implementation Group, LLC (“RESIG”) to prepare and maintain the Dune Real Estate Funds’ books and records and to assist with fund administration and reporting. Dune professionals with a title of Director and above are shown in the chart below. Dune Investment Committee and Key Personnel
Name Title Years with Firm Years
Experience Dan Neidich* CEO, Partner 15 45
Cia Buckley Marakovits* CIO, Partner 12 31
Russell Gimelstob* Head of Acquisitions, Partner 14 17
$1,984 $1,868
$2,607 $2,985
$3,240
$3,895 $4,372 $4,278 $4,107
$4,595
$1,243 $1,283 $1,270 $1,626 $1,647
$2,246 $2,316 $2,207 $2,389
$2,534
2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
Gross
Net
Exhibit 10
Knowledge. Experience. Integrity. 7
Name Title Years with Firm Years
Experience Eric Calder* Partner 9 17
David Beznos* Managing Director 8 13
Cory Elbaum* Managing Director 1 22
Brad Caracausa Director 1 11
Thomas Kinslow Director 2 10
David Oliner Senior Adviser 10 32
Darren Berk** CFO 15 25
Michael Sherman** General Counsel, CCO 9 18
Julie Brenton* Head of Investor Relations, Partner 5 30 *Denotes membership on Fund Investment Committee. ** Denotes non-voting membership on Fund Investment Committee.
Dune represented it does not have any legal, financial or other “disciplinary” events to report with regard to its status as registered investment adviser.
Investment Strategy3 Fund IV is being formed to continue Dune’s opportunistic real estate investment program of making investments in real estate debt and equity with a thematic focus on distressed situations, deep value-add opportunities and contrarian investments that Dune believes can generate a fund-level net annual internal rate of return (“IRR”) on invested capital of between 15% and 17%. Fund IV is targeting capital commitments of $1.25 billion, subject to a $1.50 billion hard cap.
Fund IV’s strategy will be broadly focused on opportunities stemming from capital dislocation that frequently affects the real estate markets. This capital dislocation is a result of a shifting economic landscape as uncertainty in the property markets continues to increase, growing time pressure created from the continued deleveraging of the real estate industry, and trends occurring in certain sectors. When creating a portfolio, Dune’s primary screen is the extent of the capital markets dislocation with a particular opportunity and then they focus on geographic markets and property type. With respect to geographic markets, Dune focuses on markets with deep pools of capital and higher barriers to entry for supply. These are markets that have the most liquidity and benefit disproportionately from market moves that create asymmetrical upside potential as well as downside protection through liquidity. Currently, those markets that Dune is targeting are Boston, New York City, Washington DC, South Florida, Los Angeles, San Francisco and Waikiki.
Dune anticipates executing its investment program through three primary investment strategies: Distressed Situations, Deep Value-Add, and Contrarian. – Distressed Situations: Acquiring and/or restructuring of sub-performing and non-performing commercial mortgages and other real
estate loans as an effective means of acquiring real estate assets and recapitalizing transactions. Dune characterizes distressed real estate owners as owners or lenders being forced to sell, seek liquidity or recapitalize at inopportune times often because of pressure created by the amount and/or terms of their debt. Factors creating distress may include a seller’s need for liquidity and
3 Includes quoted and paraphrased excerpts from representative materials provided to, and reviewed by, Callan.
Fund IV will focus on acquiring institutional-quality real estate assets that may be illiquid for a variety of reasons, including a challenged or distressed capital structure, mismanagement of operations, ownership disputes and/or negative investor sentiment. This illiquidity generally impairs value, which may result in favorable acquisition prices for investments in Fund IV. Post-acquisition, Dune will seek to utilize its capital markets and real estate skills to execute a business plan designed to create liquidity for a property.
Exhibit 10
Knowledge. Experience. Integrity. 8
reallocation of its assets, an over-leveraged property or owner seeking to refinance a near-term debt maturity or a lender selling sub-performing or non-performing loans. Opportunities may also arise as a result of property underperformance impacting the ability to pay debt service or make equity distributions or when a property requires repositioning or otherwise is in need of near term capital infusions.
– Deep Value-Add: Recapitalizing and/or rationalizing of capital structures or ownership to effectuate the repositioning of real estate assets that are often mismanaged. Dune intends to pursue investments that it believes will present opportunities to create value through the restructuring, repositioning or redevelopment of high-quality and/or strong cash flowing properties that may be temporarily impaired but remain “fixable.” The focus of this strategy is ultimately on the underlying value and institutional quality of the property, which, once repositioned, may command premium pricing. This strategy capitalizes on situations in which the existing capital and/or ownership structure of a property is impairing its performance and appeal or marketability.
Conditions that may impede a property’s broad appeal include: a lack of available capital necessary for development or redevelopment, an overly-complex capital structure, a contentious or complicated ownership situation, significant vacancy or poor property management. Many investors may not be comfortable with the risk, challenges and effort involved in such an execution-heavy strategy, or may not have the capabilities and vision required to resolve the issues and capture the value differential and a potential premium at exit. Such conditions may limit demand for a property, creating an opening for an opportunistic investor.
– Contrarian: Investing to take advantage of oversold markets or property types where the acquisition basis is compelling and where Dune believes investor sentiment has created exploitable mispricing opportunities.
Dune will seek to take advantage of opportunities in oversold markets or property types where the acquisition basis is compelling and where investor behavior has created exploitable mispricing resulting in the current market value of a property below Dune’s assessment of its fair value. The pricing disparity may exist for a variety of reasons, including property characteristics, sectors, geographic locations and/or markets that have been deemed “out of favor” by investors; insufficient market transparency; mispriced risk; or an over-correction in the market as a result of a temporary condition. Two areas that Dune believes have been, and will continue to be, oversold are land and development where continued availability for financing may create pricing opportunities.
Dune expects current and future market dislocations to arise due to illiquidity in certain segments of the real estate capital markets and a capital supply/demand imbalance across certain real estate markets and property types. Dune believes the moderate economic recovery coupled with the continued yet uneven deleveraging and recovery in the real estate sector has caused a re-pricing of risk throughout the capital structure for real estate, disproportionately affecting certain sectors and markets.
Similar to Funds I, II and III, Fund IV will target transactions with a total gross investment size of $50 million to $400 million, with an equity investment that exceeds $25 million and may be as high as $100 million. The average equity investment in Fund III was $36 million. The investment pace is anticipated to be five to seven deals per year, which may include portfolio investments in addition to individual assets. Dune targets 20 to 28 investments in total for Fund IV. Investments are generally expected to be held for five years; however, Dune continually assesses the market and the objectives of its investments to time its exit strategy. Dune intends to pursue its opportunistic strategy for Fund IV primarily in the U.S., broadly across property types and geographies. Dune generally focuses on in-fill markets that Dune believes offer greater opportunities for growth and that have high barriers to entry. In addition, while not a targeted focus of the Fund, the Fund may invest in the European Union.
Dune partners with real estate co-venturers which includes a range of partnerships with joint venture partners, borrowers, owners, developers and operating partners. Each of Dune’s investments has a co-venturer whereby Dune provides not only capital but capital markets and real estate expertise to potentially achieve opportunistic returns. Dune has found that, notwithstanding a borrower’s current difficulties, the borrower, who often controls any non-performing loan restructuring, also may possess excellent operating skills
Exhibit 10
Knowledge. Experience. Integrity. 9
and local market knowledge, and that once a capital structure has been rationalized, the borrower has specialized operating and property management skills that Dune may elect to retain (subject to tight Dune controls over operations and financials). In these cases, Dune believes its relationships with borrowers and/or owners are critical to accessing the investment opportunities and Dune’s skills and relationships are critical in executing the business plan for the underlying property. There are other investments, such as development opportunities, that Dune believes benefit from the involvement of local and/or specialized owners or developers and, as such, Dune has selected a locally-based partner and/or developer for the investment. In such cases, Dune would continue to provide the execution skills with respect to restructuring, financing, recapitalization and exit while benefiting from the expertise of its local partner and/or developer. Due to the transitional nature of the Fund’s investments, Dune targets the most efficient cost of capital for each investment and expects to primarily utilize floating rate debt with interest rate mitigation strategies through the purchase of interest rate caps in the short and medium term. Dune has typically used more moderate levels of leverage in its funds. Peak leverage in Fund I, Fund II and Fund III was 46.8%, 64.0% and 60.3%, respectively.
Track Record The Sponsor has managed three prior real estate funds in the Fund series. Within those three vehicles, Dune has made 58 investments representing a total of $2.2 billion in called capital. A total of 39 investments from the series have been realized, or partially realized, through the end of the fourth quarter of 2018, resulting in a total of $1.94 billion of distributions to investors. The balance of the portfolio has an unrealized net asset value of approximately $1.44 billion.
Exhibit 10
Knowledge. Experience. Integrity. 10
Dune Performance (as of December 31, 2018), $ millions
Dune RE Fund I Dune RE Fund II Dune RE Fund III
Year 2005 2008 20013 Target Return 18-22% gross
15-17% net 18-22% gross
15-17% net 18-22% gross
15-17% net Capital Raised $727 $794 $960 Invested Capital $678 $772 $803 Distributions $764 $951 $224 Portfolio Value $36 $430 $970 # Deals 10 22 26 # of Realized /Partially Realized Investments 10 20 9 Since Inception IRR/Mult. (Gross) 4.8% / 1.4x 24.7% / 2.2x 19.9% / 1.7x Since Inception IRR/Mult. (Net) 2.3% / 1.2x 16.3% / 1.8x 13.8% / 1.5x
Fund I did not meet its return objective, but did return 100% of capital to investors. Funds II and III have performed well, exceeding their targets. Fund I’s investment period was just prior to the global financial crisis and the Fund did not meet its return objective. The net equity multiple (1.2x) shows that the fund returned investors’ capital with a small profit. A total of 10 investments were made between 2005-2007, prior to the downturn. The 10 investments consisted of seven real estate investments similar to the Dune strategy of the past 12 years and three investments in non-controlling interests in operating companies. The seven “real estate investments” made by Fund I achieved a 9.2% gross IRR and included one investment that lost capital. Meadowlands was a mixed use development which suffered significantly when the lender, an affiliate of Lehman brothers defaulted on its funding obligation upon Lehman’s bankruptcy filing and in violation of the loan agreement. The remaining three investments of Fund I were investments made in non-controlling interests in operating companies done in collaboration with the Dune Capital Management hedge fund, all three of which performed poorly and two of the three declared bankruptcy. These three investments together generated a realized investment-level multiple of 0.6x. The Dune Capital Management hedge fund was split off from Dune Real Estate Funds in January 2010, at which point Dune Real Estate Partners became a fully dedicated real estate investment firm. Fund II has realized or partially realized 20 of its 22 investments. The since inception gross IRR exceeds the Fund’s return target. Fund II is expected to be realized over the next 12 months. Fund III completed its investment period in February 2019 so it is currently implementing business plans and in the value creation stage of the Fund’s lifecycle. The Fund has realized or partially realized 6 of 26 investments. The Fund’s since inception gross IRR meets the Fund’s return target. The net return is below target , but it is still early in the Fund’s life. Attribution by Investment Status (as of December 31, 2018), $ millions
Status # Invested Equity
% Equity
NAV
ITD IRR
ITD Multiple
Unrealized 21 $751 31% $1006 17.90% 1.7x
Realized 23 $1,004 41% - 10.51% 1.6x
Partially Realized 14 $666 27% $652 15.20% 2.1x
Exhibit 10
Knowledge. Experience. Integrity. 11
The Sponsor has fully realized 23 investments which represented 41% of all invested dollars, with a return of 1.6x invested capital; this includes the operating company investments, representing $236 million, which returned 0.3x invested capital. There are 14 investments that have been partially realized and delivered 2.2x invested capital to-date, respectively. The 21 unrealized investments are carried at 1.7x invested capital and expected to return 2.2x invested capital as business plans are implemented. Fund I has a small remaining NAV of $36 million and the fund is currently in liquidation. One of the investments was a successful and profitable condominium project in New York City with four units out of 145 remaining. New York City currently has an oversupply of large luxury apartment inventory, and the market has slowed. Of the remaining four unsold units, there remains one 1-bedroom and three 4-bedroom units. In addition, Fund I closed the sale of its interest in the Ace Hotel in September 2015 and as part of the transaction took a small preferred equity position whereby Fund I is entitled to a preferred return as well as priority in all distributions. Fund II has sold or partially liquidated 20 of 22 investments. Interests in seven investments remain and Dune is focused on harvesting the remaining investments within the Fund over the next year, with distributions of over $390 million expected. Approximately 80% of projected remaining proceeds are expected to be generated from four of the remaining investments. The Four Seasons Resort Orlando at Walt Disney World Resort was re-assessed for property taxes in 2015, resulting in an increased tax liability for that and subsequent years. In January 2019, Dune negotiated a favorable settlement to the multi-year property tax litigation. The settlement resulted in a significant tax refund to the property. Fund III completed its investment period and has partially realized nine investments to date. All investments are performing as underwritten. Distribution of Investment Returns (By Invested Equity, $millions, Gross IRRS as of December 31, 2018) Distribution of Investment Returns (By Number of Investments, $millions, Gross IRRS as of December 31, 2018)
The charts above highlight the leveraged return ranges for realized and unrealized investment performance and is categorized by the amount of equity invested in each deal for the first chart and the number of deals for the second chart. The return distribution based on
0
5
10
15
20
25
-30%--20% -20%--10% -10%-0% 0%-10% 10%-20% 20%-30% 30%-40% 40%-50% 50%+
Unrealized Realized
$0$200$400$600$800
$1,000$1,200
-30%--20% -20%--10% -10%-0% 0%-10% 10%-20% 20%-30% 30%-40% 40%-50% 50%+
Unrealized Realized
Exhibit 10
Knowledge. Experience. Integrity. 12
invested capital generally follows the distribution based on number of investments. Three realized investments have a negative IRR, and represent the three investments in the non-controlling positions in operating companies. Business plans are being implemented for the majority of Fund III properties so most of those investments are unrealized. The realized returns are concentrated in the 10% to 30% range.
Peer Group The Fund’s peer group includes the universe of diversified opportunistic real estate funds focused on the US. A non-exhaustive subset of current opportunistic real estate strategies is included in the chart below. Opportunistic Fund Managers
AEW Capital Management Fortress Rockpoint Group
Angelo Gordon GreenOak Starwood Capital
Argosy Real Estate Partners Harrison Street TPG Capital
Artemis Real Estate Partners KKR Walton Street
The Blackstone Group North Haven Wheelock Street
Carlyle Capital Oaktree Capital Management Westbrook Partners
CIM Group PCCP, LLC
Dune’s primary competitive set is Walton Street, Starwood, Fortress and Rockpoint. Walton Street is more real estate centric then Dune and less capital market oriented. Starwood has significantly larger funds targeting large entity or portfolio transactions and has a greater focus on macro thematic strategies then asset specific investing. Fortress is more capital markets focused then Dune and targets distressed debt and more highly structured transactions. Rockpoint is more real estate focused then Dune and implements deep value add and repositioning strategies focused in gateway cities and is concentrated largely in office, multi-family and hotels.
Recommendation Callan recommends Dune Real Estate Fund IV, L.P. as an appropriate investment for State Universities Retirement System of Illinois’ Non-Traditional Growth real assets portfolio and that the commitment amount increase by $30 million, from the current commitment of $20 million to a total commitment of $50 million to conform with the Strategic Plan recommendations. Within the context of institutional-quality opportunistic real estate investment managers, Callan believes that Dune is a competitive and highly skilled investment management organization. It is Callan’s opinion that the investment strategy and sponsorship are significant differentiators relative to the broader opportunistic real estate manager universe which allow the team to successfully execute its opportunistic investment strategy with a thematic focus on distressed situations, deep-value add opportunities and contrarian investments. Lastly, SURS will benefit by receiving a three month fee break on the entire $50 million investment as a result of making a $20 million commitment in the first close. Our recommendation is based on the specific considerations summarized below. Strengths Detail Section
Strong track record
The Sponsor has demonstrated the ability to exit investments, at or above projected returns.
Performance
Exhibit 10
Knowledge. Experience. Integrity. 13
Highly experienced Senior Team invests in broad strategies
Dune’s Senior Team‘s investment experience is comprehensive and its funds benefit from its 166 years of combined expertise. The Firm invests in a variety of strategies both in equity and debt and that capability enables the Firm to identify and pursue opportunities that offer the best value. Two of the owners have substantial fiduciary experience managing institutional funds having managed an aggregate of 10 institutional funds before joining Dune.
Strategy, Sponsorship
Co-investment aligns Firm with the Fund
Dune has aligned the Firm with investors by making a substantial commitment of $25.6 million to Fund IV and expects to increase its commitment prior to final close.
Sponsorship
SURS has an Advisory Board Seat
The Advisory Board has additional visibility on Fund activities and approval processes as an additional way to monitor the Fund and provide feedback to the Sponsor.
Terms
Risks
Targets investments of illiquid nature at acquisition
The Fund targets investments which are often of an illiquid nature at the time of purchase. This risk is partially mitigated by focusing on investments and markets with high quality underlying real estate or strong cash yields that will benefit from enhanced liquidity and appeal to a wide range of buyers once a business plan has been executed.
Strategy
Key Person Risk
The Firm is dependent on two of its owners and exhibits a high degree of key person risk. The dependence on these professionals is partially mitigated by the Fund’s key person provisions, the succession plan and experience of other senior professionals.
Sponsorship
The Carried Interest Distribution Structure is deal by deal.
Distribution of Fund proceeds is made at the investment level, rather than at the Fund level, which is less attractive. However, Dune has put some protections in place to mitigate risks associated with the investment level carry structure including a clawback provision; a reserve account holding 30% of the carried interest distributed until the final disposition of investments or until there is no longer a possibility of a claw back; permitting the Advisory Committee at any time to have an independent valuation performed on investments and; requiring personal guarantees from recipients receiving carried interest.
Terms
Exhibit 10
Knowledge. Experience. Integrity. 14
Important Information and Disclosures Retirement System of Illinois exclusively for use by State Universities Retirement System of Illinois. This investment evaluation and the information contained herein is confidential and proprietary information of Callan and should not be used other than by State Universities Retirement System of Illinois for its intended purpose or disseminated to any other person without Callan’s permission. This investment evaluation gives consideration to the investment requirements and guidelines provided to Callan by State Universities Retirement System of Illinois and should not be relied upon by any person other than State Universities Retirement System of Illinois or used in whole or in part for any purpose other than considering an investment in the candidate vehicle(s). Information contained herein has been compiled by Callan and is based on information provided by various sources believed to be reliable but which Callan has not necessarily verified the accuracy or completeness of or updated. Information considered by Callan, includes information provided by the investment sponsor and information that is publicly available, as well as information developed by Callan from other sources, which may not be current as of the date of this investment evaluation. Callan does not make any representation or warranty, express or implied as to the accuracy or completeness of the information contained in this investment evaluation. Callan undertakes no obligation to update this investment evaluation except as specifically requested by State Universities Retirement System of Illinois. This investment evaluation is for informational purposes only and should not be construed as legal or tax advice. State Universities Retirement System of Illinois is urged to consult with legal and tax advisers before investing in the candidate investment vehicle(s) or any other investment vehicle. A potential investor in the candidate investment vehicle(s) should undertake an independent review of the sponsor’s private placement memorandum, related offering documents and due diligence questionnaire, which describe, among other important information, the sponsor’s background, experience and track record, investment strategy, investment risk factors, compensation program, and investor rights and obligations. Callan makes no representation or warranty, express or implied, as to the accuracy or completeness of the sponsor’s offering materials. It is incumbent upon State Universities Retirement System of Illinois to make an independent determination of the suitability and consequences of an investment in the candidate investment vehicle(s). The appropriateness of the candidate investment vehicle(s) discussed in this investment evaluation is based on Callan’s understanding of State Universities Retirement System of Illinois’s portfolio as of May 20, 2019. Opinions expressed in the investment evaluation are based on Callan’s standard evaluation procedures which are designed to provide objective comments based upon information provided to Callan. Such opinions may be amended, supplemented or restated, based on changes in State Universities Retirement System of Illinois’s investment objectives or investment portfolio, the macroeconomic environment, legal/regulatory/political climate, the organization or team of the candidate general partner(s) or candidate investment vehicle(s) or other identified or unidentified factors. Callan undertakes no obligation to update any opinion expressed in this investment summary except as specifically requested by State Universities Retirement System of Illinois. Nothing contained in this investment evaluation should be relied upon as a promise or representation as to past or future performance of the candidate investment vehicle(s) or other entity. Past performance is no guarantee of future results. Certain operational topics may be addressed in this investment evaluation for informational purposes; however, Callan has not conducted due diligence of the operations of the candidate sponsor, or candidate investment vehicle(s), as may typically be performed in an operational due diligence evaluation assignment. The issues considered and risks highlighted in this investment evaluation may not be comprehensive and other undisclosed or heretofore unknown risks may exist that may be deemed material to State Universities Retirement System of Illinois regarding the candidate sponsor and candidate investment vehicle(s). The investment evaluation and any related due diligence questionnaire completed by the candidate sponsor may contain highly confidential information that is covered by a non-disclosure or other related agreement with the candidate sponsor which must be respected by State Universities Retirement System of Illinois and its representatives. State Universities Retirement System of Illinois agrees to adhere to the conditions of any confidentiality or non-disclosure agreement provided with the investment evaluation.
Exhibit 10
Knowledge. Experience. Integrity. 15
Disclosure As indicated below, one or more of the candidates listed in this report may, itself, be a client of Callan as of the date of the most recent quarter end. These clients pay Callan for educational, software, database and/or reporting products and services. Given the complex corporate and organizational ownership structures of investment management firms and/or trust/custody or securities lending firms, the parent and affiliate firm relationships are not listed here. The client list below may include names of parent companies who allow their affiliates to use some of the services included in their client contract (e.g., educational services including published research and attendance at conferences and workshops). Affiliates will not be listed if they don’t separately contract with Callan. Parent company ownership of the firms included in this report and any relationship with Callan can be provided at your request. Because Callan’s clients list of investment managers changes periodically, the above information may not reflect recent changes. Clients are welcome to request a complete list of Callan’s investment manager clients at any time. As a matter of policy, Callan follows strict procedures so that investment manager client relationships do not affect the outcome or process by which Callan’s searches or evaluations are conducted.
Firm Is an Investment Manager Client of Callan*
Is Not an Investment Manager Client of Callan*
Dune Real Estate Partners LP x
*Based upon Callan manager clients as of the most recent quarter end.
Exhibit 10
Manager
American Indian/ Alaska Native Asian
Black or African
American
Native Hawaiian or Other Pacific
Islander White
Two or More
RacesHispanic or Latino
No Response
Person With a
Disability
American Indian/ Alaska Native Asian
Black or African
American
Native Hawaiian or Other Pacific
Islander White
Two or More
RacesHispanic or Latino
No Response
Person With a
DisabilityTotal Employees
Alex Brown Realty 0 1 2 0 9 0 0 0 0 0 1 0 0 15 0 0 0 0 28CBRE 0 10 1 0 19 2 1 0 0 0 16 4 0 57 1 6 0 0 117CenterSquare 0 4 1 1 12 0 2 0 0 0 0 1 0 47 0 1 0 0 69CrossHarbor 0 0 0 0 9 0 0 0 0 0 0 0 0 26 0 0 0 0 35Dune 0 3 0 0 5 0 1 0 0 0 0 0 0 16 0 1 0 0 26Equus Capital Partners 0 0 4 0 28 0 2 0 0 0 0 1 0 55 0 0 0 0 90Garrison Real Estate 0 0 1 0 14 0 0 0 0 0 6 0 0 40 0 0 0 0 61Goldenrod 0 0 0 0 8 0 0 0 0 0 0 0 0 13 0 0 0 0 21Harrison Steet 0 3 0 0 40 1 1 0 0 0 5 1 0 73 0 2 0 0 126Long Wharf Capital 0 0 0 0 8 0 0 0 0 0 1 0 0 11 0 1 0 0 21TA Realty 0 2 1 0 19 0 0 0 0 0 3 0 0 40 0 0 0 0 65Westbrook* 0 8 1 0 16 0 2 0 0 0 12 0 0 59 0 4 0 0 102
* Note - Westbrook includes their global staff. 9 in Asia which is reflected here.
Manager
American Indian/ Alaska Native Asian
Black or African
American
Native Hawaiian or Other Pacific
Islander White
Two or More
RacesHispanic or Latino
No Response
Person With a
Disability
American Indian/ Alaska Native Asian
Black or African
American
Native Hawaiian or Other Pacific
Islander White
Two or More
RacesHispanic or Latino
No Response
Person With a
DisabilityTotal Employees
Alex Brown Realty 0% 4% 7% 0% 32% 0% 0% 0% 0% 0% 4% 0% 0% 54% 0% 0% 0% 0% 28CBRE 0% 9% 1% 0% 16% 2% 1% 0% 0% 0% 14% 3% 0% 49% 1% 5% 0% 0% 117CenterSquare 0% 6% 1% 1% 17% 0% 3% 0% 0% 0% 0% 1% 0% 68% 0% 1% 0% 0% 69CrossHarbor 0% 0% 0% 0% 26% 0% 0% 0% 0% 0% 0% 0% 0% 74% 0% 0% 0% 0% 35Dune 0% 12% 0% 0% 19% 0% 4% 0% 0% 0% 0% 0% 0% 62% 0% 4% 0% 0% 26Equus Capital Partners 0% 0% 4% 0% 31% 0% 2% 0% 0% 0% 0% 1% 0% 61% 0% 0% 0% 0% 90Garrison Real Estate 0% 0% 2% 0% 23% 0% 0% 0% 0% 0% 10% 0% 0% 66% 0% 0% 0% 0% 61Goldenrod 0% 0% 0% 0% 38% 0% 0% 0% 0% 0% 0% 0% 0% 62% 0% 0% 0% 0% 21Harrison Steet 0% 2% 0% 0% 32% 1% 1% 0% 0% 0% 4% 1% 0% 58% 0% 2% 0% 0% 126Long Wharf Capital 0 0 0 0 0.38095238 0 0 0 0 0 0.04761905 0 0 0.52380952 0 0.04761905 0 0 21TA Realty 0% 3% 2% 0% 29% 0% 0% 0% 0% 0% 5% 0% 0% 62% 0% 0% 0% 0% 65Westbrook* 0 0.07843137 0.00980392 0 0.15686275 0 0.01960784 0 0 0 0.11764706 0 0 0.57843137 0 0.03921569 0 0 102
* Note - Westbrook includes their global staff. 9 in Asia which is reflected here.
Total Contracts
Fund Expenses to Date
Total Contracts
Fund Expenses to Date Total
ManagerAlex Brown Realty1 0 -$ 0 -$ -$ CBRE 0 -$ 0 -$ -$ CenterSquare 0 -$ 0 -$ -$ CrossHarbor 3 80,380$ 1 900,000$ 900,000$ Dune 6 32,000$ 0 -$ -$ Equus Capital Partners 0 -$ 0 -$ -$ Garrison Real Estate 0 -$ 0 -$ -$ Goldenrod 0 -$ 0 -$ -$ Harrison Steet 0 -$ 0 -$ -$ Long Wharf Capital 2 119723 3 356146 356146TA Realty 0 -$ 0 -$ -$ Westbrook 0 0 0 0 0
DIVERSITY DATA - AS REPORTED BY MANAGERSNon Core MANAGER DIVERSITY DATA (actual headcount of professional employees)
Non Core MANAGER DIVERSITY DATA (percentage of professional employees)
MWDB-Owned Non- MWDB Owned >50% Work Completed
1ABR Fund VI has not acquired assets or admitted investors other than Alex Brown Realty, Inc. ABR Inc. contracts w/Coastal Pension Services a female owned business, Firm also uses the following MFDB companies, Stout Causey & Horning (audit), Grabner & Associates (insurance) & BrottoFreel LLC (legal)
Women Men
MenWomen
FUND SERVICE PROVIDERS - DIVERSITY DATA AS REPORTED BY MANAGERS
Exhibit 11
Exhibit 11
Exhibit 11
Exhibit 11
10218
Exhibit 11
Callan LLC
600 Montgomery Street Suite 800 San Francisco, CA 94111
Main 415.974.5060 Fax 415.291.4016
www.callan.com
May 28, 2019 Mr. Shane Willoughby State Universities Retirement System 1901 Fox Drive PO Box 2710 Champaign, IL 61825-2710 Delivery via email: [email protected] Dear Mr. Willoughby, Pursuant to 40 ILCS 5/1-113.23, Callan is providing the following disclosure regarding economic and compensation received. Callan recently completed an evaluation of Dune Real Estate Fund IV, L.P. (“the Fund), sponsored by Dune Real Estate Partners LP, for your organization and is recommending investment in the Fund. This letter confirms that Callan has not received any economic consideration during the past 24 months from Dune Real Estate Partners LP. Best regards, Rosanna Sangalang Sr. VP, HR & Compliance
Exhibit 11
STATE UNIVERSITIES RETIREMENT SYSTEM
MarketValue
Estimated Unfunded FundingAssets Liabilities Liabilities Ratio Month FYTD
Jun-18 19.04$ 43.15$ 24.12$ 44.1%Jul-18 19.38 43.26 23.88 44.8% 1.55% 1.55%
Aug-18 19.23 43.37 24.14 44.3% 0.72% 2.28%Sep-18 19.38 43.48 24.10 44.6% 0.21% 2.50%Oct-18 18.42 43.59 25.17 42.3% -4.71% -2.33%Nov-18 18.40 43.69 25.29 42.1% 0.99% -1.36%Dec-18 17.68 43.80 26.13 40.4% -3.46% -4.78%Jan-19 18.75 43.91 25.16 42.7% 5.22% 0.19%Feb-19 18.97 44.02 25.05 43.1% 1.61% 1.81%Mar-19 19.10 44.13 25.03 43.3% 1.13% 2.96%Apr-19 19.50 44.24 24.73 44.1% 1.83% 4.84%
Note: Assets and liabilities are estimated and unaudited through April 30, 2019. The fund had an actuarial value funding ratio of 42.8% at the end of Fiscal Year 2018, utilizing a 6.75% assumed rate of return.
Rate of Return
0%
20%
40%
60%
80%
100%
$0$2$4$6$8
$10$12$14$16$18$20$22$24$26$28$30$32$34$36$38$40$42$44$46
Jun-18 Jul-18 Aug-18 Sep-18 Oct-18 Nov-18 Dec-18 Jan-19 Feb-19 Mar-19 Apr-19
Perc
ent F
unde
d
$Bill
ions
SURS Projected Funding Status2019 Fiscal Year-to-Date Results
Assets Liability Funding Ratio
Exhibit 12
Private Equity Asset Class ReviewJune 2019
Exhibit 13
A private equity advisor search was initiated in December 2018.
Exhibit 13
Private Equity Portfolio Overview• SURS has been an investor in Private
Equity since 1990• SURS Actual vs. Target Private Equity
Allocation:• Actual Allocation = 7.2% (as of 12/31/18)• New Strategic Policy Target = 11%
• 2017–2021 Funding Plan calls for Commitments of $1.7 billion
– 2017: $300 million– 2018: $300 million– 2019: $350 million– 2020: $350 million– 2021: $400 million
• $650 million committed thus far in 2017-19
SURS has been a consistent, longstanding investor in private equity.
58%
32%
4%4% 2%
Manager Diversification (by Market Value)as of 12/31/18
Adams Street Partners Pantheon Ventures
Muller & Monroe Asset Management Fairview Capital Partners
Mesirow Financial Private Equity
Commitment Amount Paid in Capital
Capital to be Funded
Cumulative Distributions Valuation Total Value
Net Benefit (Value Added)
% Capital Called
SURS Private Equity Portfolio $3,654,157,679 $2,801,614,981 $852,542,698 $3,522,462,402 $1,154,168,879 $4,676,631,281 $1,875,016,300 76.7%
Exhibit 13
Sub-Classes• Venture Capital – Seed money and funding for start-up or early stage companies• Development, Expansion or Growth Capital – Help mature companies grow through bringing
a new product to market, investing in a new plant or acquiring a company• Buyout Capital – Used to purchase an existing company or division of a company• Mezzanine (Subordinated) Debt – The debt financing used in a buyout• Restructuring Capital – Infusing capital into distressed companies undergoing financial or
operational reorganization
Source: BlackRock
Private equity investments can include companies of all sizes and in all stages of their life cycle.
Exhibit 13
Three Phases to Private Equity Investing• Capital Commitment – an investor signs a legally binding agreement to
pay a set amount of capital over a period of time, usually 3-5 years• Drawdown – The fund manager draws down (“calls”) the investor’s
committed capital in increments as the manager finds attractive investments
• Capital Distribution – The investor receives distributions as the manager exits investments (i.e., sells them or takes them through an IPO). These distributions are usually paid to the investor as cash.
Source: BlackRock
Private equity investments are long term investments, with an average fund life of 10-12 years (slightly longer for a fund-of-funds vehicle).
Exhibit 13
Key Risks in Private Equity• Liquidity Risk – Risk that an investor is unable to redeem their investment at the
time of their choosing; private equity offers little redemption possibility but secondary market offers potential exit
• Funding Risk – Risk that the legal obligation to pay commitment cannot be funded by the investor (default risk); critical for investor to manage cash flows to meet funding obligations effectively
• Market Risk (short- and mid-term) – Change in value of the underlying assets/price volatility; difficult to measure as no market prices exist in between transactions; could be deemed “Interim NAV volatility”
• Capital Risk (mid- and long-term) – The probability of losing capital with a private equity portfolio over its entire lifetime; can be affected by numerous factors, including, but not limited to, the quality of the fund manager, equity market exposure, interest rates, and foreign exchange
Source: British Private Equity & Venture Capital Association
Diversification is the primary tool to reduce riskin private equity, just as in public equity.
Exhibit 13
Institutional Investors in Private Equity• PE activity in 2018
• PE firms worldwide raised $599 billion in 2018, a 6% increase over 2017, with 804 funds holding final closes during the period.
• Global PE-backed M&A exits totaled a record $417 billion, up 15% over 2017 and 8% higher than the prior record set in 2014. Global IPO issuance increased as well, with the U.S. market the strongest.
• U.S.-based buyout transaction activity totaled $249 billion, 9% higher than 2017, but well below the $460 billion seen in 2007 (Pre-Financial Crisis).
• U.S.-based venture capital investment and fundraising activity were robust, reaching their highest levels since 2000. Fundraising totaled $42 billion, an increase of 30% over the prior year but well below the $100 billion raised in 2000.
• At the start of Q2 2019, 3,926 funds are currently in the market, seeking an aggregate $1.0 trillion.• Fundraising market remains highly competitive
Sources: Pathway Capital Management Private Market Environment, 2018 Year in Review; Preqin Quarterly Update : Q1, 2019.
Significant amount of capital seeking PE and VC opportunities
Exhibit 13
Private Equity Portfolio Composition
• The SURS Private Equity portfolio is broadly diversified across sector and sub-class.• Exposure is concentrated in North America and Europe.
18%
7%
9%
14%
11%
31%
6%3%
0% 1%
Sector CompositionBy Portfolio Company NAV
Consumer Staples/Discretionary EnergyFinancials Health CareIndustrials & Business Services Information TechnologyMaterials Telecommunication ServicesUtilities Other
29%
5%
52%
1% 7%
0%7%
Sub-Class Diversificationby Partnership NAV
Venture Capital GrowthBuyouts MezzanineSpecial Situations Restructuring/Distressed DebtOther (multi-stage, etc.)
69%
18%
9%4%
Geographic DiversificationBy Partnership NAV
North America Europe Asia Other
Exhibit 13
Adams Street has provided diversified private equity exposure and strong long-term returns
Adams Street PartnersData as of 9/30/2018
39%
0%
50%
1%6%
0%
5%
Sub-Class Diversification
Venture Capital GrowthBuyouts MezzanineSpecial Situations Restructuring/Distressed DebtOther (multi-stage, etc.)
64%
21%
13%
1% 1%
Geographic Diversification
North America EuropeAsia Latin America & CaribbeanOther
$0$100$200$300$400$500$600$700$800
($150)($100)
($50)$0
$50$100$150$200$250
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
TD
($ m
illio
ns)
($ m
illio
ns)
Adams Street PartnersCash Flow Analysis
Contributions (Left) Distributions (Left) Market Value (Right)
DPI TVPI 1 Year 3 Years 5 Years 10 Years 15 YearsSince
Inception
Adams Street Partners 1.33x 1.74x 19.11% 13.95% 12.27% 9.43% 12.65% 26.53%DJ Total Stock Market Index + 3% 20.58% 20.05% 16.42% 15.05% 13.00% 13.87%
Net IRR Summary
16%
8%
10%
12%
12%
30%
8%4%
0% 1%
Sector Composition
Consumer Staples/Discretionary EnergyFinancials Health CareIndustrials & Business Services Information TechnologyTelecommunication Services UtilitiesOther
Inception of Relationship Jul-90Commitment Amount $2,070,783,261 Paid In Capital $1,643,602,198 Capital To Be Funded $427,181,063 Cumulative Distributions $2,182,081,916 Market Value (9/30/18) $674,013,523 Total Value $2,856,095,439 Net Benefit (Value Added) $1,212,493,241 % Capital Called 79%
Investment Style
A combination of top-down portfolio construction and bottom-up investment selection, relying on fundamental research, proprietary quantitative analysis and informed judgment
Product Type Includes primaries, secondaries, co-investments and direct investments
Structure Combination of commingled funds and separate account
Number of Funds600+ primaries since inception; 100+ liquidated
FocusDiversified across various private equity subclasses, time and geographic regions
Investment Objective Outperform public equity markets by at least 3%, net of all fees
Manager OverviewManager Statistics
Investment Strategy
Exhibit 13
Adams Street Partners Commitment History
Fund NameFund Commenced
OperationsScheduled
Termination NotesDate of SURS Commitment
SURS Commitment
amount (in USD)
Separate Account July 16, 1990 N/A100% committed and 99% drawn as
of September 30, 2018 July 1990 $906.5 million
VPAF II, L.P. November 27, 1990
Fund terminated on December 31, 2008
and was dissolved on December 31, 2012.
Fund terminated on December 31, 2008 and was dissolved on
December 31, 2012.November 1990 $10 million
Brinson Non-US Partnership Fund Trust ('98 - '04) January 15, 1999
At liquidation of the last investment held by each fund and the
making of its final liquidating
distribution.
Fully committed and 97% drawn as of September 30, 2018 1998 $39 million
Adams Street Non-US Partnership Fund Trust February 12, 2004
December 31, 2016; extended 12/16,
12/17
Fully committed and 95% drawn as of September 30, 2018 2004 $40 million
Adams Street Global Opportunities Secondary Fund January 30, 2004
December 31, 2016; extended 11/16,
12/17
Fully committed and 89% drawn as of September 30, 2018 June 2003 $25 million
Adams Street 2007 Global Opportunities Portfolio January 12, 2007 December 31, 2019
98% committed and 91% drawn as of September 30, 2018 June 2007 $100 million
Adams Street 2008 Global Offering January 7, 2008 December 31, 2020
Fully committed and 93% drawn as of September 30, 2018 September 2007 $100 million
Adams Street 2009 Global Offering January 12, 2009 December 31, 2021
Fully committed and 91% drawn as of September 30, 2018 September 2008 $100 million
Adams Street 2012 Global Fund February 6, 2012 December 21, 2023Fully committed and 79% drawn as
of September 30, 2018 March 2012 $80 million
Adams Street Global Secondary Fund 5 September 21, 2012 September 21, 2024
Fully committed and 77% drawn as of September 30, 2018 March 2012 $20 million
Adams Street 2013 Global Fund March 14, 2013 December 19, 2024Fully committed and 76% drawn as
of September 30, 2018 December 2012 $100 million
Adams Street 2014 Global Fund February 18, 2014 December 20, 2025Fully committed and 68% drawn as
of September 30, 2018 March 2014 $100 million
Adams Street 2015 Global Fund February 23, 2015 December 18, 2026Fully committed and 56% drawn as
of September 30, 2018 February 2015 $125 million
Adams Street 2016 Global Fund January 26, 2016 December 22, 2027Fully committed and 35% drawn as
of September 30, 2018 April 2016 $150 million
Adams Street 2017 Global Fund January 1, 2017 December 202886% committed and 20% drawn as
of September 30, 2018 June 2017 $90 million
Adams Street 2018 Global Fund January 1, 2018 December 202956% committed and 11% drawn as
of September 30, 2018 June 2017 $90 million
Exhibit 13
Adams Street Performance Summaryas of September 30, 2018
*GGS Direct Alpha is an annualized excess return over the referenced public market index calculated by removing the impact of public equity returns on the private capital cash flows while taking into account timing and magnitude.
Fund
SURS Subscription
($MM) IRR TVPI DPI RVPI Index Set Name
GGS Direct Alpha*
Mature (illiqiuidity premium established)
Adams Street Venture Partnerships (SEP) 901$ 28.16% 1.92 1.87 0.04 DJW US Total Stock Market Index
12.16
Venture Partners Acquisition Fund II - 1990 (FOF) 10$ 28.06% 2.07 2.07 0.00 MSCI World 13.99
Adams Street 2004 Non-U.S. Fund (FOF) 79$ 11.70% 1.73 1.61 0.12 MSCI All Country ex-US
5.39
Adams Street Global Opportunities Secondary Fund - 2004 (FOF) 25$ 11.49% 1.62 1.47 0.16 MSCI ACWI 7.51Adams Street 2007 Global Opportunities Portfolio (FOF) 100$ 8.31% 1.60 1.25 0.36 MSCI ACWI 1.60Adams Street 2008 Global Offering (FOF) 100$ 14.18% 1.87 1.09 0.78 MSCI ACWI 4.73Adams Street 2009 Global Offering (FOF) 100$ 13.35% 1.68 0.76 0.92 MSCI ACWI 3.48
Less Mature (illiquidity premium being established)Adams Street 2012 Global Fund (FOF) 80$ 11.69% 1.42 0.28 1.14 MSCI ACWI 2.20Adams Street Global Secondary Fund 5 - 2012 (FOF) 20$ 6.82% 1.20 0.43 0.77 MSCI ACWI -2.35Adams Street 2013 Global Fund (FOF) 100$ 12.84% 1.40 0.14 1.26 MSCI ACWI 3.00Adams Street 2014 Global Fund (FOF) 100$ 14.72% 1.38 0.11 1.27 MSCI ACWI 4.32Adams Street 2015 Global Fund (FOF) 125$ 35.00% 1.35 0.23 1.11 MSCI ACWI 20.28
Recent Funds (early in j-curve)Adams Street 2016 Global Fund (FOF) 150$ 27.96% 1.19 0.10 1.09 MSCI ACWI 16.01Adams Street 2017 Global Fund (FOF) 90$ 23.68% 1.07 0.00 1.07 MSCI ACWI 10.91Adams Street 2018 Global Fund (FOF) 90$ 49.23% 1.12 0.00 1.12 MSCI ACWI 34.97
Total Adams Street 2,071$ 26.53% 1.74 1.33 0.41 11.38
Source: Northern Trust Private Monitor report (pdf)
Exhibit 13
Pantheon has provided diversified private equity exposure and competitive long-term returns
Pantheon VenturesData as of 9/30/18
16%
10%
54%
0%10%
0%10%
Sub-Class Diversification
Venture Capital GrowthBuyouts MezzanineSpecial Situations Restructuring/Distressed DebtOther (multi-stage, etc.)
69%
18%
3%
1% 9%
Geographic Diversification
North America EuropeAsia Latin America & CaribbeanOther
Inception of Relationship Feb-02Commitment Amount $1,193,474,469 Paid In Capital $968,958,123 Capital To Be Funded $224,516,346 Cumulative Distributions $1,244,485,492 Market Value (09/30/18) $367,285,971 Total Value $1,611,771,463 Net Benefit (Value Added) $642,813,340 % Capital Called 81%
Investment Style
A combination of top-down portfolio construction and bottom-up investment selection, relying on fundamental research, proprietary quantitative analysis and informed judgment
Product TypeIncludes primaries, secondaries, co-investments and direct investments
StructureGlobal diversified fund-of-funds; previously utilized separate account structure
Number of Funds 700+ since inception
FocusDiversified across various private equity subclasses, time and geographic regions
Investment Objective Outperform public equity markets by at least 3%, net of all fees
Manager OverviewManager Statistics
Investment Strategy
$0
$100
$200
$300
$400
$500
$600
($150)
($100)
($50)
$0
$50
$100
$150
$200
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
TD
($ mi
llions)
($ mi
llions)
PantheonCash Flow Analysis
Contributions (Left) Distributions (Left) Market Value (Right)
DPI TVPI 1 Year 3 Years 5 Years 10 Years 15 YearsSince
Inception
Pantheon Ventures 1.28 1.66 13.87% 11.20% 10.26% 8.75% 10.73% 10.55%
DJ Total Stock Market Index + 3% 20.58% 20.05% 16.42% 15.05% 13.00% 11.49%
Net IRR Summary
20%
7%
8%
16%10%
32%
4%
1% 1% 1%
Sector Composition
Consumer Staples/Discretionary EnergyFinancials Health CareIndustrials & Business Services Information TechnologyTelecommunication Services UtilitiesOther
Exhibit 13
Pantheon VenturesCommitment History
Fund NameFund Commenced
OperationsScheduled Termination Notes
Date of SURS Commitment
SURS Commitment amount (in USD)
Separate Account February 28, 2002 N/A100% committed and 95% drawn as
of September 30, 2018February 2002 $601.2 million
Pantheon Europe Fund III January 30, 2003December 19, 2014;
extended 12/14, 11/15, 12/16, 12/17, 12/18
100% committed and 95% drawn, as of September 30, 2018
March 2002 $88 million
Pantheon Global Secondary Fund II February 9, 2004February 9, 2017;
extended 1/17; 1/18; 1/19
Fully committed and 95% drawn as of September 30, 2018
June 2002 $25 million
Pantheon Europe Fund VI August 10, 2007 December 23, 2021Fully committed and 93% drawn, as
of September 30, 2018October 2007 $40 million
Pantheon USA Fund VIII October 18, 2007 December 22, 2021Fully committed and 89% drawn as of
September 30, 2018October 2007 $103.3 million
Pantheon USA Fund IX March 3, 2011 December 20, 2025Fully committed and 83% drawn as of
September 30, 2018March 2011 $85.4 million
Pantheon Europe Fund VII April 12, 2011 December 18, 2025Fully committed and 81% drawn as of
September 30, 2018January 2012 $38.6 million
Pantheon Multi-Strategy Program - 2014 December 1, 2014 December 31, 202783% committed and 28% drawn as of
September 30, 2018October 2014 $125 million
Pantheon Access 2017 October 2, 2017 December 31, 203024% committed and 12% drawn as of
September 30, 20182017 $90 million
Pantheon Access 2018 2018 $180 millionSURS closed January 2019
Exhibit 13
Pantheon Ventures Performance Summaryas of September 30, 2018
*GGS Direct Alpha is an annualized excess return over the referenced public market index calculated by removing the impact of public equity returns on the private capital cash flows while taking into account timing and magnitude.
Fund
SURS Subscription
($MM) IRR TVPI DPI RVPI Index Set NameGGS Direct
Alpha*Mature (illiqiuidity premium established)
Pantheon Ventures, Inc. (SEP) 601$ 10.50% 1.71 1.56 0.15 DJW US Total Stock Market Index
3.61
Pantheon Europe Fund III - 2003 (FOF) 88$ 14.73% 1.82 1.72 0.09 MSCI Europe 8.66Pantheon Global Secondary Fund II - 2004 (FOF) 25$ 3.62% 1.17 1.15 0.02 MSCI ACWI -2.02
Pantheon USA Fund VIII - 2008 (FOF) 103$ 12.69% 1.87 1.04 0.83DJW US Total Stock
Market Index-0.77
Pantheon Europe Fund VI - 2008 (FOF) 39$ 9.58% 1.59 1.06 0.53 MSCI Europe 3.11
Less Mature (illiquidity premium being established)
Pantheon USA Fund IX - 2013 (FOF) 85$ 14.21% 1.60 0.44 1.16DJW US Total Stock
Market Index0.19
Pantheon Europe Fund VII - 2013 (FOF) 37$ 11.07% 1.44 0.49 0.95 MSCI Europe 5.77Pantheon Multi-Strategy Program 2014 (US), L.P. 125$ 12.68% 1.23 0.07 1.16 MSCI ACWI 0.81
Recent Funds (early in j-curve)Pantheon Access (US) 2017 90$ -7.96% 0.94% 0.00% 94.00% MSCI ACWI -12.87%
Total Pantheon 1,193$ 10.55% 1.65 1.28 0.37 2.83
Source: Northern Trust
Exhibit 13
Muller and Monroe provides diverse private equity exposure. The $100mm commitment to the most recent Muller & Monroe fund (2016) is early in its life and still in the J-curve, depressing the M2 aggregate returns.
Muller & Monroe Asset ManagementData as of 9/30/18
8%
38%54%
% 0% 0%Sub-Class Diversification
Venture Capital GrowthBuyouts MezzanineSpecial Situations Restructuring/Distressed DebtOther (multi-stage, etc.)
$0
$10
$20
$30
$40
$50
($30)
($20)
($10)
$0
$10
$20
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
TD
($ m
illio
ns)
($ m
illio
ns)
Muller and MonroeCash Flow Analysis
Contributions (Left) Distributions (Left) Market Value (Right)
DPI TVPI 1 Year 3 Years 5 Years 10 Years 15 YearsSince
Inception
Muller & Monroe Asset Mgmt 0.59 1.15 11.87% 2.71% 10.26% 8.75% -- 4.24%
DJ Total Stock Market Index + 3% 20.58% 20.05% 16.42% 15.05% -- 12.73%
Net IRR Summary
21%
1%2%
20%
7%
48%
0%
Sector Composition
Consumer Staples/Discretionary EnergyFinancials Health CareIndustrials & Business Services Information TechnologyTelecommunication Services UtilitiesOther
Inception of Relationship Dec-04Commitment Amount $150,000,000 Paid In Capital $82,494,519 Capital To Be Funded $67,505,481 Cumulative Distributions $48,720,812 Market Value (9/30/18) $45,797,248 Total Value $94,518,060 Net Benefit (Value Added) $12,023,541 % Capital Called 55%
Investment Style
Muller and Monroe (M2) follows a five-stage investment and due diligence process consisting of an initial screening, preliminary analysis and due dliigence, formal due diligence, final negotions, and then closing/investment.
Product Type
M2 targets lower middle market private equity managers primarily within buyout and growth equity strategies
Structure Fund-of-Funds and Fund-of-One structures
Number of Funds Nine funds since the firm's inception
Focus
Diversified across vintage year, stage, region, and industries. Some mandates have a specific emerging and/or MWDBE component
Investment Objective Outperform public equity markets by at least 3%, net of all fees
Manager OverviewManager Statistics
Investment Strategy
Exhibit 13
Muller & Monroe AssetCommitment History
Fund Name Final CloseScheduled
TerminationFund Size Notes
Date of SURS Commitment
SURS Commitment amount (in USD)
ILPEFF December 13, 2005 December 1, 2016 $144,430,000.00
Substantially all assets were sold in Dec 2016 and distributed to limited
partners in January 2017; Fund Terminated in December 2017.
December 2004 $25 million
MPEFF December 8, 2008 December 18, 2019 $95,950,000Fully committed and 97% funded,
as of December 31, 2018December 2007 $25 million
M2SURS August 24, 2016 August 24, 2028 $100,100,000Fund-of-one focusing on MFDB
managers; 92% committed and 45% funded, as of December 31, 2018
August 2016 $100 million
Exhibit 13
Muller & Monroe Performance Summaryas of September 30, 2018
*GGS Direct Alpha is an annualized excess return over the referenced public market index calculated by removing the impact of public equity returns on the private capital cash flows while taking into account timing and magnitude.
Fund
SURS Subscription
($MM) IRR TVPI DPI RVPI Index Set NameGGS Direct
Alpha*Mature (illiqiuidity premium established)
Muller & Monroe IL Private Equity FOF - 2005 (FOF) 25$ -2.54% 0.88 0.88 0.00 DJW US Total Stock Market Index
-11.59
M2 Private Equity FOF - 2008 (FOF) 25$ 8.98% 1.51 1.26 0.25DJW US Total Stock
Market Index-2.87
Less Mature (illiquidity premium being established)N/A
Recent Funds (early in j-curve)
Muller & Monroe Emerging Private Equity Fund of One - 2016 100$ 9.04% 1.06 0.01 1.06DJW US Total Stock
Market Index-8.05
Total Muller & Monroe 150$ 4.24% 1.15 0.59 0.56 -6.70
Source: Northern Trust
Exhibit 13
Fairview provides exposure to diverse managers. Although early in its fund life, the Lincoln Fund has emerged from the J-curve and is providing positive IRRs.
Fairview Capital Partners – Lincoln Fund I, LPData as of 9/30/18
DPI TVPI 1 Year 3 Years 5 Years 10 Years 15 YearsSince
Inception
Fairview Capital Partners 0.11 1.21 15.34% 11.08% -- -- -- 9.48%DJ Total Stock Market Index + 3% 20.58% 20.05% -- -- -- 15.09%
Net IRR Summary
22%
1%
4%
16%
15%
30%
1% 8%
0%
3%
Sector Composition
Consumer Staples/Discretionary EnergyFinancials Health CareIndustrials & Business Services Information TechnologyTelecommunication Services Utilities
26%
0%
48%
0%
0%
25%
Sub-Class Diversification
Venture Capital GrowthBuyouts MezzanineSpecial Situations Restructuring/Distressed DebtOther (multi-stage, etc.)
100%
Geographic Diversification
North America EuropeAsia Latin America & CaribbeanOther
$0
$10
$20
$30
$40
$50
$60
($20)
($15)
($10)
($5)
$0
$5
$10
2014 2015 2016 2017 2018 TD
($ mi
llions)
($ mi
llions)
Lincoln Fund I, LPCash Flow Analysis
Contributions (Left) Distributions (Left) Market Value (Right)
Inception of Relationship Mar-14Commitment Amount $75,000,000 Paid In Capital $44,073,602 Capital To Be Funded $30,926,398 Cumulative Distributions $4,779,897 Market Value (9/30/18) $48,508,648 Total Value $53,288,545 Net Benefit (Value Added) $9,214,943 % Capital Called 59%
Investment Style
Use comprehensive due diligence to construct a diversified portfolio of U.S. primary portfolio interests. Focus on team cohesiveness, consistent strategy, robust deal flow and experienced operators.
Product Type Primary Investments
Structure Fund of One (Limited Partnership Agreement)
Number of FundsCommitted to 19 partnership interests
FocusExclusive focus on private equity firms majority owned by minorities, women or persons with a disability.
Investment Objective 15%-20% Net IRR and/or a 1.5-2x Net Multiple on Invested Capital
Manager OverviewManager Statistics
Investment Strategy
Exhibit 13
Fairview Capital Partners Commitment History
Fund NameFund Commenced
OperationsScheduled
Termination Fund Size NotesDate of SURS Commitment
SURS Commitment
amount (in USD)
Lincoln Fund I, LP (Fairview Fund of One) March 20, 2014 March 20, 2029 $75 million
At least 51% MFDB. 100% committed and 62% drawn, as of
December 31, 2018March 20, 2014 $75 million
Exhibit 13
Fairview Capital Performance Summaryas of September 30, 2018
*GGS Direct Alpha is an annualized excess return over the referenced public market index calculated by removing the impact of public equity returns on the private capital cash flows while taking into account timing and magnitude.
Fund
SURS Subscription
($MM) IRR TVPI DPI RVPI Index Set NameGGS Direct
Alpha*Mature (illiqiuidity premium established)N/A
Less Mature (illiquidity premium being established)
Fairview Lincoln Fund I - 2014 (FOO) 75$ 9.48% 1.21 0.11 1.10DJW US Total Stock
Market Index-4.36
Recent Funds (early in j-curve)N/A
Total Fairview Capital Partners 75$ 9.48% 1.21 0.11 1.10 -4.36
Source: Northern Trust
Exhibit 13
Mesirow provides diversified private equity exposure; too early for performance to be meaningful.
Mesirow Financial Private EquityData as of 9/30/18
19%
25%
33%
24%
Sector Composition
Consumer Staples/Discretionary EnergyFinancials Health CareIndustrials & Business Services Information TechnologyTelecommunication Services Utilities
3%
33%
64%
% 0%0% Sub-Class Diversification
Venture Capital GrowthBuyouts MezzanineSpecial Situations Restructuring/Distressed DebtOther (multi-stage, etc.)
98%
Geographic Diversification
North America EuropeAsia Latin America & CaribbeanOther
Inception of Relationship Jan-18Commitment Amount* $120,000,000 Paid In Capital $17,585,931 Capital To Be Funded $102,414,069 Cumulative Distributions $0 Market Value (9/30/18) $18,288,014 Total Value $18,288,014 Net Benefit (Value Added) $702,083 % Capital Called 15%
Investment Style
Apply uniform qualitative and quantitative screens to narrow the broad universe of potential investments to the select few that are included in the portfolio. Mesirow believes proactive deal sourcing is critical to accessing the highest quality private equity funds.
Product Type Includes primaries, secondaries and co-investments
Structure Fund-of-Funds and Fund-of-One structures
Number of Funds Seven partnership funds and four co-investment funds
FocusDiversified across various private equity subclasses, time and geographic regions
Investment Objective Outperform public equity markets by at least 3%, net of all fees
Manager OverviewManager Statistics
Investment Strategy
*Represents $40 mm commitment to MFPE Fund VII-B and first tranche ($80 mm) of five, totaling $410 mm in commitments to MFPE Special Fund B (co-investment fund).
$0
$5
$10
$15
$20
$25
$30
($10)
($5)
$0
$5
$10
$15
$20
Q1 - 2018 Q2 - 2018 Q3 - 2018
($ m
illion
s)
($ m
illion
s)
Mesirow Financial Private EquityCash Flow Analysis
Contributions (Left) Distributions (Left) Market Value (Right)
Fund NameFund Commenced
OperationsScheduled
TerminationFund Size Notes
Date of SURS Commitment
SURS Commitment
amount (in USD)Mesirow Financial Private
Equity Fund VII-B February 2017 February 6, 2028 $411 million
Co-Investment Fund; 49% committed and drawn, as of December 31, 2018.
June 2017 $40 million
Mesirow Financial Private Equity Special Fund B
January 24, 201830 days after final
liquidating distribution$410 million (5 tranches)
20% committed and 14% drawn, as of December 31, 2018
June 20175 tranches totaling
$410 million
Exhibit 13
Mesirow Financial Private Equity Performance Summary
as of September 30, 2018
*GGS Direct Alpha is an annualized excess return over the referenced public market index calculated by removing the impact of public equity returns on the private capital cash flows while taking into account timing and magnitude.
Fund
SURS Subscription
($MM) IRR TVPI DPI RVPI Index Set Name
GGS Direct Alpha*
Mature (illiqiuidity premium established)N/A
Less Mature (illiquidity premium being established)N/A
Recent Funds (early in j-curve)Mesirow Financial Private Equity Fund VII-B 40$ 33.90% 1.14 0.00 1.14 MSCI ACWI 30.56Mesirow Financial Private Special Fund B (FOO) 80$ -39.06% 0.89 0.00 0.89 MSCI ACWI -42.81
Total Mesirow Financial Private Equity 120$ 11.54% 1.04 0.00 1.04 MSCI ACWI 7.42
Source: Northern Trust
Exhibit 13
Private Equity Fees and Carried Interest
$26.5 M in fees paid and $32.9M in carried interest accrued across the portfolio in 2018
ManagementFees
Accrued Carried Interest
Allocation
TotalFees +
Accrued Carry
Management Fees
Carried Interest
Allocation
TotalFees +
Accrued Carry
Management Fees
Accrued Carried Interest
Allocation
TotalFees +
Accrued Carry
CY 18 Totals $10,673,448 $4,360,530 $15,033,977 $15,869,590 $28,506,091 $44,375,681 $26,543,038 $32,866,620 $59,409,658
Fund-of-Funds Level Underlying Level Total
Exhibit 13
Private Equity Performance(as of September 30, 2018)
• The PE portfolio has provided strong relative and absolute returns since inception.• Over shorter time periods, the portfolio has trailed the Public Market Index + 3% benchmark
due to especially strong public equity markets.• Since inception, overall portfolio has also produced strong multiples and attractive Direct
Alpha.
Manager Net IRR TVPI DPI RVPIGGS Direct
Alpha*Adams Street Partners 26.53% 1.74 1.33 0.41 11.38Pantheon Ventures 10.55% 1.65 1.28 0.37 2.83Muller & Monroe 4.24% 1.15 0.59 0.56 -6.70Fairview Capital Partners 9.48% 1.21 0.11 1.10 -4.36Mesirow Financial Private Equity* NMF NMF NMF NMF NMF
Total SURS Private Equity 20.38% 1.67 1.26 0.41 8.03*Performance not yet meaningful due to recent nature of account
Total SURS Private Equity Performance SummarySince Inception (as of September 30, 2018)
1 Year 3 Years 5 Years 10 YearsSince
InceptionSURS Private Equity Portfolio 16.82% 12.47% 11.21% 9.02% 20.38%DJ Total Stock Market Index + 3% 20.58% 20.58% 16.42% 15.05% 13.64%
Net IRR Summary
Exhibit 13
Glossary of Terms• Distribution – Cash or the value of stock disbursed to the limited partners fund.• Paid In Capital – The sum of all capital calls plus fees, less recallable return of capital.• Internal Rate of Return – Most common measure of PE performance. IRR is
technically a discount rate: the rate at which the present value of a series of investments is equal to the present value of the returns on those investments.
• Total Value to Paid-in Capital (TVPI) – The ratio of the current value of remaining investments within a fund, plus the total value of all distributions to date, relative to the total amount of capital paid into the fund to date.
• Distributions to Paid-in-Capital (DPI) – The amount a partnership has distributed to its investors relative to the total capital contribution to the fund. DPI is expressed as a ratio. Also known as realization ratio.
• Residual Value to Paid-in Capital (RVPI) – The unrealized multiple for the selected investment, calculated as the Valuation divided by the cumulative contributions.
• GGS Direct Alpha - An annualized excess return over the referenced public market index calculated by removing the impact of public equity returns on the private capital cash flows while taking into account timing and magnitude.
Source: The Burgiss Group, The Northern Trust Company & The Institutional Limited Partners Association (ILPA)
Exhibit 13
To: Investment Committee From: Investment Staff Date: May 17, 2019 Re: U.S. Long Treasury Background At the September 2018 Investment Committee meeting the Board approved a new asset allocation that includes a 20% target to Crisis Risk Offset (CRO). The CRO class will include long duration, trend-following and alternative risk premia strategies. From the total CRO target, 35% will be allocated to the long duration strategy.
At the October 2018 Investment Committee meeting Staff and PCA presented an implementation plan for the adopted 2018 strategic allocation targets. The following is the proposed phase-in schedule for the CRO functional class.
On May 6th, 2019, a Request for Information (RFI) was sent to the SURS approved slate of passive managers:
• BlackRock • Northern Trust Company • Piedmont Investment Advisers • Rhumbline • State Street Bank and Trust Company
The deadline to respond to this RFI is Friday, May 31st, 2019. Assumptions for the U.S. Long Treasury portfolio The following underlying assumptions and guidelines were specified in the RFI to passive managers:
1. The objective of this strategy is to provide exposure to the Barclays Capital Long U.S. Treasury Index.
2. The annualized tracking error objective will be under 15 bps.
Current Late 2019 7/1/2020 7/1/2021
Long-Term Target
CRO 0% 5% 10% 20% 20%
Exhibit 14
3. Investments in the portfolio may include the following types of securities: cash, agency
bills, notes, bonds. 4. The use of leverage is not allowed. Leverage is defined as economic value at risk which is
greater than the net assets value of the portfolio. 5. Derivatives may not be used.
Timeline
Schedule of Events RFI Issued May 6th, 2019 RFI Responses due 4:30pm CT May 31st, 2019 Evaluation June 2019 Selection September 12 / October 17, 2019
Next Steps Meketa and SURS Staff will evaluate the RFI responses. An update will be given to the Board at the September meeting.
Exhibit 14
To: Investment Committee From: Investment Staff Date: June 2019 Re: Systematic Trend Following Investment Manager Search Update Search Update At the September 2018 Investment Committee meeting the Board approved a new asset allocation that includes a 20% target to Crisis Risk Offset (CRO). The CRO class will include long duration, systematic trend following and alternative risk premia strategies. Systematic trend following strategies are targeted at 35% of the CRO asset class, which will be phased in over 2019, 2020, and 2021. At the March 2019 Investment Committee meeting, the Board approved the recommendation to conduct a search for qualified firms to manage systematic trend following strategies. The RFP was developed by SURS Staff and Meketa and advertised on the website of Pensions & Investments and in its April 1, 2019 print edition. In addition, the search was advertised in the April edition of Emerging Manager Monthly, noticed as required in the State newspaper, posted to the Meketa website, and posted to the SURS website beginning April 1, 2019.
Timeline The anticipated timeline for the search process is as follows:
Schedule of Events Quiet Period Begins March 8, 2019 RFP Issued April 1, 2019 Deadline for Responder Questions April 16, 2019 Response to Questions April 23, 2019 RFP Responses due 4:30pm CT May 2, 2019 Evaluations May / June 2019 Semi-Final Interviews July 31-August 1, 2019 Selection September 12, 2019
Exhibit 15
Update Staff received 30 responses from firms by the May 2, 2019 deadline. Systematic trend following investment management proposals were received from the following firms:
Systematic Trend Following Proposals Firm Name Location Firm Name Location
Abbey Capital Dublin, Ireland GSA Capital Partners New York, NY Allianz New York, NY ISAM Boca Raton, FL AlphaSimplex Cambridge, MA KeyQuant Paris, France AQR Greenwich, CT LGT Capital Partners New York, NY Aspect Capital London, UK LongTail Alpha Newport Beach, CA BH-DG London, UK Lynx Asset Management Stockholm, Sweden Campbell & Company Baltimore, MD Man Investments London, UK Capital Fund Management Paris, France Millburn New York, NY Credit Suisse New York, NY Mount Lucas Newtown, PA Dunn Capital Stuart, FL PIMCO Newport Beach, CA Florin Court London, UK Quest Partners New York, NY FORT New York, NY ROW Asset Management Newport Beach, CA Gladius Chicago, IL Systematica New York, NY Goldman Sachs Asset Management New York, NY Transtrend
Rotterdam, The Netherlands
Graham Capital Rowayton, CT Welton Carmel, CA Next Steps Staff and Meketa are in the process of reviewing the responses, and narrowing the list to a smaller number of firms to be invited for semi-finalist interviews on July 31st and August 1st in Champaign. Upon completion of the interviews, Staff and Meketa will work together to identify finalist firms to be invited to present at the September Investment Committee. Current target for CRO phase in calls for 5% of the total SURS portfolio to be allocated in late 2019. With systematic trend following representing 35% of the asset class, the initial allocation to systematic trend following strategies is expected to be 1.75% of SURS total portfolio. Quiet Period Please note that the Quiet Period will remain in effect until a selection has been made by the Board and accepted by the service provider. A copy of the Quiet Period Policy Guidelines follows. Quiet Period Policy Guidelines The Quiet Period Policy is intended to establish guidelines by which Board Members and Staff will communicate with prospective service providers during the search process. The objectives of the policy are to ensure that prospective service providers competing to become employed by SURS have equal access to information regarding the search parameters; communications related to the selection
Exhibit 15
are consistent and accurate; and the process of selecting service providers is efficient, diligent, and fair. The following guidelines will be instituted during a search process for a service provider:
• A quiet period will commence upon Committee action (or Board action if the selection is not initiated through a Committee) to authorize a search for a service provider and end once a selection has been made by the Board and accepted by the service provider;
• Initiation, continuation and conclusion of the quiet period shall be publicly communicated to prevent inadvertent violations;
• All Board members, and Staff not directly involved in the search process, shall refrain from communicating with service provider candidates regarding any product or service related to the search offered by the candidate throughout the quiet period and shall refrain from accepting meals, travel, hotel, or other value from the candidates;
• Throughout the quiet period, if any Board member is contacted by a candidate, the Board member shall refer the candidate to SURS Consultant or Staff directly involved in the search process;
• All authority related to the search process shall be exercised solely by the relevant Committee or Board as a whole, and not by individual Board Members;
• All information related to the search process shall be communicated by the SURS Consultant and Staff to the relevant Committee or Board as a whole, and not to individual Board Members;
• The quiet period does not prevent Board approved due diligence, client conference attendance or communications with an existing service provider that happens to be a candidate in the ordinary course of services provided by such service provider; however, discussions related to the pending selection shall be avoided during those activities;
• The provisions of this policy will apply to service provider candidates throughout the quiet period and shall be communicated to candidates in conjunction with any competitive proposal process; and
• A service provider may be disqualified from a search process for a knowing violation of this policy.
Exhibit 15
To: Investment Committee From: Investment Staff Date: June 2019 Re: Alternative Risk Premia Investment Manager Search Update Search Update At the September 2018 Investment Committee meeting the Board approved a new asset allocation that includes a 20% target to Crisis Risk Offset (CRO). The CRO class will include long duration, systematic trend following and alternative risk premia strategies. Alternative Risk Premia strategies are ultimately targeted at 30% of the CRO asset class, which will be phased in over 2019, 2020, and 2021. At the March 2019 Investment Committee meeting, the Board approved the recommendation to conduct a search for qualified firms to manage alternative risk premia strategies. The RFP was developed by SURS Staff and Meketa and advertised on the website of Pensions & Investments and in its April 1, 2019 print edition. In addition, the search was advertised in the April edition of Emerging Manager Monthly, noticed as required in the State newspaper, posted to the Meketa website, and posted to the SURS website beginning April 1, 2019.
Timeline The anticipated timeline for the search process is as follows:
Schedule of Events Quiet Period Begins March 8, 2019 RFP Issued April 1, 2019 Deadline for Responder Questions April 16, 2019 Response to Questions April 23, 2019 RFP Responses due 4:30pm CT May 2, 2019 Evaluations May / June 2019 Candidate Interviews July / August 2019 Selection October 17, 2019
Exhibit 16
Update Staff received 37 responses from firms by the May 2, 2019 deadline. Alternative Risk Premia investment management proposals were received from the following firms:
Alternative Risk Premia Proposals Firm Name Location Firm Name Location
Aberdeen Standard Philadelphia, PA Lombard Odier New York, NY Acadian Asset Management Boston, MA Man Investments London, UK Adrian Lee & Partners London, UK Martlet Investments Newport Beach, CA Alliance Bernstein New York, NY Mellon Boston, MA AQR Capital Management Greenwich, CT Neuberger Berman New York, NY ARP Investments New York, NY Parametric Minneapolis, MN
Aspect Capital London, UK Pavlik Capital Oakbrook Terrace, IL
BlackRock New York, NY PE Investments Boston, MA Capital Fund Management Paris, France PIMCO Newport Beach, CA Credit Suisse New York, NY QMA Wadhwani London, UK Fulcrum Asset Management London, UK ROW Asset Management Newport Beach, CA GAM Investments New York, NY Schroder Investment Mgmt. New York, NY Gladius Capital Mgmt. Chicago, IL SpiderRock Advisors Chicago, IL Goldman Sachs Asset Management New York, NY Systematica Investments St Helier, Jersey Graham Capital Rowayton, CT Unigestion Ltd London, UK HSBC New York, NY Wellington Management Boston, MA JP Morgan New York, NY William Blair Investment Chicago, IL Kepos Capital New York, NY Windham Capital Boston, MA Liquid Strategies Atlanta, GA
Next Steps Staff and Meketa are in the process of reviewing the responses, and narrowing the list to a smaller number of firms to be invited for semi-finalist interviews in August or September in Champaign. Upon completion of the interviews, Staff and Meketa will work together to identify finalist firms to be invited to present at the October Investment Committee. Current target for CRO phase in calls for 5% of the total SURS portfolio to be allocated in late 2019. With alternative risk premia representing 30% of the asset class, the initial allocation to alternative risk premia strategies is expected to be 1.50% of SURS total portfolio. Quiet Period Please note that the Quiet Period will remain in effect until a selection has been made by the Board and accepted by the service provider. A copy of the Quiet Period Policy Guidelines follows.
Exhibit 16
Quiet Period Policy Guidelines The Quiet Period Policy is intended to establish guidelines by which Board Members and Staff will communicate with prospective service providers during the search process. The objectives of the policy are to ensure that prospective service providers competing to become employed by SURS have equal access to information regarding the search parameters; communications related to the selection are consistent and accurate; and the process of selecting service providers is efficient, diligent, and fair. The following guidelines will be instituted during a search process for a service provider:
• A quiet period will commence upon Committee action (or Board action if the selection is not initiated through a Committee) to authorize a search for a service provider and end once a selection has been made by the Board and accepted by the service provider;
• Initiation, continuation and conclusion of the quiet period shall be publicly communicated to prevent inadvertent violations;
• All Board members, and Staff not directly involved in the search process, shall refrain from communicating with service provider candidates regarding any product or service related to the search offered by the candidate throughout the quiet period and shall refrain from accepting meals, travel, hotel, or other value from the candidates;
• Throughout the quiet period, if any Board member is contacted by a candidate, the Board member shall refer the candidate to SURS Consultant or Staff directly involved in the search process;
• All authority related to the search process shall be exercised solely by the relevant Committee or Board as a whole, and not by individual Board Members;
• All information related to the search process shall be communicated by the SURS Consultant and Staff to the relevant Committee or Board as a whole, and not to individual Board Members;
• The quiet period does not prevent Board approved due diligence, client conference attendance or communications with an existing service provider that happens to be a candidate in the ordinary course of services provided by such service provider; however, discussions related to the pending selection shall be avoided during those activities;
• The provisions of this policy will apply to service provider candidates throughout the quiet period and shall be communicated to candidates in conjunction with any competitive proposal process; and
• A service provider may be disqualified from a search process for a knowing violation of this policy.
Exhibit 16
To: Investment Committee From: Investment Staff Date: May 21, 2019 Re: Summary Risk Report
Attached is the Summary Risk Report for the quarter ending March 31, 2019. Highlights for the quarter include:
• Liquidity – The portfolio remains highly liquid with 83% of assets estimated to have liquidity of less than two weeks under normal market conditions.
• Value at Risk (1 Year Forward) – Tail risk increased slightly during the quarter from 13.28% to 13.67%. This parameter indicates that, at a confidence level of 95%, the maximum estimated asset loss over a one-year period would be of 13.67%.
• Standard Deviation (5 Year Historical) – Total portfolio volatility slighlty increased from the
prior quarter from 6.66% to 6.76%. Per Northern Trust, on a sub asset class level, Equity, risk estimate for equity, Real Estate, Hedge Funds, and Commodities increased for the quarter, while risk estimate for Fixed Income and Opportunity Fund decreased. Additionally, within Equity: the risk estimate slightly decreased for International Markets, remained stable for U.S. Large Cap, and increased for Domestic Small Cap. The increased risk estimate of the total U.S. Equity portfolio ex Private Equity had a large impact on the total portfolio.
• Tracking Error: The forecasted 5-year tracking error of 0.74 was lower than the actual 0.85 for
the total fund for the quarter. The portfolio’s tracking error has been decreasing at a steady pace since mid-2015 with a recent slight spike in late 2018. The lower active risk of the total portfolio during the last few years can be partially explained by the increase in fund allocations to passive strategies.
• The Global Financial Stress Index (GFSI) was -0.21, much lower than last quarter’s 0.36,
indicating that the market is experiencing less stress than during 4Q 2018. The index remains well below the peak of 3.01 during the Global Financial Crisis.
• U.S. Treasury Yield Curve – The yield curve remained slightly inverted during the quarter. The
yield on the 10-Year Treasury decreased from 2.69% to 2.39% during the quarter.
• Appropriation Summary –FY 2019 state appropriations received were approximately $1 billion, or 84.2% of the anticipated $1.2 billion due, as of March 31, 2019. The total FY 2019 appropriation is $1,655,154,000. The actuarial benefit payment projection for FY 2019 is $2,716.848 million.
• Cash Account Summary – Ending cash on hand was approximately $270 million as of March 31, 2019. Net private partnership cash flows during the quarter were positive and approximately $40 million.
Exhibit 17
Summary Risk Report
Quarter Ending March 31, 2019
Exhibit 18
Risk Dashboard
Liquidity VaR StandardDeviation
100%0%
70%
50%
83%
20%
50%0%
18%
13.67 %
12%
10%
0% 30%
6.67%
o Liquidity Green = > 70.00% Highly Liquid, Yellow = 69.90% - 50.00%, Red = < 50.00%.
Liquidity Estimates Under Normal Market Conditions. Stressed Market Conditions Will Impact Both Liquidity & Pricing.
o Value at Risk (VaR) Green = < 18.00%, Yellow = 18.01% to 20.00%, Red = > 20.00%.
1 Year Forward Looking Maximum Data Point = 21.50% (March 2013). 1 Year Forward Looking Minimum Data Point = 11.22% (September 2018).
o Standard Deviation Green = < 10.00%, Yellow = 10.01 – 11.80%, Red = > 11.80%
5 Year Historical Rolling Maximum = 13.89% (June 2012). 5 Year Historical Rolling Minimum = 5.74% (December 1996).
Exhibit 18
Liquidity Profile
0%
10%
20%
30%
40%
50%
60%
Cash Passive < 2 Weeks 1 Month + Illiquid
Estimated Days to Liquidate83%
Liquidity risk is the risk that SURS would not be able to meet short term financial demands due to cash flow and/or the inability toconvert securities or other assets to cash without a loss of capital and/or income in the process. Currently, approximately 82.6% ofthe portfolio is highly liquid under normal market conditions.Data Source: SURS
Exhibit 18
Value at Risk (VaR)
VaR is the estimated maximum loss over a one year period given a certain level of confidence (95%).Data Source: Northern Trust
0 1 2 3-1-2-3
68%
95%
99.7%
Downside Risk (Left Tail)
13.67%
11.00%
13.00%
15.00%
17.00%
19.00%
21.00%
23.00%
Mar
-13
Jun-
13Se
p-13
Dec-
13M
ar-1
4Ju
n-14
Sep-
14De
c-14
Mar
-15
Jun-
15Se
p-15
Dec-
15M
ar-1
6Ju
n-16
Sep-
16De
c-16
Mar
-17
Jun-
17Se
p-17
Dec-
17M
ar-1
8Ju
n-18
Sep-
18De
c-18
Mar
-19
Total Fund (1 Year Forward Looking)
VaR
21.50%
11.22%
Exhibit 18
Standard Deviation
Standard deviation measures the variability of investment returns. A low standard deviation indicates that the data points tend to be veryclose to the mean, while high standard deviation indicates that the data are spread out over a large range of values. The expected standarddeviation of the SURS portfolio based on the target asset allocation is 12.5%.Data Source: SURS
6.76%
0.00%
2.00%
4.00%
6.00%
8.00%
10.00%
12.00%
14.00%
16.00%
Mar
-13
Jun-
13Se
p-13
Dec-
13M
ar-1
4Ju
n-14
Sep-
14De
c-14
Mar
-15
Jun-
15Se
p-15
Dec-
15M
ar-1
6Ju
n-16
Sep-
16De
c-16
Mar
-17
Jun-
17Se
p-17
Dec-
17M
ar-1
8Ju
n-18
Sep-
18De
c-18
Mar
-19
Total Fund (5 Years Ending)
Total Fund
• Total Fund Annualized Standard Deviation (5 Years Ending) is 6.76% as of March 31, 2019
• Total Fund (5 Year Rolling) Standard Deviation ranges from 5.74% (Dec. 1996) to 13.89% (June 2012)
• Based on the current asset allocation, portfolio volatility is lower than the expected 12.5%
Key Observations:13.89%
5.74%
Exhibit 18
Tracking Error
0.74
0.85
0.00
0.20
0.40
0.60
0.80
1.00
1.20
1.40
1.60
1.80M
ar-1
3
May
-13
Jul-1
3
Sep-
13
Nov
-13
Jan-
14
Mar
-14
May
-14
Jul-1
4
Sep-
14
Nov
-14
Jan-
15
Mar
-15
May
-15
Jul-1
5
Sep-
15
Nov
-15
Jan-
16
Mar
-16
May
-16
Jul-1
6
Sep-
16
Nov
-16
Jan-
17
Mar
-17
May
-17
Jul-1
7
Sep-
17
Nov
-17
Jan-
18
Mar
-18
May
-18
Jul-1
8
Sep-
18
Nov
-18
Jan-
19
Mar
-19
Trac
king
Err
or %
5 yr Ex-Post Total Fund Tracking Error 5 yr Ex-Ante Total Fund Tracking Error
Tracking error is the standard deviation od the difference between the returns of an investment and its benchmark. It is also refered to as active risk. The 5yr ex-ante tracking error, is typically used to describe the range of annualized returns a portfolio will have around the benchmark two thirds of the time. Sources: Investopedia and Northern Trust
Exhibit 18
Global Financial Stress Index
Global Financial Stress Index (GFSI) Chart – The GFSI composite index aggregates over twenty measures of stress across fiveasset classes and various geographies, measuring three separate kinds of financial market stress: risk, as indicated by cross-assetmeasures of volatility, solvency, and liquidity; hedging demand, from activity in equity and currency options; and investor appetitefor risk, as measured by trading volumes as well as flows in and out of equities, high-yield bonds, and money markets. GFSI > 0means more stress than normal. GFSI < 0 means less stress than normal.Data source: BofA Merrill Lynch and Bloomberg
3.01
0.50
-0.50
0.00
-0.66
Exhibit 18
Treasury Yield Curve
A yield curve is a line that plots the interest rates, at a set point in time, of bonds having equal credit quality, but differing maturitydates. The U.S. Treasury yield curve is used as a benchmark for other debt in the market, such as mortgage rates or bank lendingrates. The curve is also used to predict changes in economic output and growth. A normal yield curve is one in which longermaturity bonds have a higher yield compared to shorter-term bonds due to the risks associated with time. An inverted yield curve isone in which the shorter-term yields are higher than the longer-term yields, which can be a sign of upcoming recession. A flat (orhumped) yield curve is one in which the shorter- and longer-term yields are very close to each other, which is also a predictor of aneconomic transition. The slope of the yield curve is also seen as important: the greater the slope, the greater the gap between short-and long-term rates.Data Source: U.S. Department of the Treasury and Investopedia
10 year: 2.69%
10 year: 2.39%
0.00%
0.50%
1.00%
1.50%
2.00%
2.50%
3.00%
3.50%
1 Month 3 Month 6 Month 1 Year 2 Year 3 Year 5 Year 7 Year 10 Year 20 Year 30 Year
12/31/2018 3/29/2019
Exhibit 18
Appropriation SummarySURS Fiscal Year 2019 Appropriation
$1,655,154,000Month Amount Due Amount Received (Under) / Over % Received
July $137,929,500 $758,000 ($137,171,500) 0.5%
August $137,929,500 $69,343,750 ($68,585,750) 50.3%
September $137,929,500 $137,971,500 $42,000 100%
October $137,929,500 $143,122,280 $5,192,780 103.8%
November $137,929,500 $172,868,610 $34,939,110 125.3%
December $137,929,500 $117,861,110 ($20,068,390) 85.5%
January $137,929,500 $164,925,000 $26,995,500 119.6%
February $137,929,500 $114,932,356 ($22,997,144) 83.3%
March $137,929,500 $123,828,500 ($14,101,000) 89.8%
FYTD Total $1,241,365,500 $1,045,611,106 ($195,754,394) 84.2%
Monthly appropriation payments can be volatile, making cash management and liquidity an area of focus. Data Source: SURS
Actuarial benefit payments projection for FY 2019: $2,716,848,000
Exhibit 18
Cash Account SummarySURS Cash Account Summary
January 1, 2019– March 31, 2019
Beginning Balance $157,674,169
Cash In:
Partnership Distributions 129,056,673
Partial Redemptions 300,005,946
Funds from Closed Accounts 119,342,070
Other Income 2,607,874
Total Cash In: $551,012,563
Cash Out:
Partnership Capital Calls (80,015,220)
To Fund Accounts (319,837,472)
Net Contributions (Contributions less Benefit Payments)
(38,619,053)
Total Cash Out: (438,471,745)
Ending Balance $270,214,986
Cash flow detail is provided in the Quarterly Board Report Data Source: SURS
Key Observations:
• Net private partnership (Private Equity, Real Estate, Infrastructure and Hedge Funds) cash flows were positive and approximately $40 million for the quarter.
• Benefit payments were approximately $492 million for the quarter.
Exhibit 18
Fiscal Year 2019-20 Investment Summary Work Plan
Denotes recurring items - Denotes non-recurring items
FISCAL YEAR 2019 June 5-6, 2019 Quarterly Performance Review - Consideration of new Credit Segment Investment Policy Language - Consideration of new Principal Protection Investment Policy Language - Defined Contribution Provider Search Update - Traditional Growth Structure Recommendations - Consideration of Finalists in Private Growth Advisor Search - Systematic Trend Following and Alternative Risk Premia Search Updates - Educational Topic - Active/Passive
FISCAL YEAR 2020 September 12, 2019 Annual Review of SURS Portfolio Consideration of SURS Fiscal Year 2020 Investment Plan Annual Investment Review of Self-Managed Plan (SMP) Quarterly Performance Review - Consideration of new Traditional Growth Investment Policy Language - Discussion of Private Growth Portfolio Structure - Consideration of Finalists in SMP and Supplemental Plan Providers Search - Consideration of Finalists in Systematic Trend Following Search - Educational Topic (TBD) October 17, 2019 Annual Broker/Dealer Review - Additional Discussion on SMP - Consideration of Private Growth Investment Policy Language - Consideration of Inflation Sensitive Class Structure Recommendations - Consideration of Credit Searches, if Necessary - Prospective Real Asset Manager Interviews - Consideration of Finalists in Alternative Risk Premia Search - Educational Topic (Private Credit)
Exhibit 19
December 5, 2019 Receipt of Annual Report to the Governor and General Assembly on Utilization of Emerging
Investment Managers Annual Review of Investment Policy and Minority Brokerage Goals Quarterly Performance Review (Newly Designed to Account for New Structure) - Consideration of Real Assets Structure Recommendations - Complete Necessary Traditional Growth Manager Searches (Consultants & Staff) - Complete Necessary Inflation Sensitive Manager Searches (Consultants & Staff) - Consideration of new Inflation Sensitive Policy Language - Educational Topic (TBD) January 30, 2020 Annual Fixed Income & Emerging Market Debt Asset Class Reviews - Educational Topics – Trustee Educational Forum (TBD) March 5, 2020 Quarterly Performance Review - Educational Topic (TBD) April 16, 2020 Annual U.S. Equity Asset Class Review - Educational Topic (TBD) June 4, 2020 Annual Private Equity Asset Class Review Quarterly Performance Review - Educational Topic (TBD)
Exhibit 19