Agenda Item 18
March 6,2012
Action
MEMORANDUM
March 2, 2012
TO:
FROM:
SUBJECT:
County Council
Robert H. Drummer, Senior Legislative Attorney ( ; ' )
Action:
Bill 2-12, Personnel - Retirement Trust Funds
Managers
Emerging Investment
Government Operations and Fiscal Policy Committee recommendation (3-0): approve the
.
Bill as introduced.
I
Bill 2-12, Personnel
Retirement Trust Funds
Emerging Investment Managers,
sponsored by the Council President at the request of the County Executive, was introduced on
January 17,2012. A public hearing was held on February
14
and a Government Operations and
Fiscal Policy Committee worksession was held on February 27.
Background
Bill 2-12 would require the Board of Investment Trustees and the Consolidated Retiree
Health Benefits Trust Board of Trustees to make a good faith effort, consistent with their
fiduciary duties, to hire qualified emerging investment managers. The Board of Investment
Trustees (BIT) is responsible for managing the assets in the Employees' Retirement Trust Fund.
The Consolidated Retiree Health Benefits Trust Board of Trustees is responsible for managing
the assets in the Consolidated Retiree Health Benefits Trust Fund. Both Boards regularly hire
professional investment managers to fulfill this responsibility.l
Under the Bill, an "emerging investment manager" means an investment manager with
assets or product assets below the 75
th
percentile of their respective peer group or a new or
developing investment manager. The Bill would require each Board to adopt guidelines to
identify and evaluate qualified emerging investment managers. Each Board would also be
required to report annually to the Council and the Executive on or before September 1 for the
prior fiscal year. The report must:
(1) identify each emerging investment manager used during the fiscal year;
(2) list the percentage and dollar value of the assets of the trust fund, by investment
sector, managed by each emerging investment manager; and
(3) describe the good faith effort made to include qualified emerging investment
managers in the procurement process during the fiscal year.
The Consolidated Retiree Health Benefits Trust Fund was recently established and is just beginning to retain active
managers. The Board has adopted similar policies and will ultimately follow similar guidelines to hire managers
and invest funds.
I
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The fiduciary duties of the Trustees are codified in Section 33-61 C for the Board of
Investment Trustees and in Section 33-163 for the Consolidated Retiree Health Benefits Trust
Board of Trustees. Section 33-61 C states:
A fiduciary must discharge the fiduciary's duties regarding the retirement systems:
(a)
only in the best interest of the participants and their beneficiaries;
(b)
only to provide benefits to the participants and their beneficiaries, and
defray reasonable expenses of administering the retirement systems;
(c)
with the care, skill, prudence, and diligence under the circumstances that a
prudent person acting in a similar capacity and familiar with the same
matters would use to conduct a similar enterprise with similar purposes;
(d) by diversifying the investments of the retirement systems to minimize the
risk of large losses, unless it is clearly not prudent to diversify under the
circumstances;
(e) according to a good faith interpretation of the law governing the
retirement systems;
(f)
according to a good faith interpretation of the documents and instruments
governing the retirement systems, if they comply with this Article.
Both Boards have currently established internal service provider procurement policies
that require the inclusion of emerging investment managers in searches if the firms meet the
search criteria. The Policies require that special efforts be made to identify possible eligible
emerging investment managers and regular reporting on staff meetings with emerging
investment managers. A copy of the BIT Service Provider Procurement Policy is at ©13-23. As
of January 31,2012, approximately 6% of the ERS assets were managed by firms that qualified
as an emerging investment manager when first hired.
The Bill would codify the current emerging investment manager policies of the Boards.
Public Hearing
Assistant Chief Administrative Officer Kathleen Boucher, testifying on behalf of the
Executive, (©24) and Linda Herman, Executive Director for both Boards, testifying on behalf of
both Boards, (©25) supported the Bill at the February 14 public hearing.
February 27 Worksession
Kathleen Boucher, Assistant CAO, Linda Herman, Executive Director for the BIT, Marc
Esen, BIT staff, and Amy Moskowitz, Associate County Attorney represented the Executive
Branch at the Government Operations and Fiscal Policy Committee worksession on February 27.
The Committee reviewed the Bill and the current BIT policy on hiring emerging investment
managers with Executive staff. The Committee (3-0) recommended approval of the Bill as
introduced.
2
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Issues
1.
Are there other emerging investment manager programs in the State?
The Maryland State Retirement and Pension System established an emerging manager
program in April 2007. In September 2008, the program was expanded and renamed Terra
Maria, the Maryland Developing Manager Program. A description of the Program is at ©26-29.
The State hired 7 program managers to find and recommend emerging investment managers for
possible retention by the Chief Investment Officer. There is no formal maximum size for an
emerging investment manager and there is no graduation program. Once hired, an emerging
investment manager is retained based upon performance against an appropriate benchmark.
Emerging investment managers currently manage approximately 8.6% of the System's assets
under the Terra Maria Program.
2. What is the universe of emerging investment managers?
Investment manager performance is often evaluated by comparing it to relevant
benchmarks and the results achieved by other investment managers investing in similar types of
securities. Retirement funds also measure success by comparing their results with appropriate
benchmarks and the results achieved by similar retirement funds. The investment performance
for the County Employees' Retirement System (MCERS) has been in the top quartile of the
universe of similar retirement funds for the I-year, 3-year, and 5-year periods ending on
December 31, 2011. A chart showing the results compared to the universe of funds tracked by
different organizations is at ©30-32. MCERS has achieved these results with an asset allocation
that is more heavily weighted toward private equity and real estate than the average for other
public funds. A chart comparing the asset allocation of MCERS with the average public
retirement fund is at ©33.
The BIT must sort through a large universe of investment managers to select one. A
chart showing the universe of emerging investment managers compared to the universe of all
investment managers for different classes of investment securities is at ©34. The Bill defines an
emerging investment manager as a firm with total assets under management less than 75% of the
managers in the relevant universe. For example, there are 1246 different products
2
in the large
cap equity universe. An emerging investment manager must have less than $85 million under
management. There are currently 312 products that meet this criterion. Under current policy,
the BIT staff continually monitors emerging investment managers and includes those managers
in manager searches, where appropriate. An outline of the steps used by the BIT in a manager
search is at ©35-36.
3. Should the Bill be enacted?
Although each Board has already adopted an emerging investment manager policy, this
Bill would ensure that these programs continue regardless of future changes in Board
membership. The current emerging investment manager policy helps to keep the market open
2
The BIT looks at products rather than firms because one [lfm may offer more than one product. For example, one
firm may offer both a large cap equity management and a small cap equity management service.
3
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for new and developing investment managers without conflicting with the trustees' fiduciary
duties of care and loyalty. Opening the market for new and developing investment managers
increases competition among service providers and can enhance investment performance.
Committee recommendation (3-0):
approve the Bill as introduced.
This packet contains:
Bill 2-12
Legislative Request Report
Memo from County Executive
Fiscal and Economic Impact Statement
BIT Service Provider Procurement Policy
Public Hearing Testimony
Kathleen Boucher
Linda Herman
Terra Maria: Developing Manager Program
MCERS Results
MCERS Asset Allocation
Emerging Manager Universe
BIT manager search process
Circle
#
1
6
7
9
13
24
25
26
30
33
34
35
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Bill No.
2-12
Concerning: Personnel - Retirement
Trust Funds - Emerging Investment
Managers
Revised: December
22, 2011
Draft No.1
Introduced:
January
17, 2012
Expires:
July
17, 2013
Enacted: _ _ _ _ _ _ _ _ __
Executive: _ _ _ _ _ _ _ __
Effective: _ _ _ _ _ _ _ _ __
Sunset
Date:.......,...!.N~o:.!.!ne!::.-
_ _ _ _ __
Ch. _ _, Laws of Mont. Co._ _ __
COUNTY COUNCIL
FOR MONTGOMERY COUNTY, MARYLAND
By: Council President at the request of the County Executive
AN
ACT to:
(1)
(2)
require the Board of Investment Trustees and the Consolidated Retiree Health
Benefits Trust Board of Trustees to make a good faith effort to hire qualified
emerging investment managers; and
generally amend the laws governing the Employees' Retirement System and the
Consolidated Retiree Health Benefits Trust Fund.
By adding
Montgomery County Code
Chapter 33, Personnel and Human Resources
Sections 33-60B and 33-162A
Boldface
Underlining
[Single boldface brackets]
Double underlining
[[Double boldface brackets]]
* * *
Heading or defined term.
Added to existing law by original bill.
Deletedfrom existing law by original bill.
Added by amendment.
Deletedfrom existing law or the bill by amendment.
Existing law unaffected by bill.
The County Council for Montgomery County, Maryland approves the following Act:
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BilI No. 2-12
1
Sec. 1.
Sections 33-60B and 33-162A are added as follows:
33-60B.
Emerging Investment Managers.
2
3
!ill
Legislative findings.
4
ill
Emerging investment managers, including businesses owned
lu:.
women, minorities and disabled individuals, should receive an
equal opportunity to provide investment management services
to the Board of Investment Trustees.
5
6
7
8
ill
The Board of Investment Trustees has adopted
~
policy
9
10
11
requiring its staff to identify qualified emerging investment
managers to participate in an investment manager search,
including regular monitoring of investment managers.
12
13
ill
Expanding opportunities for emerging investment managers
will increase competition.
14
15
(hl
Definitions.
As used in this Section:
Assets
means total client assets managed
lu:.
an investment manager.
Emerging investment manager
means:
16
17
18
19
ill
ill
an investment manager with assets or product assets below the
75
th
percentile of their respective peer group; or
~
20
21
new or developing investment manager.
New or developing investment manager
means an investment
manager:
(1) raising its first or second private institutional investment fund;
22
23
24
25
26
27
(2)
creating its first institutional product.
Product Assets
means client assets managed
manager in
~
single strategy.
lu:.
an investment
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Bill No. 2-12
28
W
Consistent with the fiduciary duties established in Section 33-61 C, the
Board must make
~
29
30
good faith effort to remove any barriers that limit
participation
Qy
qualified emerging investment managers to manage
funds for the Employees' Retirement System.
31
32
33
34
35
@
The Board must adopt guidelines to identify and evaluate qualified
emerging investment managers.
procedures for:
The guidelines must include
36
37
38
ill
ill
ill
identifying possible firms;
reviewing, evaluating and interviewing emergmg investment
managers on an ongoing basis; and
maintaining research files on emerging investment managers.
39
liD
The Board must report annually to the Council and the Executive on
compliance with this Section on or before September
1
for the prior
fiscal year. The report must:
40
41
42
43
44
45
ill
ill
identify each emerging investment manager used during the
fiscal year;
list the percentage and dollar value of the assets of the trust
fund,
Qy
investment sector, managed
Qy
each emerging
investment manager; and
46
47
48
ill
describe the good faith effort made to include qualified
emerging investment managers in the procurement process
during the fiscal year.
49
50
51
33-162A.
Emerging Investment Managers.
(ill
Legislative findings.
52
53
ill
Emerging investment managers, including businesses owned
Qy
women, minorities and disabled individuals, should receive an
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W~LS\1202
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Bill No. 2-12
54
equal opportunity to provide investment management services
to the Consolidated Retiree Health Benefits Trust Board.
55
56
57
58
59
ill
The Board has adopted
~
policy requiring its staff to identify
qualified emerging investment managers to participate in an
investment manager search, including regular monitoring of
investment managers.
60
61
ill
Expanding opportunities for emergmg investment managers
will increase competition.
62
63
64
.c.hl
Definitions.
As used in this Section:
Assets
means total client assets managed by an investment manager.
Emerging investment manager
means:
65
66
67
ill
ill
an investment manager with assets or product assets below the
75
th
percentile oftheir respective peer group; or
~
68
69
70
new or developing investment manager.
New or developing investment manager
means an investment
manager:
71
72
(1)
raising its first or second private institutional investment fund;
or
73
74
(2)
creating its first institutional product.
Product Assets
means client assets managed by an investment
manager in
~
single strategy.
f.£}
75
76
77
78
79
Consistent with the fiduciary duties established in Section 33-163, the
Board must make
~
good faith effort to remove any barriers that limit
participation by qualified emerging investment managers to manage
funds for the Consolidated Retiree Health Benefits Trust Fund.
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Bill No. 2-12
80
81
82
@
The Board must adopt guidelines to identify and evaluate qualified
emerging investment managers.
procedures for:
(i)
(ii)
identifying possible firms;
revIewmg,
evaluating
and
interviewing
emergmg
The guidelines must include
83
84
85
86
87
88
89
investment managers on an ongoing basis; and
(iii)
maintaining research files on emerging investment
managers.
tru
The Board must report annually to the Council and the Executive on
compliance with this Section on or before September
1
for the prior
fiscal year. The report must:
90
91
92
93
94
95
ill
ill
identify each emerging investment manager used during the
fiscal year;
list the percentage and dollar value of the assets of the trust
fund,
Qy
investment sector, managed
Qy
each emerging
investment manager; and
96
ill
describe the good faith effort made to include qualified
emerging investment managers in the procurement process
during the fiscal year.
97
98
99
100
101
Approved:
Roger Berliner, President, County Council
Date
102
Approved:
103
Isiah Leggett, County Executive
Date
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LEGISLATIVE REQUEST REPORT
Bill 2-12
Personnel- Retirement Trust Funds - Emerging Investment Managers
DESCRIPTION:
This Bill would encourage the Board of Investment Trustees and the
Consolidated Retiree Health Benefits Trust Board (Boards) to continue
their current efforts to provide opportunities for emerging investment
managers to manage some of the assets of the Employees' Retirement
System Trust Fund and the Consolidated Retiree Health Benefits Trust
Fund, consistent with their fiduciary duties.
The Bill would codify the current procurement policies used by each
Board which requires all investment managers who meet the stated criteria
to be included in a search for a new investment manager. The Bill would
also require the Boards to report annually to the Executive and the Council
on the results oftheir good faith efforts to include emerging firms.
PROBLEM:
GOALS AND
OBJECTIVES:
The goal of this Bill is to provide opportunities for emerging investment
managers to manage some of the assets of the Employees' Retirement
System Trust Fund and the Consolidated Retiree Health Benefit Trust
Fund.
The Boards and the County Attorney's Office have reviewed this bill.
See Fiscal and Economic Impact Statement.
COORDINATION:
FISCAL IMPACT:
ECONOlVllC
IMPACT:
EVALUATION:
EXPERIENCE
ELSEWHERE:
See Fiscal and Economic Impact Statement.
N/A
The State of Maryland, along with several other state and local pension
systems, have recently enacted similar policies and laws requiring a
pension system's governing body to make a good faith effort to use
emerging managers.
SOURCE OF
INFORMATION:
Linda Herman, Board ofInvestment Trustees
Amy Moskowitz, County Attorney's Office
APPLICATION
WITHIN
MUNICIP ALITIES:
PENALTIES:
N/A
N/A
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OFFICE OF THE COUNTY EXECUTIVE
ROCKVILLE. MARYLAND 20850
. Isiah Leggett
County Executive
MEMORANDUM
December 19, 2011
TO:
FROM:
SUBJECT:
Bill_ - Personnel - Retirement - Emerging Investment Managers
I am transmitting for introduction at Council a bill that would amend the County
Code to require the Boards overseeing the investment programs for the Employees' Retirement
System (ERS) and the Consolidated Retiree Health Benefits Trust (CRHBT) to continue their
current efforts to include emerging investment managers in the procurement of services for the
investment programs. I am also transmitting a Legislative Request Report and Fiscal and
Economic Impact Statement for the bill.
The bill would require the Boards to make a good faith effort to use emerging
investment managers defined as: (1) an investment manager with assets or product assets below
the 75
th
percentile of their respective peer group; or (2) a new or developing investment manager.
The current Service Provider Procurement Policies (Policies) of the Boards
require the Boards to include emerging investment managers in searches if the firms meet the
search criteria. The Policies require special efforts be made by the Boards' staff and its
consultants to ensure identification of possible eligible investment managers to participate in the
search process, including regular monitoring of investment managers and maintenance of
research files on such investment managers to assist efforts when searches begin. In addition,
the Boards receive quarterly reports from Board staff on meetings conducted with emerging
investment managers and their analysis of the firms.
As of November 30, 2011 the Board of Investment Trustees committed
approximately 6% of ERS assets with firms that were emerging investment managers when
hired.
I am proposing this legislation to codify the current procurement policies used by
the Boards which require all service providers who meet the stated criteria to be included in
searches conducted by the Boards. The primary purpose of the legislation is to ensure that all
service providers are afforded the opportunity to participate in procurement searches conducted
by the Boards, to provide full transparency ofthe procurement process, and to ensure that the
montgomeryc:ountymd.gov/311
/i~i11'}
'UiWjii;jil,iiwiid;il'
240-173-3556 TTY
",.,\...r"".
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Roger Berliner, Council President
December 19, 2011
Page 2
intent and goals ofthe current procurement practices remain in place regardless of future changes
in
Board membership due to terms expiring, changes to Board policies, or changes in Board
Staff. The legislation would also require an annual report on efforts made by the Board to
include emerging service providers.
Thank you for your prompt consideration of this bill.
Attachments (3):
Proposed Legislation
Legislative Request Report
Fiscal and Economic Impact Statements
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OFFICE OF MANAGEMENT AND BUDGET
Isiah Leggett
County Executive
Jennifer A. Hughes
Director
MEMORANDUM
December 9. 2011
TO:
FROM:
SUBJECT:
Roger B!eIiner resident, County Council
P
Jennifer
es,
Director
COllncil
B XX-Ii -
Personnel Retirement - Emerging Investment
Managers
Attached please find the fiscal and economic impact statements for the above
referenced legislation.
JAH:hv
Attachments
c: Kathleen BOllcher, Assistant Chief Administrative Officer
Lisa Austin, Offices ofthe County Executive
Joy Nurmi, Special Assistant to the County Executive
Joseph F. Beach, Director, Department of Finance
Patrick Lacefield, Director, Public Information Office
Michael Coveyou, Department of Finance
Linda Herman. Executive Director, Board ofInvestment Trustees
Amy Moskowitz, Office ofthe County Attorney
Helen Vallone, Office ofManagement and Budget
Naeem Mia, Office ofManagement and Budget
Blaise DeFazio, Office of Management and Budget
Office of the Director
101
MOllroe
Street, 14th Floor •
Rockville, Maryland 20850 • 240-777-2800
www.montgomerycountymd.gov
montgomerycountymd.gov/311 .
240-7?3~3556
TTV
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Fiscal Impact Statement
Council Bill
XX-ll-
Personnel- Retirement - Emerging Investment Managers
1. Legislative Summary
The bill would amend the County Code to encourage the Boards overseeing the investment
programs for the Employees' Retirement System (ERS) and the Consolidated Retiree Health
Benefits Trust (CRHBT) to continue their current efforts to include emerging investment
managers in the procurement of services for the investment programs. The Bill would
require the Boards to make a good faith effort to use emerging investment managers defined
as:
• an investment manager with assets or product assets below the 75
th
percentile of their
respective peer group; or
• a new or developing investment manager
The current Service Provider Procurement Policies (policies) require the Boards to include
emerging investment managers in searches
if
the firms meet the search criteria. The Policies
require special efforts
be
made by the Boards' staff and its consultants to ensure
identification of possible eligible investment managers to participate in the search process,
including regular monitoring ofinvestment managers and maintenance of research files
on
such investment managers to assist efforts when searches begin.
In
addition, the Boards
receive quarterly reports from Board staff on meetings conducted with emerging investment
managers and their analysis of the firms. The bill also requires annual reporting to the County
Council on efforts made
by
the Boards to include emerging investment managers.
2. An estimate of changes in County revenues and expenditures regardless of whether the
revenues or expenditures are assumed in, the recommended or approved budget.
Includes source of information, assumptions, and methodologies used.
This
bi1l
has no impact to revenues or expenditures.
3. Revenue and expenditure estimates covering at least the next 6 fiscal years.
This
bill
has no impact to revenues or expenditures.
4. An actuarial analysis through the entire amortization period for each bill that would
affect retiree pension or group insurance costs.
Not Applicable
5. Later actions that may affect future revenue and expenditures
if
the bill authorizes
future spending.
This change
will
not result
in
subsequent government action that
will
impact future revenues
and expenditures.
1
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6.
An
estimate of the staff time needed to implement the bill.
Not Applicable
7. An explanation of how the addition of new staff responsibilities would affect other
duties.
No change in staffresponsibilities.
8. An estimate of costs when an additional appropriation
is
needed.
Not Applicable
9. A description of any variable that could affed revenue and cost estimates.
Not Applicable
10. Ranges of revenue or expenditures that are uncertain or difficult to project.
Not Applicable
11. H a bill is likely
to
have no
{"meal
impact, why that is the case.
The bill codifies the current procurement policies used by the Boards which require
all
investment managers who meet the stated criteria to
be
included in searches conducted by the
respective Boards.
12. Other fiscal impacts or comments.
Not Applicable
13. The following eontributed to and concurred with this analysis:
Linda Herman, Executive Director, Board of Investment Trustees and Consolidated Retiree
Health Benefits Board
Amy Moskowitz, Counsel to the Boards, Office of the County Attorney
Helen Vallone, Office of Management and Budget
Naeem Mia, Office of Management and Budget
Blaise DeFazio, Office of Management and Budget
Jenni
D
ate
1'b{~(U
Office
2
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Economic Impact Statement
Council Bill XX-ll, Qualified Emerging Investment Managers
Background:
This legislation requires the Boards overseeing the County's Retirement Plans and the
Consolidated Retiree Health Benefits Trust to make a good faith effort to hire qualified emerging
investment managers. A qualified emerging investment manager is defined as an investment
manager with assets or product assets below the 75
th
percentile of their respective peer group; or a
new investment manager who is raising its first or second private institutional investment fund; or
creating its first institutional product. This legislation codifies current policy and practices of
both Boards.
1. The sources of infolmation, assumptions, and methodologies used.
Not Applicable. This legislation codifies current policy and practice, and its only requirement
that is not currently in place is a requirement for an annual report, which the Boards state can
be handled with existing resources.
2. A description of any variable that could affect economic impact estimates.
Not Applicable
3. The bill's positive or negative effect, if any, on employment, spending, saving, investment,
incomes, and property values in the County.
Not Applicable
4. If a bill is likely to have no economic impact, why that is tlle case.
This Bill codifies current policy and practice; therefore there is no economic impact.
5. The following contributed to and concurred with this analysis: David Platt, Finance; Mike
Coveyou, Finance
@
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BOARD OF INVESTMENT TRUSTEES
SERVICE PROVIDER PROCUREMENT POLICY
@
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BOARD OF INVESTMENT TRUSTEES
SERVICE PROVIDER PROCUREMENT POLICY
Table of Contents
Page
I.
Purpose
&
Authorities
A. Purpose of Policy StatementlBoard Requirements
S.
Statutory Board Responsibility and Authority to Contract for Services
C.
Board Exemption from County Procurement Regulations
D. Communications Responsibilities
Procurement of Services - Procedures
A. Stage 1- ERP Program Requirements
B. Stage 2 - Research process
1. Criteria
2. Candidate sources
3. Emerging Service Provider
4. Selection of Candidates
C. Stage 3 Staff Review and Verification Process
1. Due diligence evaluations
2. Selection of finalists
3. Contracting
D. Stage 4 Board Selection of Finalist and Contract Process
1. Voting
2. Contract process and negotiations
3. Contract execution
III.
Monitoring of Contractors
A. Review Process
B. Contract Modifications
Termination of Service Provider
A. Basis for termination
B. Procedures
Records Retention
Ethics
Policy Review
Due Diligence Evaluation Criteria
A. Liquid Investment Managers
B. Illiquid Investment Managers
C. Other Service Providers
1
1
1
1
II.
1
2
2
2
2
2
3
3
3
3
4
4
4
4
5
5
IV .
5
6
6
6
V.
VI.
VII
VIII
6
8
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BOARD OF INVESTMENT TRUSTEES
SERVICE PROVIDER PROCUREMENT POLICY
I.
Purpose
&
Authorities
A. Purpose of Policy Statement/Board Requirements
The purpose of this statement is to define the policy of the Board of Investment Trustees
(the "Board") regarding the procurement of external service providers. These services are
required in the management of the investment programs for the Employee Retirement Plans (the
"ERP") which include the Employees' Retirement System, Retirement Savings Plan and
Deferred Compensation Plan. The policy statement is intended to foster competition and fairness
while being flexible to meet the needs of a dynamic investment environment.
This policy does not cover procurement of Board office administrative services, which generally.
follows established County contracts and procedures (Le., procurement of supplies,
rnini­
contracts, etc.) and is set forth in the Board's Administrative Manual.
B. Statutory Board Responsibility and Authority to Contract for Services
Pursuant to Section 33-60 of the Montgomery County Code, the Board has the fiduciary
responsibility for the governance of the ERP investment management programs and has
exclusive authority to contract for services to meet this responsibility.
C. Board Exemption from County Procurement Regulations
Pursuant to Section 33-60 of the Montgomery County Code, the Board is exempt from
the Montgomery County Government procurement regulations in the procurement of services for
the management of ERP assets. However, as detailed in this policy, the Board adheres to a
competitive procurement process in the procurement of service providers.
D. Communications Responsibilities
Official communications related to Board procurement processes and activities will be
coordinated by Board Staff. Staff will report items of significance to the Board as appropriate.
II.
Procurement of Service Providers - Procedures
A. Stage 1 - ERP Program requirements
• The Board will determine the services necessary to meet the goals of the program,
including:
• HiringlTerminating of service providers
• Number of service providers sought
• Urgency/timeframe for search
• Consultant support required
1
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B. Stage 2 - Research Process
This stage involves detennining search criteria and sources and the list of possible
candidates that may meet Board needs as specified in Stage 1.
1. Criteria
Based on need, Staff will recommend a specific list of criteria for determining eligible
vendors ("service providers") for the ERP.
The initial criteria will pertain to minimum
requirements related to expertise in the service area being procured. The Board may add
additional criteria to be used in a particular search.
2. Candidate sources
Although not limited to the sources listed below, Staff generally uses these sources to
identify eligible candidates. Staff may also use sources identified by the Board's consultant(s).
The Board or Staff may recommend additional sources to be used in a particular search.
Third-party databases including, consultant and other vendors
Industry sources
Marketing materials
Institutional investor contacts
Reports and sources used to identify emerging service providers
Montgomery County resources and infonnation
3. Emerging Service Provider and Minority Participation
The Board, Staff and consultants are committed to including emerging service providers,
among prospective service provider candidates. Emerging service providers, including minority,
female, and disabled owned finns, are broadly defined as:
• Finns with assets andlor product assets below the 75
th
percentile of their
respective peer group
• . New or developing finns (e.g. Funds I and II, or 1
st
institutional fund)
Special efforts will be made to ensure identification of possible eligible finns in the
search process including:
regular monitoring of above-referenced sources to identify possible candidates
regular review of emerging service providers
Staff interviews with emerging finns on an ongoing basis
maintenance of research files on such finns to assist efforts when searches
begin
4. Selection of Candidates
Based on criteria and sources noted above, Staff will prepare a list of possible candidates
for a specific search. Staff, with the assistance of the investment consultant, generally will issue
2
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a Request For Infonnation (RFI) to the candidates selected.
In
special circumstances, with Board
approval, Staff may not issue a RFI (e.g. using same service provider across County Plans).
Due to the nature of private market and non-marketable investment opportunities for the
Employees' Retirement System Staff may not issue a RFI. Staff may identify opportunities
based on criteria identified in Stage 2 and will evaluate the opportunity based on the criteria
identified in Stage 3.
C. Stage 3 - Review
and
Verification Process
Stage 3 of the search process focuses on review and verification of information pertaining
to the list of candidates identified in Stage 2. Completion of the Stage 3 process should result in
the selection of a finalist.
1. Due diligence evaluations
Staff will complete a due diligence process to confirm findings identified in Stage 2.
Those candidates deemed to be eligible will be interviewed by Staff, and the Board's consultant
(if applicable), by phone or in person in the Board's office. Staff will prepare a summary of the
candidate's evaluation which may include:
• Quantitative information resulting from Stage 2 criteria.
• Qualitative information related to candidate's experience, strategies and
operations including:
o organizational structure
o experience and depth of personnel, including turnover
o firm-specific operational philosophy
o fees
o references from Board consultant(s)
o references from other sources
o in the case of limited partnership arrangements such as private
equity, real estate or hedge funds, fund -specific aspects including but
not limited to liquidity and tax issues.
o firm-specific legal/litigation issues
2. Selection of finalist(s)
Staff will usually conduct an onsite due diligence review of the finalist(s) which will
include an interview, and prepare a report, along with a due diligence evaluation form, with input
from the Board consultant resulting in a recommendation of a finalist(s) to the Board. The
selection of the finalist(s) will be based on both quantitative and qualitative evaluations as well
as interviews and results of reference checks.
3. Contracting
After Staff has selected any finalist(s), Staff, in conjunction with Board counsel, will
evaluate the contract and governing documents to determine whether there are major issues with
3
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the service provider's contract or governing documents that would prohibit the Board from
entering into a contract.
D. Stage 4 - Board Selection of Finalist(s) and Contract Process
The Board will vote on Staffs recommendation of any service provider(s) at a meeting of
the Board pursuant to Board bylaws. Staff, with assistance from the Board's counsel" will
negotiate the terms of the contract or agreement.
1. Voting
The Board will vote based on all information made available by Staff, including
information on the entire search process as summarized by Staff and the consultant, subsequent
materials prepared for Board consideration, final interviews and due diligence meetings, as
applicable. The Board will vote by formal resolution.
If
the Board does not vote to accept Staffs recommendation, then the Board will
determine at what stage to recommence the procurement process.
2. Contract process and negotiations
Staff will pursue contract negotiations, including terms related to fees, operational issues
and guidelines, and will apprise the Board if needed.
A. Agreements may follow a format approved by the Board and generally will
include provisions for:
• establishment of the account and assignment of management and fiduciary
responsibility if required
• directions pertaining to the operations of the account
• directions pertaining to Board and Staff authorities and communications
• professional liability insurance for errors and omissions
• fee and terms of invoicing and payment
• contract termination upon notice by either Board or service provider
• Board required disclosures
• addenda related to Board policies and procedures, and operational guidelines
B. All service provider agreements will be reviewed by Staff and the Board's
counsel to confirm conformance with Board policies and applicable law.
3. Contract execution
All agreements and contracts will be approved and executed in accordance with Board
Bylaws.
III.
Monitoring of Service Providers
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A. Review process
Staff regularly conducts contract compliance reviews, including reviews of service
provider performance, conformance to guidelines, organizational structure and any other
performance requirements as specified in the service provider's contract. Service provider
related matters other than performance and contract compliance matters will be reported to the
Compliance and Audit Committee when deemed significant by Staff, i.e.
if
the matter(s) have a
possible effect on the service provider's ability to perform as expected. Staff will apprise the
Board of performance issues and make recommendations to the Board as necessary. The
Compliance and Audit Committee will assess compliance issues and make recommendations to
the Board as necessary.
Generally Staff conducts reviews of all aspects of the service provider's contract on an
annual basis. The review may include a due diligence review in the service provider's office or
the Board's office when necessary. Matters to be reviewed include but are not limited to the
quantitative and qualitative factors which served as the basis for selection as a service provider.
Annually the Compliance and Audit Committee will review and report compliance by
Board service providers with contract disclosure requirements
B. Contract modifications
With the exception of minor guideline or contract changes, Staff will advise the Board of
any suggested modifications to the contract terms, whether requested by the service provider or
by Staff. Staff, with the assistance of Counsel, will determine the appropriate method of
modification, i.e. contract amendment or letter agreement. Staff will recommend an approval
method and background information required by the Board to consider any such modification.
Staff will prepare an annual report to the Board reflecting recommendations of modifications to
service provider contracts.
With the exception of minor guideline and contract changes, the Board approves contract
modifications through Board resolution. For all minor guideline and contract changes, Staff, in
conjunction with Board counsel, has the authority to recommend that the Board Chair approve
the contract modification.
For all private market and non-marketable investments, Staff, in conjunction with Board
counsel, will have the authority to recommend approval/disapproval to the Board Chair of all
amendments to the governing documents proposed by the fund manager.
IV.
Termination of Service Providers
A. Basis for termination
With the exception of private market investments, the Board may terminate a service
provider at any time and contract terms must provide for immediate termination upon written
notice by the Board. Private market investments may not be easily liquidated and therefore
immediate termination may not be possible. The Board may terminate service providers for any
reason, including but not limited to one or more of the following reasons:
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- ERP program changes
- Changes in the following:
y
people and organization of the firm
y
philosophy and process of investment strategy
y
resources dedicated to the investment strategy
y
performance of the product that is being reviewed
- Service providers -specific issues related to lack of adherence to contract terms
or guidelines or any other changes in the service provider's business strategies.
B.
Procedures
Staff provides background information regarding any basis for termination of a service
provider to the Board. Action to terminate a service provider must be made by Board resolution.
Staff determines and implements the appropriate account transferlliquidation procedures,
informing the Board as necessary.
V.
Records Retention
Staff will maintain service provider records in the Board office. Service provider records
will include search-related materials presented to the Board at the time of selection as well as
legal and correspondence files. Records will be retained in accordance with Board office
procedures. After the service provider relationship has ended, Staff will archive records in
accordance with the Board office's records retention policy.
VI.
Ethics
The Board, and as applicable, Staff, will at all times conform to Standard of Professional
and Ethical Conduct adopted by the Board and County ethics laws. In addition, individual Board
and Staff members will disclose to the Board any inherent, potential, or perceived conflicts of
interest in dealing with specific service providers prior to taking any official action concerning
any service provider.
Any violation of County or Board ethics rules by any Board or Staff member will be
handled in accordance with County Government procedures.
VI.
Policy Review
Staff andlor the Board will reVIew and recommend amendments to this policy as
necessary.
Amended:
July 22, 2011
May 21,2010
January 11,2008
December 7, 2007
6
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(A) Due Diligence Evaluation - Liquid Investment Managers
Liquid managers will be evaluated using the following broad categories:
o People
o Ownership/incentives
o Quality of key professionals/team
o Organization
o Assets under management
o Commitment to improvement
o Firm evaluation
o Philosophy/Process
o Alpha - Idea generation
o Portfolio construction
o Resources/Systems/Administration
o Research resources
o Information/compliance systems
o Administrationlback-office
o Trading
o Performance
o Fees
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(B) Due Diligence Evaluation - Illiquid Investment Managers
Illiquid managers will be evaluated using the following broad categories:
o People
o Ownership/incentives
o Quality of key professionals/team
o Organization
o Assets under management
o Commitment to improvement
o Firm evaluation
o Boards/committees!decision-making bodies
o Philosophy/Process
o Investment process
o Portfolio construction
o Resources/S ystems!Administration
o Research resources
o Information systems
o Administrationlback-office
o Performance
o Fees
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(C)
Due Diligence Evaluation - Other Service Providers
Non-manager vendors will be evaluated using the following broad categories:
o People
o Ownership/incentives
o Quality of key professionals/team
o
Organization
o Assets under management/advisement
o Commitment to improvement
o Firm evaluation
o PhilosophylProcess (may be non-applicable to certain vendors)
o Idea generation
o Portfolio construction
o Resources/Systems/Administration
o Research resources
o Information/compliance systems
o Administrationlback-office
o Other categories deemed critical for the search
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Bill 2-12 - Personnel - Retirement - Emerging Investment Managers
Public Hearing
February 14, 2012
My name is Kathleen Boucher and I am an Assistant Chief Administrative Officer with
the County Executive's Office. I am here to testify in support of Bill 2-12 on behalf of the
County Executive.
This bill would amend County law to require the Boards overseeing the investment
programs for the Employees' Retirement System (ERS) and the Consolidated Retiree Health
Benefits Trust (CRHBT) to continue their current efforts to include emerging investment
managers in the procurement of services for the investment programs.
The bill would require the Boards to make a good faith effort to use emerging investment
managers defined as: (1) an investment manager with assets or product assets below the 75
th
percentile of their respective peer group; or (2) a new or developing investment manager.
The current Service Provider Procurement Policies (Policies) of the Boards require the
Boards to include emerging investment managers in procurement searches if the firms meet the
search criteria. The Policies require the Board's staff and consultants to make special efforts to
ensure identification of possible eligible investment managers to participate in the search
process, including regular monitoring of investment managers and maintenance of research files
on such investment managers to assist efforts when searches begin.
In addition, the Boards receive quarterly reports from Board staff on meetings conducted
with emerging investment managers and their analysis of the firms. As of November 30, 2011
the Board of Investment Trustees committed approximately 6% of ERS assets with firms that
were emerging investment managers when hired.
The CountyExecutive proposed Bill 2-12 for the purpose of codifying the current
procurement policies used by the Boards and increasing transparency and accountability to those
policies by establishing an annual reporting requirement. Under the bill, the Boards must submit
a report to the County Executive and Council on or before September 1 which includes the
following information:
1. identifies each emerging investment manager used during the fiscal year;
2. lists the percentage and dollar value of the assets of the trust fund, by investment sector,
managed by each emerging investment manager; and
3. describes the good faith effort made to include qualified emerging investment managers in
the procurement process during the fiscal year.
The primary purpose of the legislation is to ensure that all service providers are afforded
the opportunity to participate in procurement searches conducted by the Boards, to provide full
transparency of the procurement process, and to ensure that the intent and goals of the current
procurement practices remain in place regardless of future changes in Board membership due to
terms expiring, changes to Board policies, or changes in Board Staff.
Thank you for your consideration of this bill. I look forward to working with the Council
as it reviews this bill.
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TESTIMONY FOR EXPEDITED BILL 2-12, PERSONNEL
RETIREMENT TRUST FUNDS
Good morning, for the record, I am Linda Herman, Executive Director for the Board of
Investment Trustees, which oversees the assets of the County's three retirement plans,
and the Board of Trustees, which oversees the assets of the Consolidated Retiree Health
Benefits Trust. I am here today on behalf of the Boards to testify in support of Bill
2-12,
Personnel- Retirement Trust Funds.
The proposed Bill would amend the County Code to require the Boards
overseeing the investment programs for the Employees' Retirement System (ERS) and
the Consolidated Retiree Health Benefits Trust (CRHBT) to continue their current efforts
to include emerging investment managers in the procurement of services for the
investment programs. The Bill would require the Boards to make a good faith effort to
use emerging investment managers defined as:
• investment managers with assets or product assets below the
75
th
percentile of their respective peer group; or
• new or developing investment managers
The Service Provider Procurement Policies (Policies) established by the Boards
require the Boards to include emerging investment managers in searches if the firms meet
the search criteria. The Policies require that special efforts be made by the Boards' staff
and its consultants to ensure identification of possible eligible investment managers to
participate in the search process, including regular monitoring of investment managers
and maintenance of research files on such investment managers to assist efforts when
searches begin.
In
addition, the Boards require quarterly reports from their staff on
meetings conducted with emerging investment managers and their analysis of the firms.
The Boards are committed to ensuring that all investment managers, meeting the
search criteria, are afforded the opportunity to participate in procurement searches
conducted and to providing full transparency of the procurement process. As of January
31,
2012
the Board of Investment Trustees has committed nearly 6% of ERS assets to
firms that were emerging investment managers when hired.
We look forward to working with the Council
legislation.
111
its deliberations on this
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Maryland State Retirement and Pension System
Terra Maria: Developing Manager Program
In Public Markets and Private Equity
Updated February 2011
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Terra Maria
The Maryland Developing Manager Program
Program Structure Outline
The Maryland State Retirement and Pension System (the "System") formed an emerging
manager program in April 2007. In September 2008, the System revised, expanded and
transformed the program into Terra Maria, the Maryland developing manager program. The
initial Terra Maria program consisted of seven Program Managers in the public markets.
Recently, the program was expanded to include private equity fund managers as described
in Section II below.
I.
Public Markets
The focus of the Terra Maria Program (the "Program") is on investment performance with an
alignment of interests. An investment manager's product may only be represented once in
the program, however, investment managers may have more than one product in the
Program, if each product is recommended by a Program Manager.
The Program Managers are under contract with the System and recommend investment
managers based on their ability to generate alpha relative to their assigned benchmarks. The
Program Managers essentially represent an extension of the Investment Division Staff by
providing due diligence, recommendations and ongoing monitoring of the underlying
investment managers. The investment manager's accounts are maintained with the
System's custodian bank.
Following are some key facets of the Program:
The primary focus of the Program is alpha generation, or performance. Program Managers
and investment managers are evaluated primarily on performance relative to benchmarks.
The Program Managers are instructed to focus on 'smaller investment managers. While the
Program Managers apply no absolute maximum in terms of assets under management for
purposes of recommending investment managers to the Chief Investment Officer (the "CIO"),
the Program Managers are aware of the spirit of the program.
There is no formal "graduation" policy for this initiative. Investment managers that perform on
a consistent basis may become eligible for larger allocations of funds, regardless of whether
they are monitored by a Program Manager or staff.
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The Program Managers are responsible for sourcing investment managers, performing due
diligence, monitoring the retained investment managers, and presenting manager hire and
termination recommendations to the CIO. All investment manager selections must be
approved by the CIO.
The investment managers are part of the System's total portfolio and evaluated the same as
any other investment manager in the portfolio. While investment managers may have been
introduced to the System via a Program Manager, this has been done so primarily for
administrative purposes. Once an investment manager has been "hired" by the CIO, they are
part of the System's portfolio. Unlike the more traditional manager-of-manager programs, the
CIO is ultimately responsible for the managers in the Maryland program, not the manager-of­
managers.
Each Program Manager's benchmark is the weighted average of the benchmarks of
the underlying investment managers selected by the Program. Investment manager
benchmarks will be representative of the manager's investment style and aligned with the
System's benchmark(s) within the manager's designated asset class. Benchmarks must be
approved by the CIO.
Program Managers will make recommendations to the CIO regarding the initial allocation of
funds to investment managers. In making recommendations, the Program Managers
consider factors such as total assets under management by the investment manager on both
a firm-wide and a product specific basis and also the total funding allocation to the Program
Manager. In addition to portfolio asset allocation decisions, continued investment manager
funding will be subject to the review of the investment manager's performance and an
evaluation of the investment manager's business growth and organizational stability since the
investment manager was initially funded by the System. The investment manager's
performance will be evaluated on a continuous basis, although the Program Manager will
have a formal review of the manager at least annually. Final decisions regarding funding and
rebalancing decisions will be made by the CIO and Investment Division Staff.
If there are questions about the Terra Maria program in public markets, contact the
Investment Division at 410-625-5621 or the individual Program Managers found in the
attached Program Manager list.
II.
Private Equity
The Terra Maria program has recently been expanded to include private equity investment
managers. The System's private equity consultant reviews private equity funds and
investment managers for potential inclusion in the System's Terra Maria program. The
program is designed to include smaller managers, typically fund managers with less than $2
billion in assets under management that are raising a private equity fund of up to $500 million
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12
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whose funds otherwise satisfy the due diligence and investment case analysis performed by
the private equity consultant and SRPS staff.
The portfolio will potentially include small and mid-sized buyout and early to late stage
venture capital and debt funds.
The System will invest directly into the Terra Maria private equity funds. The System's
consultant will provide reporting on the Terra Maria private equity funds as it does with other
private equity investments made by SRPS.
If there are questions about the Terra Maria program in private equity, please contact the
Investment Division at 410-625-5621 or the System's private equity consultant, Altius
Associates, at 804-282-9000 or emergingmanagerinfo@altius-associates.com.
Attachment: Program Manager list
Page
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Montgomery County Employees' Retirement System
1 Year Performance by Quartiles - December 31, 2011
10%
~--------------------------------------------------------------------------------------------------------------------~
5%
t
a:
E
:>
4i
I
I
'(ft.
-
TUCS
7
0%
-5%
Wilshire
MCERS
MCERS Polley
Northern
(All
Public)
Russell
Wilshire >$1 B
Northern >$1 B
TUCS>$1B
4.7%
5.2%
4.7%
5.2%
4.7%
5.2%
4.7%
5.2"/0
4.7%
5.2%
4.7%
5.2%
4.7%
5.2"/0
1st Quartile
Median
3rd Quartile
Number of Observations
1.9%
1.0%
-0.0%
136
2.7%
0.9%.
-0.6%
40
2.3%
1.0%
0.1%
137
2.6%
0.9%
-0.3%
1.3%
0.5%
0.1%
37
4.0%
1.4%
-0.4%
133
2.7%
0.9%
0.3%
62
111
~
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:M:ontgOll1er~ Cp~ntY
E,nployJes' Retirell1ent
Syst~m
":'
,-, ", ,;::!;.;
;
i
-
-
i'
1-;:
-
- -- -
- ; ; .
t;
. :1
~ ~
3 Year Performance by Quartiles - December 31, 2011
15%
14%
13%
12%
1
IX
~
~
E
11%
10%
9%
8%
- - - - - ­
t
- • • -
­
Wilshire
Northern (All Public)
TUCS
Russell
Wilshire >$1 B
Northern >$1 B
7%
6%
TUCS>$1B
MCERS
MCERS Policy
13.3%
12.9%
13.3%
12.9%
13.3%
12.9%
13.3%
12.9%
13.3%
12.9%
13.3%
12.9%
13.3%
12.9"10
1st Quartile
Median
3rd Quartile
Number of Observations
11.5%
10.4%
9.2%
132
12.4%
11.1%
10.0%
38
12.0%
10.4°/.,
9.2%
133
12.3%
11.2%
9.9%
101
12.7%
11.2%
10.2%
37
12.9%
11.5%
9.9%
104
12.1%
10.4%
9.4%
59
®
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Montgomery County. Employees' Retirement System
5 Year Performance by Quartiles - December 31, 2011
7%
6%
5%
II:
'Ii
3%
::I
.
c
4%
1
J
<P­
2%
1%
0%
-
- - - -
­
- -
Wilshire >$1 B
Northern >$1 B
TUCS>$1B
Wilshire
MCERS
MeERS Policy
Northern (All Public)
TUCS
Russell
4.0%
3.3%
4.0%
3.3%
4.0%
3.3%
4.0%
3.3%
4.0%
3.3%
4.0%
3.3%
4.0%
3.3%
1st Quartile
Median
3rd Quartile
Number of Observations
3.6%
2.8%
1.8%
125
2.6%
2.0%
1.4%
28
3.4%
2.2%
1.7%
131
2.8%
2.0%
1.3%
96
2.9%
1.9%
1.5%
37
3.2%
2.2%
1.5%
88
3.0%
2.0%
1.3%
59
®
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Asset Allocation -
MeERS
vs. Public Fund Peers
MeERS
U.S. Equities,
Non-U.S. Equities,
17.5%
Public Funds
Average
Other Investments,
5.0%
Hedge
Foods,
5.0%
Other
Investments,
4.0%
Non-U.S. Equities,
18.0%
Hedge
Funds,
4.0%
10.0%
35.0%
10.0%
Fixed Income,
29.0%
Historically, most emerging manager programs are focused in
Us.
equities and core fixed income.
MeERS
has shifted $400m from
us.
equities to other asset classes over the past
3
years and will
be moving another $300m in the next
2
years. A recent survey ofpublic plans noted that 40% of
pension funds stated they plan to shift assets from
us.
equities in the next
12
months.
1
®
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Wilshire Database
Emerging Firms and/or Emerging Products by Asset Class
As of December 19, 2011
Emerging Managers and/or Emerging Products (bottom 25 percentile of product AUM)
Under 25% AUM
Limit (Million)
#
of Products
Asset Class
U.S. Large Cap
U.S. Mid Cap
U.S. Small Cap
International/Global
U.S. Fixed Income
International Fixed Income
Total
#
of Total Products
1,246
757
660
1,831
1,478
469
6,441
$85
35
44
78
225
142
312
189
165
458
370
117
1,611
2
®
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Search Process - Public Market Investments
• Database:
Staff utilizes Wilshire's Compass, an industry leading database and analytics tool,
to screen products/firms. Managers that contact Staff are encouraged to provide their
information (returns, holdings information, etc.) to Wilshire. In addition, Wilshire maintains a
robust database of emerging managers. There is no cost to be included in the database.
• Screening Managers:
RFI candidates are determined through a rigorous quantitative
screening process. Risk adjusted returns and consistency of returns are some of the criteria
being used for identifying RFI candidates. The data for each search is saved, with every step
being documented in a MS Excel format.
• RFI Process:
RFI responses are summarized by Staff and discussed with the Consultant to
determine semifinalists. Discussion notes and reason for inclusion/elimination are
documented.
• Due Diligence:
Due diligence calls and meetings are conducted to obtain qualitative
information on the firm, the investment team, the investment process, etc. Finalists are scored
by category (per the Service Provider Procurement Policy) by Staff and further discussed with
the Consultant.
• Investment Committee (IC):
Candidates which score highly, both quantitatively and
qualitatively, are discussed at the IC Meeting. The IC members debate the merits of the
recommendation and the Portfolio Manager provides additional information as necessary.
• Final Decision:
Board receives a presentation from the manager being recommended by
Staff, and the consultant, and makes the final decision whether or not to hire the"manager.
1
(§)
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Staff Investment Committee - Operational Process
• Executive Director
(Lim/a Herlll{l1IJ
• Senior Portfolio Manager - Fixed Income and
OpportlUllstic
(Stuart Potter)
·Selllor P0l1folio Manager - Pdvate Markets
(Brad Steber)
• P0l1folio Manager - Public Equities and Conunodities
(Afarc EsellJ
Phase I
Investment Idea
c=)
Phase II
Due Diligence - Semi-Finalists
c=:>
Phase III
Contract Management
*
IC members, consultants,
strategic partners, peers,
publications
*
Lead PM
+
llC member
+
consultant
*
Firm, investment team and strategy review
*
Operational review (evaluate systems,
policies, procedures)
*
Preliminary legal review
*
Insurance approval (County's risk
management)
*
Legal negotiations
*
Fee negotiations
b
Prospective Managers
*
Evaluation vs. key investment
criteria, peer comparisons
*
Manager candidate list
*
Analysis of manager information
*
Semifinalist selection
*
Summary write-up
[b
Reference Checks
b
Recommendation
to Board
*
Current and former clients/investors
*
Former firm employees
*
Business partners
&
vendors
Full Writeup
IC Review
*
Deep analytic review
*
Manager scorecard
*
Key merits and risks
*
Portfolio fit
ICVote
*
Full review
*
Portfolio construction
.
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Agenda Item 18
March 6,2012
Action
MEMORANDUM
March 2, 2012
TO:
FROM:
SUBJECT:
County Council
Robert H. Drummer, Senior Legislative Attorney ( ; ' )
Action:
Bill 2-12, Personnel - Retirement Trust Funds
Managers
Emerging Investment
Government Operations and Fiscal Policy Committee recommendation (3-0): approve the
.
Bill as introduced.
I
Bill 2-12, Personnel
Retirement Trust Funds
Emerging Investment Managers,
sponsored by the Council President at the request of the County Executive, was introduced on
January 17,2012. A public hearing was held on February
14
and a Government Operations and
Fiscal Policy Committee worksession was held on February 27.
Background
Bill 2-12 would require the Board of Investment Trustees and the Consolidated Retiree
Health Benefits Trust Board of Trustees to make a good faith effort, consistent with their
fiduciary duties, to hire qualified emerging investment managers. The Board of Investment
Trustees (BIT) is responsible for managing the assets in the Employees' Retirement Trust Fund.
The Consolidated Retiree Health Benefits Trust Board of Trustees is responsible for managing
the assets in the Consolidated Retiree Health Benefits Trust Fund. Both Boards regularly hire
professional investment managers to fulfill this responsibility.l
Under the Bill, an "emerging investment manager" means an investment manager with
assets or product assets below the 75
th
percentile of their respective peer group or a new or
developing investment manager. The Bill would require each Board to adopt guidelines to
identify and evaluate qualified emerging investment managers. Each Board would also be
required to report annually to the Council and the Executive on or before September 1 for the
prior fiscal year. The report must:
(1) identify each emerging investment manager used during the fiscal year;
(2) list the percentage and dollar value of the assets of the trust fund, by investment
sector, managed by each emerging investment manager; and
(3) describe the good faith effort made to include qualified emerging investment
managers in the procurement process during the fiscal year.
The Consolidated Retiree Health Benefits Trust Fund was recently established and is just beginning to retain active
managers. The Board has adopted similar policies and will ultimately follow similar guidelines to hire managers
and invest funds.
I
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The fiduciary duties of the Trustees are codified in Section 33-61 C for the Board of
Investment Trustees and in Section 33-163 for the Consolidated Retiree Health Benefits Trust
Board of Trustees. Section 33-61 C states:
A fiduciary must discharge the fiduciary's duties regarding the retirement systems:
(a)
only in the best interest of the participants and their beneficiaries;
(b)
only to provide benefits to the participants and their beneficiaries, and
defray reasonable expenses of administering the retirement systems;
(c)
with the care, skill, prudence, and diligence under the circumstances that a
prudent person acting in a similar capacity and familiar with the same
matters would use to conduct a similar enterprise with similar purposes;
(d) by diversifying the investments of the retirement systems to minimize the
risk of large losses, unless it is clearly not prudent to diversify under the
circumstances;
(e) according to a good faith interpretation of the law governing the
retirement systems;
(f)
according to a good faith interpretation of the documents and instruments
governing the retirement systems, if they comply with this Article.
Both Boards have currently established internal service provider procurement policies
that require the inclusion of emerging investment managers in searches if the firms meet the
search criteria. The Policies require that special efforts be made to identify possible eligible
emerging investment managers and regular reporting on staff meetings with emerging
investment managers. A copy of the BIT Service Provider Procurement Policy is at ©13-23. As
of January 31,2012, approximately 6% of the ERS assets were managed by firms that qualified
as an emerging investment manager when first hired.
The Bill would codify the current emerging investment manager policies of the Boards.
Public Hearing
Assistant Chief Administrative Officer Kathleen Boucher, testifying on behalf of the
Executive, (©24) and Linda Herman, Executive Director for both Boards, testifying on behalf of
both Boards, (©25) supported the Bill at the February 14 public hearing.
February 27 Worksession
Kathleen Boucher, Assistant CAO, Linda Herman, Executive Director for the BIT, Marc
Esen, BIT staff, and Amy Moskowitz, Associate County Attorney represented the Executive
Branch at the Government Operations and Fiscal Policy Committee worksession on February 27.
The Committee reviewed the Bill and the current BIT policy on hiring emerging investment
managers with Executive staff. The Committee (3-0) recommended approval of the Bill as
introduced.
2
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Issues
1.
Are there other emerging investment manager programs in the State?
The Maryland State Retirement and Pension System established an emerging manager
program in April 2007. In September 2008, the program was expanded and renamed Terra
Maria, the Maryland Developing Manager Program. A description of the Program is at ©26-29.
The State hired 7 program managers to find and recommend emerging investment managers for
possible retention by the Chief Investment Officer. There is no formal maximum size for an
emerging investment manager and there is no graduation program. Once hired, an emerging
investment manager is retained based upon performance against an appropriate benchmark.
Emerging investment managers currently manage approximately 8.6% of the System's assets
under the Terra Maria Program.
2. What is the universe of emerging investment managers?
Investment manager performance is often evaluated by comparing it to relevant
benchmarks and the results achieved by other investment managers investing in similar types of
securities. Retirement funds also measure success by comparing their results with appropriate
benchmarks and the results achieved by similar retirement funds. The investment performance
for the County Employees' Retirement System (MCERS) has been in the top quartile of the
universe of similar retirement funds for the I-year, 3-year, and 5-year periods ending on
December 31, 2011. A chart showing the results compared to the universe of funds tracked by
different organizations is at ©30-32. MCERS has achieved these results with an asset allocation
that is more heavily weighted toward private equity and real estate than the average for other
public funds. A chart comparing the asset allocation of MCERS with the average public
retirement fund is at ©33.
The BIT must sort through a large universe of investment managers to select one. A
chart showing the universe of emerging investment managers compared to the universe of all
investment managers for different classes of investment securities is at ©34. The Bill defines an
emerging investment manager as a firm with total assets under management less than 75% of the
managers in the relevant universe. For example, there are 1246 different products
2
in the large
cap equity universe. An emerging investment manager must have less than $85 million under
management. There are currently 312 products that meet this criterion. Under current policy,
the BIT staff continually monitors emerging investment managers and includes those managers
in manager searches, where appropriate. An outline of the steps used by the BIT in a manager
search is at ©35-36.
3. Should the Bill be enacted?
Although each Board has already adopted an emerging investment manager policy, this
Bill would ensure that these programs continue regardless of future changes in Board
membership. The current emerging investment manager policy helps to keep the market open
2
The BIT looks at products rather than firms because one [lfm may offer more than one product. For example, one
firm may offer both a large cap equity management and a small cap equity management service.
3
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for new and developing investment managers without conflicting with the trustees' fiduciary
duties of care and loyalty. Opening the market for new and developing investment managers
increases competition among service providers and can enhance investment performance.
Committee recommendation (3-0):
approve the Bill as introduced.
This packet contains:
Bill 2-12
Legislative Request Report
Memo from County Executive
Fiscal and Economic Impact Statement
BIT Service Provider Procurement Policy
Public Hearing Testimony
Kathleen Boucher
Linda Herman
Terra Maria: Developing Manager Program
MCERS Results
MCERS Asset Allocation
Emerging Manager Universe
BIT manager search process
Circle
#
1
6
7
9
13
24
25
26
30
33
34
35
F:\LAW\BILLS\l202 Personnel-Retirement-Emerging Investment Mgrs\Aclion Memo.Doc
4
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Bill No.
2-12
Concerning: Personnel - Retirement
Trust Funds - Emerging Investment
Managers
Revised: December
22, 2011
Draft No.1
Introduced:
January
17, 2012
Expires:
July
17, 2013
Enacted: _ _ _ _ _ _ _ _ __
Executive: _ _ _ _ _ _ _ __
Effective: _ _ _ _ _ _ _ _ __
Sunset
Date:.......,...!.N~o:.!.!ne!::.-
_ _ _ _ __
Ch. _ _, Laws of Mont. Co._ _ __
COUNTY COUNCIL
FOR MONTGOMERY COUNTY, MARYLAND
By: Council President at the request of the County Executive
AN
ACT to:
(1)
(2)
require the Board of Investment Trustees and the Consolidated Retiree Health
Benefits Trust Board of Trustees to make a good faith effort to hire qualified
emerging investment managers; and
generally amend the laws governing the Employees' Retirement System and the
Consolidated Retiree Health Benefits Trust Fund.
By adding
Montgomery County Code
Chapter 33, Personnel and Human Resources
Sections 33-60B and 33-162A
Boldface
Underlining
[Single boldface brackets]
Double underlining
[[Double boldface brackets]]
* * *
Heading or defined term.
Added to existing law by original bill.
Deletedfrom existing law by original bill.
Added by amendment.
Deletedfrom existing law or the bill by amendment.
Existing law unaffected by bill.
The County Council for Montgomery County, Maryland approves the following Act:
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BilI No. 2-12
1
Sec. 1.
Sections 33-60B and 33-162A are added as follows:
33-60B.
Emerging Investment Managers.
2
3
!ill
Legislative findings.
4
ill
Emerging investment managers, including businesses owned
lu:.
women, minorities and disabled individuals, should receive an
equal opportunity to provide investment management services
to the Board of Investment Trustees.
5
6
7
8
ill
The Board of Investment Trustees has adopted
~
policy
9
10
11
requiring its staff to identify qualified emerging investment
managers to participate in an investment manager search,
including regular monitoring of investment managers.
12
13
ill
Expanding opportunities for emerging investment managers
will increase competition.
14
15
(hl
Definitions.
As used in this Section:
Assets
means total client assets managed
lu:.
an investment manager.
Emerging investment manager
means:
16
17
18
19
ill
ill
an investment manager with assets or product assets below the
75
th
percentile of their respective peer group; or
~
20
21
new or developing investment manager.
New or developing investment manager
means an investment
manager:
(1) raising its first or second private institutional investment fund;
22
23
24
25
26
27
(2)
creating its first institutional product.
Product Assets
means client assets managed
manager in
~
single strategy.
lu:.
an investment
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Personnel-Retirement-Emerging Investment Mgrs\BiIl l.Doc
/2)­
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Bill No. 2-12
28
W
Consistent with the fiduciary duties established in Section 33-61 C, the
Board must make
~
29
30
good faith effort to remove any barriers that limit
participation
Qy
qualified emerging investment managers to manage
funds for the Employees' Retirement System.
31
32
33
34
35
@
The Board must adopt guidelines to identify and evaluate qualified
emerging investment managers.
procedures for:
The guidelines must include
36
37
38
ill
ill
ill
identifying possible firms;
reviewing, evaluating and interviewing emergmg investment
managers on an ongoing basis; and
maintaining research files on emerging investment managers.
39
liD
The Board must report annually to the Council and the Executive on
compliance with this Section on or before September
1
for the prior
fiscal year. The report must:
40
41
42
43
44
45
ill
ill
identify each emerging investment manager used during the
fiscal year;
list the percentage and dollar value of the assets of the trust
fund,
Qy
investment sector, managed
Qy
each emerging
investment manager; and
46
47
48
ill
describe the good faith effort made to include qualified
emerging investment managers in the procurement process
during the fiscal year.
49
50
51
33-162A.
Emerging Investment Managers.
(ill
Legislative findings.
52
53
ill
Emerging investment managers, including businesses owned
Qy
women, minorities and disabled individuals, should receive an
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W~LS\1202
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Bill No. 2-12
54
equal opportunity to provide investment management services
to the Consolidated Retiree Health Benefits Trust Board.
55
56
57
58
59
ill
The Board has adopted
~
policy requiring its staff to identify
qualified emerging investment managers to participate in an
investment manager search, including regular monitoring of
investment managers.
60
61
ill
Expanding opportunities for emergmg investment managers
will increase competition.
62
63
64
.c.hl
Definitions.
As used in this Section:
Assets
means total client assets managed by an investment manager.
Emerging investment manager
means:
65
66
67
ill
ill
an investment manager with assets or product assets below the
75
th
percentile oftheir respective peer group; or
~
68
69
70
new or developing investment manager.
New or developing investment manager
means an investment
manager:
71
72
(1)
raising its first or second private institutional investment fund;
or
73
74
(2)
creating its first institutional product.
Product Assets
means client assets managed by an investment
manager in
~
single strategy.
f.£}
75
76
77
78
79
Consistent with the fiduciary duties established in Section 33-163, the
Board must make
~
good faith effort to remove any barriers that limit
participation by qualified emerging investment managers to manage
funds for the Consolidated Retiree Health Benefits Trust Fund.
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Bill No. 2-12
80
81
82
@
The Board must adopt guidelines to identify and evaluate qualified
emerging investment managers.
procedures for:
(i)
(ii)
identifying possible firms;
revIewmg,
evaluating
and
interviewing
emergmg
The guidelines must include
83
84
85
86
87
88
89
investment managers on an ongoing basis; and
(iii)
maintaining research files on emerging investment
managers.
tru
The Board must report annually to the Council and the Executive on
compliance with this Section on or before September
1
for the prior
fiscal year. The report must:
90
91
92
93
94
95
ill
ill
identify each emerging investment manager used during the
fiscal year;
list the percentage and dollar value of the assets of the trust
fund,
Qy
investment sector, managed
Qy
each emerging
investment manager; and
96
ill
describe the good faith effort made to include qualified
emerging investment managers in the procurement process
during the fiscal year.
97
98
99
100
101
Approved:
Roger Berliner, President, County Council
Date
102
Approved:
103
Isiah Leggett, County Executive
Date
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LEGISLATIVE REQUEST REPORT
Bill 2-12
Personnel- Retirement Trust Funds - Emerging Investment Managers
DESCRIPTION:
This Bill would encourage the Board of Investment Trustees and the
Consolidated Retiree Health Benefits Trust Board (Boards) to continue
their current efforts to provide opportunities for emerging investment
managers to manage some of the assets of the Employees' Retirement
System Trust Fund and the Consolidated Retiree Health Benefits Trust
Fund, consistent with their fiduciary duties.
The Bill would codify the current procurement policies used by each
Board which requires all investment managers who meet the stated criteria
to be included in a search for a new investment manager. The Bill would
also require the Boards to report annually to the Executive and the Council
on the results oftheir good faith efforts to include emerging firms.
PROBLEM:
GOALS AND
OBJECTIVES:
The goal of this Bill is to provide opportunities for emerging investment
managers to manage some of the assets of the Employees' Retirement
System Trust Fund and the Consolidated Retiree Health Benefit Trust
Fund.
The Boards and the County Attorney's Office have reviewed this bill.
See Fiscal and Economic Impact Statement.
COORDINATION:
FISCAL IMPACT:
ECONOlVllC
IMPACT:
EVALUATION:
EXPERIENCE
ELSEWHERE:
See Fiscal and Economic Impact Statement.
N/A
The State of Maryland, along with several other state and local pension
systems, have recently enacted similar policies and laws requiring a
pension system's governing body to make a good faith effort to use
emerging managers.
SOURCE OF
INFORMATION:
Linda Herman, Board ofInvestment Trustees
Amy Moskowitz, County Attorney's Office
APPLICATION
WITHIN
MUNICIP ALITIES:
PENALTIES:
N/A
N/A
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OFFICE OF THE COUNTY EXECUTIVE
ROCKVILLE. MARYLAND 20850
. Isiah Leggett
County Executive
MEMORANDUM
December 19, 2011
TO:
FROM:
SUBJECT:
Bill_ - Personnel - Retirement - Emerging Investment Managers
I am transmitting for introduction at Council a bill that would amend the County
Code to require the Boards overseeing the investment programs for the Employees' Retirement
System (ERS) and the Consolidated Retiree Health Benefits Trust (CRHBT) to continue their
current efforts to include emerging investment managers in the procurement of services for the
investment programs. I am also transmitting a Legislative Request Report and Fiscal and
Economic Impact Statement for the bill.
The bill would require the Boards to make a good faith effort to use emerging
investment managers defined as: (1) an investment manager with assets or product assets below
the 75
th
percentile of their respective peer group; or (2) a new or developing investment manager.
The current Service Provider Procurement Policies (Policies) of the Boards
require the Boards to include emerging investment managers in searches if the firms meet the
search criteria. The Policies require special efforts be made by the Boards' staff and its
consultants to ensure identification of possible eligible investment managers to participate in the
search process, including regular monitoring of investment managers and maintenance of
research files on such investment managers to assist efforts when searches begin. In addition,
the Boards receive quarterly reports from Board staff on meetings conducted with emerging
investment managers and their analysis of the firms.
As of November 30, 2011 the Board of Investment Trustees committed
approximately 6% of ERS assets with firms that were emerging investment managers when
hired.
I am proposing this legislation to codify the current procurement policies used by
the Boards which require all service providers who meet the stated criteria to be included in
searches conducted by the Boards. The primary purpose of the legislation is to ensure that all
service providers are afforded the opportunity to participate in procurement searches conducted
by the Boards, to provide full transparency ofthe procurement process, and to ensure that the
montgomeryc:ountymd.gov/311
/i~i11'}
'UiWjii;jil,iiwiid;il'
240-173-3556 TTY
",.,\...r"".
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Roger Berliner, Council President
December 19, 2011
Page 2
intent and goals ofthe current procurement practices remain in place regardless of future changes
in
Board membership due to terms expiring, changes to Board policies, or changes in Board
Staff. The legislation would also require an annual report on efforts made by the Board to
include emerging service providers.
Thank you for your prompt consideration of this bill.
Attachments (3):
Proposed Legislation
Legislative Request Report
Fiscal and Economic Impact Statements
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OFFICE OF MANAGEMENT AND BUDGET
Isiah Leggett
County Executive
Jennifer A. Hughes
Director
MEMORANDUM
December 9. 2011
TO:
FROM:
SUBJECT:
Roger B!eIiner resident, County Council
P
Jennifer
es,
Director
COllncil
B XX-Ii -
Personnel Retirement - Emerging Investment
Managers
Attached please find the fiscal and economic impact statements for the above
referenced legislation.
JAH:hv
Attachments
c: Kathleen BOllcher, Assistant Chief Administrative Officer
Lisa Austin, Offices ofthe County Executive
Joy Nurmi, Special Assistant to the County Executive
Joseph F. Beach, Director, Department of Finance
Patrick Lacefield, Director, Public Information Office
Michael Coveyou, Department of Finance
Linda Herman. Executive Director, Board ofInvestment Trustees
Amy Moskowitz, Office ofthe County Attorney
Helen Vallone, Office ofManagement and Budget
Naeem Mia, Office ofManagement and Budget
Blaise DeFazio, Office of Management and Budget
Office of the Director
101
MOllroe
Street, 14th Floor •
Rockville, Maryland 20850 • 240-777-2800
www.montgomerycountymd.gov
montgomerycountymd.gov/311 .
240-7?3~3556
TTV
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Fiscal Impact Statement
Council Bill
XX-ll-
Personnel- Retirement - Emerging Investment Managers
1. Legislative Summary
The bill would amend the County Code to encourage the Boards overseeing the investment
programs for the Employees' Retirement System (ERS) and the Consolidated Retiree Health
Benefits Trust (CRHBT) to continue their current efforts to include emerging investment
managers in the procurement of services for the investment programs. The Bill would
require the Boards to make a good faith effort to use emerging investment managers defined
as:
• an investment manager with assets or product assets below the 75
th
percentile of their
respective peer group; or
• a new or developing investment manager
The current Service Provider Procurement Policies (policies) require the Boards to include
emerging investment managers in searches
if
the firms meet the search criteria. The Policies
require special efforts
be
made by the Boards' staff and its consultants to ensure
identification of possible eligible investment managers to participate in the search process,
including regular monitoring ofinvestment managers and maintenance of research files
on
such investment managers to assist efforts when searches begin.
In
addition, the Boards
receive quarterly reports from Board staff on meetings conducted with emerging investment
managers and their analysis of the firms. The bill also requires annual reporting to the County
Council on efforts made
by
the Boards to include emerging investment managers.
2. An estimate of changes in County revenues and expenditures regardless of whether the
revenues or expenditures are assumed in, the recommended or approved budget.
Includes source of information, assumptions, and methodologies used.
This
bi1l
has no impact to revenues or expenditures.
3. Revenue and expenditure estimates covering at least the next 6 fiscal years.
This
bill
has no impact to revenues or expenditures.
4. An actuarial analysis through the entire amortization period for each bill that would
affect retiree pension or group insurance costs.
Not Applicable
5. Later actions that may affect future revenue and expenditures
if
the bill authorizes
future spending.
This change
will
not result
in
subsequent government action that
will
impact future revenues
and expenditures.
1
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6.
An
estimate of the staff time needed to implement the bill.
Not Applicable
7. An explanation of how the addition of new staff responsibilities would affect other
duties.
No change in staffresponsibilities.
8. An estimate of costs when an additional appropriation
is
needed.
Not Applicable
9. A description of any variable that could affed revenue and cost estimates.
Not Applicable
10. Ranges of revenue or expenditures that are uncertain or difficult to project.
Not Applicable
11. H a bill is likely
to
have no
{"meal
impact, why that is the case.
The bill codifies the current procurement policies used by the Boards which require
all
investment managers who meet the stated criteria to
be
included in searches conducted by the
respective Boards.
12. Other fiscal impacts or comments.
Not Applicable
13. The following eontributed to and concurred with this analysis:
Linda Herman, Executive Director, Board of Investment Trustees and Consolidated Retiree
Health Benefits Board
Amy Moskowitz, Counsel to the Boards, Office of the County Attorney
Helen Vallone, Office of Management and Budget
Naeem Mia, Office of Management and Budget
Blaise DeFazio, Office of Management and Budget
Jenni
D
ate
1'b{~(U
Office
2
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Economic Impact Statement
Council Bill XX-ll, Qualified Emerging Investment Managers
Background:
This legislation requires the Boards overseeing the County's Retirement Plans and the
Consolidated Retiree Health Benefits Trust to make a good faith effort to hire qualified emerging
investment managers. A qualified emerging investment manager is defined as an investment
manager with assets or product assets below the 75
th
percentile of their respective peer group; or a
new investment manager who is raising its first or second private institutional investment fund; or
creating its first institutional product. This legislation codifies current policy and practices of
both Boards.
1. The sources of infolmation, assumptions, and methodologies used.
Not Applicable. This legislation codifies current policy and practice, and its only requirement
that is not currently in place is a requirement for an annual report, which the Boards state can
be handled with existing resources.
2. A description of any variable that could affect economic impact estimates.
Not Applicable
3. The bill's positive or negative effect, if any, on employment, spending, saving, investment,
incomes, and property values in the County.
Not Applicable
4. If a bill is likely to have no economic impact, why that is tlle case.
This Bill codifies current policy and practice; therefore there is no economic impact.
5. The following contributed to and concurred with this analysis: David Platt, Finance; Mike
Coveyou, Finance
@
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BOARD OF INVESTMENT TRUSTEES
SERVICE PROVIDER PROCUREMENT POLICY
@
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BOARD OF INVESTMENT TRUSTEES
SERVICE PROVIDER PROCUREMENT POLICY
Table of Contents
Page
I.
Purpose
&
Authorities
A. Purpose of Policy StatementlBoard Requirements
S.
Statutory Board Responsibility and Authority to Contract for Services
C.
Board Exemption from County Procurement Regulations
D. Communications Responsibilities
Procurement of Services - Procedures
A. Stage 1- ERP Program Requirements
B. Stage 2 - Research process
1. Criteria
2. Candidate sources
3. Emerging Service Provider
4. Selection of Candidates
C. Stage 3 Staff Review and Verification Process
1. Due diligence evaluations
2. Selection of finalists
3. Contracting
D. Stage 4 Board Selection of Finalist and Contract Process
1. Voting
2. Contract process and negotiations
3. Contract execution
III.
Monitoring of Contractors
A. Review Process
B. Contract Modifications
Termination of Service Provider
A. Basis for termination
B. Procedures
Records Retention
Ethics
Policy Review
Due Diligence Evaluation Criteria
A. Liquid Investment Managers
B. Illiquid Investment Managers
C. Other Service Providers
1
1
1
1
II.
1
2
2
2
2
2
3
3
3
3
4
4
4
4
5
5
IV .
5
6
6
6
V.
VI.
VII
VIII
6
8
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BOARD OF INVESTMENT TRUSTEES
SERVICE PROVIDER PROCUREMENT POLICY
I.
Purpose
&
Authorities
A. Purpose of Policy Statement/Board Requirements
The purpose of this statement is to define the policy of the Board of Investment Trustees
(the "Board") regarding the procurement of external service providers. These services are
required in the management of the investment programs for the Employee Retirement Plans (the
"ERP") which include the Employees' Retirement System, Retirement Savings Plan and
Deferred Compensation Plan. The policy statement is intended to foster competition and fairness
while being flexible to meet the needs of a dynamic investment environment.
This policy does not cover procurement of Board office administrative services, which generally.
follows established County contracts and procedures (Le., procurement of supplies,
rnini­
contracts, etc.) and is set forth in the Board's Administrative Manual.
B. Statutory Board Responsibility and Authority to Contract for Services
Pursuant to Section 33-60 of the Montgomery County Code, the Board has the fiduciary
responsibility for the governance of the ERP investment management programs and has
exclusive authority to contract for services to meet this responsibility.
C. Board Exemption from County Procurement Regulations
Pursuant to Section 33-60 of the Montgomery County Code, the Board is exempt from
the Montgomery County Government procurement regulations in the procurement of services for
the management of ERP assets. However, as detailed in this policy, the Board adheres to a
competitive procurement process in the procurement of service providers.
D. Communications Responsibilities
Official communications related to Board procurement processes and activities will be
coordinated by Board Staff. Staff will report items of significance to the Board as appropriate.
II.
Procurement of Service Providers - Procedures
A. Stage 1 - ERP Program requirements
• The Board will determine the services necessary to meet the goals of the program,
including:
• HiringlTerminating of service providers
• Number of service providers sought
• Urgency/timeframe for search
• Consultant support required
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B. Stage 2 - Research Process
This stage involves detennining search criteria and sources and the list of possible
candidates that may meet Board needs as specified in Stage 1.
1. Criteria
Based on need, Staff will recommend a specific list of criteria for determining eligible
vendors ("service providers") for the ERP.
The initial criteria will pertain to minimum
requirements related to expertise in the service area being procured. The Board may add
additional criteria to be used in a particular search.
2. Candidate sources
Although not limited to the sources listed below, Staff generally uses these sources to
identify eligible candidates. Staff may also use sources identified by the Board's consultant(s).
The Board or Staff may recommend additional sources to be used in a particular search.
Third-party databases including, consultant and other vendors
Industry sources
Marketing materials
Institutional investor contacts
Reports and sources used to identify emerging service providers
Montgomery County resources and infonnation
3. Emerging Service Provider and Minority Participation
The Board, Staff and consultants are committed to including emerging service providers,
among prospective service provider candidates. Emerging service providers, including minority,
female, and disabled owned finns, are broadly defined as:
• Finns with assets andlor product assets below the 75
th
percentile of their
respective peer group
• . New or developing finns (e.g. Funds I and II, or 1
st
institutional fund)
Special efforts will be made to ensure identification of possible eligible finns in the
search process including:
regular monitoring of above-referenced sources to identify possible candidates
regular review of emerging service providers
Staff interviews with emerging finns on an ongoing basis
maintenance of research files on such finns to assist efforts when searches
begin
4. Selection of Candidates
Based on criteria and sources noted above, Staff will prepare a list of possible candidates
for a specific search. Staff, with the assistance of the investment consultant, generally will issue
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a Request For Infonnation (RFI) to the candidates selected.
In
special circumstances, with Board
approval, Staff may not issue a RFI (e.g. using same service provider across County Plans).
Due to the nature of private market and non-marketable investment opportunities for the
Employees' Retirement System Staff may not issue a RFI. Staff may identify opportunities
based on criteria identified in Stage 2 and will evaluate the opportunity based on the criteria
identified in Stage 3.
C. Stage 3 - Review
and
Verification Process
Stage 3 of the search process focuses on review and verification of information pertaining
to the list of candidates identified in Stage 2. Completion of the Stage 3 process should result in
the selection of a finalist.
1. Due diligence evaluations
Staff will complete a due diligence process to confirm findings identified in Stage 2.
Those candidates deemed to be eligible will be interviewed by Staff, and the Board's consultant
(if applicable), by phone or in person in the Board's office. Staff will prepare a summary of the
candidate's evaluation which may include:
• Quantitative information resulting from Stage 2 criteria.
• Qualitative information related to candidate's experience, strategies and
operations including:
o organizational structure
o experience and depth of personnel, including turnover
o firm-specific operational philosophy
o fees
o references from Board consultant(s)
o references from other sources
o in the case of limited partnership arrangements such as private
equity, real estate or hedge funds, fund -specific aspects including but
not limited to liquidity and tax issues.
o firm-specific legal/litigation issues
2. Selection of finalist(s)
Staff will usually conduct an onsite due diligence review of the finalist(s) which will
include an interview, and prepare a report, along with a due diligence evaluation form, with input
from the Board consultant resulting in a recommendation of a finalist(s) to the Board. The
selection of the finalist(s) will be based on both quantitative and qualitative evaluations as well
as interviews and results of reference checks.
3. Contracting
After Staff has selected any finalist(s), Staff, in conjunction with Board counsel, will
evaluate the contract and governing documents to determine whether there are major issues with
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the service provider's contract or governing documents that would prohibit the Board from
entering into a contract.
D. Stage 4 - Board Selection of Finalist(s) and Contract Process
The Board will vote on Staffs recommendation of any service provider(s) at a meeting of
the Board pursuant to Board bylaws. Staff, with assistance from the Board's counsel" will
negotiate the terms of the contract or agreement.
1. Voting
The Board will vote based on all information made available by Staff, including
information on the entire search process as summarized by Staff and the consultant, subsequent
materials prepared for Board consideration, final interviews and due diligence meetings, as
applicable. The Board will vote by formal resolution.
If
the Board does not vote to accept Staffs recommendation, then the Board will
determine at what stage to recommence the procurement process.
2. Contract process and negotiations
Staff will pursue contract negotiations, including terms related to fees, operational issues
and guidelines, and will apprise the Board if needed.
A. Agreements may follow a format approved by the Board and generally will
include provisions for:
• establishment of the account and assignment of management and fiduciary
responsibility if required
• directions pertaining to the operations of the account
• directions pertaining to Board and Staff authorities and communications
• professional liability insurance for errors and omissions
• fee and terms of invoicing and payment
• contract termination upon notice by either Board or service provider
• Board required disclosures
• addenda related to Board policies and procedures, and operational guidelines
B. All service provider agreements will be reviewed by Staff and the Board's
counsel to confirm conformance with Board policies and applicable law.
3. Contract execution
All agreements and contracts will be approved and executed in accordance with Board
Bylaws.
III.
Monitoring of Service Providers
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A. Review process
Staff regularly conducts contract compliance reviews, including reviews of service
provider performance, conformance to guidelines, organizational structure and any other
performance requirements as specified in the service provider's contract. Service provider
related matters other than performance and contract compliance matters will be reported to the
Compliance and Audit Committee when deemed significant by Staff, i.e.
if
the matter(s) have a
possible effect on the service provider's ability to perform as expected. Staff will apprise the
Board of performance issues and make recommendations to the Board as necessary. The
Compliance and Audit Committee will assess compliance issues and make recommendations to
the Board as necessary.
Generally Staff conducts reviews of all aspects of the service provider's contract on an
annual basis. The review may include a due diligence review in the service provider's office or
the Board's office when necessary. Matters to be reviewed include but are not limited to the
quantitative and qualitative factors which served as the basis for selection as a service provider.
Annually the Compliance and Audit Committee will review and report compliance by
Board service providers with contract disclosure requirements
B. Contract modifications
With the exception of minor guideline or contract changes, Staff will advise the Board of
any suggested modifications to the contract terms, whether requested by the service provider or
by Staff. Staff, with the assistance of Counsel, will determine the appropriate method of
modification, i.e. contract amendment or letter agreement. Staff will recommend an approval
method and background information required by the Board to consider any such modification.
Staff will prepare an annual report to the Board reflecting recommendations of modifications to
service provider contracts.
With the exception of minor guideline and contract changes, the Board approves contract
modifications through Board resolution. For all minor guideline and contract changes, Staff, in
conjunction with Board counsel, has the authority to recommend that the Board Chair approve
the contract modification.
For all private market and non-marketable investments, Staff, in conjunction with Board
counsel, will have the authority to recommend approval/disapproval to the Board Chair of all
amendments to the governing documents proposed by the fund manager.
IV.
Termination of Service Providers
A. Basis for termination
With the exception of private market investments, the Board may terminate a service
provider at any time and contract terms must provide for immediate termination upon written
notice by the Board. Private market investments may not be easily liquidated and therefore
immediate termination may not be possible. The Board may terminate service providers for any
reason, including but not limited to one or more of the following reasons:
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- ERP program changes
- Changes in the following:
y
people and organization of the firm
y
philosophy and process of investment strategy
y
resources dedicated to the investment strategy
y
performance of the product that is being reviewed
- Service providers -specific issues related to lack of adherence to contract terms
or guidelines or any other changes in the service provider's business strategies.
B.
Procedures
Staff provides background information regarding any basis for termination of a service
provider to the Board. Action to terminate a service provider must be made by Board resolution.
Staff determines and implements the appropriate account transferlliquidation procedures,
informing the Board as necessary.
V.
Records Retention
Staff will maintain service provider records in the Board office. Service provider records
will include search-related materials presented to the Board at the time of selection as well as
legal and correspondence files. Records will be retained in accordance with Board office
procedures. After the service provider relationship has ended, Staff will archive records in
accordance with the Board office's records retention policy.
VI.
Ethics
The Board, and as applicable, Staff, will at all times conform to Standard of Professional
and Ethical Conduct adopted by the Board and County ethics laws. In addition, individual Board
and Staff members will disclose to the Board any inherent, potential, or perceived conflicts of
interest in dealing with specific service providers prior to taking any official action concerning
any service provider.
Any violation of County or Board ethics rules by any Board or Staff member will be
handled in accordance with County Government procedures.
VI.
Policy Review
Staff andlor the Board will reVIew and recommend amendments to this policy as
necessary.
Amended:
July 22, 2011
May 21,2010
January 11,2008
December 7, 2007
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(A) Due Diligence Evaluation - Liquid Investment Managers
Liquid managers will be evaluated using the following broad categories:
o People
o Ownership/incentives
o Quality of key professionals/team
o Organization
o Assets under management
o Commitment to improvement
o Firm evaluation
o Philosophy/Process
o Alpha - Idea generation
o Portfolio construction
o Resources/Systems/Administration
o Research resources
o Information/compliance systems
o Administrationlback-office
o Trading
o Performance
o Fees
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(B) Due Diligence Evaluation - Illiquid Investment Managers
Illiquid managers will be evaluated using the following broad categories:
o People
o Ownership/incentives
o Quality of key professionals/team
o Organization
o Assets under management
o Commitment to improvement
o Firm evaluation
o Boards/committees!decision-making bodies
o Philosophy/Process
o Investment process
o Portfolio construction
o Resources/S ystems!Administration
o Research resources
o Information systems
o Administrationlback-office
o Performance
o Fees
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(C)
Due Diligence Evaluation - Other Service Providers
Non-manager vendors will be evaluated using the following broad categories:
o People
o Ownership/incentives
o Quality of key professionals/team
o
Organization
o Assets under management/advisement
o Commitment to improvement
o Firm evaluation
o PhilosophylProcess (may be non-applicable to certain vendors)
o Idea generation
o Portfolio construction
o Resources/Systems/Administration
o Research resources
o Information/compliance systems
o Administrationlback-office
o Other categories deemed critical for the search
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Bill 2-12 - Personnel - Retirement - Emerging Investment Managers
Public Hearing
February 14, 2012
My name is Kathleen Boucher and I am an Assistant Chief Administrative Officer with
the County Executive's Office. I am here to testify in support of Bill 2-12 on behalf of the
County Executive.
This bill would amend County law to require the Boards overseeing the investment
programs for the Employees' Retirement System (ERS) and the Consolidated Retiree Health
Benefits Trust (CRHBT) to continue their current efforts to include emerging investment
managers in the procurement of services for the investment programs.
The bill would require the Boards to make a good faith effort to use emerging investment
managers defined as: (1) an investment manager with assets or product assets below the 75
th
percentile of their respective peer group; or (2) a new or developing investment manager.
The current Service Provider Procurement Policies (Policies) of the Boards require the
Boards to include emerging investment managers in procurement searches if the firms meet the
search criteria. The Policies require the Board's staff and consultants to make special efforts to
ensure identification of possible eligible investment managers to participate in the search
process, including regular monitoring of investment managers and maintenance of research files
on such investment managers to assist efforts when searches begin.
In addition, the Boards receive quarterly reports from Board staff on meetings conducted
with emerging investment managers and their analysis of the firms. As of November 30, 2011
the Board of Investment Trustees committed approximately 6% of ERS assets with firms that
were emerging investment managers when hired.
The CountyExecutive proposed Bill 2-12 for the purpose of codifying the current
procurement policies used by the Boards and increasing transparency and accountability to those
policies by establishing an annual reporting requirement. Under the bill, the Boards must submit
a report to the County Executive and Council on or before September 1 which includes the
following information:
1. identifies each emerging investment manager used during the fiscal year;
2. lists the percentage and dollar value of the assets of the trust fund, by investment sector,
managed by each emerging investment manager; and
3. describes the good faith effort made to include qualified emerging investment managers in
the procurement process during the fiscal year.
The primary purpose of the legislation is to ensure that all service providers are afforded
the opportunity to participate in procurement searches conducted by the Boards, to provide full
transparency of the procurement process, and to ensure that the intent and goals of the current
procurement practices remain in place regardless of future changes in Board membership due to
terms expiring, changes to Board policies, or changes in Board Staff.
Thank you for your consideration of this bill. I look forward to working with the Council
as it reviews this bill.
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TESTIMONY FOR EXPEDITED BILL 2-12, PERSONNEL
RETIREMENT TRUST FUNDS
Good morning, for the record, I am Linda Herman, Executive Director for the Board of
Investment Trustees, which oversees the assets of the County's three retirement plans,
and the Board of Trustees, which oversees the assets of the Consolidated Retiree Health
Benefits Trust. I am here today on behalf of the Boards to testify in support of Bill
2-12,
Personnel- Retirement Trust Funds.
The proposed Bill would amend the County Code to require the Boards
overseeing the investment programs for the Employees' Retirement System (ERS) and
the Consolidated Retiree Health Benefits Trust (CRHBT) to continue their current efforts
to include emerging investment managers in the procurement of services for the
investment programs. The Bill would require the Boards to make a good faith effort to
use emerging investment managers defined as:
• investment managers with assets or product assets below the
75
th
percentile of their respective peer group; or
• new or developing investment managers
The Service Provider Procurement Policies (Policies) established by the Boards
require the Boards to include emerging investment managers in searches if the firms meet
the search criteria. The Policies require that special efforts be made by the Boards' staff
and its consultants to ensure identification of possible eligible investment managers to
participate in the search process, including regular monitoring of investment managers
and maintenance of research files on such investment managers to assist efforts when
searches begin.
In
addition, the Boards require quarterly reports from their staff on
meetings conducted with emerging investment managers and their analysis of the firms.
The Boards are committed to ensuring that all investment managers, meeting the
search criteria, are afforded the opportunity to participate in procurement searches
conducted and to providing full transparency of the procurement process. As of January
31,
2012
the Board of Investment Trustees has committed nearly 6% of ERS assets to
firms that were emerging investment managers when hired.
We look forward to working with the Council
legislation.
111
its deliberations on this
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Maryland State Retirement and Pension System
Terra Maria: Developing Manager Program
In Public Markets and Private Equity
Updated February 2011
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Terra Maria
The Maryland Developing Manager Program
Program Structure Outline
The Maryland State Retirement and Pension System (the "System") formed an emerging
manager program in April 2007. In September 2008, the System revised, expanded and
transformed the program into Terra Maria, the Maryland developing manager program. The
initial Terra Maria program consisted of seven Program Managers in the public markets.
Recently, the program was expanded to include private equity fund managers as described
in Section II below.
I.
Public Markets
The focus of the Terra Maria Program (the "Program") is on investment performance with an
alignment of interests. An investment manager's product may only be represented once in
the program, however, investment managers may have more than one product in the
Program, if each product is recommended by a Program Manager.
The Program Managers are under contract with the System and recommend investment
managers based on their ability to generate alpha relative to their assigned benchmarks. The
Program Managers essentially represent an extension of the Investment Division Staff by
providing due diligence, recommendations and ongoing monitoring of the underlying
investment managers. The investment manager's accounts are maintained with the
System's custodian bank.
Following are some key facets of the Program:
The primary focus of the Program is alpha generation, or performance. Program Managers
and investment managers are evaluated primarily on performance relative to benchmarks.
The Program Managers are instructed to focus on 'smaller investment managers. While the
Program Managers apply no absolute maximum in terms of assets under management for
purposes of recommending investment managers to the Chief Investment Officer (the "CIO"),
the Program Managers are aware of the spirit of the program.
There is no formal "graduation" policy for this initiative. Investment managers that perform on
a consistent basis may become eligible for larger allocations of funds, regardless of whether
they are monitored by a Program Manager or staff.
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The Program Managers are responsible for sourcing investment managers, performing due
diligence, monitoring the retained investment managers, and presenting manager hire and
termination recommendations to the CIO. All investment manager selections must be
approved by the CIO.
The investment managers are part of the System's total portfolio and evaluated the same as
any other investment manager in the portfolio. While investment managers may have been
introduced to the System via a Program Manager, this has been done so primarily for
administrative purposes. Once an investment manager has been "hired" by the CIO, they are
part of the System's portfolio. Unlike the more traditional manager-of-manager programs, the
CIO is ultimately responsible for the managers in the Maryland program, not the manager-of­
managers.
Each Program Manager's benchmark is the weighted average of the benchmarks of
the underlying investment managers selected by the Program. Investment manager
benchmarks will be representative of the manager's investment style and aligned with the
System's benchmark(s) within the manager's designated asset class. Benchmarks must be
approved by the CIO.
Program Managers will make recommendations to the CIO regarding the initial allocation of
funds to investment managers. In making recommendations, the Program Managers
consider factors such as total assets under management by the investment manager on both
a firm-wide and a product specific basis and also the total funding allocation to the Program
Manager. In addition to portfolio asset allocation decisions, continued investment manager
funding will be subject to the review of the investment manager's performance and an
evaluation of the investment manager's business growth and organizational stability since the
investment manager was initially funded by the System. The investment manager's
performance will be evaluated on a continuous basis, although the Program Manager will
have a formal review of the manager at least annually. Final decisions regarding funding and
rebalancing decisions will be made by the CIO and Investment Division Staff.
If there are questions about the Terra Maria program in public markets, contact the
Investment Division at 410-625-5621 or the individual Program Managers found in the
attached Program Manager list.
II.
Private Equity
The Terra Maria program has recently been expanded to include private equity investment
managers. The System's private equity consultant reviews private equity funds and
investment managers for potential inclusion in the System's Terra Maria program. The
program is designed to include smaller managers, typically fund managers with less than $2
billion in assets under management that are raising a private equity fund of up to $500 million
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whose funds otherwise satisfy the due diligence and investment case analysis performed by
the private equity consultant and SRPS staff.
The portfolio will potentially include small and mid-sized buyout and early to late stage
venture capital and debt funds.
The System will invest directly into the Terra Maria private equity funds. The System's
consultant will provide reporting on the Terra Maria private equity funds as it does with other
private equity investments made by SRPS.
If there are questions about the Terra Maria program in private equity, please contact the
Investment Division at 410-625-5621 or the System's private equity consultant, Altius
Associates, at 804-282-9000 or emergingmanagerinfo@altius-associates.com.
Attachment: Program Manager list
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Montgomery County Employees' Retirement System
1 Year Performance by Quartiles - December 31, 2011
10%
~--------------------------------------------------------------------------------------------------------------------~
5%
t
a:
E
:>
4i
I
I
'(ft.
-
TUCS
7
0%
-5%
Wilshire
MCERS
MCERS Polley
Northern
(All
Public)
Russell
Wilshire >$1 B
Northern >$1 B
TUCS>$1B
4.7%
5.2%
4.7%
5.2%
4.7%
5.2%
4.7%
5.2"/0
4.7%
5.2%
4.7%
5.2%
4.7%
5.2"/0
1st Quartile
Median
3rd Quartile
Number of Observations
1.9%
1.0%
-0.0%
136
2.7%
0.9%.
-0.6%
40
2.3%
1.0%
0.1%
137
2.6%
0.9%
-0.3%
1.3%
0.5%
0.1%
37
4.0%
1.4%
-0.4%
133
2.7%
0.9%
0.3%
62
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:M:ontgOll1er~ Cp~ntY
E,nployJes' Retirell1ent
Syst~m
":'
,-, ", ,;::!;.;
;
i
-
-
i'
1-;:
-
- -- -
- ; ; .
t;
. :1
~ ~
3 Year Performance by Quartiles - December 31, 2011
15%
14%
13%
12%
1
IX
~
~
E
11%
10%
9%
8%
- - - - - ­
t
- • • -
­
Wilshire
Northern (All Public)
TUCS
Russell
Wilshire >$1 B
Northern >$1 B
7%
6%
TUCS>$1B
MCERS
MCERS Policy
13.3%
12.9%
13.3%
12.9%
13.3%
12.9%
13.3%
12.9%
13.3%
12.9%
13.3%
12.9%
13.3%
12.9"10
1st Quartile
Median
3rd Quartile
Number of Observations
11.5%
10.4%
9.2%
132
12.4%
11.1%
10.0%
38
12.0%
10.4°/.,
9.2%
133
12.3%
11.2%
9.9%
101
12.7%
11.2%
10.2%
37
12.9%
11.5%
9.9%
104
12.1%
10.4%
9.4%
59
®
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Montgomery County. Employees' Retirement System
5 Year Performance by Quartiles - December 31, 2011
7%
6%
5%
II:
'Ii
3%
::I
.
c
4%
1
J
<P­
2%
1%
0%
-
- - - -
­
- -
Wilshire >$1 B
Northern >$1 B
TUCS>$1B
Wilshire
MCERS
MeERS Policy
Northern (All Public)
TUCS
Russell
4.0%
3.3%
4.0%
3.3%
4.0%
3.3%
4.0%
3.3%
4.0%
3.3%
4.0%
3.3%
4.0%
3.3%
1st Quartile
Median
3rd Quartile
Number of Observations
3.6%
2.8%
1.8%
125
2.6%
2.0%
1.4%
28
3.4%
2.2%
1.7%
131
2.8%
2.0%
1.3%
96
2.9%
1.9%
1.5%
37
3.2%
2.2%
1.5%
88
3.0%
2.0%
1.3%
59
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Asset Allocation -
MeERS
vs. Public Fund Peers
MeERS
U.S. Equities,
Non-U.S. Equities,
17.5%
Public Funds
Average
Other Investments,
5.0%
Hedge
Foods,
5.0%
Other
Investments,
4.0%
Non-U.S. Equities,
18.0%
Hedge
Funds,
4.0%
10.0%
35.0%
10.0%
Fixed Income,
29.0%
Historically, most emerging manager programs are focused in
Us.
equities and core fixed income.
MeERS
has shifted $400m from
us.
equities to other asset classes over the past
3
years and will
be moving another $300m in the next
2
years. A recent survey ofpublic plans noted that 40% of
pension funds stated they plan to shift assets from
us.
equities in the next
12
months.
1
®
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Wilshire Database
Emerging Firms and/or Emerging Products by Asset Class
As of December 19, 2011
Emerging Managers and/or Emerging Products (bottom 25 percentile of product AUM)
Under 25% AUM
Limit (Million)
#
of Products
Asset Class
U.S. Large Cap
U.S. Mid Cap
U.S. Small Cap
International/Global
U.S. Fixed Income
International Fixed Income
Total
#
of Total Products
1,2