agenda investment advisory council (iac)...mar 31, 2020 · agenda investment advisory council...
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Agenda Investment Advisory Council (IAC)
Tuesday, March 31, 2020, 1:00 P.M.*
Hermitage Room, First Floor
1801 Hermitage Blvd., Tallahassee, FL 32308 1:00 – 1:05 P.M. 1. Welcome/Call to Order/Election of Bobby Jones, Chair Officers/Approval of Minutes (See Attachments 1A – 1B) (Action Required) 1:05 – 1:10 P.M. 2. Opening Remarks/Legislative Update/ Ash Williams
Reports Executive Director & CIO (See Attachments 2A – 2E)
1:10 – 2:10 P.M. 3. Florida Growth Fund Investment Hamilton Lane Review Nayef Perry
(See Attachments 3A – 3B) Katie Moore Ankur Dadhania Daniel Felman
J.P. Morgan Robert Cousin Tyler Jayroe Patrick Miller
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Investment Advisory Council – Agenda March 31, 2020 Page 2 2:10 – 3:10 P.M. 4. Real Estate Review Steve Spook, SIO
(See Attachments 4A – 4B) Lynne Gray, Senior Portfolio Manager Michael Fogliano, Senior
Portfolio Manager Townsend Group
Richard Brown Seth Marcus
3:10 – 3:40 P.M. 5. Corporate Governance Review Michael McCauley (See Attachment 5) Senior Officer, Investment Programs & Governance 3:40 – 4:10 P.M. 6. Review Changes to Florida Aon Hewitt Retirement System Investment Plan Katie Comstock Investment Policy Statement Aaron Chastain (See Attachments 6A – 6C) (Action Required)
4:10 – 5:10 P.M. 7. Asset Class SIO Update s Tim Taylor, SIO DC Programs Chief Update Global Equity (See Attachments 7A – 7E) Katy Wojciechowski, SIO Fixed Income
John Bradley, SIO Private Equity Trent Webster, SIO Strategic Investments
Daniel Beard, Chief, Defined Contribution Programs
5:10 – 5:25 P.M. 8. Major Mandate Performance Review Aon Hewitt (See Attachment 8) Katie Comstock 5:25 – 5:30 P.M. 9. Audience Comments/2020 Meeting TBD, Chair Dates/Closing Remarks/Adjourn (See Attachment 9)
*All agenda item times are subject to change.
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STATE BOARD OF ADMINISTRATION OF FLORIDA
· ·INVESTMENT ADVISORY COUNCIL MEETING
· · · ·Tuesday, December 17, 2019
· · · · · 1:00 p.m. - 3:52 p.m.
· · · · · · · PAGES 1 - 156
· · · · 1801 HERMITAGE BOULEVARD· · · ·HERMITAGE ROOM, FIRST FLOOR· · · ·TALLAHASSEE, FLORIDA 32308
· · · Stenographically Reported By:
· · · · · · ·TRACY L. BROWN
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Page 2APPEARANCES:
IAC MEMBERS:
BOBBY JONES, CHAIRPETER COLLINSPETER JONESGARY WENDTCHUCK COBBTERE CANIDAJOHN GOETZ
SBA EMPLOYEES:
ASH WILLIAMS, EXECUTIVE DIRECTOR and CIOKENT PEREZALISON ROMANOJOHN BENTONTIM TAYLORKATY WOJCIECHOWSKISTEVE SPOOKJOHN BRADLEYTRENT WEBSTERDANIEL BEARDMICHAEL MCCAULEYSUBHASIS DAS
CONSULTANTS:
KRISTEN DOYLE - Aon HewittHUGH MERKEL - MercerRICHARD BROWN - Townsend GroupSETH MARCUS - Townsend GroupJIM MNOOKIN - Cambridge AssociatesANDRE MEHTA - Cambridge AssociatesSAMIT CHHABRA - Cambridge AssociatesSHEILA RYAN - Cambridge Associates
CERTIFICATE OF REPORTER· · · · · · · · · · · · 156
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Page 3·1· · · · MR. CHAIR:· First, I would like to welcome
·2· ·everyone to our December 17th Investment
·3· ·Advisory Council meeting.
·4· · · · And before we get started, the first thing
·5· ·I'd like to do is entertain a motion to accept
·6· ·the minutes that have been offered from our
·7· ·September 11th meeting.
·8· · · · MR. JONES:· So moved.
·9· · · · MR. CHAIR:· Do we have a second?
10· · · · MS. CANIDA:· Second.
11· · · · MR. CHAIR:· Got a second.
12· · · · All in favor, please say aye.
13· · · · (Members reply aye.)
14· · · · MR. CHAIR:· Okay.· Minutes are approved.
15· · · · First, we have two wonderful new council
16· ·members.· And I'd like to welcome, but I want
17· ·Ash to make his executive director's report
18· ·first so he can tell you something about both
19· ·of them.
20· · · · So, Ash, I'm going to turn it over to you,
21· ·sir.
22· · · · MR. WILLIAMS:· Thank you, sir.
23· · · · So, let me welcome Tere Canida and John
24· ·Goetz to the Investment Advisory Council.· Both
25· ·of them are very distinguished members of the
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Page 4·1· ·investment community.
·2· · · · Tere was a founder of Taplin, Canida,
·3· ·Habacht, a fixed-income firm that the SBA
·4· ·invested with a number of years ago with great
·5· ·success.· The firm got bigger and bigger and
·6· ·bigger and was eventually sold to the Bank of
·7· ·Montreal, leaving Tere in the difficult spot of
·8· ·managing her own family office, a problem many
·9· ·of us would aspire to.· And so she is coming to
10· ·us with deep expertise, deep roots in Florida,
11· ·and no conflicts, which is an excellent
12· ·combination.
13· · · · Tere, would you have anything to add to
14· ·that?
15· · · · MS. CANIDA:· Thank you.· I'm honored and I
16· ·look forward to working with everyone.
17· · · · MR. WILLIAMS:· Thank you.
18· · · · And then we also have John Goetz.· There's
19· ·John.· John is a founder and -- co-founder and
20· ·chief investment officer of Pzena Asset
21· ·Management in New York City, but like any wise
22· ·person with an appreciation of climate and tax
23· ·laws, he also has a home in Florida and will
24· ·soon be a full-time Florida resident as he
25· ·leaves the full-time management of a private
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Page 5·1· ·investment firm and joins others as a retiree
·2· ·in Florida with many things still going on.
·3· · · · So, John, anything to add to that?
·4· · · · MR. GOETZ:· Yeah.· I want to thank you for
·5· ·inviting me to join this group.· I've heard a
·6· ·lot about it, so I'm excited to participate.
·7· ·And hopefully do a little bit of help along the
·8· ·way.
·9· · · · MR. WILLIAMS:· Well, no doubt that will be
10· ·the case.
11· · · · MR. WENDT:· You really can't take -- what
12· ·people have been telling you.· That's not fair,
13· ·Bobby's a very good Chairman.
14· · · · MR. WILLIAMS:· Well, I didn't share the
15· ·history either, that if anything goes wrong,
16· ·the newest members are commonly blamed, so
17· ·there's that.
18· · · · Mr. Chair, if I may, a couple other
19· ·opening comments --
20· · · · MR. COBB:· Mr. Chairman, I'd like to just
21· ·add to your comment about how fortunate we are
22· ·to have these two superstars.· We just met with
23· ·the chief financial officer, and one of the
24· ·themes of our communication was that -- how
25· ·much we appreciate the fact that chief
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Page 6·1· ·financial officer, the governor, and the
·2· ·attorney general have consistently, for more
·3· ·than a decade, picked really top professionals
·4· ·for this Board, and we're delighted that
·5· ·they've continued with our two new appointees.
·6· · · · MR. WILLIAMS:· Thank you.
·7· · · · Wanted to also note, and I believe all of
·8· ·you were copied on the email, Alison Romano has
·9· ·stepped up.· She was previously co-senior
10· ·investment officer for the Global Equity Asset
11· ·class, our largest asset class and one of our
12· ·top performing.· Alison has been with the board
13· ·for a number of years, has also been on the
14· ·private side, was with Goldman Sachs, and went
15· ·to a little school in Pennsylvania that's
16· ·reasonably well known for turning out financial
17· ·professionals.
18· · · · Alison, anything you want to add to the
19· ·mix on that?
20· · · · Great.· Thank you.
21· · · · Tim Taylor, who is the other co-SIO in
22· ·Global Equity, is now SIO without the co in
23· ·Global Equity.· And no doubt, he will do a fine
24· ·job there.
25· · · · Also wanted to welcome Robert Tornillo and
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Page 7·1· ·Tanya Cooper from the CFO's office who are with
·2· ·us this afternoon.
·3· · · · Anybody from other trustees' offices that
·4· ·I've missed?· Apparently not.
·5· · · · We have legislative staff with us.· Thank
·6· ·you for being here.· We're going to touch on
·7· ·something that's relevant to you in just a
·8· ·moment.
·9· · · · Let's jump into performance update if I
10· ·may.· Looking through last night's close, the
11· ·Florida Retirement Trust Fund is at a gain of
12· ·16.82 percent.· That is 133 basis points behind
13· ·target.· We would be quick to add, as I do at
14· ·every trustee's meeting, this is not, I think,
15· ·anything to do with relative performance.· This
16· ·is a function of mark to market that's hitting
17· ·two asset classes especially hard, strategic
18· ·investments and private equity.· And I think
19· ·when those are fully marked, that deficit would
20· ·go away.
21· · · · Would you gentlemen agree with that?
22· · · · MR. WEBSTER:· We certainly hope.
23· · · · MR. WILLIAMS:· That's -- that's what's
24· ·known as a lukewarm response.· But at any rate,
25· ·I think it's a self-curing problem.
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Page 8·1· · · · To put a little better light on what a
·2· ·16.8 percent gain means, the fund is up 18 and
·3· ·a half billion dollars over where it started
·4· ·the calendar year, and that's net of
·5· ·distributing $600 million a month in cash.· So
·6· ·it's been a very sweet year.
·7· · · · Another thing indicating the sweetness of
·8· ·the year is that the current asset balance in
·9· ·the Florida Retirement System trust fund,
10· ·$169.1 billion, is an all-time high.· And to
11· ·put it in perspective, at the bottom of the
12· ·market in March of '09, that number was
13· ·83 billion.· Pretty significant difference.
14· ·And when you consider also, though, that very,
15· ·very long period of time, we've paid out many
16· ·hundreds of millions of dollars every month in
17· ·cash for benefits, it makes that gain in size,
18· ·I think, all the more remarkable.
19· · · · You will recall that legislatively a
20· ·couple of years ago, the legislature, with our
21· ·support, changed the default preference.
22· ·Meaning that when a new employee comes into the
23· ·Florida Retirement System, they have a choice
24· ·of going into the defined benefit plan or the
25· ·defined contribution plan, that is, the pension
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Page 9·1· ·plan or the investment plan.· In the old days,
·2· ·if they did nothing, and a surprisingly large
·3· ·number of employees do nothing and they just go
·4· ·whichever way the default blows them, they
·5· ·would have all gone into the DB.· That was
·6· ·changed to DC.
·7· · · · As a consequence, what we have since seen
·8· ·is that the investment plan now has nearly
·9· ·27,000 people in it, more than it did last
10· ·year.· That's an increase of 14 percent in
11· ·headcount, and its assets have expanded over
12· ·the calendar year through November 30, not
13· ·through last night's close, by over a billion
14· ·dollars, and are now 11.625 billion.
15· · · · So the defined contribution plan is
16· ·growing very healthily and doing just fine,
17· ·thank you.
18· · · · So that performance and those records
19· ·reflect, obviously I would say, culture that is
20· ·working, and our successes have not gone
21· ·unnoticed.· So I wanted to share with you a few
22· ·indications of external appreciation of the
23· ·good work that this team is doing with your
24· ·guidance here at the Florida State Board.
25· · · · So, the first thing would be back in
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Page 10·1· ·October, went to a meeting of the National
·2· ·Association of State Investment Officers, which
·3· ·is a, as its name implies, a small group.
·4· ·They're basically people from the 50 states who
·5· ·manage state pension plans on the investment
·6· ·side.· It's a very small gathering.· There's no
·7· ·sponsorship, there's no glitz, there's no
·8· ·entertainment.· We get together, we divvy up
·9· ·the costs among the different plans, pay the
10· ·bills ourselves.· So it's very private, very
11· ·nice.· And we just trade ideas for a few days
12· ·and talk about shared challenges and strategies
13· ·for dealing with them.
14· · · · NASIO, as the group is known, episodically
15· ·awards what's known as the Richard L. Stoddard
16· ·Award, which is for an individual who has done
17· ·something to meaningfully change the level of
18· ·expertise in public fund investment.· And I was
19· ·surprised and honored to receive the Richard
20· ·Stoddard Award, which has only been given a
21· ·handful of times over the time that NASIO has
22· ·existed.
23· · · · And as I told the gathering of investment
24· ·officers, thank you for the recognition, but I
25· ·would see this purely as a reflection on the
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Page 11·1· ·excellence of our team.· Because as anybody
·2· ·that knows this organization knows, the group
·3· ·of people sitting across the table here do
·4· ·magnificent work.· And, yes, I might have some
·5· ·coaching role in there somewhere, but at the
·6· ·end of the day, that's where the work's getting
·7· ·done and that's where the credit needs to go.
·8· · · · So then roll the clock forward a little
·9· ·bit, and last week I was in New York at the
10· ·Industry Innovation Awards, which is an event
11· ·put on by COO Magazine.· We had been nominated,
12· ·we the Florida SBA, had been nominated for an
13· ·investment innovation award in the category of
14· ·large funds, meaning over a hundred billion
15· ·dollars, competing against Texas Teachers and a
16· ·number of other very well-known funds, and we
17· ·won that.· So that was nice.
18· · · · And then the evening wore on, and the
19· ·emcee, who's a publisher of the magazine, said,
20· ·now I'd like to call Chris Ailman, who's the
21· ·chief investment officer of CalSTRS, forward to
22· ·present the chief investment officer of the
23· ·year award.· Well, Ailman comes up, and Ailman
24· ·had been wearing a tie like this, and he comes
25· ·up to do the presentation and he switched to a
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Page 12·1· ·bow tie.· And I thought, hmm.· So, he ends up
·2· ·making a very nice speech about our successes
·3· ·here at the SBA, and I pick up the chief
·4· ·investment officer of the year award.
·5· · · · So, you know, I -- all these things
·6· ·reflect magnificently on what the organization
·7· ·has done.· I don't see them as personal things,
·8· ·I see them as validation of the collective
·9· ·cultural strength of the institution we're all
10· ·a part of, and I thank you all for that and
11· ·congratulate you on your success.
12· · · · The other thing one must take away from
13· ·this is, it ain't gonna get any better, it's
14· ·almost certainly gonna get worse, and that's
15· ·not very encouraging.· One thing I've been able
16· ·to rule out is that I do not, in fact, have
17· ·some terminal condition that I'm not aware of,
18· ·because usually people pile on stuff like that
19· ·if you've got some awful problem.· I don't
20· ·think that's there.
21· · · · So with that, we've established the
22· ·investment engine is hitting on all cylinders,
23· ·which raises the question, what about the
24· ·control environment?· Are we in bounds there?
25· ·And the answer's yes.
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Page 13·1· · · · A couple things to add, and I think we
·2· ·have got all the right people probably in the
·3· ·room, our chief risk and compliance officer is
·4· ·back there.· And our inspector general, Ken
·5· ·Chambers, may or may not be in here.· He's
·6· ·probably out inspecting somebody in a general
·7· ·way.· And our chief audit executive, Kim
·8· ·Stirner, is right here.· So, in this building
·9· ·you can run but you can't hide.· The
10· ·oversight's very thorough.
11· · · · And I think I can truthfully say our
12· ·control environment is in excellent shape.· We
13· ·had an audit committee meeting on the 25th of
14· ·November that included a nonpublic session on
15· ·IT security, and a public session on everything
16· ·else.· And we had Todd Neville come as a new
17· ·member.· Kim Ferrell and Mark Thompson remain
18· ·on the committee and are doing a good job.· And
19· ·I think I can summarize it by saying it was a
20· ·great meeting, everything is fine, and Grant is
21· ·still buried in Grant's tomb.
22· · · · So unless anyone has any -- oh, wait.
23· ·There's one other key thing I want to talk
24· ·about.· At our last meeting, the IAC got very
25· ·involved in the investment return assumption
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Page 14·1· ·discussion.· And you were very interested in
·2· ·authoring a little piece to go to the trustees
·3· ·in support of reducing that return assumption.
·4· ·We did so, got it to the trustees.· And at the
·5· ·actuarial investing -- actuarial estimating
·6· ·conference meeting, which took place right
·7· ·around last week in October, first week in
·8· ·November, they actually reduced the return
·9· ·assumption by twice the amount they've reduced
10· ·it in recent prior years.· They went down by 20
11· ·basis points, from 7.4 percent to 7.2 percent.
12· ·We still think it should be 6.6, which is the
13· ·number Aon is using, but at least now we're
14· ·below the national average and we made a move
15· ·in the right direction by a greater increment
16· ·than we have in I don't know how many years but
17· ·a lot of years.· So I thank the IAC for your
18· ·embrace and involvement in that issue.· It was
19· ·helpful.· And I believe the monetary impact of
20· ·that move is something on the order of
21· ·$300 million per year in increased funding for
22· ·the fund.
23· · · · John, does sound right to you as a rough
24· ·number?
25· · · · MR. BENTON:· Yes.· Correct.
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Page 15·1· · · · MR. WILLIAMS:· Yes.· So, you know, 300
·2· ·million bucks, even in this scale world, is
·3· ·real money, so very helpful.· And that's
·4· ·recurring money.· That's not a one-time thing.
·5· ·So thank you for that.
·6· · · · All right.
·7· · · · MR. COBB:· A question -- a question,
·8· ·Mr. Chairman.
·9· · · · MR. CHAIR:· Yeah.
10· · · · MR. COBB:· Was it --
11· · · · MR. WENDT:· I want to congratulate you on
12· ·all these awards you've won.· Have any of them
13· ·included cash?
14· · · · MR. WILLIAMS:· Regrettably, no.
15· · · · MR. WENDT:· All right.
16· · · · MR. COBB:· I would also like to add my
17· ·congratulations to both you and the firm.
18· · · · But my question is, did our letter that
19· ·you -- that our chair sent urging this
20· ·reduction expected returns, did that have
21· ·anything to do with the final decision or had
22· ·the final decision been pretty much made before
23· ·our email arrived?
24· · · · MR. WILLIAMS:· I think it absolutely had
25· ·plenty to do with it.· That discussion, it
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Page 16·1· ·actually -- when the meeting started, it went
·2· ·on for several hours.· It then adjourned
·3· ·without a decision.· They came back the
·4· ·following day and finished it up.· It was not
·5· ·cooked in advance by any means.
·6· · · · And the parties basically are the
·7· ·Governor's Office, the House and the Senate,
·8· ·more or less.· And the Governor's Office took
·9· ·the lead on this and stayed with it.· And I
10· ·think it -- it ended very, very constructively.
11· ·So it was a good thing.
12· · · · MR. COBB:· Good.
13· · · · MR. CHAIR:· Any other questions for our
14· ·executive director?
15· · · · Okay.· The moment everybody's been waiting
16· ·for.· Is it a duck or not?· Strategic
17· ·investments, everything you've always wanted to
18· ·know, starring Trent Webster.
19· · · · MR. WEBSTER:· Well, the first thing you
20· ·have to know for the newer members in the room
21· ·today, is that this duck called strategic
22· ·investments is just another way of saying
23· ·alternative investments.
24· · · · So, the pension plan total fund is
25· ·organized, like a typical pension plan where
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Page 17·1· ·you've got allocations to stocks, bonds, real
·2· ·estate, and private equity.· And if an
·3· ·investment idea doesn't fit into one of those
·4· ·asset classes, it comes to us, strategic
·5· ·investments.
·6· · · · And we have four objectives in policy.
·7· ·The first one is to generate over a long period
·8· ·of time, the real return target of the total
·9· ·fund.· And that's currently CPI plus 4 percent.
10· ·Our second objective is to dampen the
11· ·volatility and improve the risk adjusted
12· ·returns of the FRS.· Our third objective is to
13· ·outperform the total fund significant market
14· ·declines.· And finally, we have the objective
15· ·of being able to invest flexibly,
16· ·opportunistically and in new strategies as they
17· ·come about.· So that makes us, we think, quite
18· ·an interesting place to be.
19· · · · But we play other roles in the
20· ·organization as well.· The first one is, well,
21· ·what if you have a cross-asset class strategy,
22· ·so your typical -- you know, your stereotypical
23· ·strategy might be a 60/40 manager, but where
24· ·would you stick that if there's no place for
25· ·it?· So if there was a 60/40 manager who's very
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Page 18·1· ·good, we would take a look at that.· And we
·2· ·actually have some strategies that do run
·3· ·across the different asset classes in our
·4· ·portfolio.
·5· · · · The next thing is is that we're a
·6· ·repository for investments and funds that may
·7· ·not fit well in the other asset classes.· So
·8· ·hypothetically, let's say an ambitious young
·9· ·man or woman from the Midwest came to us and
10· ·said, I've got a good idea for an equity
11· ·portfolio, we're going to invest in four to six
12· ·stocks, we might hold a hundred percent cash
13· ·and we'll take 25 percent of the profits above
14· ·6 percent.
15· · · · I started in the -- what was then the
16· ·domestic equities asset class, and we wouldn't
17· ·have looked at that, because that would have
18· ·blown up our risk budget and violated our cash
19· ·guidelines.· But that's the original terms of
20· ·the Warren Buffett partnership.· And I would
21· ·think that if we could find another Warren
22· ·Buffett, we'd probably find a place somewhere
23· ·in the Board to investment with them.· So,
24· ·unfortunately we haven't found that person yet,
25· ·so if you happen to know of that person,
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Page 19·1· ·please, you know, we'd be interested in talking
·2· ·to them.
·3· · · · And finally, we also act as an incubator
·4· ·for potential new asset classes.· Now, in the
·5· ·10 or 12 years or so that strategic investments
·6· ·has existed, we haven't had any new asset
·7· ·classes, but when we talk through our different
·8· ·substrategies, you'll see that we have some
·9· ·things in our portfolio that in other pension
10· ·plans, in other endowments or whatever, they
11· ·exist as different asset classes, and it's
12· ·possible that they could get elevated at some
13· ·time in the future.
14· · · · So I'll briefly talk about performance.
15· ·The blue bars are our performance, the red bars
16· ·is the performance of our benchmark, and the
17· ·yellow bar, that's the real return target that
18· ·we're required to hit over time.· Being an
19· ·alternative investment, benchmarking is
20· ·problematic.· That -- this graph with the red
21· ·bars, this is the benchmark that you look at
22· ·that gets rolled up into the total fund.· And
23· ·this is an aggregation of all the individual
24· ·fund targets.· I'm sorry, fund benchmarks.
25· · · · But because invest -- or benchmarking
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Page 20·1· ·alternatives is difficult, we like to look at
·2· ·ourselves on multiple levels.· Obviously we
·3· ·have to have official performance, but we like
·4· ·to look at other things as well.· One of them
·5· ·is whether or not we're returning above or
·6· ·below our long-term target.· And the other one
·7· ·is to look at how we're doing against the rest
·8· ·of the FRS.
·9· · · · So the green bar is the FRS performance,
10· ·excluding strategic investments.· So we would
11· ·not expect to beat the rest of the FRS over
12· ·time, because the risk in the FRS is primarily
13· ·equities.· And the risk in strategic is
14· ·primarily not equities.· We would expect
15· ·equities to do better over time.· So we don't
16· ·expect to keep -- to beat the FRS over long
17· ·periods of time, but we should be somewhere in
18· ·the ballpark.
19· · · · So, for example, our three-year
20· ·performance of the FRS was about eight and
21· ·three-quarter percent.· Our performance was
22· ·about seven and a quarter.· That's roughly
23· ·okay.· I would be more concerned if the FRS was
24· ·at eight and three-quarters and we were at two
25· ·and a quarter, that might set off a few alarm
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Page 21·1· ·bells, so -- but this is just another way of
·2· ·looking at how we're doing and whether or not
·3· ·we're performing in the way that we're supposed
·4· ·to.
·5· · · · So our policy target is 12 percent of the
·6· ·the total fund.· We're currently at
·7· ·8.4 percent.· We have an allocation range
·8· ·between zero and 16 percent.· We can be
·9· ·zero percent of the fund, we can be 12 or even
10· ·up to 16.· So in theory, if there were things
11· ·that we did not like, because we have this
12· ·mandate to invest opportunistically, we could
13· ·liquidate everything and give it back to the
14· ·rest of the fund.· Practically that's not going
15· ·to happen.· Practically, in the next few years,
16· ·we expect to be up at 12 percent.· But what
17· ·that enables us to do is to be able to allocate
18· ·capital across a wide variety of different
19· ·strategies and not feel like we ever have to
20· ·force capital into a market.· So if there's
21· ·things that we don't like, we would rather put
22· ·our capital into things which we think are more
23· ·attractive from a risk adjusted return.
24· · · · Now, our current rate -- or weight, I'm
25· ·sorry, as of the end of the third quarter is
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Page 22·1· ·8.4 percent.· We've been kind of hanging around
·2· ·this eight, eight and a half percent for a
·3· ·while.· That's not by design.· One of the
·4· ·reasons why we haven't been getting -- gotten
·5· ·up to 12 percent is because Tim and our new
·6· ·deputy CIO, Alison, have done an excellent job,
·7· ·global equities have been a hard rabbit to keep
·8· ·up to.
·9· · · · Also, because we have a lot of private
10· ·structures, we have found that the cash coming
11· ·back to us from our funds has been greater than
12· ·the amount of cash that's been going out.
13· ·We're sort of running to stand still.· And
14· ·finally, we've had net redemptions in hedge
15· ·funds about a billion dollars.· Now, we've had
16· ·a very busy year last year and this year.· We
17· ·would expect that in the next few years, to get
18· ·back near to our 12 percent target.
19· · · · Currently our net asset value is just over
20· ·13 and a half billion dollars.· We manage 93
21· ·relationships amongst 146 funds, more or less.
22· ·We're split roughly between private markets and
23· ·what we call liquid.· We expect that over the
24· ·next few years as we get up to near our
25· ·12 percent target, we'll probably be around 120
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Page 23·1· ·relationships and 200 funds, which sounds like
·2· ·a lot on the surface, but it's not as much as
·3· ·you see -- as it seems as we go through this
·4· ·presentation.
·5· · · · So we invest primarily in fund and
·6· ·fund-like structures.· So we're not -- other
·7· ·than in GP investments, we're not doing direct
·8· ·investments in individual securities or
·9· ·individual opportunities.· So, we aren't
10· ·particularly good at being able to assess the
11· ·viability of a power plant in southern
12· ·California versus a power plant in Sussex,
13· ·right?· But we're very good at assessing a
14· ·manager who invests in power and can assess
15· ·between, you know, investments in southern
16· ·California and Sussex.· So that's what we do.
17· · · · We have no liquidity demands.· All the
18· ·liquidity demand for the FRS comes from our
19· ·good friends in global equities and fixed
20· ·income.· We do supply equities through the
21· ·distri -- or liquidity through the
22· ·distribution, but Mr. Benton has not yet called
23· ·me up and asked for a couple hundred million
24· ·dollars to fund the liabilities.· And that
25· ·makes a difference in terms of how we construct
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Page 24·1· ·the portfolio, which we'll discuss in a minute.
·2· · · · And finally, we haven't done a whole lot
·3· ·of co-investing.· This is something that we're
·4· ·looking at.· We may do something.· It's a
·5· ·little more difficult in our asset class
·6· ·because of the flexible nature of it.· And
·7· ·there isn't really a whole lot of empirical
·8· ·evidence that we're aware of, of whether or not
·9· ·this is a -- you know, if this is something we
10· ·should do.· But we're going to see if we can
11· ·gather a little bit of that empirical evidence
12· ·and go forward with that.
13· · · · So we invest primarily in funds.· And so
14· ·how do we do that?· The very first thing we
15· ·look at is the ethical standards of the
16· ·managers.· So we're not interested in investing
17· ·with anybody who has a bad reputation or seems
18· ·unethical.· The very first thing we look at
19· ·for -- or we want to understand before we look
20· ·at anything else.· We don't care what the
21· ·performance is, we don't care if they're a rock
22· ·star.· If we think that funny things are going
23· ·on in the firm or behavior is not acceptable to
24· ·us, we won't invest with them.
25· · · · Then the second thing we want to
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Page 25·1· ·understand is whether or not the firm is
·2· ·institutional.· The FRS is the fifth largest
·3· ·public pension plan in the country, and so can
·4· ·they take -- can they meet the demands of a
·5· ·large institutional client like us?
·6· · · · And then and only then, after those two
·7· ·hurdles have been cleared, do we assess the
·8· ·performance.· Ultimately this is a business of
·9· ·performance.· You can have the smartest guy in
10· ·the room with the best credentials, went to the
11· ·best schools, but if they can't produce, we
12· ·can't, you know -- we wouldn't find a place for
13· ·them in the corporation.
14· · · · MR. CHAIR:· Trent, I had one question
15· ·before we move from this.
16· · · · MR. WEBSTER:· Yes.
17· · · · MR. CHAIR:· Because of your size, you
18· ·know, 13-plus billion, you look at the
19· ·commitments.· On that selection, is there some
20· ·kind of size criteria?· Because it takes a lot
21· ·to move the needle when you have 13 billion.
22· ·Do you just say, I'm not gonna look at anything
23· ·under X?· I'm just curious.
24· · · · MR. WEBSTER:· Yeah.· So typically on --
25· ·typically our fund size, our check size is
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Page 26·1· ·between 50 and $300 million.· So, our target
·2· ·currently is around 200 million.· So our
·3· ·average check we're trying to get out is about
·4· ·200 million.· So that's about what we're
·5· ·looking at.
·6· · · · So, in our process, our philosophy is that
·7· ·it's a concept proof of concept strategy.
·8· ·There are other funds and there are other pools
·9· ·of capital out there which make it a point of
10· ·funding new startups and seed capital.· We
11· ·don't do a lot of that.· We want to see if
12· ·there's a track record, if they're actually
13· ·good at what they do.· We have invested in
14· ·first-time funds.· We typically don't, but if
15· ·we do it, it's usually in a unique or
16· ·compelling idea.· Or it's with a manager which
17· ·we're very familiar.· So we've probably made
18· ·about 160, 170 funds -- or fund investments.
19· ·You could count the number of the first-time
20· ·funds on one hand.· But we do do it
21· ·occasionally.
22· · · · We like to get to know a manager between
23· ·when they're fundraising -- and this is
24· ·important, the manager's more important than
25· ·the strategy.· One of our managers who we've --
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Page 27·1· ·on successive funds they -- they had -- they
·2· ·were investing into a strategy where the market
·3· ·had fallen by 40 percent.· And they'd been able
·4· ·to -- they'd been able to create value and
·5· ·generate positive returns even though their
·6· ·market had been crushed.
·7· · · · So that's the type of thing that we like
·8· ·to look for.
·9· · · · MR. JONES:· Trent, one quick question:
10· ·Are most of your new ideas coming from the
11· ·consultants or internally sourced or a
12· ·combination or --
13· · · · MR. WEBSTER:· We work in consultation with
14· ·our consultants, so we're out there and we're
15· ·very, very active and we're seeing a lot of
16· ·different things.· We get a lot of in-bound
17· ·calls.· But we talk to our consultants every
18· ·week, and so it's a very active dialogue. I
19· ·don't know what the split would be, but
20· ·oftentimes when we have a new manager that have
21· ·come on the radar, we're typically talking to
22· ·them very -- to our consultants very early in
23· ·our process.
24· · · · So we're going to see here a whole bunch
25· ·of different asset classes.· We do have an
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Page 28·1· ·asset allocation process that we do once a year
·2· ·where we're looking forward for three to five
·3· ·years on where we want to allocate capital.
·4· ·This process is a -- we do this once a year and
·5· ·it's meant to be a road map or a guide.· It's
·6· ·not meant to be set in stone.· Because of our
·7· ·flexible mandate, what we may see, we may --
·8· ·things may pop up every -- you know, in between
·9· ·our asset allocation meetings and we may move a
10· ·different direction or certain way.
11· · · · But this is the output, so we have this
12· ·big giant spreadsheet, you know, this big
13· ·model.· We talk to our consultants, we have
14· ·internal meetings.· And this is what comes out
15· ·of it.· And we do this every year.· So this was
16· ·done in the spring of this year.· The current
17· ·weight was the weight of each sub-asset class
18· ·in March, and then the target weight was the
19· ·determination of where we'd like to go.· And
20· ·then we look forward five to ten years on where
21· ·we think we're going to allocate capital and
22· ·see what the target weights are five years from
23· ·now.· And then we can make an approximation of
24· ·how much capital we want to allocate to the
25· ·different strategies.
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Page 29·1· · · · So, this is a model and so we -- all the
·2· ·caveats of a model.· What it does is it
·3· ·provides us a framework so we don't get too far
·4· ·off track where one day we wake up and we have,
·5· ·say, 30 percent in the sub-strategy we don't
·6· ·necessarily mean to.
·7· · · · These are our strategy allocations over
·8· ·time.· So this asset class began in 2007.· And
·9· ·it was originally funded -- and correct me if
10· ·I'm wrong, John, but this was originally funded
11· ·with the global equities asset class, which is
12· ·different than the global equities asset class
13· ·from today.· I think it was a 5 percent
14· ·allocation of the total fund.
15· · · · MR. BENTON:· Yes, correct.
16· · · · MR. WEBSTER:· Right.· And so we had -- the
17· ·decision was made to transfer the funds from
18· ·the global equities asset class at that time
19· ·into strategic investments.· This asset class
20· ·was managed by the foreign equities asset
21· ·class, which was different from the domestic
22· ·equities asset class.· I know it's all a little
23· ·confusing.· But the global equities asset class
24· ·came into us, which we managed and began to
25· ·sell down to invest in alternative investments.
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Page 30·1· · · · A couple years later, the foreign equities
·2· ·and the domestic equities asset class merged to
·3· ·become what was now called global equities.
·4· ·And then we had a global equities portfolio
·5· ·within strategic investments and that didn't
·6· ·make a lot of sense, so that was transferred to
·7· ·the new stra -- or the new the global equities
·8· ·asset class.· And we consider the beginning of
·9· ·July 2010 is really where we, as an asset
10· ·class, as an alternative asset class, came
11· ·before.· Because for the first three years, our
12· ·average allocation of global equities was about
13· ·75 percent.· And we behaved like a global
14· ·equities asset class.· So during the financial
15· ·crisis, we dropped down significantly and then
16· ·we bounced up significantly.· So we look more
17· ·like a global equities asset class.
18· · · · But you can see here over time that when
19· ·the global equities asset class was transferred
20· ·out, we were actually given a $2.2 billion high
21· ·yield investment from fixed income, which we
22· ·then proceeded to liquidate.· And most of what
23· ·we did was in debt, which is that navy blue
24· ·part of the graph.· And then over time, we
25· ·started investing in a whole bunch of other
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Page 31·1· ·things.
·2· · · · And the emphasis over the last five or six
·3· ·years, apart from our normal course of
·4· ·business, has been investing in that purple
·5· ·part of the graph, which is called diversifying
·6· ·strategies.· And that diversifying strategies
·7· ·is the part of the portfolio which should help
·8· ·us fulfill the policy objective of
·9· ·outperforming the FRS where there's a
10· ·significant market decline.
11· · · · MR. WENDT:· Trent, I've raised this
12· ·before.
13· · · · MR. WEBSTER:· Yeah.
14· · · · MR. WENDT:· I had the opportunity to
15· ·attend Art Basel just a couple weeks ago.· This
16· ·would have been one of the better works.· Don't
17· ·you guys think this is very nice?· I'm going to
18· ·get a copy of it at some point.
19· · · · MR. WILLIAMS:· Wait.· Should we take a
20· ·minute, Mr. Chairman, and see if there's an
21· ·offer on the table?
22· · · · MR. WENDT:· I'll give you $20 for it.
23· · · · MR. WILLIAMS:· There may be some action
24· ·around this.
25· · · · MR. CHAIR:· Commodities are bananas,
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Page 32·1· ·right, with masking tape?
·2· · · · MR. WENDT:· This is better.
·3· · · · MR. COLLINS:· In all seriousness, though,
·4· ·for those of us that don't deal in these charts
·5· ·every day, this is a very difficult chart.
·6· ·Just saying.
·7· · · · MR. WEBSTER:· This chart -- this chart is
·8· ·our three-year performance.· And you're going
·9· ·to see a bunch of three-year performance charts
10· ·in this presentation, because that's where
11· ·we've got the most data for our sub-asset
12· ·classes.· You can see here is that the other
13· ·four, like the four strategies which are
14· ·levered to the economy have done better.· The
15· ·diversifying strategies have been a little
16· ·worse than we'd expected, but if you -- this
17· ·was a three-year performance, say, in 2002,
18· ·when the stock market had gone down three years
19· ·in a row, we'd expect that to be flipped, where
20· ·everything else would -- if it's all upside
21· ·down, the purple part would be upside down a
22· ·whole lot less than everything else.· That's
23· ·the role that that plays.
24· · · · And these are the sub-asset classes, which
25· ·we're all going to talk about here in a minute.
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Page 33·1· ·So we got 21, I think, active sub-asset classes
·2· ·that we're investing in.
·3· · · · MR. COLLINS:· Can I ask a question,
·4· ·Mr. Chairman?
·5· · · · MR. CHAIR:· Yes, sir.
·6· · · · MR. COLLINS:· A little easier to
·7· ·understand this chart.
·8· · · · I remember in the origins of strategic
·9· ·investments, and it was a little bit of, hey,
10· ·let's grab this and let's grab that, let's put
11· ·all this stuff together and we're going to call
12· ·it strategic investments.· How much of that
13· ·chart is a result of the initial sort of
14· ·pooling together of all those disparate
15· ·investments that then made up strategic
16· ·investments?· Or do you really sit around and
17· ·say, well, you know, we're going to have
18· ·2 percent here and one and a half percent here?
19· ·I mean, are you -- how molecular are you
20· ·getting with it?
21· · · · MR. WEBSTER:· Well, we'll go back to this
22· ·chart that you really don't like.· This one
23· ·right here.
24· · · · MR. COLLINS:· I can't look at it.
25· · · · MR. WEBSTER:· That blue -- the dark -- and
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Page 34·1· ·the reason for this, and maybe I can, you know,
·2· ·sell it to the Museum of Modern Art and do
·3· ·something better, but that -- the dark blue is
·4· ·all the original investments that we went into.
·5· ·And so what we were investing back in that
·6· ·time --
·7· · · · MR. COLLINS:· All that tells me is that
·8· ·there was a lot.
·9· · · · MR. WEBSTER:· There was a what?
10· · · · MR. COLLINS:· There was a lot of dark
11· ·blue.
12· · · · MR. WEBSTER:· There's a lot of dark blue.
13· ·So what we were doing is that during the
14· ·financial crisis, we were investing in hung
15· ·bridge loans and distressed assets.· That's
16· ·what we were doing, and that's what most of
17· ·that is in that dark blue.
18· · · · So when we talk about, we want to act
19· ·opportunistically, we're trying to act in a
20· ·contrarian manner.· So we want to go to where
21· ·capital is scarce.· We want to maybe be
22· ·cautious where there's a lot of capital.· And
23· ·so during the financial crisis, we were putting
24· ·capital to work in some of the worst parts of
25· ·the credit market.
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Page 35·1· · · · Now, it's a little more difficult today,
·2· ·but we'll talk a little bit about some of the
·3· ·things that we're doing.· It's a little bit
·4· ·more difficult today because everyone's happy
·5· ·and there's a flood of liquidity and we're
·6· ·never ever, ever going to go down again, et
·7· ·cetera, et cetera, et cetera.· But a lot of the
·8· ·stuff that happened back in that time period,
·9· ·most of that's run off, Peter.
10· · · · MR. CHAIR:· And, Trent, I had a question,
11· ·kind of to follow-up on Peter's.· Would you
12· ·kind of -- particularly for Tere and John --
13· ·describe both the investment and the time frame
14· ·of Lexington Partners, which to me is a great
15· ·example of an opportunistic deal, and when did
16· ·that happen and what bucket does that fit in?
17· · · · MR. WEBSTER:· Can I get that in a minute?
18· · · · MR. CHAIR:· Sure.
19· · · · MR. WEBSTER:· That's actually on the board
20· ·here.
21· · · · MR. CHAIR:· Okay.
22· · · · MR. WEBSTER:· So we'll get that in a
23· ·minute as we go through here.
24· · · · So we've got five broad strategies.· The
25· ·first one is debt.· Our broad opinion of debt
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Page 36·1· ·is that we generally are cautious on debt
·2· ·because of the -- it's a very late cycle
·3· ·credits.· It's very late cycle in the credit
·4· ·cycle.· So we've been generally cautious.
·5· ·We've been more focused on protecting capital.
·6· ·But we are finding some interesting things to
·7· ·do.· So I'd said earlier about some markets we
·8· ·don't like if there are managers we really like
·9· ·and markets we don't like, we'll go ahead and
10· ·invest with the manager.
11· · · · So distressed is our largest allocation.
12· ·And again, this is -- you can actually see
13· ·here.· Peter, it's over there.· You can see
14· ·some here, Peter, on this graph, there are some
15· ·original investments during that time.· Most of
16· ·those have since run off or they're small net
17· ·asset values, a few things left there.· This is
18· ·a strategy we generally really like, but the
19· ·problem is, there's not a whole lot of
20· ·distressed like there was, you know, even five
21· ·years ago.
22· · · · So this has morphed a little bit.· So what
23· ·we call distressed, Cambridge would now call
24· ·credit opportunity.· So that includes stressed,
25· ·distressed, and other sort of eclectic lending
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Page 37·1· ·strategies.
·2· · · · There is opportunities abroad.· We've been
·3· ·doing some work in India, which is a very
·4· ·interesting market.· And China's really
·5· ·interesting.· Whether or not we can ever play
·6· ·in there, I'm not sure, but -- and the other
·7· ·observational half about the market is before
·8· ·five years ago, we talked to distressed
·9· ·managers and, you know, they were very bullish
10· ·on Spain and what was going on in Spain.· And
11· ·we'd ask them about Italy and they'd say,
12· ·oh, no, we never want to go in Italy because it
13· ·takes forever to get anything done.· You know,
14· ·it's all -- you know, the laws are archaic and
15· ·the judges are really slow.· And now they're
16· ·all into Italy.· So, you know, we're a little
17· ·cautious on some of that stuff.
18· · · · So evergreen debt is what we generally
19· ·call -- it's what people might call hedge funds
20· ·and credit hedge funds.· But we have some
21· ·other -- a few things in there.· It might be
22· ·something that wouldn't fit into Katy's
23· ·program, might come into here.· Our experience
24· ·in this sub-asset class, and we've had direct
25· ·experience in this, is that when we look to
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Page 38·1· ·some of the private debt stuff here in
·2· ·distressed, a lot of this -- and when we talk
·3· ·about lending, some of these lending strategies
·4· ·were showing up here in some of the hedge
·5· ·funds, literally some of the same assets.· And
·6· ·oftentimes they were long only.
·7· · · · So the question that we had, well, if
·8· ·we're paying really high fees in hedge funds
·9· ·and more attractive fees in the private
10· ·markets, why would we have the same assets in
11· ·the hedge funds that we're getting in the
12· ·private markets?· We actually found that the
13· ·performance in the private markets, even
14· ·adjusting for fees, was better in the private
15· ·markets than they were in the liquid markets.
16· ·Now, that doesn't mean we wouldn't invest in a
17· ·good credit hedge fund, because we will look at
18· ·any good manager and any strategy, no matter
19· ·what they do.· But we've chosen to take most of
20· ·our credit exposure in the private markets.
21· · · · And that includes in lending.· And we're
22· ·kind of cautious on lending currently because
23· ·of some of the things that are going on in --
24· ·with no covenants and silly add backs and
25· ·adjustments that you're seeing right now in the
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Page 39·1· ·lending market, so we're cautious here.
·2· · · · MR. COLLINS:· What was the vintage of the
·3· ·last fund that you went into in this space?
·4· · · · MR. WEBSTER:· Looking at that, I think
·5· ·2016, '17, somewhere in there.· Now, we'll look
·6· ·at those.
·7· · · · So these managers, we -- the managers that
·8· ·we have, most of the managers, we'll re-up
·9· ·with, but we won't necessarily go and find new
10· ·managers unless we find managers that we like.
11· ·So if there are managers that we don't like on
12· ·this list and we find managers we like, we
13· ·can -- we can change -- we can swap them out.
14· ·But usually we're looking for some sort of
15· ·twist on it.
16· · · · So, just straight-up lending, you know,
17· ·we've got a manager that's pretty conservative,
18· ·pretty high in the capital stack, very low
19· ·default rate, we're happy with them and we
20· ·think they've got a lot of experience.· They
21· ·can weather deep economic crisis,so we're happy
22· ·with them.· But in terms of doing a massive
23· ·expansion in this asset class -- or in this
24· ·sub-asset class, that's not gonna happen in
25· ·this environment.
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Page 40·1· · · · MR. COLLINS:· Would you take -- I'm sorry,
·2· ·Mr. Chairman.
·3· · · · MR. CHAIR:· Go, please.
·4· · · · MR. COLLINS:· So on this end and on the
·5· ·distressed, I mean, as you look at distressed
·6· ·debt right now, you'd say, well, not a great
·7· ·place to be but we've got a bunch of managers
·8· ·there and we'll re-up with them because they're
·9· ·going to raise another fund, or would you look
10· ·at it and say, well, we're gonna skip this
11· ·vintage?· Or would you say, we're gonna cut our
12· ·allocation down by 50 percent to this vintage?
13· · · · How -- how much discretion are you guys
14· ·exercising there on particular vintages?
15· · · · MR. WEBSTER:· A fair amount.· I mean,
16· ·the -- if there's a market that we don't like
17· ·but if there's a manager that we like, we'll
18· ·support them.· If there's a manager that we're
19· ·kind of eee on and we don't like, we won't
20· ·re-up with them.
21· · · · So, this is a -- this is something that we
22· ·have a conversation with -- we have a
23· ·conversation about a lot, right, on what --
24· ·where we like different areas of the market and
25· ·where we don't like, right.· What you won't see
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Page 41·1· ·is that you won't see all these suddenly
·2· ·disappear because we've sold them in the
·3· ·secondary market, 80 cents on the dollar.· That
·4· ·won't happen.
·5· · · · But what's happened in debt -- again, back
·6· ·to the chart that we looked at earlier -- is
·7· ·that debt has become a lesser amount of the
·8· ·portfolio, and we haven't been re-upping a
·9· ·whole lot.· So one of the reasons -- so we go
10· ·back to this distressed, there's 30 loans on
11· ·this page, 23 of them are outside of their
12· ·investment period.· So when we go back to here,
13· ·you'll see that distressed is 10 percent.
14· ·That's gonna fall, right, partly because of
15· ·just the lack of opportunities.
16· · · · Now, if you go back even further back
17· ·here, this says we got to be putting about a
18· ·billion dollars a year into distressed just to
19· ·keep that 12 percent target.· I tell you that
20· ·that's the model.· Probably not gonna happen
21· ·unless you get a big recession.· But we're
22· ·never ever going to have another recession
23· ·again, so, you know, we don't have to worry
24· ·about that.
25· · · · MR. COBB:· Mr. Chairman, I have a
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Page 42·1· ·question.
·2· · · · MR. CHAIR:· Yes, sir.
·3· · · · MR. COBB:· Of the 14 approximate billion
·4· ·dollars, what percent do you pay a 15 to
·5· ·20 percent performance fee on?· And of that
·6· ·percentage, what percent -- is there a hurdle
·7· ·or is it a straight --
·8· · · · MR. WEBSTER:· Yeah.· So --
·9· · · · MR. COBB:· Just to generalize on the full
10· ·14 billion.
11· · · · MR. WEBSTER:· Yeah.· So most of what we
12· ·do, we pay a carry-on, right.· And then most of
13· ·what we do has a hurdle.· So, generally in
14· ·hedge funds don't have a hurdle.· But in our
15· ·private markets and with our activists, they'll
16· ·have hurdles.· And so, you know, that's -- I
17· ·can't remember, do insurance funds have
18· ·hurdles?
19· · · · MR. DAS:· No, they do not.
20· · · · MR. WEBSTER:· No.· So I'm thinking maybe
21· ·two-thirds, roughly.
22· · · · MR. COBB:· There'll be a performance fee.
23· · · · MR. WEBSTER:· And a hurdle in it.· Right.
24· · · · MR. COBB:· And a hurdle.· Right.· Thank
25· ·you.
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Page 43·1· · · · MR. COLLINS:· Preferred return.
·2· · · · MR. WEBSTER:· Then our last debt is what
·3· ·we call subordinated capital.· We've been big
·4· ·players in mezz for a long period of time.
·5· ·This is a strategy where if you're concerned
·6· ·about loans probably should be concerned about
·7· ·subordinated capital.
·8· · · · Our focus on this area recently has been
·9· ·on kind of nichier strategy with managers that
10· ·we like.· Broad mezz is an area -- I wouldn't
11· ·say it's necessarily shrinking or under
12· ·pressure, but what we're seeing is that
13· ·Unitranche, which does the whole debt stack,
14· ·taking a lot of share from mezzanine.· We
15· ·haven't done a Unitranche manager yet, but
16· ·we're kind of on -- with mezz, we're not
17· ·expanding generic mezz.· We do nichier stuff,
18· ·but we're not doing anything that's broad.
19· · · · In equity, so we've got -- we've got these
20· ·five equity strategies.· We're not doing
21· ·anything in long equity, that's Warren Buffett
22· ·number two, if we ever were to do something
23· ·like that and Tim couldn't take it, that's
24· ·where it would go.· This number, we set our
25· ·medium term target at 16.· It's probably going
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Page 44·1· ·to go up.· It's probably going to be higher,
·2· ·and we'll tell you why in a minute.· This is
·3· ·the minute.
·4· · · · So, this is -- our activist equity book,
·5· ·I'm going to get on my soapbox here for a
·6· ·minute, so to answer the ambassador's question
·7· ·about hurdles.· This is a strategy where we
·8· ·will not hire anybody without a hurdle on it.
·9· ·We would very -- we very strongly -- when we
10· ·talk to managers, we very strongly advise them
11· ·that they should take a market hurdle.· Some of
12· ·them like to take an absolute return hurdle.
13· ·We'll listen to them.
14· · · · But we've probably talked to 50 or 60
15· ·activists around the world.· We probably know
16· ·more about this space than anybody, any of our
17· ·peers.· And I very strongly believe that this
18· ·is a beta-plus strategy and you should pay
19· ·carry based on the alpha.· So if the market --
20· ·if the market's down 40 and the manager's down
21· ·20, we'll pay carry on the 20 percent alpha, if
22· ·the market's up 40.· The market's up 20, why am
23· ·I paying alpha on it?· Right.
24· · · · So we pay -- and there's a lot of academic
25· ·evidence for this.· The academic evidence is
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Page 45·1· ·that activists create 3 to 400 basis points of
·2· ·alpha.· The two and 20 structure, they take all
·3· ·the alpha.· Why would I do that?· That makes no
·4· ·sense whatsoever.· And of the 50 or 60, the
·5· ·number of funds who are actually worth the two
·6· ·and 20, you can count on one hand and take some
·7· ·fingers away, right?
·8· · · · So -- but this is an area we actually find
·9· ·interesting.· Where there's some changes going
10· ·on in Japan, we find really interesting.· And
11· ·if there is a beta market it's -- I'm sorry, if
12· ·there's an alpha market, it's Japan.· So you're
13· ·probably going to see some Japanese funds start
14· ·popping up on that list here when we do this
15· ·next year.
16· · · · We also like what's going on in Europe,
17· ·not because we necessarily like Europe, but the
18· ·equity performance of the European markets have
19· ·been pretty poor and it's putting pressure on
20· ·firms to create value and be more susceptible
21· ·to activists.· So this has been a strong
22· ·performer for us.
23· · · · So the question came up about Lexington.
24· ·And Lexington is here.· This is where we are,
25· ·here.· So John's group's had a long -- John
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Page 46·1· ·Bradley in private equities, they've had a
·2· ·long, long relationship with Lexington.· And so
·3· ·we had the opportunity to invest in Lexington
·4· ·in 2010.· It's -- we've been very happy with
·5· ·that relationship.· They've been a very good
·6· ·partner for us.· We still think the secondary
·7· ·market in private equity is a good place to be.
·8· ·We think that that's the market that's going to
·9· ·continue to grow and get more liquid.· We think
10· ·Lexington is probably the -- we're not supposed
11· ·to talk about, you know, individual funds here,
12· ·but, you know, just to give them props, they're
13· ·probably the preeminent secondary player in the
14· ·world.· So we like this.· We haven't done
15· ·anything since 2011 because what -- there's
16· ·been a proliferation of funds.· We actually
17· ·think that they're overpaying generally for GP
18· ·stakes, and really not quite sure what the exit
19· ·strategies are in some of these things.· So we
20· ·haven't done anything other than these two.
21· · · · Long/short equity.· So we think long/short
22· ·equity as a strategy, before fees -- this is a
23· ·group that actually creates value.· After fees,
24· ·takes all the value away and more.· So it's a
25· ·very high hurdle for equity long/short.· And in
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Page 47·1· ·part also because the beta's pretty -- I'm
·2· ·sorry the correlation is pretty high to the
·3· ·equity markets.· So we've got Tim doing a
·4· ·really good job in equity, giving us a lot of
·5· ·equity exposure.· For us, the bar is very high.
·6· · · · And so what we're looking for in this is
·7· ·something that's different, or it's actually
·8· ·going to -- there's going to be another one on
·9· ·here when we do this again a year from now,
10· ·maybe two.· There's generally some sort of --
11· ·there's some sort of specialization that they
12· ·do or they genuinely create value on a
13· ·risk-adjusted basis.· We'll always look, even
14· ·if it's a -- we don't like long/short equity as
15· ·a strategy, but we'll look at really good
16· ·managers in this strategy if they can prove to
17· ·us that they've done a good job.
18· · · · So we've got this thing called SI private
19· ·equity.· Well, Trent, why you got SI private
20· ·equity if you've got this whole private equity
21· ·group?· And this private equity group is one of
22· ·the best in the country, so why are you doing
23· ·it?· And the reason is because when we go back
24· ·to one of our roles of going across different
25· ·asset classes, well, some of this stuff is
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Page 48·1· ·wound up in private equity.· So we've got funds
·2· ·that do private equity in real estate, we've
·3· ·got funds that do private equity in debt, we've
·4· ·got funds that do private equity in public
·5· ·equity and they're kind of morphing more into
·6· ·private equity.· So we have funds, if they
·7· ·morphed completely in private equity, we'll
·8· ·say, well, that's over to John's and private
·9· ·equity, we're not going to do that.· But if
10· ·it's mixture of different strategies, then
11· ·that's where it comes.
12· · · · This is also where the Florida Growth
13· ·Fund -- the equity portion of the Florida
14· ·Growth Fund sits.· The credit portion of the
15· ·Florida Growth Fund fits here in debt
16· ·subordinated capital.· You can actually see
17· ·that in about the middle of the list on the
18· ·right.
19· · · · MR. CHAIR:· Trent, I have one question
20· ·real quick.
21· · · · MR. WEBSTER:· Yeah.
22· · · · MR. CHAIR:· We did a deep dive in
23· ·September on the Florida Growth Fund and both
24· ·Hamilton Lane and our JP Morgan new partner and
25· ·gatekeeper.· Any update there in terms of both
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Page 49·1· ·JP Morgan and Hamilton Lane?· And more, I'm
·2· ·thinking from Tere and John's standpoint, a
·3· ·real high-level summary on the Florida Growth
·4· ·Fund real quick.
·5· · · · MR. WEBSTER:· Well, I think Ash could
·6· ·probably explain the Florida Growth Fund better
·7· ·than I could.
·8· · · · MR. WILLIAMS:· Well, thank you for that
·9· ·suicide pass, Trent.
10· · · · MR. CHAIR:· Here are the charts.
11· · · · MR. WILLIAMS:· Yeah, just when you thought
12· ·I wasn't paying attention.
13· · · · I don't think there's any major change. I
14· ·would say that it's working exactly as we hoped
15· ·it would work, which is JP Morgan has brought
16· ·to the party a broader range of sourcing
17· ·channels, a broader set of relationships.
18· ·They've helped us look at some -- look at some
19· ·existing things in new ways, and it's working
20· ·really, really well.
21· · · · The two firms, Hamilton Lane and JP,
22· ·complement one another nicely, and I think
23· ·they're working well.· We've adjusted our
24· ·processes to accommodate working with the two
25· ·of them, as has Cambridge, and it's been good.
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Page 50·1· · · · MR. COLLINS:· Are we over a billion yet
·2· ·commitment?
·3· · · · MR. WILLIAMS:· Yes.· And I'd say the other
·4· ·thing we've come across is there's been some
·5· ·interest in some other Florida institutions in
·6· ·participating in the growth fund.· And
·7· ·depending on how that scales up, we may be able
·8· ·to provide an investable opportunity for some
·9· ·of the university foundations in state, and
10· ·potentially other entities or other clients --
11· ·this would be through the JP end of the
12· ·thing -- in a fund format.· That remains to be
13· ·seen.
14· · · · MR. CHAIR:· Thank you so much, Trent.
15· · · · MR. WEBSTER:· You're welcome,
16· ·Mr. Chairman.
17· · · · So we have a real assets allocation.· The
18· ·first one is commodities.· Commodities is an
19· ·area that we like, simply because we talked
20· ·earlier about being contrarian and going where
21· ·people aren't and avoiding where people are.
22· ·There ain't a lot of people right now in
23· ·commodities, especially energy.· And so we have
24· ·chosen to do most of our -- well, all of our
25· ·exposures through credit.· And we still think
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Page 51·1· ·there's a wave of bankruptcies coming into some
·2· ·of the energy, especially in that energy high
·3· ·yield area.· But some of the best risk-adjusted
·4· ·returns that we're seeing right now are in
·5· ·energy credit.
·6· · · · We also like some of the metals,
·7· ·particularly in copper, which we mentioned
·8· ·before, and we think there's a big shortage
·9· ·coming in copper several years down the road.
10· ·But, again, just looking at the supply and
11· ·demand dynamics, there's been very little
12· ·supply, very little capital going into these
13· ·areas for the last four or five years.
14· · · · Now, commodity fair markets can last for a
15· ·long time.· So that's one of the reasons we
16· ·like going through the credit.· But we think
17· ·that the amount of fear that there is in energy
18· ·is right up there with the fear that I remember
19· ·back in 2009 towards the financials.· In fact,
20· ·the oil services ETF is down as much as the
21· ·banks were in 2009, and more so than what tech
22· ·stocks were down in 2002.· So, again, some of
23· ·those are going to go away, at least as
24· ·equities, but we like this area.
25· · · · For us, it's a problem.· The problem that
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Page 52·1· ·we have is that there's not a lot in credit
·2· ·that we can invest in.· A lot of that private
·3· ·equity is through -- a lot of the private
·4· ·investment is through private equity.· But this
·5· ·is an area we like.
·6· · · · Infrastructure, now, an area we don't like
·7· ·is core and core-plus infrastructure.· And I'll
·8· ·be the first to tell you, I've been here saying
·9· ·this for five or six years, I've been wrong.
10· ·Returns have been pretty good.· But our concern
11· ·remains the same is that you've got these very
12· ·large buckets of capital have been raised and
13· ·allocated through pension plans to invest in
14· ·core and core-plus infrastructure, which are
15· ·being viewed by some as a bond proxy.· And we
16· ·think that that's -- that's problematic.· And
17· ·we think that if there ever is another
18· ·recession, that some of these people are going
19· ·to be surprised by what they have bought.
20· · · · But we do like some areas of
21· ·infrastructure.· We like some of the stuff
22· ·going on in emerging markets, we like some of
23· ·the nichier areas like build out of 5G.· So
24· ·there are some interesting things.· And, in
25· ·fact, my -- you know, in the ten years or so
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Page 53·1· ·that I've been here, I think there's probably
·2· ·more interest in the group in infrastructure
·3· ·than we've seen in a -- you know, in that time.
·4· · · · Okay.· So we got real estate.· I got Steve
·5· ·sitting down here.· You know, he's got real
·6· ·estate, so, Trent, what are you doing here in
·7· ·this real estate thing.· Well, this stuff was
·8· ·stuff that wouldn't necessarily fit in Steve's
·9· ·group.· So this is debt and distressed.· And
10· ·the debt thus far we've been doing in real
11· ·estate has been primarily in the mezz.
12· · · · So you talked, Peter, earlier about what
13· ·happens in terms of the allocations, this has
14· ·been falling.· So it was about 12 percent.
15· ·It's about 6 now.· It will probably go up a
16· ·little bit.
17· · · · So timber, we've got two allocations. I
18· ·think it's 400,000 acres, I think, we have in
19· ·timber in this country in the Southeast, the
20· ·Northwest, New York State, and in Chile,
21· ·southern Chile.· So we're a big timber
22· ·investor.· We own that directly.· We have two
23· ·managers managing it.· Returns have been a
24· ·little disappointing over the last few years,
25· ·but we think that it will generate its real
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Page 54·1· ·return over time.
·2· · · · We've got a lot of internal capabilities
·3· ·on transportation.· So we've been very active
·4· ·in aircraft for about ten years.· The newer
·5· ·aircraft, we think is probably overvalued.
·6· ·They're easily securitizable, so there's a lot
·7· ·of securitization going on there.· The midlifes
·8· ·may be a little overvalued.· The end of life is
·9· ·kind of interesting.· For us in aircraft, what
10· ·we've been really interested in are the
11· ·operators.· So there's some very, very good
12· ·operators running funds, and we like that.
13· ·People who really, really know the nuts and
14· ·bolts of the business.
15· · · · We have -- we've got an investment in
16· ·railcars.· We love our manager there.· That's
17· ·an area that is not -- we don't think is
18· ·overvalued.
19· · · · We think shipping's been a pretty big bear
20· ·market for a long period of time.· We think
21· ·it's coming out.· We've actually made an
22· ·investment in there through the credit.
23· · · · Diversifying strategies, these are the
24· ·strategies that should do well in a down
25· ·market, relatively speaking.· One that hasn't
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Page 55·1· ·done particularly well is global macro.· Most
·2· ·of what we have is discretionary.
·3· ·Discretionary global macro has been very
·4· ·difficult.· We think that this market may have
·5· ·been changed permanently by technology and
·6· ·alternative or artificial intelligence, so
·7· ·maybe the machines are the way to go with this
·8· ·group as opposed to the human beings.· But we
·9· ·do think that emerging markets, again,
10· ·opportunities there, simply because it's a wide
11· ·variety, a wide diverse opportunity set in
12· ·emerging markets because there's so many
13· ·countries with so many different central banks,
14· ·and it looks more normal compared to the 0
15· ·percent interest rate environment we're all
16· ·going to.
17· · · · Insurance, we've been putting a lot of
18· ·money --
19· · · · MR. COLLINS:· Can I ask a quick question?
20· · · · MR. WEBSTER:· Yeah.
21· · · · MR. COLLINS:· What would you say our total
22· ·dollar amount is in that strategy today, in
23· ·global macro?
24· · · · MR. WEBSTER:· About 700 million, 6,
25· ·700 million.
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Page 56·1· · · · MR. COLLINS:· Is that down from a peak?
·2· · · · MR. WEBSTER:· Yeah, it is down from the
·3· ·peak.· And probably going to continue, to be
·4· ·honest.
·5· · · · So we've been very active in the insurance
·6· ·markets the last 18 months.· So insurance for
·7· ·us includes reinsurance, retrocession, life
·8· ·settlements, and runoff books of business.· Our
·9· ·book currently is mostly reinsurance.
10· ·Retrocession has seen some carnage in that
11· ·market.· We've seen people literally wiped out
12· ·there.· And so you're seeing a really good
13· ·hardening and we think you're getting
14· ·attractive returns in the retrocession market.
15· · · · So I tend to be pretty bearish about
16· ·everything, don't like a lot of things.· I like
17· ·commodities and we like some of the parts of
18· ·the insurance --
19· · · · MR. CHAIR:· Trent, we're embarrassed to
20· ·ask about retrocession.
21· · · · MR. WEBSTER:· Reinsurance for reinsurers.
22· · · · MR. CHAIR:· Okay.
23· · · · MR. COLLINS:· Leverage.
24· · · · MR. WEBSTER:· You love that.
25· · · · MR. COLLINS:· That's right.
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Page 57·1· · · · MR. WEBSTER:· I tried to tell Steve, so --
·2· · · · MR. COBB:· I have a question on that.· On
·3· ·page 15 on your asset allocation page, you show
·4· ·insurance is your fastest growth, 2 percent to
·5· ·8 percent.
·6· · · · MR. WEBSTER:· Yeah.
·7· · · · MR. COBB:· You show it also as your only
·8· ·high in terms of priority, but then you show no
·9· ·financial commitment.· Why no financial
10· ·commitment?
11· · · · MR. WEBSTER:· Well, what we actually have
12· ·is that on that graph -- and again, it's a
13· ·guidebook.· We actually have, at allocating
14· ·where it says liquid funds, we've got two,
15· ·liquid funds and private market funds.· This is
16· ·our unique oddity in that we classify insurance
17· ·as liquid funds.· So you can classify it as
18· ·private markets, we classify it as liquid
19· ·because they're really more evergreen and we
20· ·can call the money within six months or -- as