Report to Board of Administration

Transcription

1 Report to Board of Administration Agenda of: JUNE 10, 2014 From: Thomas Moutes, General Manager ITEM: IV-C SUBJECT: CONTRACT RENEWAL WITH LOOMIS, SAYLES & COMPANY, L.P. AND POSSIBLE BOARD ACTION Recommendation: That the Board approve a three-year contract renewal with Loomis, Sayles & Company, L.P. for active management of a core domestic fixed income portfolio, and authorize the General Manager to approve and execute the necessary documents, subject to satisfactory business and legal terms. Discussion: Background and Investment Strategy The Board hired Loomis, Sayles & Company, L.P. ( Loomis ) in June 1980 to actively manage a domestic fixed income portfolio which is currently benchmarked against the Barclays Capital Aggregate Bond Index. Loomis approach is to add value over the index by focusing on sector rotation and security selection primarily within the investment grade corporate, Treasury, governmentrelated, mortgage-backed, asset-backed, municipal, and Yankee bond markets. The strategy is managed by a team of three portfolio managers, led by John Hyll, who has 26 years of experience with Loomis and 30 years of industry experience in total. Loomis, a global investment company, is a wholly owned subsidiary of Natixis Global Asset Management. Loomis is headquartered in Boston and employs 460 investment professionals. As of March 31, 2014, Loomis had $212 billion of total assets under management invested across various equity, fixed income, and mutual fund strategies, with $5.6 billion of assets under management in the fixed income strategy. The market value of LACERS portfolio was $1.2 billion as of March 31, The current three-year contract expires on July 31, Organization Loomis organizational structure, personnel, investment philosophy, strategy, and process have not changed since the last contract renewal in Board Report 1 June 10, 2014

2 Performance As of March 31, 2014, Loomis has outperformed its benchmark, net-of-fees, over a one-, three-, and five- year period and since inception, as presented in the table below: Annualized Performance Table as of 3/31/2014 (Net-of-Fees) One Three Five Since Quarter Year Years Years Inception * Loomis 2.99% 1.69% 5.24% 9.10% 9.81% BC U.S. Aggregate Index 1.84% -0.14% 4.01% 5.60% 8.24% Excess Returns 1.15% 1.83% 1.23% 3.50% 1.57% *Gross of Fees Loomis is on Good Standing status pursuant to the LACERS Manager Monitoring Policy. Fees The portfolio will continue to be managed to the existing asset-based fee structure. LACERS General Fund Consultant, Wilshire Associates, concurs with this recommendation. Strategic Plan Impact Statement Renewing Loomis contract will allow LACERS to maintain exposure to core fixed income, pursuant to the target asset allocation and core fixed income risk budget and is consistent with Goal IV (achieve satisfactory long-term risk adjusted investment returns). The discussion of the investment manager s profile, strategy, performance, and management fee structure is consistent with Goal V (uphold good governance practices which affirm transparency, accountability, and fiduciary duty). This report was prepared by Barbara Sandoval, Investment Officer II, Investment Division. RJ:BF:BS:ag Attachments: 1) Proposed Resolution 2) Consultant Recommendation Wilshire Associates 3) Manager s Fact Sheet 4) Workforce Composition Board Report 2 June 10, 2014

3 ATTACHMENT 1 CONTRACT EXTENSION LOOMIS, SAYLES & COMPANY, L.P. ACTIVE CORE DOMESTIC FIXED INCOME PORTFOLIO MANAGEMENT PROPOSED RESOLUTION BE IT RESOLVED, that the General Manager is hereby authorized to approve and execute a contract renewal subject to satisfactory business and legal terms and substantially consistent with the following services and terms: Company Name: Service Provided: LOOMIS, SAYLES & COMPANY, L.P. Active Core Domestic Fixed Income Portfolio Management Effective Dates: August 1, 2014 through July 31, 2017 Duration: Benchmark: Allocation as of March 31, 2014: Three years Barclays Capital U.S. Aggregate Index $1.2 billion June 10, 2014

4 ATTACHMENT 2 MEMORANDUM To: From: Subject: Board of Administration Los Angeles City Employees Retirement System Eileen L. Neill, CFA Wilshire Associates Incorporated Contract Renewal Recommendation Loomis Sayles & Company, LP Date: May 27, 2014 CC: Rod June, Bryan Fujita, CFA, Eduardo Park, Patrick Lighaam, Karim Simplis, CFA Recommendation Wilshire recommends that LACERS renew its contract with Loomis Sayles & Company, LP ( Loomis Sayles ). Summary Loomis Sayles has managed an active U.S. Fixed Income portfolio for LACERS since June As of June 2013, the portfolio transitioned from a Core-Plus U.S. Fixed Income portfolio to a Core U.S. Fixed Income portfolio with the Barclays Capital Aggregate Bond Index as its benchmark. Performance Loomis Sayles has produced positive returns relative to a custom benchmark 1 in 49 out of 80 quarters, or 61% of the time, over the past 20 years. The firm has produced on average, a quarterly, net-of-fee excess return of positive 31 basis points. Significant underperformance occurred during 2008, where the manager underperformed the benchmark by over 700 basis points. Exhibit 1 summarizes the quarterly excess returns over the past 20 years of the LACERS relationship. 1 Custom Benchmark: March 2005 June 2013: Barclays U.S. Universal Index; June 2013 to present: Barclays U.S. Aggregate Index. 1

5 ATTACHMENT 2 Exhibit 1 On a net-of-fee basis, the average rolling 60-month information ratio 2 over the past 20 years was a positive 42 basis points as shown in Exhibit 2. Our analysis indicates that rolling information ratios (which denotes trend) have been positive for a majority of time periods since inception. Exhibit 2 2 Information ratio = Excess return (alpha) / Excess risk (tracking error) 2

6 ATTACHMENT 2 Exhibit 3 shows Loomis Sayles composite portfolio (based on quarterly portfolio holdings) relative to the Barclays Aggregate Index. Loomis Sayles has consistently exhibited a lower quality and slightly lower duration bias relative to its benchmark since 12/31/2010. Holdings-based style analysis is not available prior to that period as LACERS employed a different general consultant prior to 12/31/2010. Exhibit 3 3

7 ATTACHMENT 2 Loomis Sayles is currently benchmarked against the Barclays U.S. Aggregate Index, which is a Core U.S. fixed income benchmark. For purposes of a peer analysis, we compare their gross-of-fee performance, since managers report returns to databases on a gross-of-fee basis, versus a universe of Core U.S. Fixed Income managers. Exhibit 4 shows this peer universe comparison on a rolling 60- month basis for periods from since inception to March For the majority of periods, Loomis Sayles has ranked in the top quartile of peers. (Caution must be exercised when using peer universe data for comparisons due to the survivorship bias effect.) Exhibit 4 Fees At 12 basis points per year, Loomis Sayles fee ranks in between the 10 th and 15 th percentile among all managers in their universe, which is above average (i.e., a lower fee) relative to this group. The universe is comprised of two hundred fifty-five separately-managed active Core U.S. fixed income managers. 4

8 ATTACHMENT 3 LOS ANGELES CITY EMPLOYEES RETIREMENT SYSTEM MANAGER FACT SHEET Manager: Investment Mandate: Benchmark: Loomis, Sayles & Company, L.P. Active Core Domestic Fixed Income Barclays Capital U.S. Aggregate Index Hire Date: June 1980 Fee Structure: Asset-based Contract Expiration Date: July 31, 2014 Assets Under Management: $1.2 billion as of March 31, 2014 Description of Strategy: Manager s investment approach is to add value over the market index by focusing on sector rotation and security selection primarily within the investment grade corporate, Treasury, government-related, mortgage-backed, assetbacked, municipal, and Yankee bond markets. Portfolio Characteristics per Manager Guidelines: Number of Holdings Range Portfolio Duration ± 20% of the Barclays Capital Aggregate Bond Index modified adjusted duration. Portfolio Credit Quality Investment Grade A2 as rated by Moody s or A as rated by Standard & Poor s or Fitch. Individual Issue Credit Quality B3 as rated by Moody's or B- as rated by Standard and Poor's or Fitch. This category also includes securities issued under 144A regulations.

9 ATTACHMENT 4 Vendor Address Category Loomis Sayles One Financial Center Boston, MA Asset Class Date Completed: June 2, 2014 TOTAL COMPOSITION OF WORK FORCE African Two or More Asian or American Indian/ Caucasian Total Percent (%) Gender American Races Hispanic Pacific Islander Alaskan Native (Non Hispanic) Employees Minority Male Female Occupation Full Time Full Time Full Time Full Time Full Time Full Time Full Time Full Time Full Time Officials & Managers % Professionals % Technicians % 0 0 Sales Workers % 11 2 Office/Clerical % Semi-Skilled % 0 0 Unskilled % 0 0 Service Workers % 0 0 Other % Total %