State Universities Retirement System of Illinois 7333 Serving Illinois Community Colleges and Universities 1901 Fox Drive Champaign, IL 61820- (217) 378-8800 (217) 378-9802 Investment Department To: Investment Committee From: Douglas Wesley, CFA, Lou Ann Fillingham, CPA, and Tony J. Lee Date: February 19, 2010 Re: Manager Development Program TIPS Manager Recommendation Overview At the December 2, 2009, SURS Board of Trustees meeting, a domestic Treasury Inflation- Protected Securities (TIPS) search was approved to expand the Manager Development Program (MDP) to more closely mirror the structure of the overall SURS investment program. Staff initiated the search and conducted a thorough review of the seven request for proposal (RFP) responses that the System received. Interviews were conducted with four semi-finalist firms in February, resulting in staff recommending Longfellow Investment Management and New Century Advisors be retained in the MDP. Search Process An RFP was created and publicly disseminated in December 2009. The RFP was designed to seek qualitative information about each firm s organizational structure, investment process and quantitative information about each firm s performance. The RFP was posted on the SURS website and advertised in the official state newspaper, the Arlington Heights Daily Herald. In addition, an advertisement was placed in Emerging Manager Monthly, a publication whose target audience is minority-owned and female-owned investment management firms, and in Pensions and Investments, a publication which targets the investment manager community and plan sponsors. The firms responding to the RFP are listed below. Four of the seven firms that responded had previously contacted SURS during the past year. In addition, three of the firms are current managers for SURS through Progress Investment Management, the system s manager of managers provider. Appendix A following this memorandum lists the managers who responded to the RFP and provides reasons for each manager being eliminated from further consideration. All managers not selected for allocations will be notified by mail. Firm Name Firm Ownership Location 1 Ambassador Capital Management African American Detroit, MI 2 Davis Hamilton Jackson & Associates Latino/Female Houston, TX 3 Leading Edge Investment Advisors Asian American San Francisco, CA 4 Longfellow Investment Management Female Boston, MA 5 New Century Advisors Female Bethesda, MD 6 The Swarthmore Group African American Philadelphia, PA 7 Williams Capital African American New York, NY
SURS staff reviewed the RFP responses and invited four firms to make presentations to the investment staff during February 2009. The following firms were interviewed: Firms Interviewed Leading Edge Investment Advisors New Century Advisors Longfellow Investment Management The Swarthmore Group Based on the RFP responses and manager presentations, staff identified two firms, Longfellow Investment Management and New Century Advisors, to be included in the MDP due to their experienced investment staff, organizational stability, investment process, positive performance record, and their ability to add product diversification to the SURS TIPS portfolio and MDP. The following criteria were considered in making decisions related to the search process: Selection Criteria A. Organization, Structure, and Personnel B. Assets Under Management and Client Base C. Investment Philosophy, Policy, and Process D. Research Capabilities and Resources E. Performance and Risk Factors F. Investment Operations, Compliance and Internal Controls G. Fee Structure Profiles of the recommended firms are included in Appendix B. Recommendation: Staff recommends the following: That Longfellow Investment Management be retained as a domestic Treasury Inflation- Protected Securities (TIPS) manager in the Manager Development Program, contingent on successful contract negotiations, with an initial allocation of $100 million. That New Century Advisors be retained as a domestic Treasury Inflation-Protected Securities (TIPS) manager in the Manager Development Program, contingent on successful contract negotiations, with an initial allocation of $75 million.
APPENDIX A Eliminated firms: Name Reasons for Elimination 1 Ambassador Capital Management Product yet to be funded No use of TIPS in other fixed income strategies 2 Davis Hamilton Jackson & Associates Consistent underperformance in product since 2004 inception through calendar year 2008 Limited TIPS assets under management Low trade execution volume with minority- and female- owned broker dealer firms 3 Williams Capital Product yet to be funded Short tenure of TIPS portfolio manager and investment team Broker dealer operation could pose a potential conflict of interest Eliminated Semi Finalist firms: Name Reasons for Elimination 1 Leading Edge Investment Advisors Product yet to be funded Short tenure of TIPS portfolio manager and investment team 2 The Swarthmore Group Strategic redundancy with other TIPS semifinalists Underperformance in product for the 1-year and since inception periods
APPENDIX B Longfellow Investment Management (Female) Longfellow Investment Management (Longfellow), based in Boston, Massachusetts, was established in 1986. The firm is 100% employee owned and controlled by four principals. Ms. Barbara McKenna and Ms. Michelle Martin control a majority ownership of the firm. Longfellow employs 11 investment professionals with a total staff of 15 individuals. As of December 31, 2009, Longfellow managed a total of $2.4 billion, of which $16 million was in the TIPS product currently under consideration by SURS. Clients in the TIPS product include Cox Health Systems. Investment Process Longfellow s objective is to construct a conservative portfolio that focuses on security selection and duration positioning. The firm uses broad market themes to frame the sector and security analysis in selecting securities that result in a portfolio that returns minimal tracking error to the TIPS benchmark. Longfellow s strategy focuses on macroeconomic factors as well as client objectives and guidelines to customize its portfolio. All guidelines are established prior to initiating analysis and portfolio construction ensuring that the firm provides the most appropriate solution to a client s needs. Longfellow s TIPS product concentrates on supply/demand inefficiencies and pricing anomalies in the market while maintaining a tight duration band around the index. Longfellow expects to hold 100% of its portfolio in U.S. Government TIPS and nominal U.S. Treasury securities. The portfolio currently holds 9 securities with an average expected turnover of 25% per year. Longfellow does not invest in futures, options, or derivatives in the firm s TIPS portfolios. Duration is targeted to be within a narrow band +/- 5% around the Index.
New Century Advisors (Female) New Century Advisors (NCA), based in Bethesda, Maryland, was registered with the SEC in 2002. NCA is 100% employee owned. Ms. Ellen Safir, Chief Investment Officer, controls majority ownership of the firm. NCA employs five investment professionals with a total staff of six individuals. As of December 31, 2009, NCA managed a total of $815 million, of which $207 million was in various TIPS ($80 million) or Global Inflation Linked Bond ($127 million) products currently under consideration by SURS. Clients in these products include ICMA, Bank Fund Staff Federal Credit Union, Teachers Retirement System of the State of Illinois, State of Maryland Retirement System, and Northern Trust Global Advisors (on behalf of a Midwest based corporate pension plan). Investment Process NCA s process is predicated on dissecting the fixed income markets into specific risks which can be valued and then isolated and employed in portfolios to better meet the client needs. The firm seeks to achieve consistent outperformance relative to its benchmark by balancing active portfolio risks while carefully monitoring tail-event performance. NCA employs a top-down approach. The firm s primary strategy to achieve the objective of outperforming the benchmark is attained through managing sector, duration, spread duration, key rate, and quality risk factors. NCA has created a proprietary risk model to assist in its efforts to manage and exploit risks to the advantage of its clients. NCA also seeks to employ the following strategies to add value to its clients through duration management, yield curve positioning, and sector selection. The firm expects to add approximately 50-100 basis points annually, net of fees above the benchmark over a 3-5 year time period. The portfolio typically holds between 25 30 high quality securities with an expected duration band of +/- 15% around the benchmark. NCA does not invest in derivatives or ETF s in its TIPS mandates.