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Hiring, Managing, and Changing Managers Great Plains Public Employee Retirement System Forum November 14, 2008

Hiring, Managing, and Changing Managers Great Plains Public Employee Retirement System Forum November 14, 2008. Jon Forman Vice Chair, Board of Trustees Oklahoma Public Employees Retirement System (OPERS) & Professor, University of Oklahoma College of Law

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Hiring, Managing, and Changing Managers Great Plains Public Employee Retirement System Forum November 14, 2008

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  1. Hiring, Managing, and Changing ManagersGreat PlainsPublic Employee Retirement System ForumNovember 14, 2008 Jon Forman Vice Chair, Board of Trustees Oklahoma Public Employees Retirement System (OPERS) & Professor, University of Oklahoma College of Law www.law.ou.edu/faculty/forman.shtml

  2. Board of Trustees Advisors & Consultants Executive Director General Counsel ORGANIZATIONAL STRUCTUREOklahoma Public Employees Retirement System Director of Member Services Director of Information Technology Chief Investment Officer Director of Finance and CFO Assistant CFO Financial Services Administrator Defined Contribution Plans Manager Communication & Counseling Administrator Member Services

  3. OPERS Traditional DB Plan6/30/2006 Active OPERS Members 45,472 Retired OPERS Members 24,372 OPERS Plan Net Assets $5,817,165,538 OPERS Funded Ratio 71.4%

  4. OPERS INVESTMENTS • Board hires professional investment managers • Each allotted portion of the portfolio to manage • Managers decide what securities to buy and hold • Board helped by staff, investment consultant • Goal: find firms with particular expertise • Staff prepares requests for proposal (RFPs) • Staff reviews and analyzes submitted proposals • Investment Committee interviews, recommends • Board makes selection

  5. OPERS INVESTMENT MANAGERS(as of 6/30/2007)

  6. OPERS INVESTMENT MANAGERS(continued)

  7. Statement of Investment Policy(August 2008) • Investment philosophy • Investment objectives • Investment guidelines • Administration • Selection process guidelines

  8. Investment Guidelines • Full discretion granted to all investment managers • Perform fiduciary duties as prudent people • In general • Shall not purchase securities on margin • Be fully invested in the assigned asset class • Limits on options, puts, and calls; and derivatives

  9. Investment Guidelines • Domestic Equity Investment Managers • International Equity Investment Managers • Domestic Fixed Income Investment Managers • No more than 8% in the securities of a single issuer (except U.S. government and its agencies • Total portfolio minimum quality of A

  10. Administration • Investment Manager • Fiduciaries • Reporting • Formal reviews annually with the Board • Annual reports • Quarterly reports • Monthly reports • Billing • Executive Director & Chief Investment Officer

  11. Administration • Investment Consultant • Investment Committee • Regular reports • From Investment Consultant • From Chief Investment Officer • Periodic reviews of investment managers • Annual reviews of funds • Recommendations to the board of trustees

  12. Administration • Board of Trustees • Regular reports • From Investment Consultant • From Chief Investment Officer • From Investment managers • Actions

  13. Selection Process Guidelines • Request for Information • Request for Proposals (RFP) • Analysis from staff and/or investment consultant • Selection criteria

  14. Selection Criteria • E.g., domestic large cap investment managers • 10 years live data • History of successful performance • Must accept fiduciary status • “Most favored nation” fee clauses

  15. Termination Issues Generally • Termination takes time • Review • Place on watch • Terminate • Transition takes time • Shift to another manager • Active or passive • Transition management

  16. Remember: “Termination and selection of managers is fraught with risk” • AmitGoyal & Sunil Wahal, The Selection and Termination of Investment Management Firms by Plan Sponsors (May 2006) • Plan sponsors hire investment managers after large returns up to 3 years prior to hiring • However, post-hiring returns ~ 0 • Plan sponsors terminate investment managers after underperformance • But subsequent performance is frequently positive

  17. Other Issues • Asset Allocation • Fees • Most favored nation • Performance fees • Typically a base annual fee, say, 5 basis points • Plus a performance fee, say, 8 to 10 basis points • Investment Manager Roundtable

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