Post on 07-Jul-2020
Board Regular Meeting
ScheduleVenue
Organizer
Wednesday, February 26, 2020, 9:00 AM — 12:00 PM TRS Board Room, 5th Floor, 2500 N Lincoln Blvd., Oklahoma City, Okla.Phyllis Bennett
Agenda
1. Roll Call for Quorum
2. Discussion and Possible Action on Approval of January 22, 2020, BoardRegular Meeting Minutes
Bd-2 Minutes-01-22-20-BdRegMtg-draft.docx 1
3. Discussion and Possible Action on Investment Committee Report
3.1. Discussion and Possible Action on Master Custodian RFP Selection
Bd-3.1 Global Custodian RFP Selection.pdf 8
3.2. Discussion and Possible Action on Amendments to Investment PolicyStatement
Bd-3.2 TRS Investment Policy Statement - DRAFT - Feb 26 2020.pdf 14
3.3. Discussion and Possible Action on Selection of Finalists for Open-End Non-Core Real Estate RFP and Amendment of April Investment CommitteeMeeting Time
Bd-3.3 TRSO_Open_End_Core Plus Real Estate RFP 2020.pdf 45
3.4. Discussion and Possible Action on Investment Consultant Quarterly Report
Bd-3.4.a AndCo-QuarterlyReport.pdf 86 Bd-3.4.b 2019-09-30 TRSO (Alternatives Summary) (004).pdf 167
3.5. Discussion and Possible Action in Chief Investment Officer Report
Bd-3.5 CIO Report Feb2020.pdf 269
3.6. Discussion and Possible Action on Harvey Parkway Building Fiscal Year toDate Financial Report
Bd-3.6.a HarveyPkwySummaryBalSheet12-31-19.pdf 275 Bd-3.6.b HarveyParkwayBudget&IncomeStateFYTD 12-31-19.pdf 276
3.7. Discussion and Necessary Action to Approve a Capital Expense for theHarvey Parkway Building in Excess of $50,000
Bd-3.7 HarveyParkway5thFloorHeatPumpsMemo2-21-20.pdf 277
4. Discussion and Possible Action to Approve Budget Changes to Pay forFurniture, equipment and other expenses related to the relocation of the TRSOffice to the Harvey Parkway Building
Bd-4 BudgetChangesReOfficeMove-2-20-20.pdf 278
5. Discussion and Possible Action on Committee Reports:
5.1. Audit Committee
5.2. Governance Committee:Discussion and Possible Action to Approve Amendments to CommitteeCharters Contained in Board Policy Manual
Bd-5.2 Charters Amendments.docx 280
6. Discussion and Possible Action to Approve the GAS B 68 "Schedule ofEmployer Allocations and Collective Pension Amounts" and GASB 75"Schedule of Employer Allocations and Collective Other PostemploymentBenefits Amounts" Prepared by External Auditor Eide Bailly
Bd-6.a GASB 68 2019 AU 260 Letter.pdf 287 Bd-6.b GASB 68 Final Signed 2019 Report.pdf 290 Bd-6.c GASB 75 2019 AU 260 Letter.pdf 318 Bd-6.d GASB 75 2019 Financial Statements.pdf 321
7. Discussion and Possible Action to Set Contribution Rate for Federal and GrantMatching Funded Position for FY 2021
Bd-7 FederalGrantMatchFY2021Memo.pdf 348
8. Discussion and Possible Action to Review First Draft of Board ProcurementPolicy to be Included in the Board Policy Manual Upon Final Approval
Bd-8 Board Procurement Policy Feb 2020.docx 349
9. Discussion and Possible Action on Staff Recommendations on ProposedLegislation for the 2020 Session
Bd-9 TRSOpposeSupport2-22-20.docx 353
10. Discussion and Possible Action on Agency Reports:
10.1. Client Services
Bd-10.1 Feb2020 ClientServicesBd Report.pdf 361
10.2. Human Resources
Bd-10.2 HR Status Report 2020-02-26.pdf 363
10.3. Financea. Employer Reportingb. CFO Report
Bd-10.3.a Employer Reporting.pdf 364Bd-10.3.b CFO Reports.pdf 365
10.4. Deputy Director of Operations
Bd-10.4 DepDirRpt-Feb2020.docx 371
10.5. General Counsel
Bd-10.5 GC Report Feb.docx 372
10.6. Executive Director
2500 N. Lincoln Blvd., 5th Floor, Oklahoma City, OK
11. Questions and Comments from Trustees
12. New Business
13. Adjournment
Next meetings:Investment Committee - 2 p.m. Tuesday, April 21Board Regular Meeting - 9 a.m. Wednesday, April 22
MEETING MINUTES
JANUARY 22, 2020
BOARD OF TRUSTEES REGULAR MEETING
TEACHERS’ RETIREMENT SYSTEM OF OKLAHOMA
A regular meeting of the Board of Trustees of the Teachers’ Retirement System of Oklahoma was called to
order by Roger Gaddis, Vice-Chairman, at 9:02 a.m. January 22, 2020, in the Administration Board Room, 5th
Floor, Oliver Hodge Education Building, 2500 N. Lincoln Blvd., Oklahoma City, Oklahoma. The meeting
notice and agenda were posted in accordance with 25 O.S. Section 311(A)(9).
TRUSTEES PRESENT:
Roger Gaddis, Vice-Chairman
Tim Allen
Bill Bentley
Rod Boles
Lisa Henderson*
Michael Kellogg
Brandy Manek
Brandon Meyer
Chris Rector
Mathangi Shankar
Stephen Streeter
Drew Williamson*
Greg Winters
TRUSTEES ABSENT:
Vernon Florence, Chairman
Judie Harris, Secretary
TRS STAFF PRESENT:
Tom Spencer, Executive Director
Sarah Green, General Counsel
John Santos, Deputy Director of Operations
Dixie Moody, Director of Client Services
Kirk Stebbins, Chief Investment Officer
Sam Moore, Director of Finance/CFO
Kim Bold, Director of Human Resources
Debra Plog, Employer Reporting Manager
Joe Cappello, Sr. Investment Officer
Phyllis Bennett, Executive Assistant
OTHERS PRESENT:
Doug Anderson, AndCo Consulting
Peter Brown, AndCo Consulting
Jack Evatt, AndCo Consulting
Steve Massey, OREA
Wayne Maxwell, RPOE
* Denotes late arrival or early departure
ITEM 1 - ROLL CALL FOR QUORUM: Vice-Chairman Gaddis asked the recording secretary to call roll to
determine if a quorum was present. Trustees responding were Mr. Allen, Mr. Bentley, Mr. Boles, Mr. Gaddis,
Mr. Kellogg, Ms. Manek, Mr. Meyer, Mr. Rector, Ms. Shankar, Mr. Streeter, and Dr. Winters. A quorum was
present.
ITEM 2 – SWEAR IN NEW NON-VOTING TRUSTEE, BILL BENTLEY: Mr. Bentley read the Oath of
Office and shared some information about himself. Mr. Bentley will serve a one-year term on behalf of Retired
Professional Oklahoma Educators.
Ms. Henderson arrived at 9:02 a.m.
ITEM 3 – DISCUSSION AND ACTION ON APPROVAL OF MINUTES FROM DECEMBER 11, 2019,
BOARD REGULAR MEETING:
Page 1 of 372
A motion made by Dr. Winters with a second made by Mr. Boles to approve the minutes of the December 11,
2019, Board Regular Meeting carried by a unanimous voice vote. Trustees responding were Mr. Allen, Mr.
Boles, Mr. Gaddis, Ms. Henderson, Mr. Kellogg, Ms. Manek, Mr. Meyer, Mr. Rector, Ms. Shankar, Mr.
Streeter, and Dr. Winters.
Mr. Williamson arrived at 9:07 a.m.
ITEM 4 – DISCUSSION AND POSSIBLE ACTION ON INVESTMENT COMMITTEE REPORT:
Investment Committee Chairman Roger Gaddis presented items discussed in yesterday’s meeting.
The next item was taken out of sequence.
4.2 - DISCUSSION AND POSSIBLE ACTION ON AMENDMENTS TO LIMITED PARTNERSHIP
AGREEMENT, FEE SCHEDULE AND INVESTMENT MANAGER AGREEMENT WITH L&B
REALTY FOR THE GOLDEN DRILLER FUND: TRS General Counsel Sarah Green reviewed TRS’
relationship with L&B and the proposed amendments to the investment manager agreement with L&B and the
agreement with Golden Driller LP.
A motion out of the Investment Committee to approve the proposed amendments subject to minor modifications
upon legal approval carried by a unanimous voice vote. Trustees responding were Mr. Allen, Mr. Boles, Mr.
Gaddis, Ms. Henderson, Mr. Kellogg, Ms. Manek, Mr. Meyer, Mr. Rector, Ms. Shankar, Mr. Streeter, Mr.
Williamson and Dr. Winters.
4.3 - DISCUSSION AND POSSIBLE ACTION ON INVESTMENT CONSULTANT MANAGER
REVIEW: Mr. Gaddis said the report prepared by AndCo Consulting was reviewed in depth at the Investment
Committee meeting yesterday. Investment Consultant to the Board Doug Anderson reviewed Hotchkis & Wiley
and Geneva Capital, which are on AndCo’s watch list due to performance and ownership change respectively.
He also pointed out AndCo’s research group and the reports they generate.
4.4 - DISCUSSION AND POSSIBLE ACTION ON INVESTMENT CONSULTANT REPORT: Mr.
Anderson presented AndCo’s investment performance review for the period ending December 31, 2019. For the
Market, he reported CY 2019 the S&P 500 was up 31.49% and U.S. Aggregate bond index was up 8.72%. Also
for CY 2019, TRS’ Total Fund Composite was up 9.49%; Total Equity Composite was up 25.53%; the Total
International Equity Composite was up 21.34%; and the Total Fixed Income was up 11.83%. TRS’ Total Fund
market value was at $17,741,769,007, and Mr. Anderson said the current value is now higher. He added that
FYTD, the TRS’ Total Fund Composite is up 5.69%.
4.5 - DISCUSSION AND POSSIBLE ACTION ON CHIEF INVESTMENT OFFICER REPORT: TRS
Chief Investment Officer Kirk Stebbins reviewed projects and education sessions planned for 2020. He reported
that the Real Estate open-ended RFP responses are due Friday and the Custodial Bank RFP responses are due
January 31. Mr. Stebbins encouraged Trustees to take a copy of CFA Institute’s “A Primer for Investment
Trustees” that he provided.
4.1 - DISCUSSION AND POSSIBLE ACTION ON MID CAP U.S. EQUITY STRUCTURE: Mr. Gaddis referred Trustees to the Executive Summary and graphs in the “Mid Cap Equity Structure Review and
Proposal” that the Investment Committee discussed thoroughly yesterday. Mr. Stebbins reviewed the
Conclusion & Recommendation report. There was discussion on the recommended changes, investment
managers involved, and how much TRS can save in fees.
Page 2 of 372
ITEM 5 – DISCUSSION AND POSSIBLE ACTION REGARDING JOINT STAFF AND
CONSULTANT MID CAP U.S. EQUITY STRUCTURAL REVIEW INCLUDING POSSIBLE
CHANGES TO ALLOCATIONS AMONG ACCOUNTS, REALLOCATIONS OF FUNDS TO
ACHIEVE DESIRED ALLOCATIONS AND/OR POTENTIAL TERMINATION OF AGREEMENTS
WITH ANY OR ALL OF THE FOLLOWING ASSET MANAGEMENT SERVICES REQUIRED TO
ACHIEVE DESIRED OUTCOMES
a. AJO, LP
A motion made by Mr. Gaddis with a second made by Dr. Winters to terminate the Mid Cap account managed
by AJO and transition funds to Northern Trust as successor manager and to allow staff to make allocations as
necessary carried by a unanimous voice vote. Trustees responding were Mr. Allen, Mr. Boles, Mr. Gaddis, Ms.
Henderson, Mr. Kellogg, Ms. Manek, Mr. Meyer, Mr. Rector, Ms. Shankar, Mr. Streeter, Mr. Williamson and
Dr. Winters.
b. Frontier Capital Management
A motion made by Mr. Gaddis with a second made by Mr. Meyer to terminate the Mid Cap account managed
by Frontier Capital Management and transition funds to Northern Trust as successor manager and to allow staff
to make allocations as necessary carried by a unanimous voice vote. Trustees responding were Mr. Allen, Mr.
Boles, Mr. Gaddis, Ms. Henderson, Mr. Kellogg, Ms. Manek, Mr. Meyer, Mr. Rector, Ms. Shankar, Mr.
Streeter, Mr. Williamson and Dr. Winters.
c. Hotchkis & Wiley Capital Management, LLC
d. Wellington Management Company, LLC
e. NTAM Russell 1000 Index
f. NTAM SciBeta Index
Mr. Gaddis said no action will be taken on items c, d, e and f.
ITEM 6 – DISCUSSION AND POSSIBLE ACTION TO AMEND THE INVESTMENT MANAGER
AGREEMENT WITH NORTHERN TRUST TO INCLUDE RUSSELL MID CAP INDEX SERVICES
UNDER MANAGEMENT OF NORTHERN TRUST AND DETAILING FEES AND INVESTMENT
GUIDELINES FOR SERVICES RENDERED:
A motion made by Dr. Winters with a second made by Mr. Rector to amend the investment manager agreement
with Northern Trust to include the Russell Mid Cap Index Services under management of Northern Trust and
detailing fees and investment guidelines for services rendered carried by a unanimous voice vote. Trustees
responding were Mr. Allen, Mr. Boles, Mr. Gaddis, Ms. Henderson, Mr. Kellogg, Ms. Manek, Mr. Meyer, Mr.
Rector, Ms. Shankar, Mr. Streeter, Mr. Williamson and Dr. Winters.
A motion by Dr. Winters with a second made by Mr. Rector to amend the previous motion to include using
Northern Trust as the transition manager carried by a unanimous voice vote. Trustees responding were Mr.
Allen, Mr. Boles, Mr. Gaddis, Ms. Henderson, Mr. Kellogg, Ms. Manek, Mr. Meyer, Mr. Rector, Ms. Shankar,
Mr. Streeter, Mr. Williamson and Dr. Winters.
ITEM 7 - DISCUSSION AND POSSIBLE ACTION ON COMMITTEE REPORTS:
a. Audit: DISCUSSION AND POSSIBLE ACTION ON STINNETT & ASSOCIATES’ REPORT
ON CYBER SECURITY: Audit Committee Chair Dr. Winters reported that the committee had a
Page 3 of 372
conference call last week about OMES I.T. issues with Stinnett & Associates. He said there is positive
movement with OMES and the committee continues to work with them on the cyber security protection
TRS is seeking. It was decided not to close out the Cyber Security Audit because recommendations are
expected to come at the end of this week. It is hoped that the Cyber Security Audit will be closed out at
the February meeting. TRS Executive Director Tom Spencer shared positive comments about OMES
Director Steven Harpe.
b. Governance: Governance Committee Chair Mr. Kellogg said there was nothing to report.
ITEM 8 – DISCUSSION AND POSSIBLE ACTION ON AMENDMENTS TO VISION STATEMENT:
Mr. Spencer reviewed the Vision Statement that was approved by the Board at the October 2019 Retreat. He
said after further input from Trustees changes were made and he presented a draft of an amended Vision
Statement for consideration.
A motion made by Dr. Winters with a second made by Mr. Kellogg to approve the amended Vision Statement
as presented carried by a unanimous voice vote. Trustees responding were Mr. Allen, Mr. Boles, Mr. Gaddis,
Ms. Henderson, Mr. Kellogg, Ms. Manek, Mr. Meyer, Mr. Rector, Ms. Shankar, Mr. Streeter, Mr. Williamson
and Dr. Winters.
ITEM 9 – DISCUSSION AND POSSIBLE ACTION ON FINAL ADOPTION OF PERMANENT
RULES: 715:1-1-5[AMENDED]; 715:10-1-6[AMENDED]; 715:10-5-7[AMENDED]; 715:10-9-
3[AMENDED]; 715:10-13-15[AMENDED]; 715:10-15-3[AMENDED]; 715:10-17-5[AMENDED]; 715:10-
17-16[NEW]: TRS General Counsel Sarah Green explained that in current rulemaking process TRS received no
comments during the public comment period from December 3, 2019, through January 2, 2020, and no one
appeared to comment at the public hearing January 6, 2020. The next step is final adoption by the Board and
then the rules will be submitted to the Governor and Legislature.
A motion made by Mr. Meyer with a second made by Dr. Winters to adopt the permanent rules 715:1-1-
5[AMENDED]; 715:10-1-6[AMENDED]; 715:10-5-7[AMENDED]; 715:10-9-3[AMENDED]; 715:10-13-
15[AMENDED]; 715:10-15-3[AMENDED]; 715:10-17-5[AMENDED]; 715:10-17-16[NEW] carried by a
unanimous voice vote. Trustees responding were Mr. Allen, Mr. Boles, Mr. Gaddis, Ms. Henderson, Mr.
Kellogg, Ms. Manek, Mr. Meyer, Mr. Rector, Ms. Shankar, Mr. Streeter, Mr. Williamson and Dr. Winters.
Ms. Green requested a break to allow the executive assistant to fix the orientation of some documents on the
meeting tablets.
A break was taken from 10 a.m. to 10:10 a.m.
ITEM 10 – DISCUSSION AND POSSIBLE ACTION ON SECURITIES LITIGATION REPORT: Ms.
Green explained that one of her duties is to provide the Board an annual report of TRS’ class action claims
filing status. She said TRS’ previous custodial bank was JP Morgan and is now Northern Trust. Staff files
claims involving JP Morgan. She presented Northern Trust’s report of Class Action Activity dating back to
January 2010. Northern Trust gets 2% of proceeds, up to a maximum of $1,000 per claim filed. It recovered
$93,251.34 on behalf of TRS in FY 2019.
ITEM 11 – DISCUSSION AND POSSIBLE ACTION ON STAFF RECOMMENDATIONS ON
PROPOSED LEGISLATION FOR THE 2020 SESSION: Mr. Spencer reviewed bills relevant to TRS that
have been filed for the 2020 Legislative session. There were several bills requesting COLAs to state retirement
systems, a couple of which were held over from last year as they were referred to the Legislative Actuary. Mr.
Page 4 of 372
Spencer explained that last year Gov. Stitt issued an executive order stating that State agencies cannot have
contract lobbyists without approval of their cabinet secretary. TRS did not seek approval for a contract lobbyist.
There was discussion. No action was necessary.
ITEM 12 – DISCUSSION AND POSSIBLE ACTION ON SELECTION OF FINALIST FOR
EXTERNAL AUDITOR SERVICES: Mr. Spencer said TRS’ Board of Trustees and the State Auditor &
Inspector’s office issued a joint RFP for external auditor services. He reviewed information about the five
candidates and said TRS and SAI recommend the Board retain Eide Bailly as TRS’ external auditor. The five-
year contract will cost $502,100.
A motion made by Dr. Winters with a second made by Mr. Allen to retain Eide Bailly for external auditor
services carried by a unanimous voice vote. Trustees responding were Mr. Allen, Mr. Boles, Mr. Gaddis, Ms.
Henderson, Mr. Kellogg, Ms. Manek, Mr. Meyer, Mr. Rector, Ms. Shankar, Mr. Streeter, Mr. Williamson and
Dr. Winters.
ITEM 13 - DISCUSSION AND POSSIBLE ACTION ON AGENCY REPORTS:
13.1 – TRS Client Services Director Dixie Moody reviewed her division’s metrics through December 2019:
There were 350 requests for retirement estimates were received, and around 400 were completed due to
inventory from November. In December there were 4,874 incoming calls, 87% of which were answered by an
Information Center agent within 13 seconds, 11% opted to go through the menu options and 81 callers
abandoned their call after waiting approximately 5 seconds. Client Services received and responded to 228
emails, and 402 members were added to the Member Portal. Of 207 members who applied for a January 1
retirement, 10 were disability retirements, 6 of whom were approved by TRS’ Medical Board, and 4 of by the
Social Security Administration. There were 159 annuities terminated due to death.
13.2 – TRS Human Resources Director Kim Bold reported the manager of the Information Center plans to retire
July 1 and she hopes to fill the position soon to for training purposes. She said department managers are
working on PMPs.
13.3 – Finance:
a. TRS Employer Reporting Manager Debra Plog said there are now two late employer reports and she
explained their reasons for the late reporting.
b. TRS CFO Sam Moore said the Balance Sheet as of December 31, 2019, was up $634.8 million since October
31, 2019. The Statement of Revenues, Expenditures and Changes for the 6 Months Ended December 31, 2019,
reflects late payments to State Credit in FY 2019. Retirement Benefit Payments were lower due to the $18
million stipend that was paid out last year. On the Comparison of Actual Expenditures FY 2019 and FY 2020
for the 6 months ended December 31, 2019, Auditing Services reflects a large decrease because TRS paid BKD
for services, and Postage shows a large decrease because of the large mailing a year ago. On the Comparison of
FY 2020 Budget to Actual Auditing Services was off because TRS had budgeted to pay BKD. The Claims for
Authorized Expenditures were presented without comment.
13.4 – TRS Deputy Director of Operations John Santos reviewed issues he worked on the past month:
• 70,770 1099 forms were generated and sent to a vendor to print and mail. This will result in an increase
in call volume.
• In 2019, there were 81,967 incoming calls, 65,997 answered calls, 33,516 workflows created, 33,417
workflows closed, 2,433 retirements processed and 1,781 terminated annuities processed.
Page 5 of 372
• Annual member statements were generated and available on the Member Portal. TRS is issuing a bid
solicitation for printing and mailing.
• Member Portal: 10,308 user accounts were created in CY 2019. From inception through Jan. 17, 2020,
there are now 32,032.
• OMES has made some progress on the services TRS requested. They scheduled a site visit for network
connectivity to the new building. They also upgraded eight servers and My Consulting will prepare for
testing.
13.5 – TRS General Counsel Ms. Green updated the Board on projects she has been working on:
• Attorney General Opinion Letter Request and Response: Ms. Green reviewed documents related to
TRS’ External Funds Matching Statute.
• Securities Litigation re GE: a. The briefing cycle was completed in November. b. TRS is awaiting
scheduling of oral arguments.
• White Star Bankruptcy: a. A prepetition claim for $169K was filed for May 2019 rent. B. TRS filed a
claim for post-petition debt because White Star’s lease ran through 2021. TRS is limited to one year of
rent, about $1.3 million. Today TRS will file a claim for that amount through its bankruptcy counsel.
White Star originally filed to reject their lease of November 30 but they were still in the building on
December 15, so TRS raised an issue and ended up settling for an additional $50K rent for December
along with furniture White Star left behind.
• Harvey Parkway Building: White Star occupied 72% of the building once and TRS’ property manager is
doing a good job of getting that space filled, which mitigates TRS’ damages from White Star’s lease
running through 2021. a. The first floor has a fitness center and a café area, that is not being used, but
the other side is vacant space where TRS plans to build a conference room. b. Intensity leased one-half
of the 2nd floor January 1, 2020. c. Another company is interested in leasing the remaining 2nd floor
space May 1, 2020. d. Contango, who purchased White Star, leased the entire 3rd floor. Arcadia Capital
who is currently occupying 9,000 square feet on the 4th floor, would like to move to the 6th floor to
occupy 12,000 square feet February 1. Their former 9,000 square foot space will be leased out
eventually. The remaining 4th floor space is occupied by federal tenants and the property manager. e.
TRS renewed the 5-years lease with the Comptroller of the Currency on the 4th floor effective January 1.
f. TRS intends to occupy the entire 5th floor. g. The property manager responded to an RFP from the
Department of Tourism who would like to lease 25K square feet of space. TRS probably does not have
enough space for that but it is good that our property manager responded.
Greg asked how many square feet is on each floor. Mr. Spencer replied it’s 16,000 sq. ft.
• Permanent Rulemaking was discussed earlier in the meeting.
13.6 – TRS Executive Director Tom Spencer shared his activities from December 10 through January 21, 2020:
• Mr. Spencer and TRS CFO Mr. Moore attended Governor Stitt’s Leadership Summit January 7.
Recognition was given to some agencies that had been nominated for various awards. Agency CFOs
later met separately with Secretary of Budget Mike Mazzei.
• Information Technology: In December, the Board authorized TRS to seek a proposal from a software
company to replace ALICE. A request was made to TRS’ Cabinet secretary to approve but he has not
responded.
• Budget Review: Messrs. Spencer, Santos and Moore met with Secretary Mazzei, Secretary of Digital
Transformation David Ostrowe and two OMES budget staffers in December regarding information they
wanted for the Governor’s Annual Budget book. TRS’ highlights include its administrative costs being
some of the lowest in the nation, three of the Oklahoma plans were the top three in the nation with the
highest percentage improvements in funded ratio, and TRS’ long-term investment returns.
• The Legislation report was discussed earlier in the meeting.
Page 6 of 372
• Communications: a. TRS’ Popular Annual Financial Report (PAFR) was included in TRS’ newsletter
which was sent out in December. b. There will be a couple follow-up interviews to hire a
communications firm. c. Mr. Santos talked about the “annual statement”, which is considered a best
practice for public pension plans. It gives members information on their accounts and a benefit estimate.
• The audit was discussed earlier in the meeting.
• Actuarial: Ryan Falls of Gabriel Roeder Smith will present an “experience study” in April. This study is
done to analyze the investment return assumption, inflation, mortality and wage growth. This data is
used for an Asset/Liability study.
• Office Building: Issues with White Star were covered in Ms. Green’s report. Staff was taken in small
groups to tour the Harvey Parkway Building. Mr. Spencer invited Trustees to tour the building.
Meetings with the space planner are ongoing. A moving committee headed by TRS’ Business Manager
is working on details with a goal to be in the building by July 1. There was discussion about furniture
left for TRS at the Harvey Parkway Building and the future of its fitness center. There was also
discussion about sharing TRS’ positive news that was mentioned in the Communications report.
ITEM 14 – QUESTIONS AND COMMENTS FROM TRUSTEES: Mr. Gaddis reviewed upcoming meeting
times of the Investment Committee meeting and reminded Trustees that everyone is invited to attend.
ITEM 15 – NEW BUSINESS: There was no new business.
ITEM 16 – ADJOURNMENT: Mr. Gaddis adjourned the meeting at 11:19 a.m.
By:
_________________________________________
Roger Gaddis, Vice Chairman
Page 7 of 372
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Page
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OVER
VIEW
OF
RESP
ONSE
SBN
Y Mellon
Northern Trust
State Street
Corporate History
Year fo
unde
d17
8418
8917
92Years in glob
al custody
business
151
131
39Globa
l Custody
Client Base
Total num
ber o
f global custody
clients
4,10
02,44
654
2Num
ber o
f pub
lic pen
sion clients
150
302
102
Total value
of assets u
nder custody
$23 Trillion
$8.1 Trillion
$3.9 Trillion
Value of pub
lic pen
sion assets und
er custody
$2.0 Trillion
$1.9 Trillion
$2.1 Trillion
Total clients g
aine
d in th
e last 3 years (#
/ $A
UC)
41 Clients /
$26
7.2 Billion
233 / $
338 Billion
7 Clients /
$15
.2 Billion
Total clients lost in the last 3 years (#
/ $A
UC)
23 Clients /
$71
Billion
83 / $2
37 Billion
144 Clients /
$24
3 Billion
# of employees w
ithin th
e glob
al custody
de
partmen
t19
,300
10,080
16,743
Securities L
ending
Curren
t num
ber o
f clients
402
454
283
Num
ber o
f pub
lic pen
sion clients
8912
244
Num
ber o
f clients g
aine
d in th
e last 3 years
6024
58Num
ber o
f clients lost in the last 3 years
173
97Security Lend
ing Split
90/10
90/10
85/15
Cash M
anagem
ent ‐ M
ost com
mon
ly used vehicle
Total current STIF AU
M$3
2.98
billion
$30.42
Billion
$53.6 billion
20
18 ann
ualized
return
2.10
%2.10
%2.10
%20
19 ann
ualized
return (m
ost u
p‐to‐date)
2.40
%2.40
%1.90
%Pe
rson
nel
Num
ber o
f accou
nts serviced by
this relatio
nship
mgm
t. team
98
7Accoun
t relationship staff add
ed (last 3
years)
64
3Accoun
t relationship staff lost (last 3 years)
51
3Av
erage years o
f experience of re
latio
nship team
1918
> 20
Page
10
of 3
72
BLEN
DED
SCOR
ING
MAT
RIX
Weight
BNY Mellon
Northern Trust
State St
Max
Bidd
er M
eets All Minim
um Qua
lifications (Y
es/ No)
Yes
Yes
Yes
Bidd
er’s ability to perform
Services R
eque
sted
Risk M
anagem
ent a
nd Internal Con
trols
3.3%
99
910
Custod
ial Capabilitie
s3.3%
99
910
Settlemen
t and
Securities Processing Capabilties
3.3%
99
910
Accoun
ting, Aud
iting, and
Rep
ortin
g Capabilities
3.3%
910
910
System
s and
Techn
ology
3.3%
89
910
Security and Bu
siness C
ontin
uity
3.3%
99
910
Trade and FX
Processing
3.3%
89
810
Performance M
easuremen
t and
Analytics
3.3%
99
910
Securities L
ending
3.3%
99
810
Total (Out of 3
0)30
%79
8279
90
Bidd
er’s experience an
d record of successful past p
erform
ance
with
engagem
ents of sim
ilar scope
and
com
plexity
Firm
Experience
8%9
99
10Team
Mem
ber E
xperience
8%9
99
10Re
ference Ch
ecks
8%8
98
10To
tal (Out of 3
0)30
%26
2726
30
Disclosures
Material D
isclosures (Yes/No)
10%
310
210
Total (Out of 1
0)10
%3
102
10
Price
Bund
led Co
st15
%9
93
10Ad
ditio
nal Fees &
Expen
ses
15%
47
510
Total (Out of 3
0)30
%13
168
20
Grand
Total (R
aw)
121
135
115
160
Grand
Total (W
eighted)
75%
88%
66%
100%
Page
11
of 3
72
NorthernTrust
AnnualFee:
•$2
5,00
0
SecurityLendingSplit:
•90
%/1
0%
On‐BoardingFee:
•$0
STIFFee:
•10
bp
TotalFY21FeeEstimate*
•AnnualFee:$
25,0
00
•STIFFee:$
135,
000
•TotalFee:$160,000
FEE
COM
PARI
SON
BNYMellon
AnnualFee:
•$2
5,00
0
SecurityLendingSplit:
•90
%/1
0% +
2bp
Adm
in. F
ee
On‐BoardingFee
•$0
STIFFee:
•7b
p
TotalFY21FeeEstimate*
•AnnualFee:
$25,
000
•STIFFee:$
94,5
00
•SecLendingAdminFee:$
360,
000
•TotalFee:$479,500
StateStreet
AnnualFee:
•$4
50,0
00 w
ith S
TIF
•$0
ifDD
A Ch
ecki
ng A
ccou
nt (F
ed fu
nds r
ate)
SecurityLendingSplit:
•Ra
nge
of 8
5%/1
5% to
90%
/10%
On‐BoardingFee:
•$0
with
STI
F
•$1
00,0
00 w
ith D
DA C
heck
ing
STIFFee:
•10
bp
TotalFY21FeeEstimate*
•AnnualFee:$
450,
000
•STIFFee:$
135,
000
•TotalFee:$585,000
* Fee
est
imat
e ba
sed
on $
135m
il av
erag
e ca
sh b
alan
ce, $
1.8B
ass
ets o
n lo
an, S
TIF
cash
veh
icle
(Not
DDA
)
Page
12
of 3
72
APPE
ND
IX: F
Y19
SECU
RITY
LEN
DIN
G BR
EAKD
OW
N
Page
13
of 3
72
Investment Policy Statement adopted September February 1826, 20192020
INVESTMENT POLICY STATEMENT AS OF SEPTEMBER 2019FEBRUARY 2020
Page 14 of 372
Investment Policy Statement adopted September February 1826, 20192020
Table of Contents
I. INTRODUCTION AND STATEMENTS OF PURPOSE, PHILOSOPHY AND ETHICS .............................. 1 A. Legal Authority and System Description........................................................................ 1 B. Statement of Purpose ...................................................................................................... 2 C. Statement of Investment Philosophy .............................................................................. 3 D. Statement of Ethical Standards ....................................................................................... 4
II. STATEMENT OF DUTIES AND RESPONSIBILITIES ........................................................................ 5 A. Board of Trustees ............................................................................................................ 5 B. Staff ................................................................................................................................. 5 C. Investment Consultant .................................................................................................... 6 D. Investment Managers ...................................................................................................... 7 E. Custodian ........................................................................................................................ 8 F. Securities Lending Agent ............................................................................................... 9 G. Transition Manager ....................................................................................................... 10
III. PROCEDURES .......................................................................................................................... 11 A. Investment Policy Review ............................................................................................ 11 B. Investment Manager Policy Exceptions ....................................................................... 11 C. Third Party Marketing and Referrals Disclosure Policy ............................................... 11 D. Request for Proposal Policy .......................................................................................... 12 E. Additional allocations to a previously retained manager: ............................................ 13
IV. INVESTMENT GOALS AND OBJECTIVES ................................................................................... 14 V. INVESTMENT GUIDELINES AND CONSTRAINTS ........................................................................ 15
A. Public Market Separate Account Investments .............................................................. 15 B. Private Market Partnership Interests and Commingled Account Investments ............. 20
VI. EVALUATION AND REVIEW ..................................................................................................... 23 A. Investment Staff Reporting Requirements .................................................................... 23 B. Investment Consultant Reporting Requirements .......................................................... 23 C. Investment Manager Reporting Requirements ............................................................. 23
APPENDIX A - PERFORMANCE BENCHMARKS .................................................................................. 25 APPENDIX B - STRATEGIC ASSET ALLOCATION ............................................................................... 26 APPENDIX C - REBALANCING POLICY .............................................................................................. 27 APPENDIX D - INVESTMENT MANAGER EXCEPTIONS TO INVESTMENT GUIDELINES ........................ 29
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Investment Policy Statement adopted September February 1826, 20192020
I. INTRODUCTION AND STATEMENTS OF PURPOSE, PHILOSOPHY AND ETHICS
The Board of Trustees of the Teachers’ Retirement System of Oklahoma, as the governing bodyfor the System, deems it prudent and necessary to maintain this Investment Policy Statement to actas the principal governing document for the investment of System assets.
A. Legal Authority and System Description
The System is established by statute; the legal authority and description of the System are detailedbelow.
Constitutional AuthoritySection 62 of Article 5 of the Oklahoma Constitution was added as a result of the passage of StateQuestion 306 on July 14, 1942. This section reads:
“The Legislature may enact laws to provide for the retirement for meritorious service of teachers and other employees in the public schools, colleges and universities in this State supported wholly or in part by public funds, and may provide for payments to be made and accumulated from public funds, either of the State or of the several school districts. Payments from public funds shall be made in conformity to equality and uniformity within the same classifications according to duration of service and remuneration received during such service.”
Statutory Authority As a result of the passage of State Question 306, the Legislature enacted House Bill 297 in the 1943 legislative session that created the Oklahoma Teachers Retirement System (“System”). The legislation has been changed substantially in the years since its creation and is currently codified in Oklahoma Statutes Title 70, Sections 17-101 et. seq. (NOTE: In the remainder of this document, statutory references will follow the notation O.S. 70 § 17-101 to reference Oklahoma Statutes Title 70, Section 17-101.)
Purpose of System In O.S. 70 § 17-102, paragraph 1 creates the Oklahoma Teachers Retirement System and outlines the purpose of the System as follows:
“A retirement system is hereby established and placed under the management of the Board of Trustees for the purpose of providing retirement allowances and other benefits under the provisions of this act for teachers of the State of Oklahoma.”
Board of Trustees Powers The second paragraph of O.S. 70 § 17-102 provides the broad terms of the powers entrusted to the Board of Trustees (“Board”):
“The Board of Trustees shall have the power and privileges of a corporation and shall be known as the "Board of Trustees of the Teachers' Retirement System of Oklahoma", and by such name all of its business shall be
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Investment Policy Statement adopted September February 1826, 20192020
transacted, all of its funds invested, and all of its cash and securities and other property held in trust for the purpose for which received.”
Further powers vested upon the Board are set forth in O.S. 70 § 17-106, in part: “(1) The general administration and responsibility for the proper operation of the retirement system and for making effective the provisions of the act are hereby vested in a Board of Trustees which shall be known as the Board of Trustees and shall be organized immediately after a majority of the trustees provided for in this section shall have qualified and taken the oath of office.”
and: “(9) (10) Subject to the limitations of this act, the Board of Trustees shall, from time to time, establish rules and regulations for the administration of the funds created by this act and for the transaction of its business.
Finally, O.S. 70 § 17-106.1, in part, defines the duties of the Board in relation to investment of fund assets:
“A. The Board of Trustees of the Teachers’ Retirement System of Oklahoma shall discharge their duties with respect to the System solely in the interest of the participants and beneficiaries and: 1. For the exclusive purpose of:a. providing benefits to participants and their beneficiaries, andb. defraying reasonable expenses of administering the System;2. With the care, skill, prudence, and diligence under the circumstancesthen prevailing that a prudent person acting in a like capacity and familiarwith such matters would use in the conduct of an enterprise of a likecharacter and with like aims;3. By diversifying the investments of the System so as to minimize the riskof large losses, unless under the circumstances it is clearly prudent not todo so; and4. In accordance with the laws, documents and instruments governing theSystem.”
B. Statement of Purpose
A primary purpose of this investment policy statement is to guide fiduciaries, including the Boardof Trustees, System staff, investment managers, consultants and others responsible for overseeingand investing the assets of the Fund. This policy also communicates foundational tenets underlyingits formulation. This policy provides specific guidance regarding investment objectives, assetallocation, risk management and the means by which investment objectives are intended to beachieved. Additional specific guidance is given in defining roles, delegated duties andaccountabilities of System fiduciaries as well as setting forth logical, disciplined procedures formaking decisions.
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Investment Policy Statement adopted September February 1826, 20192020
C. Statement of Investment Philosophy
Since this policy is a communication tool for System fiduciaries, interested stakeholders as well asother external parties, the Board recognizes that it is important to articulate the underlying beliefsthat are foundational in its formulation. Key aspects of the Board’s investment philosophy aresummarized in the following statements.
1. The Fund has an infinite time horizon and the assets should be invested and managedaccordingly.
2. A central tenet in investing is the tradeoff between risk and return, meaning that the pursuitof higher expected returns is accompanied with higher expected risk. Bearing some degreeof investment risk is necessary in the pursuit of investment return objectives.
3. Investment risk comes in many forms. The most common risk is the volatility of periodicreturns measured by the statistical term known as standard deviation. Additionally, there area variety of other risks to be considered. A partial list of these risks would include the riskof permanent loss of capital, the risk of not meeting objectives, illiquidity risk, credit risk,interest rate risk, inflation risk, leverage risk, concentration risk and manager risk. A primaryfocus of this investment policy is to balance, manage and, to the extent possible, controlthese various risks.
4. Funds with long term investment horizons are able to pursue higher expected returnsassociated with higher risk portfolios because they are able to remain invested when periodicdeclines in market values occur.
5. The Fund will best contribute to the primary goal of providing benefits to participants andtheir beneficiaries by realizing high risk-adjusted net returns.
6. The Board acknowledges that while other institutions may make investment decisions topursue various worthy causes that may be admirable in their own right, the Board’sinvestment decisions are made to achieve the primary goal of providing benefits toparticipants and their beneficiaries and defraying reasonable expenses.
7. Long-term investing success is best accomplished by adhering to a long-term strategic assetallocation rather than engaging in short term tactical market timing among asset classes.
8. Diversification among asset classes and securities is the primary means of controlling therisk of an investment portfolio.
9. The primary factor determining portfolio risk and return is how the portfolio is allocatedamong asset classes.
10. The decision-making process for investments should be both disciplined and logicalderiving support from current academic theory and the application of rigorous analysis.
11. In less efficient markets where the probabilities of achieving net-of-fee outperformancerelative to a passive market index are higher, active management is preferred. In moreefficient markets where the probabilities of achieving net-of-fee outperformance relative toa passive market index are lower, low-cost index management is preferred.
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Investment Policy Statement adopted September February 1826, 20192020
12. Certain asset classes are only accessible in the form of private market interests which havevery limited liquidity and normally higher costs relative to public market instruments.Investing a portion of the Fund in these illiquid asset classes is reasonable to the extent thatthey offer some desirable combination of the following relative to available public marketasset classes: higher expected net return and/or risk reduction through diversification.
D. Statement of Ethical Standards
The Board of Trustees is committed to maintaining and promoting the highest ethical standardsamong Board members and among all parties involved in the administration of fund assets.
The Board expects all parties involved in the administration of fund assets, including all Systemfiduciaries, to conduct their activities according to the highest ethical standards adhering likewiseto the principles expressed in the Board of Trustee Policy Manual Chapter 5 – Code of Conductand Chapter 6 – Ethical and Fiduciary Conduct. Given the nature of fund management andinvesting, particular attention will be given to conflicts of interest. All parties involved in theadministration of fund assets should be free of conflicts of interest to avoid even the appearance ofnot acting in the sole interests of System participants and their beneficiaries. Where any involvedparty becomes aware of an actual or potential conflict of interest it is their duty to disclose theconflict to the Board so that the Board may assess its seriousness.
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Investment Policy Statement adopted September February 1826, 20192020
II. STATEMENT OF DUTIES AND RESPONSIBILITIES
A. Board of Trustees
The Board of Trustees has the final decision making authority for the System. The InvestmentCommittee of the Board has the authority to make investment recommendations to the Board. TheBoard evaluates and decides whether or not to take action on recommendations from the InvestmentCommittee. The Investment Committee’s authority and responsibilities are set forth in theInvestment Committee Charter contained in the Board of Trustees Policy Manual.
Trustee duties and responsibilities are listed in summary as follows:
1. Adopt, and when deemed necessary, amend this Investment Policy Statement.
2. Determine delegated duties to be performed by other qualified fiduciaries in order to ensurethat the Fund is properly administered and regularly evaluated to assess progress towardsachieving established objectives.
3. Receive and evaluate reports, presentations and other materials provided by investmentconsultant(s), staff, investment managers, and other retained advisors to monitor theadministration of Fund assets in accordance with policy objectives and to regularly assessprogress towards achieving the goals and objectives defined herein.
4. Select and contract with qualified professional advisory organizations to perform functionsdeemed necessary by the Board to manage the Fund in accordance with policy. Commonprofessional advisory organizations would include investment consultant(s), investmentmanagers, global custodians and securities lending agents.
5. Evaluating the performance of retained professional advisory organizations and staff toassess fulfillment of duties, achievement of goals and compliance with policy guidelines.
6. Annually conduct a formal review of the performance of Investment Consultant(s),normally to be performed in the month of April.
7. Terminating the contracts with any retained professional advisory organization whendeemed necessary.
8. Review all costs of investment operations at least annually.
B. Investment Staff
A summary of the duties and responsibilities of the Investment sStaff is as follows:
1. Provide the Board and the Investment Committee with reports, presentations and any othermaterials to assist them in the fulfillment of their duties and responsibilities. The generalcontent and focus of reporting from Investment Staff is further described in Section VI.
2. Serve as the primary liaison between the Board of Trustees and the investment consultant(s),investment managers, custodian, securities lending agent and transition manager(s).
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Investment Policy Statement adopted September February 1826, 20192020
3. Implement Board decisions regarding asset allocation, investment structure, portfoliorebalancing procedures and retention of investment consultant(s), investment managers,custodian and securities lending agent.
4. Coordinate the search, selection and evaluation processes for investment consultant(s),investment managers, custodian and securities lending agent on behalf of the Board ofTrustees.
5. Monitor and review the performance of the total fund, asset class composites, andinvestment managers to evaluate achievement of objectives and compliance with policyguidelines.
6. Monitor and review all costs of investment operations including, but not limited to, feespaid to investment consultant(s), investment managers, and custodian, as well as portfoliotransactions costs.
7. Manage the liquidity in the Total Portfolio as necessary to ensure timely payment of benefitpayments, plan expenses and capital calls, etc. consistent with established asset allocationand portfolio rebalancing policies. The raising of cash amounts greater than two months’worth of benefit payments shall be subject to Board approval.
8. Conduct the search and selection of transition manager(s) in collaboration with theinvestment consultant(s) as directed by the Board.
9. Conduct due diligence in collaboration with the investment consultant(s) when investmentmanagers fail to meet the expectations of the Board or are formally placed ‘On Alert’ or‘On Notice’.
10. Research and review innovative investment ideas and concepts in collaboration with theinvestment consultant(s) in an effort to identify potential modifications to improve theinvestment portfolio.
11. Monitor the performance of the total fund, asset class composites and investment managersto determine if any issues need to be addressed by the Investment Committee or the Boardof Trustees.
C. Investment Consultant
A summary of the duties and responsibilities of the investment consultant(s) retained by the Boardis as follows:
1. Acknowledge status as a fiduciary to the System and remain in compliance both with thisinvestment policy and with the current executed contract with the System.
2. Provide the Board and the Investment Committee with reports, presentations and any othermaterials to assist them in the fulfillment of their duties and responsibilities. The generalcontent and focus of reporting from Investment Consultant is further described in SectionVI.
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Investment Policy Statement adopted September February 1826, 20192020
3. Assist the Board in developing and modifying policy objectives and guidelines, includingthe development of asset allocation strategies, recommendations on long-term assetallocation and the appropriate mix of investment manager styles and strategies.
4. Assist the Board by monitoring compliance with this Investment Policy.
5. Provide assistance in investment performance calculation, evaluation, and analysis.
6. Provide assistance in investment manager searches and selection.
7. Provide assistance in custodian, securities lending agent, transition manager andcommission recapture agent searches and selection.
8.7.Provide timely information, written and/or oral, on investment strategies, instruments, managers and other related issues, as requested by the Board.
9.8.Monitor the Board's System's investment managers and notify the Board and Investment staff of any material changes in the investment managers' organizational structure, their personnel or if there are performance issues.
10.9. Certify in writing to the Board on an annual basis as of the System’s June 30 fiscal year end, the investment consultant’s compliance with this Policy during the fiscal year period ending June 30.
11.10. Review with the Investment staff Staff the status and performance of current investment managers and determine if any issues need to be addressed by the Investment staff Staff or the Board of Trustees.
12.11. Provide assistance in the search and selection of transition manager(s) as directed by the Board.
13.12. Provide assistance in the conduct of due diligence when investment managers fail to meet the expectations of the Board or are placed ‘On Alert’ or ‘On Notice’.
14.13. Explore, research, analyze and review new investment ideas and managers in collaboration with the Investment staff Staff in an effort to keep the system current with investment options.
D. Investment Managers
A summary of the duties and responsibilities of each separate account, public markets investmentmanager retained by the Board is listed below. Commingled account and private market investmentmanagers whose investment activities are governed by subscription agreements or commingledtrust documents should adhere to the duties and responsibilities contained herein to the extentpossible and to the extent that they are not superseded by, or in conflict with, subscriptionagreements or commingled trust documents defining the relationship with the System.
1. Acknowledge status as a fiduciary to the System and remain in compliance both with thisinvestment policy and with the current executed contract with the System.
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Investment Policy Statement adopted September February 1826, 20192020
2. Provide the Board, the Investment Committee, the staff and the investment consultant(s)with reports, presentations and any other materials to assist them in the fulfillment of theirduties and responsibilities. The general content and focus of reporting from InvestmentManagers is further described in Section VI.
3. Manage the Fund’s assets in accordance with the policy guidelines and objectives expressedherein.
4. Prudently select investments based on thorough evaluation of all risks applicable to statedmandate.
5. Work with the custodian and the investment consultant to verify monthly accounting andperformance reports.
6. Certify in writing to the Board on an annual basis as of the System’s June 30 fiscal year end,the Investment Manager’s compliance with this Policy during the fiscal year period endingJune 30.
7. Act as a fiduciary in adopting and adhering to proxy voting policies, acknowledging that itsproxy voting policies may affect the value of their respective portfolio.
8. Seek to obtain best execution in all securities transactions to minimize the costs of trading.
E. Custodian
A summary of the duties and responsibilities of the custodian bank(s) retained by the System is asfollows:
1. Acknowledge status as a fiduciary to the System and remain in compliance both with thisinvestment policy and with the current executed contract with the System.
2. Provide the Board, the Investment Committee, the staff and the investment consultant(s)with reports, presentations and any other materials to assist them in the fulfillment of theirduties and responsibilities.
3. Accept daily instructions from designated staff.
4. Notify investment managers of proxies, tenders, rights, fractional shares or otherdispositions of holdings.
5. Safekeeping of securities.
6. Timely collection of interest and dividends.
7. Daily cash sweep of idle principal and income cash balances.
8. Process and maintain records of all investment manager transactions.
9. Collect proceeds from maturing securities.
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Investment Policy Statement adopted September February 1826, 20192020
10. Disburse all income or principal cash balances as directed.
11. Perform regular reconciliations of holdings and transactions with the System’s retainedinvestment managers on at least a monthly basis.
12. Work with the System’s staff and the investment consultant to ensure accuracy in reporting.
13. Manage and administer the System’s directed brokerage program.
14. Monitor compliance with this Investment Policies Statement, provide applicable research toensure the validity of suspected breaches, and submit appropriate commentary offering arecommendation to the reported breach.Calculate the investment performance of theSystem’s investment accounts and composites.
15. Participate in an annual review of compliance with the System’s staff, to determine theeffectiveness of investment policy testing. Providing required reports to assist the System’sstaff and vendors with compliance with the Governmental Accounting Standards Board, theInternal Revenue Service, the Securities and Exchange Commission, the Financial IndustryRegulatory Authority and other regulatory agencies.
16. Monitor, file and report on securities class action lawsuits and collect and record settlementproceeds.
17. Process and file Foreign Tax Reclaims on behalf of the System.
F. Securities Lending Agent
A summary of the duties and responsibilities of the securities lending agent retained by the Systemis as follows:
1. Acknowledge status as a fiduciary to the System and remain in compliance both with thisinvestment policy and with the current executed contract with the System.
2. Provide the Board, the Investment Committee, the staff and the investment consultant(s)with reports, presentations and any other materials to assist them in the fulfillment of theirduties and responsibilities.
3. Arrange terms and conditions of securities loans.
4. Monitor the market value of the securities lent and mark to market at least daily and ensurethat any necessary calls for additional collateral are made and that such collateral is obtainedon a timely basis.
5. Direct the investment of cash received as collateral in accordance with direction from theBoard, provided that such investments are consistent with guidelines provided in thisdocument.
6. Notify the Board of any changes to the investment guidelines in the Securities and ExchangeCommission’s rule 2A7 for consideration by the Board.
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Investment Policy Statement adopted September February 1826, 20192020
7. Notify the System’s staff in the event that a recalled security has not been returned by aborrowing party within 10 days of the request.
G. Transition Manager
The transition managers shall manage the transition of assets from one or more investmentmanagers or asset categories to one or more other investment managers or asset categories.Transition managers shall be selected among those approved by the Board. Transition managersshall be utilized when such employment is likely to present significant opportunities for costsavings, technical efficiencies or other benefits to the System.
A summary of the duties and responsibilities of Transition Managers retained by the System is asfollows:
1. Acknowledge status as a fiduciary to the System and remain in compliance both with thisinvestment policy and with the current executed contract with the System.
2. Provide a pre-trade analysis, which will include, among other things, a trading liquidityanalysis, portfolio sector analysis, volatility analysis, and estimated transaction costs.
3. Provide a detailed written plan of transition execution.
4. Provide a post-trade analysis, comparing the actual costs with the pre-trade estimates. Thereport will also include various trading statistics, benchmarking information, and detailedtrade reports.
5. In all securities transactions, transition managers shall seek to obtain best execution tominimize the costs of trading.
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Investment Policy Statement adopted September February 1826, 20192020
III. PROCEDURES
A. Investment Policy Review
In order to keep the Investment Policy current, the Board will, at least annually, review and modify,as deemed necessary any portions of the policy. The annual review will consider, but not be limitedto, the following: objectives and guidelines, the development of asset allocation strategies,recommendations on long-term asset allocation and the appropriate mix of investment managerstyles and strategies.
The Board, both upon their own initiative and upon consideration of the advice andrecommendations of staff, consultants, the investment managers and other fund professionalsinvolved with the assets, may amend policy guidelines. Proposed modifications should bedocumented in writing to the Board.
B. Investment Manager Policy Exceptions
Requests for an exception to invest in securities precluded by section V. A. or the applicablemandate’s specific policies, should be submitted in writing to the System and include justificationfor such request, , and a requested time period, up to three years. Exception requests will undergoa reevaluation and approval process at the end of each term. Staff and investment consultant willdetermine the investment manager’s process for providing quarterly reporting on attributionanalysis of the contribution of the allowed exception.
C. Third Party Marketing and Referrals Disclosure Policy
The Teachers’ Retirement System of Oklahoma requires transparency and full disclosure of allrelationships in proposed and committed investments with any third parties. A “third partymarketer” is a person who represents an asset management firm or any other type of investmentservices provider, as an independent contractor rather than as an employee of the firm, for thepurpose of making presentations or securing contracts with the System for the firm or provider.Any such third party marketer must disclose himself or herself as a third party marketer before orat the same time as contacting any member of the Board of Trustees, employee of the System orthe outside investment consultant for the System. In addition, firms submitting investmentproposals for consideration by Teachers’ Retirement System of Oklahoma (including any sub-managers or consultants engaged by such firms) are hereby required to disclose the identity of allthird-party marketers and/or individuals by whom the firm has been referred to Teachers’Retirement System of Oklahoma and further indicate those so identified that stand to receive feesor other consideration in the event that a contract between the firm and the Teachers’ RetirementSystem of Oklahoma is secured. Any consideration paid or benefits received, or any relationshipbetween such firm (including any sub-managers or consultants engaged by such firms) and thirdparty marketing entities and/or individuals, shall be disclosed. The disclosure requirementsestablished by this Policy apply throughout the term of any contractual relationship Teachers’Retirement System of Oklahoma may have with any firm and represents a continuing obligation ofdisclosure. This Policy becomes effective immediately and applies to all firms currently managingTeachers’ Retirement System of Oklahoma assets. All firms submitting investment proposals must
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Investment Policy Statement adopted September February 1826, 20192020
make the disclosures required by this Policy prior to any action being taken on the firm's investment proposal by the Board, as well as comply with the continuing obligation of disclosure.
D. Request for Proposal Policy
70 O.S. § 17-106.1(E) provides “The Board of Trustees may retain qualified investment managersto provide for the investment of the monies of the System. The investment managers shall bechosen by a solicitation of proposals on a competitive bid basis pursuant to standards set by theBoard of Trustees. Subject to the overall investment guidelines set by the Board of Trustees, theinvestment managers shall have full discretion in the management of those monies of the Systemallocated to the investment managers[…]”
While TRS statutes provide that investment managers must be retained on a competitive bid basis,this process is not required to conform to the Oklahoma Central Purchasing Act. The process forinvestment manager selection and allocation shall conform to the following process:
1. The Board shall approve all request for proposals (RFPs) issued by the System.
2. Respondents to a proposal shall comply with the procedures and conform to the standardsset forth in the RFP.
3. The issuance of an RFP does not commit the Board to award a contract or make anallocation to a manager or strategy. The Board reserves the right to accept or reject any orall proposals received, to negotiate with any and all qualified bidders, and to cancel in partor in its entirety a solicitation if it is in the best interests of the System to do so.
4. The Board shall award contracts to the most suitable bidder at a specified time and placewhich shall be open to the public pursuant to the Oklahoma Open Meetings Act.
5. Proposals shall be evaluated by the Investment Consultant and the Chief InvestmentOfficerStaff. An evaluation report to identify potential managers shall be presented to theInvestment Committee for recommendation to the Board.
6. Except for the purposes of seeking clarification of RFP responses, no member of theBoard, staff, or Investment Consultant shall knowingly communicate concerning anymatter that is material to the selection process with any party having a direct financialinterest in the award of the contract, an officer or employee of that party, or a placementagent retained or employed by that party, unless the communication is part of the processexpressly described in the RFP or part of any Board meeting prior to the award of thecontract. Any bidder who knowingly participates in a communication that is prohibited bythis subsection shall be disqualified from the contract award.
7. Due diligence shall be conducted on potential managers prior to the award of the contract.The nature of the due diligence shall be recommended to the Board by the InvestmentCommittee with the advice of the Investment Consultant, Chief Investment Officer, andExecutive Director.
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E. Additional allocations to a previously retained manager:
1. The Board may at any time make an additional allocation to a manager currently undercontract at its discretion in accordance with this Policy.
2. Additional allocations to subsequent or follow-on closed-end funds of a manager may bemade without the necessity of an additional RFP provided the investment thesis andstrategy of the subsequent or follow-on fund is substantially similar to the fund that wasoriginally allocated on a competitive bid basis. To be substantially similar a fund musthave the same benchmark, the same type of assets, and the investment decisions must bemade by substantially the same people as were managing the original fund/strategy.Closed-end funds are generally in the form of ownership interests in limited partnershipsand may include, but are not limited to, private equity, venture capital, mezzanine anddistressed debt, real estate funds, and natural resource funds.
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IV. INVESTMENT GOALS AND OBJECTIVES
To fulfill the System’s Mission Statement set forth in Chapter 2 of the Board of Trustees Policy Manual, the Board has a goal of earning a nominal, long-term, time-weighted, annualized, net total return of 7.5% on the investment portfolio while maintaining liquidity necessary to fund net benefits and operations.
To achieve the goal above the Board believes that several investment objectives need to be attained. In setting the objectives the Board follows the criteria as recommended in “A Primer for Investment Trustees” (Bailey, Jeffery, Jesse Phillips and Thomas Richards. A Primer for Investment Trustees. Charlottesville: Research Foundation of CFA Institute, 2011). Specifically, investment objectives should be
unambiguous and measurable, specified in advance, actionable and attainable, reflective of the Trustees’ risk tolerance and consistent with the System’s mission.
The Board has established several objectives for the investment portfolio that meet the criteria above. These objectives listed below are specified at the Total Fund, Asset Class Composite and individual mandate/Investment Account level.
Total Fund Investment Objectives Achieve or exceed on a three year rolling basis, absolute and risk-adjusted, net excess returns
relative to the Total Fund Policy Index as specified in Appendix A. On a three year rolling basis, maintain relative risk levels equal to or below that of the Total
Fund Policy Index.
Asset Class Investment Objectives Achieve or exceed on a three year rolling basis, absolute and risk-adjusted, net excess returns
relative to the Asset Class Index as specified in Appendix A. On a three year rolling basis, maintain relative risk levels equal to or below that of the Asset
Class Index.
Investment Account Objectives Achieve or exceed on a three year rolling basis, absolute and risk-adjusted, net excess returns
relative to the Investment Account Index as specified in Appendix A. On a three year rolling basis, maintain relative risk levels equal to or below that of the
Investment Account Index.
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V. INVESTMENT GUIDELINES AND CONSTRAINTS
The System maintains a diversified portfolio with investments in multiple asset classes as definedby its strategic asset allocation. Investments in some asset classes can be made through publicsecurities markets while investments in other asset classes are only possible through private marketinvestment vehicles.
Generally the System’s public market investments are held by the System’s Custodian in separateaccounts managed by retained investment management firms. For these public market investmentsin separate accounts at the System’s custody bank, the System defines the parameters within whichthe retained investment managers can manage the portfolio. In addition to public marketinvestments held in separate accounts the System may choose to invest in commingled orpartnership structures alongside other institutional investors where the System does not define theinvestment management parameters but rather accepts the investment management parameters asspecified in commingled trust documents or in partnership agreements.
With the above distinctions in mind, this section of the Policy covering guidelines and constraintsis divided into two subsections and further grouped by asset class. The first subsection addressespublic market investments held in separate accounts by the System’s Custodian. It communicatesto the investment management firms retained to manage these accounts the parameters within whichthey are permitted to manage the portfolio.
The second subsection addresses commingled and private market investments where the Systemaccepts the investment parameters as defined in trust documents or partnership agreements andother associated legal documents. This subsection documents the rationale for choosing acommingled or partnership structure and the general boundaries within which the System will seekto structure its private markets investments.
A. Public Market Separate Account Investments
1. Discretion and Prohibited Investments
Full discretion, within the parameters of these guidelines is granted to the investmentmanagers regarding the allocation of their portfolios, the selection of securities, and thetiming of transactions. Any exception requests to the guidelines listed herein should becommunicated to the System’s Investment staff and Investment Consultant. Due to the everexpanding variety of financial instruments and financial engineering methods, the followinglist of ineligible investments is not considered to be exhaustive. Any instrument, to whichthese Investment Guidelines do not explicitly prohibit, that is not expressly allowed by theapplicable mandate specific guidelines, should be requested through the exception process,detailed in section III. B, prior to investment.
a. Privately placed or other non-marketable debt, except securities issued under Rule144A.
b. Securities denominated in non-US currency, unless provided in accordance with anapplicable mandate.
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c. Lettered, legend or other so-called restricted stock
d. Physical commodities and commodity derivatives
e. Short sales and purchases on margin; leverage is not allowed unless the System hasexpressly given the right to lever to a manager.
f. Direct investments in private placements, real estate, oil and gas and venture capital,unless provided in accordance with an applicable mandate.
2. Index Portfolios
a. All index portfolios characteristics and returns are expected to closely resemble thedesignated benchmark.
b. Index managers may use both full replication and stratified sampling portfolioconstruction methodologies.
3. Cash Rule for Equity Portfolios
a. Investment managers of portfolios consisting of equity securities including MLPsshould seek to remain fully invested. Fully invested for the purposes of this documentshall mean normally maintaining a portfolio allocation to cash investments of 5% orless. Should the investment manager desire to maintain cash investments at a levelgreater than 5% for an extended period of time, the investment manager shall provideadvanced written notification and explanation to the Investment Staff and InvestmentConsultant.
b. No violation shall be deemed to occur if cash investment levels exceed the 5% due toinstructions received from the System. If cash investments breach the 5% threshold forten consecutive business days or 7% for three consecutive business days the managershall submit a written notice and explanation of each such event to Investment Staff andInvestment Consultant.
4. Derivatives
a. Investment managers may be permitted, under the terms of individual investmentcontracts, to use derivative instruments as set forth in each manager’s investmentguidelines. A derivative is a security or contractual agreement that derives its value fromsome underlying security, commodity, currency or index. Some examples of derivativesfor purposes of this Policy are (a) contracts such as forwards, futures, put and calloptions, and swaps and (b) non-traditional securities with embedded options such ascollateralized mortgage obligations (CMOs) and structured note products. Traditionalsecurities with options such as convertible bonds and preferred stock are not consideredderivatives under this policy, nor are warrants.
b. Derivatives shall not be used to introduce leverage, that is, the notional value ofderivatives positions cannot exceed the cash or securities values available from the
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System’s assets. Derivatives may not be used to create levered exposure to the assets being managed. Derivatives may be used for the purpose of reducing effective cash exposure and for hedging currency risk and interest rate risk.
c. Managers must ascertain and carefully monitor the creditworthiness of any third partiesinvolved in derivative transactions.
d. Foreign exchange forward contracts or currency swaps are permitted for currencyhedging purposes. Posting of a “margin” deposit for these contracts is permitted inconnection with foreign exchange forward contracts or currency swaps as such a depositis not considered to be “purchases on margin” or “leverage”.
5. Domestic Equity
a. Domestic Equity portfolios will not concentrate more than the greater of a 2%benchmark-relative active weight or 7% of market value of funds under advisement inholdings of a single issuer.
b. Domestic Equity portfolios will not hold greater than 5% of the outstanding shares of asingle issuer.
c. Domestic Equity portfolios will be limited to holdings of common stock, AmericanDepository Receipts (ADRs) listed on a domestic exchange, non-midstream MLP unitsand any security type that is a constituent in the portfolio’s benchmark index.
d. Domestic Equity portfolios may hold, sell or exercise rights, warrants or otherinstruments received by virtue of corporate actions.
e. Domestic Equity portfolios may purchase unlevered Exchange Traded Funds (ETFs)linked to the portfolio’s benchmark index solely for the purpose of reducing temporarilyhigh cash exposure.
6. International Equity
a. International Equity portfolios will not concentrate more than the greater of a 2%benchmark-relative active weight or 7% of market value of funds under advisement inholdings of a single issuer.
b. International Equity portfolios will not hold greater than 5% of the outstanding sharesof a single issuer.
c. International Equity portfolios will not concentrate more than the greater of a 5%benchmark-relative active weight or 35% of the market value of funds under advisementin issuers from the UK or Japan and no more than 30% of the market value of fundsunder advisement in issuers from any other single country.
d. International Equity portfolios will invest no less than 50% of the portfolio in companieslocated in developed markets as determined by MSCI.
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e. International Equity portfolios will be limited to holdings of common stock, AmericanDepository Receipts (ADRs) listed on a domestic exchange and any other security typethat is a constituent in the portfolio’s benchmark index.
f. International Equity portfolios may hold, sell or exercise rights, warrants or otherinstruments received by virtue of corporate actions.
g. International Equity portfolios may purchase unlevered Exchange Traded Funds (ETFs)linked to the portfolio’s benchmark index or country sub index solely for the purpose ofreducing temporarily high cash exposure. International Equity portfolios may also holdcommingled fund units to gain exposure to markets where individual company sharepurchases are either inefficient or not possible.
7. Fixed Income
a. Fixed Income portfolios will not concentrate greater than 5% of market value of fundsunder advisement in holdings of a single issuer. This restriction does not apply tosovereign issues.
b. Fixed Income portfolios will not hold greater than 5% of the issued securities of a singleissuer.
c. Fixed Income portfolios will not concentrate greater than 20% in non-USD denominatedobligations.
d. Fixed Income portfolios will not concentrate greater than 10% in developing oremerging markets issuers as determined by MSCI.
e. Fixed Income portfolios may hold shares of common stock converted from embeddedcorporate actions. At the time of conversion, managers should communicate issuesconverted into common shares to the System’s Investment staff and InvestmentConsultant.
f. Core Plus Full Discretion Fixed Income
i. Core Plus portfolios will not concentrate greater than 50% in issues which are ratedBa1 or lower by Moody’s, or Moody’s equivalent rating by an SEC registeredNRSRO. If the ratings assigned to an instrument by an SEC registered NRSROare not the same, the highest rating of these rating agencies will be used. If aninstrument is not rated by an SEC registered NRSRO, the equivalent ratingdetermined by the Manager’s internal rating system will be used.
ii. Core Plus portfolios may hold up to 5% of the market value of the account in anycombination of the following: issues which internally or externally are ratedbelow Caa2 Moody’s, or Moody’s equivalent rating by an SEC registeredNRSRO, common stock, preferred stock, closed-end funds or exchange-tradedfunds..
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iii. All holdings of unrated securities and securities subject to the 5% limitation aboveshall be subject to monthly reporting requirements as set forth in Section VI. 3. ofthis Policy.
iv. The Core Plus portfolio manager may not invest more than 10% of the portfolioin unrated securities.
g. Active Duration Fixed Income
i. Active duration portfolios may concentrate holdings up to 100% at any maturityalong the U.S. Treasury term structure.
ii. Active duration portfolio accounts are limited to holding securities backed by thefull faith and credit of the U.S. government and units of the short term investmentfund of the System’s custodial bank.
h. Securities Lending Collateral Pool
i. The investments of the securities lending collateral are governed by a separateinvestment policy document therefore they are not addressed herein.
8. Master Limited Partnership (Midstream Energy Infrastructure)
a. Master Limited Partnership (MLP) portfolios will be limited to the purchase ofinvestments in midstream energy infrastructure, which include: (a) securities such asunits and other ownership instruments issued by MLPs that are organized as partnershipsor limited liability companies which elect to be taxed as a partnership; (b) securities thatoffer economic exposure to MLPs from entities holding primarily general partner ormanaging member interests in MLPs; and (c) equity securities in companies that focuson energy infrastructure and the midstream energy sector.
b. MLP portfolios will not concentrate greater than 15% of market value of funds underadvisement in holdings of unregistered, privately placed securities of publicly tradedMLPs at the time of purchase.
c. MLP portfolios will be permitted to invest in Initial Public Offerings and SecondaryPublic Offerings of MLP securities.
d. MLP portfolios will not concentrate greater than 10% of market value of funds underadvisement in holdings of a single issue. A “single issue” is defined by shares in eitherthe limited partner, or shares in the general partner; or equity securities of midstreamenergy infrastructure companies but shares in the limited partnership and generalpartnership should not be taken in aggregate.
e. MLP portfolios will not hold greater than 5% of the outstanding shares of a singleissuer.
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B. Private Market Partnership Interests and Commingled Account Investments
The System recognizes that private market investments and commingled fund investments are governed by subscription agreements, limited partnership agreements, trust documents and other related legal documents. Additionally, the System recognizes that in the event of a conflict between the aforementioned documents and this Investment Policy Statement, the subscription agreements, limited partnership agreement and other related legal documents shall take precedence in the governance of these investments.
The System determines how it will select and structure its private market and commingled fund investments this section sets forth the guidelines the System will follow for structuring the portion of the portfolio invested in private market and commingled fund investments.
1. Private Equity and Private Debt