Chicago Teachers’ Pension Fund Annual Report

Diversity and Inclusion

Presented to Governor Pat QuinnDecember, 2013

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Chicago Teachers’ Pension Fund (CTPF) provides retirement benefits for a diverse ethnic population of approximately 34,000 active and

27,500 retired Public School Teachers.

Since the early 1990’s, CTPF is proud to be at the forefront of pension and retirement systems throughout the United States to ensure that minorities, women and persons with disabilities have access to the many opportunities to conduct business with CTPF. CTPF continues to encourage diversity and equality among our employees, vendors,

and investment professionals.

On behalf of the CTPF Fund and our Board of Trustees, we present to Governor Pat Quinn CTPF’s annual Diversity Report for 2013.

Commitment To Diversity

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• EquityHired Earnest Partners ($50M), an African American-owned firm, and DuPont ($150M) for an emerging markets allocationReduced assets by $100M from a Latino-owned firm, Lombardia, due to performance, to fund an emerging markets allocationTerminated an African American-owned firm, Credo, due to performance and organizational concerns, to fund an emerging markets allocationTerminated an African American-owned firm, Piedmont, due to performance to fund CTPF benefits

• Fixed IncomeReduced assets of Western Asset Management by $105M to fund CTPF benefits and increase the mandate of a minority-owned firmIncreased allocation to LM Capital, a Latino-owned firm, by $50M and refocused their mandate to Core Plus

• Real EstateFunded Newport Capital Partners ($5M), a Disabled-owned firm

Changes to the Fund’s Portfolio during Fiscal Year 2013

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20% of Total Fund Assets will be invested with MWDBE firms25% of actively managed assets will be invested with MWDBE firms

Additionally:30% of all equity assets will be invested with MWDBE firms

25% being managed by Minority owned firms5% being managed by Women owned firms

15% of all fixed income assets will be invested with MWDBE firms

12% being managed by Minority owned firms3% being managed by Women owned firms

10% of all alternative assets will be invested with MWDBE firms 10% being managed by Minority owned firmsBest efforts for Women owned firms

Since Public Act 096-0006…CTPF Enhanced our MWDBE Diversity Goals:

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Trades are to be executed with CTPF approved MWDBE brokers.Non-direct trading is not allowed to meet the Fund’s goals.

CTPF Brokerage goals:

50% of Domestic Equity trades: Active Large, All cap, and MoM’s

35% of Domestic Equity trades: Active Small Cap and Passive

25% of International Equity trades: Active & Passive Large, All Cap, and MoM’s

5% of International Equity trades: Active Small Cap

25% of all Fixed Income Volume

10% Active REIT Managers

Since Public Act 096-0006…CTPF Enhanced our MWDBE Diversity Goals: (continued)

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CTPF began investing with MWDBE firms in the early 1990’s.

Some of CTPF’s earliest MWDBE dollars were invested with firms such as Ariel Investment (African American), Zevenbergen (Women) and Taplin, Habatch & Canida (Latino)

As of September 2013, the Fund invested $3.2B or 32% of total Fund assets with MWDBE firms

Total MWDBE % Growth Since 1993

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Total MWDBE % Growth Since 1993

FY 93

FY 94

FY 95

FY 96

FY 97

FY 98

FY 99

FY 00

FY 01

FY 02

FY 03

FY 04

FY 05

FY 06

FY 07

FY 08

FY 09

FY 10

FY 11

FY12 FY 13

Sep-13

5.8%6.7%

7.9%6.1%

5.2%5.4%5.7% 5.8%6.3%6.3%7.3%

9.2%

12.7%12.8%

23.2%23.6%

27.5%

33.0%

30.8%31.6%

31.2% 31.6%

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CTPF had $3.2B of the Fund’s total assets invested with MWDBE firms

MWDBE goal for total assets is 20%; actual Fund assets are 32%

CTPF had $2.3B of the Fund’s active assets invested with MWDBE firms

MWDBE goal for active assets is 25%; actual Fund assets are 34%

Total Fund Assets Total Fund Active Assets

0%

5%

10%

15%

20%

25%

30%

35%

32% 34%

20%25%

Actual Goal

Total Fund MWDBE Assets

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As of 9/30/13

$1.24B was managed by African American owned firms$1.17B was managed by Women owned firms$639.2M was managed by Latino owned firms$75.0M was managed by Asian American owned firms$8.4M was managed by a Person with a Disability owned firms

11.7%

0.1%12.5

%

6.4% 0.8%

Women

Asian American

African American

Latino

Person witha Disability

Fund Breakdown by MWDBE Status

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As of 9/30/13

For domestic and international equity assets, CTPF had $2.6B assets invested with MWDBE firms.

41% of all equity assets were managed by MWDBE firms24% of these assets were managed by minority owned firms17% of these assets were managed by women owned firms

MWDBE Equity Managers

MWDBE Equity Assets

Minority Owned Equity Firms

Women Owned Equity Firms

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%41%

24%

17%

30%25%

5%

Actual Goal10

As of 9/30/13

For fixed income assets, CTPF had $328.6M invested with MWDBE firms.

19% of all fixed income assets were managed by MWDBE firms15% of these assets were managed by minority owned firms5% of these assets were managed by women owned firms

MWDBE Fixed Income Assets

Minority Owned Fixed Income

Firms

Women Owned Fixed Income

Firms

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

20%

19%

15%

5%

15%12%

3%

Actual Goal

MWDBE Fixed Income Managers

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As of 9/30/13

For alternative assets, CTPF had $210.9M invested with MWDBE firms.

12% of all alternative assets were managed by MWDBE firms11% of these assets were managed by minority owned firms2% of these assets were managed by women owned firms.1% of these assets were managed by disabled owned firms

MWDBE Alter-native Assets

Minority Owned Alternative Firms

Women Owned Alternative Firms

0%

2%

4%

6%

8%

10%

12%

14% 12%11%

2%

10% 10%

0%

Actual Goal

MWDBE Alternative Managers

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As of 9/30/13

How We Invest In Minority ManagersCTPF invests in MWDBE firms in four ways:

Direct MandatesThe Fund has direct relationships with 26 MWDBE firms in the public markets and alternative investments area

Manager of Managers (MoM)The Fund has two domestic equity (both African American) and one international equity (Asian American) Manager of Manager programsThrough the MoM program the Fund has relationships with 20 MWDBE firms via 26 investment portfolios

Graduation ProgramSince the inception of the Fund’s MoM program, six firms graduated to direct mandates with the Fund

Fund of Funds (FoF)The Fund is a Limited Partner in two minority focused Private Equity Funds. The General Partner is African American-ownedThe Fund is a Limited Partner in a minority focused Private Real Estate Fund 13

As of 9/30/13

CTPF Outreach

CTPF’s First Friday MeetingOccurs the first Friday of each month. Provides opportunities for Emerging and MWDBE manager firms to meet with CTPF’s Investment Consultant, CTPF Trustees, CTPF Investment Staff and Executive Director to highlight their firms products and accomplishments

Manager of Managers (MoM) ProgramsEmerging managers have opportunities to manage CTPF assets. Due to their size, these opportunities would not be available to small firms without the Manager of Managers program

PublicationsEmerging Manager MonthlyFund FirePensions & Investments

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CTPF Outreach - continued

Organizations and Involvement (continued)Robert Toigo FoundationRising Farmworker Dream FundWomen Investment ProfessionalsCouncil of Institutional Investors (November, 2013)Pension Real Estate Association (PREA)Institutional Limited Partners Association (ILPA) (January, 2014)

Institutional Financial Services DaysA 2-day educational program initiated and designed by CTPF to expose underrepresented students to the institutional financial services industry

ConferencesEmerging Manager Conferences (Opal, IMN)Groundbreakers Summit – Women in Leadership (Toigo Foundation)MBDA: Minority Investment Management ForumNational Association of Securities ProfessionalsNew America Alliance

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In calendar year 2012, the Fund paid over $4.5M in domestic

equity and international equity

commissions and $1.9M was directed to

MWDBE brokers.

In 2012, the Fund had 9.0B in fixed income volume and 2.6B was

directed MWDBE brokerage firms

Domestic Equity Large Cap & Mid

Cap

Domestic Equity Small Cap &

Passive Large Cap

Fixed Income International Equity

0%

10%

20%

30%

40%

50%

60%

59%

52%

30% 30%

50%

35%

25% 25%

Total Paid Goal

Brokerage Commissions for 2012

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CTPF’S MWDBE Brokerage Programs

CTPF maintains a list of approved MWDBE brokerage firms. To be an approved MWDBE broker with CTPF, the following qualifications must be met:

Certified MWDBE brokerage firmRegistered with FINRA (Financial Industry Regulatory authority) for a minimum of 1 yearHave a Chicago or metro area office with at least one dedicated full time staff person that holds a Series 7 license

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Mary S. Reilly Jerry Travlos Raymond Wohl Andrea Zopp

Carlos Azcoitia Jeffrey Blackwell Bernie Eshoo Walter Pilditch

James WardRecording Secretary

Tina PadillaFinancial Secretary

Jay RehakPresident

Lois AshfordVice President

The Chicago Teachers’ Pension Fund Board of Trustees

As of 9/30/13

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Diversity Of The CTPF Board

CTPF Total Board of Trustees0

1

2

3

4

5

6

77

5

3

7

2

0

MenWomenAfrican AmericanCaucasianLatinoAsian American

42% 58% 25% 58% 17%

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As of 9/30/13

Diversity Of The CTPF Fund Staff

CTPF Total Staff0

10

20

30

40

50

60

15

53

2226

11 9

MenWomenAfrican AmericanCaucasianLatinoAsian American

22%

20

FT EmployeesAs of 9/30/13

78% 32% 38% 16% 13%

The CTPF Investment Management Staff

has 6 employees

6 are Women2 are African American2 are Latino

CTPF Investment Management Department Employee Diversity

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As of 9/30/13

CTPF Investment Mgmt Staff0

1

2

3

4

5

66

2 2 2

Women African American Caucasian Latino

100% 33% 33% 33%

CTPF’S METROPOLITAN CHICAGO RECRUITING AREA

CTPF’s goal is to develop a workforce that more closely reflects the minority and women demographics of the CTPF’s metropolitan Chicago recruiting area

The metropolitan recruiting area includes Cook, DuPage, Lake, and Will counties in Illinois

CTPF CurrentHeadcount Ratio

Metro RecruitingArea Ratio

African American 22 32% 17.8%

Asian American 9 13% 6.0%

Caucasian 25 37% 56.6%

Latino 11 16% 19.7%

Women 53 78% 51.3%

Men 15 22% 48.7%Data as of October 1, 2013 Metro Data – 2010 U.S. Census

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Management is directed to pursue diversity in the recruitment of staff that reflects our area demographicsThe Board of Trustees recognizes that knowledge and understanding of diversity is the cornerstone of a successful diversity strategy. It is the policy of the Fund to provide Diversity Training to Human Resources and management staffThe Board of Trustees recognizes that achievement of the Fund’s diversity goals is contingent upon the Fund gaining exposure to a large and broad pool of qualified candidatesWhen no internal candidate applies for, and/or no internal candidate is identified as the best candidate for a position, CTPF shall expand the pool of candidates on the Fund’s websiteIn all cases, CTPF will seek to hire the best qualified candidate for each positionWhen two or more candidates have comparable qualifications for a position, CTPF will seek to hire the qualified candidate that lends to achievement of the State of Illinois’ public policy goals and the Fund’s diversity goals

Staff Diversity Recruitment Guidelines

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CTPF fully supports the public policy considerations of SB364 (Public Act 96-0006) which among other provisions, mandates the establishment of procurement policies by all major public pension funds in Illinois that promotes inclusion and diversity. The law also mandates establishment of incremental goals for the inclusion of minorities, women, and disabled persons when pension funds seek fiduciaries and services.

Diversity Procurement and Purchasing Policy

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The primary objective of the CTPF diversity policy is to ensure that minorities, women and disabled persons are provided an equal opportunity to provide services to and do business with CTPF.

Diversity Policy Objectives promote and ensure:Prospective service providers have an equal opportunity to compete and have access to information regarding the search parameters;Fair competition among qualified fiduciaries and service providers;Communications related to the selection of service providers are accessible, consistent and accurate; The process of selecting service providers is efficient, diligent, and fair;Transparency in the process of selection and retention of service providers.

Policy Objectives

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In fiscal year 2013, minorities and women-owned businesses received:

• 12% of the business expenditures made by the fund for goods and services

• 32% of the expenditures made to investment managers.

Fiduciaries and Service Providers

Table data as of June 30, 2013

Service Expense MWDBE Status and Allocation

Actuarial Services 164,753   Independent Auditor 210,750   Investment Consulting and Services       Master Custodian 501,250    Investment Consulting 374,814    Real Estate Investment Consulting 166,598   Health Insurance Consulting 50,000   Legal Services 164,800   Information Services Consulting 947,196   Communications and Publications 316,979 MWDBE 214,047 (6%)

Document Processing and Mailing 194,384 MWDBE 153,939 (4%)

Election Administration 197,117  

Legislative Lobbyists 164,800 MWDBE 61,800 (2%)

Total   $3,453,441    

Total MWDBE Participation 429,786.00   12%

       Total Investment Manager Fees $39,317,322.00  

Total Investment Fees Paid to MWDBE managers.

$12,478,563.54   32%26

It is CTPF’s goal is to have a minimum of 20% of all fund expenditures forfiduciaries, suppliers, consultants and service providers paid to firms owned by minorities, women and persons with disabilities. This goal is comparable to the percentage of investment related allocations to MWDBE investment professionals.

Goal

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The Policy Guidelines below apply to the selection of all fiduciaries and service providers.

Procurement of all goods and services budgeted or proposed individually or in the annual aggregate for an amount in excess of $25,000, shall be subject to a formal bid process including:

Announcement of issuance of a Request for Proposal in appropriate trade journals and periodicals as applicableIssuance of a formal Request for Proposal in the format appropriate for the goods or services being sought and including all selection criteria to be considered in the evaluation of the proposalA Proposal Evaluation Committee, made up of organizational stakeholders for the goods or services being sought , who shall develop criteria and an objective tool for proposal evaluationPosting of the formal Request for Proposals on the Fund’s website

Formal Bid Process

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Observance of a quiet period during which communications with potential providers is limited

A quiet period will commence upon the initiation of a search for goods or services and end once a selection has been made by the Board and accepted by the service providerInitiation, continuation and conclusion of the quiet period shall be publicly communicated to prevent inadvertent violationsAll Board members, and Staff not directly involved in the search process, shall refrain from communicating with provider candidates regarding any product or service related to the search offered by the candidate throughout the quiet period and shall refrain from accepting meals, travel, hotel, or other value from the candidatesThroughout the quiet period, if any Board member is contacted by a candidate, the Board member shall refer the candidate to CTPF Staff directly involved in the search processAuthority related to the search process shall not be exercised by management or by individual staff members, but shall be exercised solely by the bid evaluation committeeAll information related to the search process shall be communicated by Staff to the relevant Committee as a whole, and not to individual staff membersThe quiet period does not prevent due diligence, or communications with an existing service provider that happens to be a candidate in the ordinary course of services provided by such service provider; however, discussions related to the pending selection shall be avoided during those activitiesThe provisions of this policy will apply to service provider candidates throughout the quiet period and shall be communicated to candidates in conjunction with any Request For Proposal or Request For InformationA service provider may be disqualified from a search process for a knowing violation of this policy

Formal Bid Process - continued

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Evaluation of submitted bids by the Proposal Evaluation Committee using of an objective evaluation toolSubmission of a statement of due diligence and recommendation to the Board of Trustees by CTPF management and staffApproval of selected service provider by the Board of TrusteesRetention in the organizational archives of all materials distributed, created, collected and evaluated in the search process for a period of at least 5 years

Formal Bid Process - continued

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Procurement of all goods and services budgeted or anticipated individually for an amount between $10,000 and $24,999 shall be subject to an informal bid process including but not limited to:

Development of a Needs, Requirements and Evaluative Criteria document prior to the initiation of discussion with potential providers or issuance of a request for informationPosting of a Request for Information on the fund websiteDocumentation of the need for services, criteria used in the evaluative process, and basis for selection of a particular vendor or service providerRetention in the purchasing records of CTPF of all written materials for a period of at least 5 years

Informal Bid Process

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