Exhibit 4

Transcription

Exhibit 4

Exhibit 4
Hewitt EnnisKnupp | September 17, 2013
State Universities Retirement System
Presentation to the Board of Trustees and Staff
October 17, 2013
To protect the confidential and proprietary information included in this material, it
may not be disclosed or provided to any third parties without the approval of Hewitt
EnnisKnupp.
Exhibit 4
Discussion Topics
Executive Summary
Investment Performance Analysis and Monitoring
Overview of HEK
– Performance Reporting
– Proposed SURS Team
– Manager Monitoring
– Organization and Business Model
DC Capabilities
– Consulting Philosophy
Closing Remarks
– Staffing and Resources
– Fees
– Trustee and Staff Education
– Competitive Advantages
Investment Policy and Asset Allocation
– Commitment to SURS
– Asset Allocation
– New Ideas
SURS | October 2013
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Exhibit 4
Executive Summary
Exhibit 4
Overview of Hewitt EnnisKnupp
Over 270 U.S. investment consulting professionals (total staff of over
300); more than 600 worldwide
$2.2 trillion in assets under advisement in the U.S.; more than $4.2
trillion in global assets
#1 Industry Rankings
Over 470 U.S. investment consulting clients covering:
Total U.S. Client
Assets
– Corporate and Public Pension Plans
– Defined Contribution Retirement Plans
Number of 401(k)
Plans
– Endowments and Foundations
– VEBAs
Number of DB Plans
– Specialty Assets
Independent and objective advice—100% of revenue derived from
consulting clients
Number of Plans
>$200 million
Investment Manager and Capital Market Research structured as global
practices
Source: P&I Magazine,2012
Experience
SURS | October 2013
Depth of Resources
4
Analytical Capabilities
Exhibit 4
Hewitt EnnisKnupp Experience
AUA
# of
Clients
Traditional Consulting
$2.2 Trillion
387
Public Fund Clients
$1.9 Trillion
42
Breakdown of Client AUM
Specialty Services
Private Equity
$35 Billion
40
Real Estate
$20 Billion
50
Hedge Funds
$25 Billion
70
Clients by Asset Size
We are an institutional investment consulting firm advising
sophisticated clients
SURS | October 2013
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Exhibit 4
Hewitt EnnisKnupp’s Competitive Advantages
Public Fund Expertise
Full Suite of Services
Proactive Advice
Proven Track Record with
SURS
SURS | October 2013

More public sector experience than any other firm

Experience with systems with funding and other challenges

Unique Fiduciary Services team that specializes in public fund nuances and
governance

Best-in-industry DB and DC plan capabilities

Boutique Global Real Estate practice

Specialized Global Asset Allocation and Investment Policy teams ensure
thought leadership

Dedicated global manager research team

Thought leadership on plan structure, investment policy, market events,
investment trends, and risk management

Research driven recommendations

Forward looking perspective

Above benchmark-results

Strong relationship with the Board and Staff

Culture of partnership to report to the Board while serving as an
extension of staff
6
Exhibit 4
Proven Track Record with SURS
SURS and HEK enjoyed a successful 20+ year relationship
During our prior relationship with SURS we helped to:
– Earn an annualized net of fee return of 10% (and outperform the benchmark)
– Rank in the 34th percentile of public funds over the 10-year period
– Outperform other Illinois public funds
– Select an efficient asset allocation
– Enter new asset classes (REITs, TIPS, Global Equity, Non Core Real Estate, Portable Alpha)
– Evaluate managers across all asset classes
– Initiate infrastructure investments
– Create an Opportunity Fund
– Allocate to PPIP managers
– Respond to initiatives from the Illinois legislature
– Implement and evaluate the Manager Diversity Program
– Navigate difficult market environments (rebalanced in first half of 2009)
SURS | October 2013
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Exhibit 4
Evolution of Hewitt EnnisKnupp Over Past Three Years
Greater global presence:
– U.S.
Enhanced communication with clients,
including:
– Europe
– Monthly webinars
– Canada
– HEK Blog
– Idea Forum
Growth in resources:
– Dedicated manager research team
has grown from 45 to over 70
New client tools, including:
– Medium-term views
– Specialized Operational Due
Diligence team
– Client portal (broad distribution in 2014)
– Material growth in the alternatives
group
– Reporting
– New Global Asset Allocation team
– Enhanced alternatives
New investment consulting offerings,
including delegated solutions for:
– Investment Policy Services team
has grown from 10 individuals to 17
– Endowments/foundations
– Defined benefit plans
– Specialized DC Consulting Practice
SURS | October 2013
– Defined contribution plans
8
Exhibit 4
How We See Our Role
SURS
Circumstances
Role of the
General
Consultant
• Forward-thinking organization
• Innovative investment program
• Experienced staff and knowledgeable Board
• Counsel to Board on all investment and related issues
• Partner to staff to solve problems and monitor the program
• Provide Board clear articulation and understanding of potential investment
strategies – risks and benefits – to support prudent decision making
• Counsel to Board on real estate investment policy
• Provide market environment coverage on the asset class
Role of the • Identify real estate opportunities
Real Estate • Monitor and benchmark the program
Consultant
HEK Strengths:
Trusted Advisor, Breadth & Depth of Resources, Rich Experience
SURS | October 2013
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Exhibit 4
Overview of the Firm
Exhibit 4
SURS Team and Resources
State Universities Retirement System
Client Investment Team
PJ Kelly and Cate Polleys, Lead Consultants
Brandon Patterson and David Rose, co-Consultants
Russ Ivinjack, Senior Advisor
Supporting Consultants and Analysts
Global Investment
Investment Policy
Global Asset
Management
Services
Allocation
Fiduciary Services
Team
70+ Professionals
Average of 12 Years
Experience
17 Professionals
Average of 15 Years
Experience
10 Professionals
Average of 13 Years
Experience
7 Professionals
Average of 22 Years
Experience
Client Practice Areas
Defined Contribution
SURS | October 2013
403(b)
Corporate
Alternatives
11
Public
Endowment & Foundation
Exhibit 4
Dedicated Global Real Estate Consulting Team
Global Real Estate Consulting Team / Resources
North American Team
UK/European Team
U.S. Shared Resources
Catherine Polleys
Nick Duff
Monitoring and Compliance
(Partner & Co-Head of Global Real Estate)
(Partner & Co-Head of Global Real Estate)
Christopher Brandely
Chae Hong
Richard Cooper
Nolan Sauls
Florian Ghiurau
David Rose, CPA
Jani Venter
Tim Zukowski
Canadian Team
Kirloes Gerges
Justin Menze
SURS | October 2013
Operational Due Diligence
Richard Spivey
Ben Abramov
Chris Goodeve-Ballard
12
Exhibit 4
Business Model and Consulting Philosophy
Business Model
Consulting Philosophy

Clients must come first -- we are fiduciaries

Building implementable solutions for clients is
key

100% of our revenue is derived from
investment consulting

No payments from investment managers or
other service providers

SURS | October 2013
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Investment policy and
asset allocation come first
Understand and control
risk exposures
Pursue an efficiency or an
opportunity approach
Maintain a long-term
perspective
Base decisions on
accepted theoretical
principles and sound
empirical data
Costs matter
Exhibit 4
Hewitt EnnisKnupp: Depth of Resources
Consulting staff of over 270 investment professionals
– 187 employees based in Illinois
Highly credentialed employees:
– 57 CFAs
– 15 CAIAs
– 18 FSAs
– 39 Additional certifications including PhD, ACA, AIF, ASA, CEBS, CERA, CFP, ChFC, CIPM, CLU,
CPA, EA, FIA, FLMI, PRM, QKA, QPA, and RPA
38 graduates of public Illinois universities
105 professionals with advanced degrees
Leaders with experience:
– 51 Partners average 21 years in the industry
We have built a highly capable, practitioner-based consulting team
SURS | October 2013
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Exhibit 4
Representative Clients
SURS | October 2013
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Exhibit 4
Educational Opportunities
Event
Description
Board/Committee Meetings

Review market events and address manager issues
Answer questions about the portfolio
HEK University

One day training sessions offered to all HEK clients
Topical sessions addressing investment and fiduciary issues
Networking opportunities with peers
HEK Client Conference

Two day event offered every 18-24 months
Includes internal and external key note speakers
Breakout sessions on specific topics relevant to HEK clients
Presentation of HEK research
HEK Alternatives Conference

One day conference exploring issues specific to alternative
investment portfolios
Investment Strategy Webinars

Monthly webinars available to clients
Updates on HEK research and market events
Customized Retreats /
Educational Meetings

In depth sessions on investments or fiduciary issues per the
client’s request
Fiduciary Training

Overview of fiduciary responsibilities
Research Papers

Access to all HEK white papers and other research pieces
SURS | October 2013
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Exhibit 4
The Importance of Diversity
At the firm…
– HEK and our parent company are dedicated to creating and maintaining a diverse workplace
– Approximately 50% of the HEK Chicago office is woman and/or minorities
– Our firm is fully compliant with Equal Employment Opportunity policies and laws
– Aon’s Director of Corporate Human Resources serves as the firm’s Equal Employment Opportunity
Compliance Officer
– Through our parent company, Aon, mentoring and support is offered to many employee
demographics
• Business Resource Groups (BRGs) and Local Diversity Councils (LDCs)
– Aon recognized as a good place to work for women and minorities:
• Named to the Top 50 “Out Front Companies for Diversity Leadership: Best Places for Diverse
Managers to Work” by Diversity MBA Magazine (Diversity MBA Magazine, 2011)
• Named, by Working Mother 2011, as one of the 100 Best companies
– Aon Cornerstone is a dedicated business unit charged with proactively sourcing and vetting diverse
businesses to address the specific diversity and inclusion needs of our clients across the nation
• Nearly 170 Minority Business Enterprise firms have been hired through the program
SURS | October 2013
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Exhibit 4
The Importance of Diversity
In our research process…
– Databases open to all managers
– We recognize that these databases are not perfect so we have an open door policy
– Established an internal team from different investment areas to ensure robust MFPD-owned
manager coverage:
• Meets quarterly to compare information on market events, review progress, and to share
information on new firms
• Tasked with developing a list of MFPD-owned managers in each asset class to be monitored
closely for the purpose of continuing in our approval process
– Our manager evaluation framework does not set barriers like assets under management or years
in business that would unduly screen out any type of manager
SURS | October 2013
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Exhibit 4
Policy and Asset Allocation
Exhibit 4
Investment Policy Indications for Driving Factors
Governance
Risk Tolerance
Time Horizon
Most Flexible

More opportunistic
More alternatives
Greater reliance on
active risk

More strategic
Less alternatives
Greater reliance
on market risk
Most Strategic
Higher Risk Budget

More alternatives
Greater Reliance on
active risk

Less alternatives
Less reliance on
market risk
Lower Risk Budget
Longest

Most illiquid alternatives
(liquidity premium)
Return-seeking over
diversification in risk
premiums

No illiquid
alternatives
Diversification
over returnseeking
Shortest
More alternatives
Greater reliance on
market risk
Market impact?

Less alternatives
Greater reliance
on active risk
Smallest

Portfolio Size
Largest

SURS | October 2013
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Exhibit 4
Key Risks for Public Pension Plans
Types of Risk
Time Horizon
Risk Management Tools and Controls
Return Shortfall
Assets do not grow with liabilities
Investment return & contribution less
than liability growth
Long Term
(10+ years)

Funding policy
Plan design
Investment policy
Assumptions & methods
Liquidity
Cannot liquidate assets efficiently to
meet needs
Lose control of asset allocation
Short to Medium Term
(<5 years)

Funding policy
Benefit accruals
Use of Illiquid investments
Scenario analysis
Monitoring
Investment
Asset allocation (policy)
Investment structure
Manager selection
Rebalancing
Scenario (or path risk)
Factor
Short to Medium Term
(<5 years)

Investment policy statement
– static/dynamic
– asset allocation
– rebalancing
– manager guidelines
– monitoring/roles & responsibilities
Risk budgeting
Monitoring / dashboards
Medium term views
Regression and scenario analysis

Others?
SURS | October 2013
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Exhibit 4
Special Considerations for Underfunded Systems
Given SURS’ funded ratio (41%*), we believe the Board should seek to understand how the growing
liabilities impact the optimal asset allocation and investment strategy for the Fund
As a mature plan, negative cash flows call for careful liquidity planning and a key consideration in
asset allocation decisions
The risk posture of the fund should balance the competing objectives of investing for safety and
liquidity versus investing to potentially materially grow assets
Scenario Planning will help to bring to light these and other important considerations on an ongoing
basis and provide an important planning tool for all key stakeholders
*as of June 30, 2012
SURS | October 2013
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Exhibit 4
Sample Scenario Analysis: Baseline Forecast Results (Assumed Asset
Return is 7.1%, Amounts in $ Billions)
40%
$14.0
35%
$12.0
% of Fund Assets Needed for Liquidity
30%
$10.0
Assets in $ Billions
25%
$8.0
20%
$6.0
15%
$4.0
10%
$2.0
5%
$-
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
2022
2024
2025
2026
2027
2028
2029
2030
$9.8
$9.0
$8.2
$7.3
$6.4
$5.3
$4.2
$3.0
Net Outflow
$0.7
$0.8
$0.8
$0.8
$0.8
$0.9
$1.0
$1.1
$1.1
$1.2
$1.2
$1.3
$1.3
$1.4
$1.4
$1.4
$1.4
$1.4
$1.4
$1.4
Liquidity Need
6%
6%
6%
6%
7%
7%
8%
9%
9%
10%
11%
12%
13%
14%
16%
17%
19%
23%
27%
34%
Assets
$12.2 $12.3 $12.3 $12.4 $12.5 $12.5 $12.5 $12.3 $12.1 $11.8 $11.4 $10.9 $10.4
2023
SURS | October 2013
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0%
Exhibit 4
Sample Scenario Planning: Probability of Liquidity Needs
Exceeding 10%, 20% and 25% of Total Plan Assets
80%
70%
60%
50%
40%
30%
20%
10%
0%
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030
25%
0%
0%
0%
0%
1%
4%
6%
10%
14%
17%
20%
25%
28%
32%
37%
40%
43%
46%
48%
51%
53%
20%
0%
0%
0%
1%
3%
6%
10%
13%
17%
21%
25%
28%
33%
37%
41%
44%
47%
50%
52%
54%
56%
10%
0%
1%
5%
11%
15%
22%
28%
36%
40%
46%
50%
54%
57%
59%
62%
63%
64%
65%
66%
67%
67%
SURS | October 2013
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Exhibit 4
The Changing Role of the Public Retirement Boards
Basic trust law separates the roles of the settlor (the creator of the pension trust), the trustee (the
overseer of the trust), and the beneficiary (the recipient of trust benefits)
The governmental entities that are the settlors usually set the benefit structure and the contribution
levels
The public retirement boards and the systems they govern usually make investments and pay
benefits; in some instances the boards also impact the contributions
For many severely underfunded plans, it has become obvious that there is no way that investments
alone can solve the problem and make the plans actuarially sound
We have seen the roles “blurred” when state legislatures or local governments have asked trustees to
help them solve the problems of underfunding
Some requests are made informally and others are made through statute; more collaboration is taking
place now than ever before
From a fiduciary perspective this is tricky because trustees are to act solely and exclusively for the
benefit of the beneficiaries and not for the benefit of the settlors
SURS | October 2013
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Exhibit 4
SURS Expected Risk and Returns
SURS Current
Policy Allocation
Annualized
Return (10 Year
Forecast)
Standard
Deviation (10
Year Forecast)
Annualized
Return (30 Year
Forecast)
Standard
Deviation (30
Year Forecast)
32.0%
7.3%
19.5%
7.3%
19.5%
Private Equity
6.0
9.4
26.0
9.4
27.0
Non-U.S. Equity
21.0
8.0
21.6
8.2
21.9
Global Equity
8.0
7.7
19.5
7.8
20.0
Fixed Income
21.0
3.1
4.0
4.5
5.5
TIPS
4.0
2.7
4.5
3.6
4.5
Real Estate
7.0
7.3
14.5
7.3
14.5
Opportunity Fund*
1.0
7.9
16.5
7.9
16.5
100.0%
7.1%
13.4%
7.5%
13.6%
5th Percentile
--
14.2%
--
11.6%
--
25th Percentile
--
10.0
--
8.5**
--
50th Percentile
--
7.1
--
7.5
--
75th Percentile
--
4.3
--
6.6**
--
95th Percentile
--
0.4
--
3.6
--
Probability of
Achieving 7.75%
--
44%
--
46%
--
U.S. Equity
Total Fund
* Please note that the projected return and risk represent the Infrastructure asset class.
** Represents the 35th and 65th percentiles.
SURS | October 2013
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Exhibit 4
HEK Portfolio Implementation Principles: Two Paths to Success
Efficiency and Opportunity describe two approaches to constructing a total portfolio
SURS | October 2013
Efficiency
• Simplicity
• Achieve market returns at minimum cost
• Heavy use of indexing
• Little or no alternatives
Opportunity
Go BIG!
• Strong reliance on skill
• Accept increased cost and complexity to
achieve above-market returns
• Open to substantial traditional active risk
• Substantial alternatives allocation
• Implement Medium Term Views
27
Exhibit 4
Best Ideas
New
Opportunities
Private Market Debt
Reinsurance
Equity Insurance
Risk Premium
Measurably
Improve Risk
and Return
Outcomes
Improve
Returns
Re-envision
approach to
active
management
Control Risk
Restructure
fixed income
portfolio
SURS | October 2013
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Exhibit 4
Possible Asset Allocation
SURS | October 2013
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Exhibit 4
Real Estate Consulting Advice Begins with In-Depth Real Estate
Knowledge
Real Estate Market Research
– In-depth knowledge of:
• real estate fundamentals (e.g. supply/demand, occupancy, rents), and
• capital market indicators (e.g. interest rates, liquidity issues, fund flows, expected returns)
– Identify and monitor current market trends and issues;
• keep clients abreast of tactical concerns
– Database subscriptions include: fundamentals, transactions, economic indicators, and capital
market factors
– Participate in industry conferences and organizations
Investment Universe Research
– Cover all quadrants of commercial real estate; public, private, debt and equity
– Extensive qualitative and quantitative analysis employed to evaluate each manager’s capabilities
– A combination of proprietary investment databases and external vendor subscriptions are utilized
– Expected returns are modeled by our internal Investment Policy Services group for guidance on
relative attractiveness of real estate versus other asset classes at any point in the economic cycle
Peer Universe Surveys
– Access to over 160 clients provides us significant insight into investment trends and best practices
across the asset class
SURS | October 2013
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Exhibit 4
How is the Real Estate Cycle Progressing?
Stages of Fundamental Recovery in the Real
Estate Market Cycle
We Are
Here
Construction Reignites
YE 2012
Growth in Rental Rates
Apartments
Hotels
YE 2011
Office
Declining Vacancy
Industrial
Retail
Net Absorption Turns Positive
Demand Drivers Rebound
YE 2009
YE 2010
Source: HEK 6.30.13
SURS | October 2013
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Exhibit 4
SURS Portfolio at a Glance – June 30, 2013
Style Diversification
Portfolio Snapshot
Current Real Estate
Total Portfolio
Current
Allocation
$963 million
6.5%
Policy
Allocation
7.0%
Managers
7
Funds/
Product
s
Non-Core
11%
Core
28%
10
Program has evolved over time with allocations to:
–
US REITs: 2000
–
US Core & Value Added: 2005 & 2006
–
Global REITs: 2007
–
Non-Core Direct and Fund of Funds: 2009 – Present
Global
REITs
38%
US REITs
23%
Heavy tilt towards publicly traded real estate signifies an importance of liquidity
REITs have been a strong contributor to overall performance for the program
Significant non-US exposure through REITs and non-Core fund of funds (~25% of RE program)
–
Most exposure comes from the Global REIT mandates (~60% non-US within allocation)
HEK would recommend style allocations dependent upon goals for the program
SURS | October 2013
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Exhibit 4
Investment Performance Analysis and Monitoring
–
–
Performance Reporting
Manager Monitoring
Exhibit 4
Performance Reporting
Monthly reports
– High level market and economic developments
– Typically includes performance summary of asset
classes and Total Fund asset allocation relative to
policy targets
Quarterly reports
– Market review
– Executive summary
• Performance summary (vs. benchmark and peers)
and asset allocation for Total Fund and asset class
levels
• Total Fund attribution analysis, risk/return analytics
– Investment Managers
• Performance summary
Absolute and relative to benchmarks and peers
• Excess return and cumulative wealth analyses
• Risk/return charts and statistics
• Attribution and portfolio characteristics
Ability to provide custom exhibits based on your needs
and circumstances
SURS | October 2013
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Exhibit 4
Global Investment Management – Our Overarching Beliefs
Customized solutions achieve client goals
There is no single right way to successful fund management
Active management can add value
Globally sourcing investment managers results in better outcomes
Dedicated, specialist investment teams with accountability work best
Independence is critical
SURS | October 2013
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Exhibit 4
Manager Monitoring – Our Dedicated Team
More than 70 dedicated manager research professionals covering traditional and alternative strategies,
including operational due diligence
Christopher Riley
Equities
Global
Regional
Style
Size
19 researchers
Catherine Polleys
& Nick Duff
Real Estate
Lennox Hartman
Fixed Income
Peter Hill
Liquid Alternatives
Government
IG Credit
Emerging Market
Debt
Absolute Return
LDI
Cash
Direct Hedge Funds
Fund of Hedge
Funds
Currency
Commodities
Core
Value add
Opportunistic
REITs
Timber
Agriculture
Direct Private Equity
Fund of Funds
Infrastructure
Global
Regional
12 researchers
12 researchers
8 researchers
12 researchers
Operational Due Diligence Leaders—Richard Spivey, Chris Goodeve-Ballard
Technical Analysts/Support Staff
7 Associates
SURS | October 2013
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Karen Rode
Private Equity
Exhibit 4
Manager Research Evaluation Process
1
7
Initial inputs
News flow
Quantitative screens
Portfolio analysis
Intro meetings
Implementation
of research
Meetings
Manager selections
2
Pre-meeting
Discuss key issues
Set the agenda
Share with manager
On-going monitoring
Communication with Clients
Quarterly Reviews
6
Global Manager
Monitor Database
Rating sheet
3
Review and update
Share with manager
We ask the questions
Listen to the answers
5
4
Rating decision
Full airing of issues
with
consultants and
specialists
SURS | October 2013
Manager visit
Post meeting
Do they do what they
say they do?
Rating
recommendation
37
Exhibit 4
Our Rating Criteria and Rankings
Factor
Criteria
Rating
Business
Profitability, stability & spread of ownership, client
base, remuneration policy
1-4
Investment Staff
Quality, depth of resource, team dynamic, staff
turnover
1-4
Investment Process
Competitive advantage, repeatability, skill,
implementation
1-4
Risk Management
Embedded in process, independent verification, mix of
measurements
1-4
Operational Due
Diligence
Operational controls, valuation of assets, independent
directors, 3rd party vendors
Pass/ Conditional
Pass/ Fail
Performance Analysis
Consistent with stated process, risk adjusted,
persistent
1-4
Client Service – responsiveness and flexibility
Terms & Conditions
Fees – appropriate and competitive for the product?
1-4
Best practices in documentation
Overall
Buy / Hold / Sell
Rating Key: 4 = Strong, 3 = Above average, 2 = Average, 1 = Weak
SURS | October 2013
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Exhibit 4
DC Capabilities
Exhibit 4
A Deep DC Practice
Strong Practice Leadership and Accountability
Kevin Vandolder, CFA
Diane Vallerie Improta
Leslie Smith
Drew McCorkle, JD
DC Investment
Practice Leader
403(b) Investment
Practice Leader
DC Plan Operations
Practice Leader
Fiduciary Governance
Practice Leader
Key Areas of Concentration
Stable Value
Off the Shelf
Target Date Funds
Investment Policy &
Advice
403(b)
Consulting
Fee Benchmarking
Plan Design
Jacob Punnoose
Steve Tagarov
Brian Abshire
John Doyle
Beth Hanig
Michele Ward
David Swallow
Dan Pawlisch
Jan Raines
Linda Boarman
Craig Harris
Rob Reiskytl
Lifetime Income
Custom
Target Date Funds
Recordkeeper/
Vendor Evaluation
Legal/Compliance
& Operations
Retirement
Communications
Fiduciary Oversight
Steve Shepherd
Jay Dinunzio
Scott Fisher
Eric Friedman
Rhonda Jinks
Eric Brager
Dan Schwallie
Joe Steen
Barb Hogg
Erika Illiano
Bridget Steinhart
Gena Buchwald
Dedicated Resources
Rob Austin
Danielle Farmer
Joe Hass
Stephen Lauko
Darren Moran
Diane Smola
Steve Benjamin
Scott Fiedler
Amanda Janusz
Dessy Leintz
Corey Meyers
Paul Sylvia
Juliette deCarteret
John Flagel
Zofia Kaczmarczyk
Nathalie Luke
Michelle Nhan
Mark Tavares
Craig de Guzman
Dan Fletcher
Becky King
Mark Manning
Matt Stone
Beth Thatcher
John Doyle
Greg Fox
Chris Kohler
Frances McDonald
Claire Shaughnessy
Sherry Zhou
Investments
SURS | October 2013
Ongoing Monitoring
Vendors and Design
40
Governance
Exhibit 4
DC Plan Philosophy
Investment structure is the most important component of the investment program as it will:
– Shape how participants invest their assets
– Impact the employees’ perceived value of the plan
– Address diversification concerns
We believe a plan’s investment options should offer a sufficient range of choice to allow participants
to form well-diversified portfolios, given a reasonable range of risk and return circumstances
We recommend that defined contribution plans have a structure that:
– Includes target date retirement funds
– Offers a limited number but diversified series of “core funds”

“Asset Class” menu (better)

“Objective-based” menu (best)
– Is competitive in fees
SURS | October 2013
41
Exhibit 4
Typical Challenges Facing DC Participants
Insufficient Savings
Inadequate Savings
and Distribution Tools
Poor Diversification
and High Cost
and Too Rich in Cost
Not Enough
EnoughReturn
Return
Not
SURS | October 2013
Focusononefficiency
efficiencyand
andincome
incomeadequacy
adequacy
• Focus
Auto-enroll,auto
auto-escalate,
and
re-enroll
• Auto-enroll,
-escalate and
re-enroll
• Adjust
Optimize
matching
company
contributions
contributions
to encourage
through design
the“reach”
and
• Stop
leakagebehavior
participant
• Focus
Focusonongetting
gettingparticipants
participantstotoefficient
efficientfrontier
frontier
MoveDC
DCinvestment
investmentoption
optionstructure
structureforward
forwardto manage key risks
• Move
to manage
key cost
risksinvestment program
• Re-affirm
lowest
Re-affirm low cost investment program
• Simplify the investment option structure
Simplify the investment option structure
• Broaden the investment mandates
Broaden
the investment
• Focus
on consistent
alpha mandates
capture
42
Exhibit 4
DC Design Philosophy
The Solutions
A New
Governance
Framework
The Problems
Participant
Gaps
The Barriers
Plan Sponsor
Gaps
Insufficient
Savings
Inefficient
Plan
Design
Redesign Plan
Structure and
Communications
Poor Investment
Choices
Inefficient
Investment
Design
Redesign
Investment
Structure and
Offer Help
Growing
Retirement
Needs
Ineffective
Guiding
Metrics
Accurately
Monitor and
Measure Efficacy
SURS | October 2013
43
Exhibit 4
Moving the DC Investment Structure Option Forward to Manage Key
Risks
Participant Risk to
Manage
HEK DC Solution
Core Line Up
Return Shortfall
• Growth
Capital Markets Volatility
• Income
Unexpected Inflation
Longevity
SURS | October 2013
• Capital Preservation
• Inflation Protection
• Lifetime Income Solution
44
Asset Allocation
Custom
Target
Date
Funds
Exhibit 4
DC Solution:
Sample Menu Consolidation
Tier 1:
Target Date
(“TD”) Funds
TD Income
Tier 2 & 3:
Multiple Choice
Asset Class Menu
Objectives Menu
Current
Better
Best Practice
TD 2015
TD 2020
Large Cap
Large Cap Growth
Opportunity
Small/Mid Cap Value
Small/Mid Cap Core
Small & Mid Cap
Additional
Strategies
Small/Mid Cap Growth
TD 2025
TD 2030
Non-US Value
Non-US Index
Growth
TD 2040
TD 2045
TD 2055
sophisticated
High Yield Bonds
Global REIT
Hybrid Equity
investors/
Other Specialty Funds
Core Bond
TD 2050
Core Bond Index
Stable Value/Money Mkt
Core Plus Bond
Additional
Strategies
Income
Capital
Preservation
Preservation
Inflation
Inflation
Capital
Other Low Risk FI
SURS | October 2013
for Complex
Portfolios for
Non-US Equity
Non-US Growth
TD 2035
Brokerage
Window
Large Cap Value
Large Cap Index
TD 2010
Tier 4:
45
participants
Exhibit 4
Closing Remarks and Q&A
Exhibit 4
Fees
If we have over or underestimated your needs, we are able to adjust our scope and fees
One asset liability study, real estate and private equity pacing models, MDP Program review and
monitoring, SMP consulting, and all travel is included for the five year period
Calendar Year
Year 1
Ye a r 2
Year 3
Year 4
Year 5
Annual Retainer (GC Only)
$380,000
$390,000
$403,000
$415,000
$427,000
Annual Retainer (RE Only)
$95,000
$100,000
$105,000
$110,000
$115,000
Annual Retainer (GC and RE)
$465,000
$480,000
$498,000
$515,000
$532,000
Additional Fees:
– Public Market Searches: $25,000 - $65,000
– Private Markets Searches: $50,000 - $75,000
– Custodian/Securities Lending Search: $50,000 - $75,000
– Additional MDP Manager level due diligence: $65,000*
– DC Provider Searches: $75,000
*includes meeting with MDP managers every 12 – 24 months, and an overall acceptable/unacceptable assessment
SURS | October 2013
47
Exhibit 4
Hewitt EnnisKnupp’s Competitive Advantages
Public Fund Expertise
Full Suite of Services
Proactive Advice
Proven Track Record with
SURS
SURS | October 2013

More public sector experience than any other firm

Experience with systems with funding and other challenges

Unique Fiduciary Services team that specializes in public fund nuances and
governance

Best-in-industry DB and DC plan capabilities

Boutique Global Real Estate practice

Specialized Global Asset Allocation and Investment Policy teams ensure
thought leadership

Dedicated global manager research team, including alternatives

Thought leadership on plan structure, investment policy, market events,
investment trends, and risk management

Research driven recommendations

Forward looking perspective

Above benchmark-results

Strong relationship with the Board and Staff

Culture of partnership to report to the Board while serving as an
extension of staff
48
Exhibit 4
SURS & Hewitt EnnisKnupp -- a Strong Partnership
Custom solutions for large, sophisticated institutional investors
Resources to assist with all aspects of investment programs
Specialized real estate team housed within the practice
Proven history of commitment, excellence, and innovation in serving public funds
Will bring you honest, robust, and forward-thinking advice
No conflicts of interest: no “pay to play”, soft dollar or commission recapture arrangements
We would be honored to serve as SURS’ investment consultant, and would strive to exceed all
of your expectations
Experience
SURS | October 2013
Depth of Resources
49
Analytical Capabilities
Exhibit 4
Appendix
– Presenter Biographies
– Additional Information
Exhibit 4
Presenter Biographies
Exhibit 4

Primary consultant for several Hewitt EnnisKnupp retainer and project clients
Chair of U.S. Investment Committee, the group responsible for vetting all HEK research and setting firmwide investment beliefs
Works with Ernst & Young, Federal Thrift Savings Plan, Gloucester Insurance, National Grid USA, OSRAM
Sylvania, and Teacher Retirement System of Louisiana representing over $350 billion in assets
Previously served as the lead consultant to SURS
Joined the firm in 1994
B.S. degree in finance from the Northern Illinois University
M.B.A. degree from DePaul University’s Kellstadt Graduate School of Business
Russ Ivinjack
Senior Partner

PJ Kelly, CFA, CAIA
Partner
SURS | October 2013

Joined the firm in 1996 and holds the title of Partner
Leads one the firm’s client advisory groups
Conducted asset liability and asset allocation studies for several multi-billion dollar investment
programs with severe funding issues
Assisted in the implementation of customized hedge fund and private equity programs for several multibillion dollar public pension plans
Currently works with Arkansas Teacher Retirement System, Central Pension Fund, the International
Union of Operating Engineers, Kentucky Teacher Retirement System, Marian Health Systems,
Montgomery County Public Schools, Pennsylvania State Education Association, and the Ohio
Operating Engineers representing over $46 billion in assets
Frequently speaks before industry groups on a broad range of topics pertaining to public clients
CFA and CAIA charterholder and a member of CFA Institute and the CFA Society of Chicago
Contributed to the International Foundation Trustee Handbook (2012)
52
Exhibit 4

Catherine Polleys, CRE
Partner

David Rose, CPA
Senior Consultant
SURS | October 2013

Co-leads the firm’s Global Real Estate group; joined the firm in 2009 with over 20 years of practitioner
experience directing activities in both public and private, domestic and global real estate investment
sectors
Currently works with a confidential Taft Hartley client, the Nebraska Investment Council, Ohio Public
Employees’ Retirement System, San Diego County Employees Retirement Association, and the South
Carolina Retirement System
Prior to joining Hewitt EnnisKnupp, was the Director of Research for real estate at Fidelity Investments
and previously served as the Vice President and Director of Strategic Consulting at Torto Wheaton
Research
Other work experience includes private real estate development and investment management in both the
U.S. and Southeast Asia
B.Sc. in civil engineering from Brown University; M.S. in real estate development from the Massachusetts
Institute of Technology
Past-chairman of the National Council of Real Estate Investment Fiduciaries’ (NCREIF) Board of Directors
and Research Committee; current Chair of the NCREIF Defined Contribution Committee
Active member of the research committee and research infinity group at the Pension Real Estate
Association (PREA); a Hoyt Fellow and Counselor of Real Estate (CRE)
Leads consulting assignments for a select number of Hewitt EnnisKnupp retainer and project clients
Leads the new product manager research process; also a senior manager researcher across the full
spectrum of real estate - core, non-core and REIT managers
Champions the real estate securities real estate style areas for manager research
Lead lecturer for real estate at HEK University sessions
Currently works with a confidential Taft Hartley client, the Nebraska Investment Council, and the South
Carolina Retirement System
Joined the firm in 2008 and has nine years of industry experience
Previous industry experience includes PricewaterhouseCoopers and Walton Street Capital
B.S. in Business Administration – Finance & Accounting from The Ohio State University
Certified Public Accountant (CPA)
53
Exhibit 4

Serves as a consultant in the firm’s client advisory group
Currently works with Ernst & Young, a confidential corporate client, the Kansas City Employees'
Retirement System, the New York State Teachers' Retirement System, Trinity School, and the University
of Illinois Alumni Association
Projects include asset allocation and peer review for $90 billion public fund and DB glidepath
implementation for $5 billion corporate pension plan
Prior to joining Hewitt EnnisKnupp, worked as a research analyst at an investment consulting firm for three
years, where he serviced a number of institutional clients and worked in the firm’s alternatives group
performing due diligence and research on hedge fund investment strategies
B.B.A. and M.S. degrees in finance from the University of Memphis
Holds the Chartered Alternatives Investment Analyst designation
Brandon Patterson
Consultant, CAIA
SURS | October 2013
54
Exhibit 4
Additional Information
Exhibit 4
HEK Research
Recently Released:
Public Funds Can Compete
Harvesting the Equity Insurance Risk Premium
Measuring Success in Fixed Income
Go Big or Go Home: The Case for an Evolution in Risk Taking
Conviction in Equity Investing
Inflation Risk and Real Return
The Opportunity Allocation: A Tool to Provide Maximum Flexibility with Implementation
Tales from the Downside: Risk Reduction Strategies
Improving DC Plan Investment Governance: A Call to Action
Rethinking Fixed Income: Challenging Conventional Wisdom
Hedge Fund Replication
Coming Soon:
Investing in Real Assets
Role of Alternative Beta
New Rules for Asset Allocation
SURS | October 2013
56
Exhibit 4
Our Full Suite of Real Estate Services
Services
Description
Hewitt EnnisKnupp Implementation
Policy
Development &
Strategic
Planning

Due Diligence
Conduct due diligence searches and
prepare diligence reports
Assist with closing process and term
negotiations
Maintain a customized deal log of
investment opportunities
9 In-depth due diligence using our unique
analytics and global resources
9 Utilize our knowledge of best practices
globally to assist with the closing process and
negotiation of terms
Monitoring,
Reporting and
Risk
Management
Provide customized quarterly performance
reports
Review funds’ compliance with valuation
policies and other risk metrics
Assist staff with liquidation of interests,
distribution of securities, restructuring of
distressed investments
9 Back-office team assists with monitoring and
reporting
9 Customized risk metrics are provided to
continually track compliance of your portfolio
9 Our dedicated researchers are continually
monitoring the market place and tracking
current trends/risks
Education
Present educational materials to Board &
Staff as needed, including market
overviews and updates on topical issues
9 Provide tailored education and training
sessions
9 Keep Board & Staff abreast of market cycle
and on-going concerns, risks or opportunities
Communications
Meet with Board, Investment Committee,
and Staff as needed
9 We are available in person or via phone as
frequently as client prefers
SURS | October 2013
Review Investment Policy Statement
Review existing program and benchmarks
Prepare cash flow pacing analyses
Develop investment program to match
client’s risk/return spectrum
57
9 Detailed understanding of your program that
serves as a basis for our recommendations
9 Recommend enhancements or changes to
existing portfolio and benchmark
measurements
9 Regularly share our market insight
Exhibit 4
Real Estate Sector Specific Knowledge Base
Apartments
Core
Kirloes Gerges
Justin Menze
Warehouse / R&D
Value-Added
Chae Hong
Styles
Jani Venter
Office
Opportunistic
Jani Venter
Property
Types
Chae Hong
Hotel
Debt / CMBS
Catherine Polleys
Tim Zukowski
Retail
REITs
Justin Menze
David Rose
Timber / Farmland
Tim Zukowski
Regions
US / Rest ofDomestic
World
Catherine Polleys
SURS | October 2013
UK / Europe
Canada
Nick Duff / Richard
Cooper
Ben Abramov
58