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THE CITY OF NEW YORK OFFICE OF THE COMPTROLLER March 2, 2018 COMMON INVESTMENT MEETING Public Session
THE CITY OF NEW YORKOFFICE OF THE COMPTROLLER
March 2, 2018
COMMON INVESTMENT MEETINGPublic Session
STRATEGIC INITIATIVESUpdate
THE CITY OF NEW YORKOFFICE OF THE COMPTROLLER
March 2018
Update on Reform2018 Update
4Prepared by THE OFFICE OF NEW YORK CITY COMPTROLLER SCOTT M. STRINGER | Bureau of Asset Management 4
Transition Book of Record to SSB and Optimize MyStateStreet.com
• Plan and design rollout of DataGX warehouse
• Complete policies and practices documentation
• Implement phase I of DataGX
warehouse• Enrich DataGX capabilities
Build Cash Management Capabilities and Reduce Cash Drag
• Increase sweep frequency for alternative fund accounts.
• Implement cash monitoring
• Launch cash management accounts
• eCFM phase II • Enhance custodian payment processing
Build a Middle Office and Redeploy Investment Control Resources
• Migrate to oversight functions • Rollout policy and practices document
• Fill operations management positions
• Full rollout of Investment Operations Support
• Introduce operational scorecards
• Implement alternative asset solution
Build Compliance Capabilities • Campaign finance database automation
• Regulatory education
Enhance Risk Management and Create an ERM Framework
• Assess risk management systems vendors
• Hired senior risk staff
• Enhance KPIs
• Roll out risk register/establish risk committee
• Implement risk system• Standard risk reports for boards
Improve Investment Performance Capabilities• Assess alternative asset
vendors• Issue contract management
RFP
• Procure alternatives system • Implement contract management system
• Reporting and analytic enhancements
PRIORITIES Q1 2017 Q2 2017 Q3 2017 Q4 2017
Roadmap for Reform: 2017 Progress Update
55
Transition Book of Record to SSB and Optimize MyStateStreet.com
• Plan and design rollout of DataGX warehouse
• Complete policies and practices documentation
• Implement phase I of DataGX
warehouse• Enrich DataGX capabilities
Build Cash Management Capabilities and Reduce Cash Drag
• Increase sweep frequency for alternative fund accounts.
• Implement cash monitoring
• Launch cash management accounts
• eCFM phase II • Enhance custodian payment processing
Build a Middle Office and Redeploy Investment Control Resources
• Migrate to oversight functions • Rollout policy and practices document
• Fill operations management positions
• Full rollout of Investment Operations Support
• Introduce operational scorecards
• Implement alternative asset solution
Build Compliance Capabilities • Campaign finance database automation
• Regulatory education
Enhance Risk Management and Create an ERM Framework
• Assess risk management systems vendors
• Hired senior risk staff
• Enhance KPIs
• Roll out risk register/establish risk committee
• Implement risk system• Standard risk reports for boards
Improve Investment Performance Capabilities• Assess alternative asset
vendors• Issue contract management
RFP
• Procure alternatives system • Implement contract management system
• Reporting and analytic enhancements
PRIORITIES Q1 2017 Q2 2017 Q3 2017 Q4 2017
Roadmap for Reform: 2017 Progress Update
Prepared by THE OFFICE OF NEW YORK CITY COMPTROLLER SCOTT M. STRINGER | Bureau of Asset Management
66
Transition Book of Record to SSB and Optimize MyStateStreet.com
• Plan and design rollout of DataGX warehouse
• Complete policies and practices documentation
• Implement phase I of DataGX
warehouse• Enrich DataGX capabilities
Build Cash Management Capabilities and Reduce Cash Drag
• Increase sweep frequency for alternative fund accounts.
• Implement cash monitoring
• Launch cash management accounts
• eCFM phase II • Enhance custodian payment processing
Build a Middle Office and Redeploy Investment Control Resources
• Migrate to oversight functions
• Rollout policy and practices document
• Fill operations management positions
• Full rollout of Investment Operations Support
• Introduce operational scorecards
• Implement alternative asset solution
Build Compliance Capabilities • Campaign finance database automation
• Regulatory education
Enhance Risk Management and Create an ERM Framework
• Assess risk management systems vendors
• Hired senior risk staff
• Enhance KPIs
• Roll out risk register/establish risk committee
• Implement risk system• Standard risk reports for boards
Improve Investment Performance Capabilities• Assess alternative asset
vendors• Issue contract management
RFP
• Procure alternatives system • Implement contract management system
• Reporting and analytic enhancements
PRIORITIES Q1 2017 Q2 2017 Q3 2017 Q4 2017
Roadmap for Reform: 2017 Progress Update
Prepared by THE OFFICE OF NEW YORK CITY COMPTROLLER SCOTT M. STRINGER | Bureau of Asset Management
77
Optimize State Street Operating Environment • BAM requirements for Phase I of DataGX
• Designed BAM specific account master
• Develop KPI to measure service levels
• eCFM system enhancements
• Implement phase I of DataGX
• Alternative assets consultant reconciliations
• Enrich DataGX capabilities
• ILPA and fee transparency service
Continue Development of BAM IOS Capabilities
• Build out IOS fee capture
• Commingled account strategy
• Securities lending program review and recommendations
• Complete process documentation
• Fee reporting structure (2018 data to be delivered 2019)
Control and Oversight • Investment manager operational scorecards
• Build out operational KPI
• Contract with foreign tax consultant
• Improved oversight of IM reconciliation processes
• Funston update• Expanded oversight of
alternatives consultant and accounting data
• Complete expanded BAM policies and procedures documentation
Enhance Compliance Capabilities • Complete businesscontinuity/disaster recovery plan and testing
• Continued compliance training
Enhance Risk Management and Create an ERM Framework
• Implement phase I risk system
• Operationalize risk register• Implement FX hedging strategy • Implement phase II risk
system• Standard risk reports for boards
Investment Support Capabilities • Negotiate alternative asset reporting vendor contract
• Contract management system purchased
• Implement contract management system
• Procure alternatives system • Initiate alternative reporting system implementation
PRIORITIESQ1 2018 Q2 2018 Q3 2018 Q4 2018
2018 Plans and Priorities
Prepared by THE OFFICE OF NEW YORK CITY COMPTROLLER SCOTT M. STRINGER | Bureau of Asset Management
88
Optimize State Street Operating Environment • BAM requirements for Phase I of DataGX
• Designed BAM specific account master
• Develop KPI to measure service levels
• eCFM system enhancements
• Implement phase I of DataGX
• Alternative assets consultant reconciliations
• Enrich DataGX capabilities
• ILPA and fee transparency service
Continue Development of BAM IOS Capabilities
• Build out IOS fee capture
• Commingled account strategy
• Securities lending program review and recommendations
• Complete process documentation
• Fee reporting structure (2018 data to be delivered 2019)
Control and Oversight • Investment manager operational scorecards
• Build out operational KPI
• Contract with foreign tax consultant
• Improved oversight of IM reconciliation processes
• Funston update• Expanded oversight of
alternatives consultant and accounting data
• Complete expanded BAM policies and procedures documentation
Enhance Compliance Capabilities • Complete businesscontinuity/disaster recovery plan and testing
• Continued compliance training
Enhance Risk Management and Create an ERM Framework
• Implement phase I risk system
• Operationalize risk register• Implement FX hedging strategy • Implement phase II risk
system• Standard risk reports for boards
Investment Support Capabilities • Negotiate alternative asset reporting vendor contract
• Contract management system purchased
• Implement contract management system
• Procure alternatives system • Initiate alternative reporting system implementation
PRIORITIESQ1 2018 Q2 2018 Q3 2018 Q4 2018
2018 Plans and Priorities
Prepared by THE OFFICE OF NEW YORK CITY COMPTROLLER SCOTT M. STRINGER | Bureau of Asset Management
THE CITY OF NEW YORKOFFICE OF THE COMPTROLLER
March 2018
Bureau of Asset Management
DEEP DIVE: FEE TRANSPARENCY STATUS
• Public Markets– $$ Invest– Management fees are invoiced
• Private Markets– $$ Commit capital– Manager calls for capital
• Capital Call Notice includes detail on investment and/or fees– Fees are embedded in quarterly capital account statements
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Public Markets vs. Private Markets
Prepared by THE OFFICE OF NEW YORK CITY COMPTROLLER SCOTT M. STRINGER | Bureau of Asset Management
January 2014 – manually calculate fees for Performance Reporting
June 2016 – implement daily fee accruals
September 2017 – calculate fees based on daily Net Asset Value
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Background – Public Markets Process Enhancements
Prepared by THE OFFICE OF NEW YORK CITY COMPTROLLER SCOTT M. STRINGER | Bureau of Asset Management
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Current: Public Managers Performance - Quarterly Reports
Prepared by THE OFFICE OF NEW YORK CITY COMPTROLLER SCOTT M. STRINGER | Bureau of Asset Management
For illustrative purposes only
• The lack of fee transparency was a driver for an industry standard and the creation of the ILPA Reporting Template.
• In early 2016, BAM began the process of formally requiring the completion and submission of the standardized ILPA templates by current and all future private market partners. In July, 2016, the Boards publicly endorsed IPLA standards. This is now a prerequisite for all NYCRS investments and will improve fee transparency.
• BAM’s experience of the number of GP’s providing ILPA Templates is consistent with the industry.
• BAM has been proactive with GP’s in requiring ILPA reporting.
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Background – Private Markets
Prepared by THE OFFICE OF NEW YORK CITY COMPTROLLER SCOTT M. STRINGER | Bureau of Asset Management
• Neither GPs nor most LPs have fully embraced the ILPA templates. ILPA standards are still evolving and many GPs don’t believe ILPA Version 4 will be the final industry standard.
• For many GPs, populating the ILPA templates is a manual process and is highly prone to error.
• GPs who are in a “run-off” status have no incentive to produce ILPA statements and rarely comply with these requests.
• Fee Transparency Services are starting to be offered by Administrators (including State Street Bank).
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State of Fee Reporting in the Private Market Industry
Prepared by THE OFFICE OF NEW YORK CITY COMPTROLLER SCOTT M. STRINGER | Bureau of Asset Management
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Standard ILPA Template
Prepared by THE OFFICE OF NEW YORK CITY COMPTROLLER SCOTT M. STRINGER | Bureau of Asset Management
For illustrative purposes only
• Track receipt of ILPA templates
• Gather Fee Data Regardless of Source (over 1200 documents per quarter)
– ILPA Templates– GP Statements
• Consolidate fee information into master spreadsheet to feed quarterly net of fee performance reporting
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BAM Fee Transparency Initiative
Prepared by THE OFFICE OF NEW YORK CITY COMPTROLLER SCOTT M. STRINGER | Bureau of Asset Management
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ILPA Compliance
Private Equity Real Estate Infrastructure Opportunistic Fixed Income
Prepared by THE OFFICE OF NEW YORK CITY COMPTROLLER SCOTT M. STRINGER | Bureau of Asset Management
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Current: Private Managers Performance- Quarterly Reports
Managers Performance- Quarterly Reports
Prepared by THE OFFICE OF NEW YORK CITY COMPTROLLER SCOTT M. STRINGER | Bureau of Asset Management
For illustrative purposes only
• State Street initiated a new ILPA and Fee Transparency service which we have opted to use.
• State Street will review and consolidate ILPA statements. They are procuring technology to allow these to be received and reviewed with an automated tool.
• State Street will pull fee information from non-ILPA GP statements. They will be the contact to the GPs when data gaps exist.
• State Street will report on ILPA compliance and private market fees.
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State Street ILPA and Fee Transparency Services
Prepared by THE OFFICE OF NEW YORK CITY COMPTROLLER SCOTT M. STRINGER | Bureau of Asset Management
Asset Class Current State Future State
Public Investments• Quarterly: Gross and Net Returns at Manager level
• Annually: Fees earned by Manager in the CAFR
• Same
• Same
Private Investments
• Quarterly: Net IRR at Partnership level
• Annually: Fees and Carry paid to GPs with estimates of unreported fees in the System’s CAFRs
• Quarterly: Net IRR and Gross IRR (including Mgmt Fees, Carried Interest, Other Fees, Offsets)
• Annually: Fees Paid to GP including Carry plus BAM estimate of fee accruals with increased granularity and detail
• Annually: Supplemental fee schedule and reporting
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Changes in Fee Reporting
Prepared by THE OFFICE OF NEW YORK CITY COMPTROLLER SCOTT M. STRINGER | Bureau of Asset Management
QUESTIONS?
SMART BETA /ALTERNATIVELY WEIGHTED INDEXES
Information Session
This presentation covers: Description of Smart Beta and Alternatively Weighted Indexes Potential benefits of Smart Beta and Alternatively Weighted Indexes How they can be used Pros and cons Next steps
Introduction
23Prepared by THE OFFICE OF NEW YORK CITY COMPTROLLER SCOTT M. STRINGER | Bureau of Asset Management
Academic research has identified several factors -- Value, Size, Momentum, Quality, Profitability, and Volatility -- that have been consistent across various market cycles.
In the past several years, investment products have been created that explicitly provide exposure to these factors.
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What are Factors?
Prepared by THE OFFICE OF NEW YORK CITY COMPTROLLER SCOTT M. STRINGER | Bureau of Asset Management
Smart Beta products typically look to provide higher portfolio returns versus passive indexes, but with the same or lower risk profile by investing in factors which have the following characteristics:
Higher Returns Over Time: Certain risk factors (such as value, size, momentum, quality/profitability, and low volatility/risk) have been found to provide strong returns over time.
Robust and Pervasive: While there are many factors that can be used to describe stock returns, only a handful have been shown to have their performance replicated across various market conditions and time periods.
Have plausible explanations for their continued existence: These factors typically have behavioral, structural and/or risk-based explanations for their continued existence.
Description: Smart Beta Products
25Prepared by THE OFFICE OF NEW YORK CITY COMPTROLLER SCOTT M. STRINGER | Bureau of Asset Management
Alternatively Weighted Indexes weight stocks based on something other than market capitalization. The intuition for using an alternative weighting is that cap-weighted indexes overweight all
overvalued stocks while they underweight all undervalued stocks. Examples of alternatively weighted indexes include:
• Equal weighted indexes• Indexes based on statistical properties (e.g. those that minimize volatility or maximize Sharpe
ratio)• Indexes weighted by company financial statement metrics such as revenues, dividends, book
value, and/or cash flow. Indexes based on financial statement metrics are often referred to as “fundamental
indexes”. Fundamental indexes often have inherent exposures to the same factors that are found in Smart Beta products.
Description: Alternatively Weighted Indexes
26Prepared by THE OFFICE OF NEW YORK CITY COMPTROLLER SCOTT M. STRINGER | Bureau of Asset Management
Smart Beta and Alternatively Weighted index strategies are: “Active” strategies Strategies that have some of the beneficial characteristics of passive cap weighted
strategies Use of a rules-based stock selection and weighting approach Broad stock, sector and economic diversification Institutional capacity and scale High levels of liquidity Low fees and trading costs compared to many other active managers
Strategies with some important differences when compared to traditional active strategies Excess Return not driven by idiosyncratic risk Use historical data versus forward looking forecasts
Description: Smart Beta and Alternatively Weighted Indexes
27Prepared by THE OFFICE OF NEW YORK CITY COMPTROLLER SCOTT M. STRINGER | Bureau of Asset Management
Smart Beta and Alternatively Weighted Index products can be used to: Replace or complement Active products
Capture factor returns (similar to active managers) but in a more systematic, consistent and less expensive manner. This could be particularly useful in highly efficient markets like US Large Cap.
Replace/complement cap weighted passive products to reduce risk and improve risk adjusted returns.
Portfolio Placement
28Prepared by THE OFFICE OF NEW YORK CITY COMPTROLLER SCOTT M. STRINGER | Bureau of Asset Management
General observations about markets also apply to factors: Individual factors can be expensive or cheap at any given time. Factor values, like markets, can stay irrational longer than you can remain solvent. We don’t want to chase good performance (or run from bad performance) in the
guise of “factors” and make the same old mistakes in new ways. Factors are primarily backward looking.
Active managers (stock pickers with high active share) are primarily forward looking. Active managers’ forward looking perspective should benefit from insightful research and
analysis. Factor based strategies should benefit when markets recognize that expectations priced
into particular stocks were optimistic.
Caveats
29Prepared by THE OFFICE OF NEW YORK CITY COMPTROLLER SCOTT M. STRINGER | Bureau of Asset Management
We prefer multi-factor products with alternative weighting schemes vs. single factor products because: Individual factors can be expensive or cheap at any given time and are no easier to
time than the market in general. Factor values show low correlation to each other. Just because a factor worked in the past is no guarantee that it will work in the future.
Preferred Product Types
30Prepared by THE OFFICE OF NEW YORK CITY COMPTROLLER SCOTT M. STRINGER | Bureau of Asset Management
Identify Multi-Factor products we believe can add value. See if/how they complement each other and existing managers. Recommend portfolio of Smart Beta/Alternative Index product to Boards.
Next Steps
31Prepared by THE OFFICE OF NEW YORK CITY COMPTROLLER SCOTT M. STRINGER | Bureau of Asset Management
QUESTIONS?
