OHIO PUBLIC EMPLOYEES RETIREMENT SYSTEM U.S. Mid Cap Equity Manager Request for Information TIMELINE Issue RFI April 29th, 2016 RFI Response Deadline May 20th, 2016 Semi-Finalist Meetings at OPERS June/July 2016 Finalist On-Site Due Diligence July/ August 2016 Selection of Managers September/October 2016 Ohio Public Employees Retirement System (“OPERS”) will use reasonable efforts to adhere to the time schedule specified above. However, OPERS reserves the right to amend the time schedule as it deems necessary. Please Note: 1) OPERS is subject to the Ohio Public Records Act; the documents submitted pursuant to this RFI may be subject to a public records request. 2) All responses must be delivered by May 20th, 2016, 6:00PM (Eastern Daylight Time) to [email protected]. Any questions may also be directed to the same email address. 3) If you are submitting more than one product for consideration, please complete a separate RFI for each product. 1
Transcript
OHIO PUBLIC EMPLOYEES RETIREMENT SYSTEM
U.S. Mid Cap Equity Manager Request for Information
TIMELINEIssue RFI April 29th, 2016
RFI Response Deadline May 20th, 2016
Semi-Finalist Meetings at OPERS June/July 2016
Finalist On-Site Due Diligence July/ August 2016
Selection of Managers September/October 2016
Ohio Public Employees Retirement System (“OPERS”) will use reasonable efforts to adhere to the time schedule specified above. However, OPERS reserves the right to amend the time schedule as it deems necessary.
Please Note:1) OPERS is subject to the Ohio Public Records Act; the documents submitted pursuant to this
RFI may be subject to a public records request. 2) All responses must be delivered by May 20th, 2016, 6:00PM (Eastern Daylight Time) to
[email protected]. Any questions may also be directed to the same email address. 3) If you are submitting more than one product for consideration, please complete a separate
A. FIRM / ORGANIZATIONAL INFORMATION.......................................................7
B. PRODUCT INFORMATION.......................................................................................9
C. INVESTMENT PHILOSOPHY AND PROCESS....................................................11
D. PORTFOLIO INFORMATION.................................................................................12
E. TRADING....................................................................................................................15
F. RISK MANAGEMENT..............................................................................................16
G. PERFORMANCE........................................................................................................17
H. FEE STRUCTURE AND COSTS..............................................................................18
EXHIBIT A - OPERS INSURANCE STANDARDS.......................................................19
EXHIBIT B - OPERS TRADING GUIDELINES............................................................21
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OHIO PUBLIC EMPLOYEES RETIREMENT SYSTEM
US Mid Cap Equity ManagerRequest for Information
INTRODUCTION
In 1935, the Ohio Public Employees Retirement System began a tradition of providing retirement benefits to state employees. Today, OPERS provides retirement, disability, and survivor benefit programs to public employees throughout the state who are not covered by another state or local retirement system. Currently, OPERS serves more than 1,000,000 members and provides more than 196,000 retirees and surviving beneficiaries with monthly benefits. In addition, OPERS currently works with more than 3,700 public employers.
As of December 31, 2015, OPERS $86 billion in plan assets were diversified across various asset classes. Details on the investment programs including strategies and resources can be found in the OPERS Annual Investment Plan available on the OPERS website at www.opers.org.
SUMMARY OF SERVICES
OPERS may engage investment manager(s) to run a U.S. Mid Cap equity mandate (s). This is an opportunistic search that may or may not result in any hire. U.S. Mid Cap Core, Mid Cap Growth and/or Mid Cap Value strategies will be sought; and the benchmark will be the respective Russell Midcap style index. This search will focus on long only, non-leveraged, active managers, who are not SMID cap or sector specific. Preference will be given to a separate account structure. However, commingled strategies will also be reviewed.
Investment Managers who invest in closed-end funds, enhanced index or 130-30 strategies are not being sought at this time.
MINIMUM QUALIFICATIONS
Prospective managers responding to this request (“Prospective Managers”) must meet the minimum qualifications to OPERS satisfaction to be given further consideration. Minimum qualifications are listed in Attachment 1 – Manager Certification. However, OPERS reserves the right to choose to retain a manager that does not meet such qualifications, at OPERS’ sole and absolute discretion.
1. OPERS is subject to the Ohio Public Records Act; the documents submitted pursuant to this Request for Information (“RFI”) may be subject to a public records request. Accordingly, Prospective Managers must identify any material or documents that are confidential and clearly mark those items or documents at the time of submittal. If no documents or materials are identified and marked by Prospective Manager as confidential, the Prospective Manager will be deemed to have consented to the release of the document or material and to have waived any cause of action against OPERS resulting from the release of the documents or materials.
2. All responses must be delivered by May 20th, 2016, 6:00PM (Eastern Daylight Time) to [email protected]. Any questions may also be directed to the same email address.
3. OPERS reserves the right without prejudice to reject any or all proposals submitted. There are no expressed or implied obligations on the part of OPERS to reimburse responding Prospective Managers for any expenses incurred in preparing proposals in response to this request.
4. This RFI is not a contract, not meant to serve as a contract, does not constitute a promise to enter into a contract and is not a promise or assurance that any Prospective Manager will be selected to provide services.
5. All documents, proposals and other materials submitted in response to this RFI will become the property of OPERS and will not be returned to the Prospective Manager.
6. By submitting a response to this RFI, Prospective Manager agrees to comply with all terms, conditions and requirements described in the RFI.
7. If a contract results from this RFI, neither the Manager, nor anyone on its behalf (including its agents, affiliates, subcontractors and/or Managers), shall publish, distribute or otherwise disseminate any press release, advertising and/or publicity matter of any type or kind (collectively “Advertising Material”) having any reference to OPERS (or this RFI) unless and until such Advertising Material first shall have been submitted to and approved in writing by OPERS.
8. An individual who is authorized to contractually bind the Prospective Manager must sign Attachment 1 - Manager Certification.
EVALUATION PROCESS
All responses submitted will be evaluated in accordance with the provisions stated in this RFI. Clarifications may be requested from the Prospective Manager at any phase of the evaluation process.
The purpose of the evaluation process is two-fold: (1) to assess the responses for compliance with the minimum qualifications requirements listed in Attachment 1 – Manager Certification; and (2) to identify Prospective Managers that have the highest probability of successfully performing the services as described herein. The evaluation process will be conducted in a comprehensive and impartial manner.
U.S. Mid Cap Equity Manager Request for Information
_______________________________ _________________________Prospective Manager Firm Name Prospective Product Name
The Prospective Managers must substantiate that the firm satisfies or will agree to meet the minimum criteria listed below to OPERS satisfaction. This certification and the associated documentation must contain sufficient information, as prescribed, to assure OPERS of its accuracy.
The Prospective Manager must:1) Have and maintain the status of a registered investment advisor under the Investment
Advisors Act of 1940. 2) Have a minimum of $25 million in total U.S. Midcap Equity assets under management as
of March 31, 2016.3) Have a minimum of $1.0 billion in total Firm assets under management as of March 31,
2016.4) Have previously established and managed separate account mandates (for separate
accounts only).5) Agree to comply with OPERS insurance standards as outlined in Exhibit A hereto, if
hired.6) Agree to route all trades through the OPERS trading desk as outlined in Exhibit B (for
separate accounts only).7) The strategy portfolio manager(s) must have a minimum of three years of experience as a
portfolio manager. 8) Have a minimum of a three year track record for the strategy as of March 31, 2016.9) Agree to comply with Ohio law as it applies to investments made by OPERS.10) Agree to act as a fiduciary within the meaning of applicable Ohio law (including Chapter
145 of Ohio Revised Code).
The Prospective Manager certifies:
1) To the best of our knowledge, all information and representations provided are true, complete and accurate.
2) We warrant and represent that our firm did not confer with any other persons or organizations submitting information regarding the search in progress.
3) We have read the complete materials and agree to the terms and requirements upon which this Request for Information is conditioned.
4) The signature affixed hereon and dated certifies compliance with all the requirements of this Request for Information.
Yes: ______ No: ______
Prospective Manager - Authorized Signature Printed Name Title Date
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ATTACHMENT 2 - QUESTIONNAIRE
OHIO PUBLIC EMPLOYEES RETIREMENT SYSTEM
U.S. Mid Cap ManagerRequest for Information
INSTRUCTIONS
OPERS is considering US Mid Cap Equity Managers as outlined in this Request for Information. All Prospective Managers shall complete each of the sections of this questionnaire. Responses should be clear, concise and complete.
Please try to limit your responses to no more than one (1) page per question and type each response in the same order as listed in this questionnaire.E.
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A. Firm / Organizational Information
1) Please complete the following table and provide a brief history of the firm:
Firm InformationCountry and state of incorporationDate firm foundedPrincipal place of businessFiduciary classificationDate and current registration with any regulatory agency (SEC, FSA).
2) Please detail the ownership structure of the firm:
OwnershipForm of organization (corporation, partnership, LLC, etc.)Ownership % of each principal (list names)Ownership % by minorities (list names)Ownership % by women (list names)
3) Provide a current organizational chart of your firm. Please also provide an organizational chart that shows the persons who would be involved in proposed product. Finally, please provide professional bios for all staff aligned with the proposed product.
4) Please describe:a) Any material developments in your organization (changes in ownership, personnel,
business, etc.) over the past five years in detail.b) Any joint ventures or affiliations including any ownership the firm or any entity under its
control may hold in other investment firms.c) Any planned changes in terms of ownership structure, resources or staffing, including any
succession planning for potential retirements of key individuals in the U.S. Mid Cap equity portfolio.
5) Please disclose and describe:a) Any significant findings by any regulatory agency that conducted an audit or review of
the firm within the last seven years.b) Any deficiency letter or similar report by any regulatory agency regarding an audit or
review of the firm within the last ten years.c) Any investigation or litigation involving the firm or any of its principals during the last
ten years, including the nature of the litigation, the parties and the status of the litigation.d) Please provide an electronic copy of your full Form ADV (Parts I and II) if applicable.
6) Provide the location and function of each of your firm’s offices and the location(s) of the management of this particular strategy.
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7) Indicate whether your firm’s U.S. Mid Cap equity capabilities were developed in-house or derived through acquisition of investment talent from another firm. If the latter, please describe when and how this occurred, identify the individuals which joined the firm at that time, and note any currently binding retention contracts (such as a multi-year contract with acquired key personnel).
8) Please list the number of employees in each department/job function. If persons are included in more than one category, please explain in detail the reason for inclusion in such categories:
# of EmployeesInvestment CommitteePortfolio ManagementAnalystRisk ManagementLegalOperations (Back Office / Admin)Other (please provide detail)Total Dedicated to US Mid Cap Equity Management
9) Provide a list of the professionals in the subject product in the manner listed below:
Portfolio Management
Name Title/ Responsibilities
Years Exp
Years at Firm
Degrees/ Designations
SponsoringBody/ School
Research
Name Title/ Responsibilities
Years Exp
Years at Firm
Degrees/ Designations
SponsoringBody/ School
Trading
Name Title/ Responsibilities
Years Exp
Years at Firm
Degrees/ Designations
SponsoringBody/ School
10) Please list all investment professionals associated with your U.S. Mid Cap equity strategies as well as other firm strategies that joined your organization in the past five years:
Professionals - Joined Date Joined Title/Job Function Products
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11) Please list all investment professionals associated with your U.S. Mid Cap equity strategies as well as other strategies that left your organization in the past five years. Please include departures, regardless of seniority.
Professionals - Departures Date Left Title/Job Function
Years with Firm Products
12) Discuss your organization’s employee compensation and incentive program and how this aligns interests with investors. For example, what percentage of their bonus is tied to alpha generation? Do employees receive equity compensation (physical or phantom)? Are the investment professionals for this strategy required to invest in this product?
13) Please state whether any of the firm’s investment professionals have other business responsibilities outside of their employment with the firm and, if applicable, describe the other business responsibilities, including how many hours each week are allocated to those outside efforts.
14) Please identify and describe any relationships with third party marketers or placement agents. Will any management fees paid by OPERS be used to compensate these parties?
B. Product Information
1) Please complete the following table relating to asset growth:
Amount of Assets 3/16 12/15 12/14 12/13 12/12 12/11 12/10 12/09Total Firm Assets ($ mil)Total U.S. Mid Cap Equity Assets ($ mil)Total U.S. Mid Cap Equity Assets ($mil)- inst’l separate accountsTotal # of U.S. Mid Cap Equity ClientsTotal # of U.S. Mid Cap Equity Clients- inst’l separate accounts
2) Please list each of the firm’s U.S. Mid Cap equity products with a brief description of each. The description should include:a) Investment objective, return, riskb) Investment universe c) Number of securities in the portfoliod) Inception datee) Maximum capacity
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3) Please specify which product is proposed for this mandate. If you have more than one U.S. Mid Cap strategy, please explain why you chose to propose this one?
4) Please list the amount of assets for each of your U.S. Mid Cap equity strategies in the following table:
Assets ($mil) 3/16 12/15 12/14 12/13 12/12 12/11 12/10 12/09Mid Cap Strategy 1Mid Cap Strategy 2etc.
5) List any U.S. Mid Cap equity fund that you have previously operated which has been subsequently closed. Please describe the reasons for closure.
6) What is your preferred benchmark for the proposed product, and why? Is this consistent with the majority of existing client mandates?
7) Please list the five largest clients currently invested in the proposed product.
Client Name Client Type
Inception Date
Product Type (Commingled,
Separate)Market Value
% of Product
AUM
8) For all U.S. Mid Cap equity products, please list the accounts gained and lost over the past several years and the reasons for any lost accounts.
As of 12/31:Total Assets
Gained
# ofAccountsGained
Total AssetsLost
# ofAccounts
Lost2015201420132012201120102009
9) Please state at what level of assets under management you would consider closing this product to new clients and provide a brief explanation regarding how you arrived at the capacity ceiling?
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C. Investment Philosophy and Process
1) Describe your investment philosophy for the proposed product. Provide a brief history of the philosophy and process. Who was the original architect? Describe how it has changed over the past several years and how you expect it to change in the future.
2) What market anomaly or inefficiency are you trying to capture? What are the key factors that differentiate this product and give it a competitive advantage over the others in the marketplace?
a) Why do you believe this philosophy will be successful in the future? Provide any evidence or research that supports this belief.b) Will you emphasize risk control or return maximization as the primary route to success? Or do you think it is possible to achieve both simultaneously?c) Do you put your faith in macro forecasts and adjust your portfolio based on what they say?d) How reliably do you believe a disciplined process will produce the desired results? That is, how do you view the question of determinism versus randomness in results?e) Under what circumstances would you deviate from the discipline associated with this philosophy?
3) Are there any niches in which you have a specific focus or competitive advantage? How was this competitive advantage developed? How do you maintain this advantage?
4) Please indicate what fundamental/quantitative factors are used to analyze investment opportunities and indicate their relative importance in the decision making process
5) How much transparency do you allow clients into your decision-making process, research and holdings? Please specify any areas of the investment process that you consider proprietary and, therefore, would not reveal to clients in a separately managed account.
6) Explain the roles and responsibilities of each team member in the investment process. Notably the portfolio manager(s), analysts and trader(s). Indicate who has the final decision making authority over the portfolio. Explain how these respective roles have evolved over time.
7) Please explain, in detail your firm’s research process and how the research function is organized. Be sure to highlight the following:
a) Describe your research capabilities with particular emphasis on the product being reviewed.
b) State the location(s) where research is carried out and what specific research is conducted at each location.
c) What is the universe of companies researched and how is it determined?d) How many companies / sectors are analysts responsible for covering?e) How frequent do analysts travel to their coverage areas?
8) What is your buy discipline? When would your firm deviate from its buy discipline?
9) What is your sell discipline? When would your firm deviate from its sell discipline?
10) Describe what circumstances or market conditions would favor your investment strategy. When can it be expected to be out of favor or be unrewarded vs. the expressed benchmark?
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11) What percentage of resources and time does your team devote to the top-down aspect of your approach versus the bottom-up (security selection) aspect of your process?
12) What percentage of time do the Lead Portfolio Manager and backup Portfolio Manager dedicate to the proposed strategy?
13) Discuss in detail the use of third party research in your investment process. How does your firm pay for this research?
14) Please disclose all usage of “Expert Network” firms in the past five years. Please include name of firm(s) and industry/sector reviewed.
15) What is the range of market capitalizations (lowest to highest) for which you will consider investing in this U.S. Mid Cap equity product?
16) If the subject product uses derivatives please discuss how they are used, strategies employed and the extent of their use, the experience of the staff in managing derivative instruments and where leverage is being employed.
17) What impact to performance would there be if derivatives were not allowed in this portfolio? Please describe how this constraint would affect your portfolio construction process.
18) Please describe the portfolio’s expected cash position and circumstances that would lead to higher than expected cash holdings? Do you use cash as a method of risk control?
19) How important historically have initial public offerings (IPOs) played to the strategy?
20) Please provide details on the last two names removed from the portfolio. Please include:a) Original thesisb) How sizing was decidedc) Updates to thesis that informed sizing, timing of buys/sells, etc.
21) What percentage of your annual budget is spent on research?
22) What is your current market outlook for U.S. Mid Cap equities (2-5 years forward)?
D. Portfolio Information
1) What is your targeted alpha and tracking error above the benchmark? How were the targets developed?
2) Over what time horizon would be your strategy be expected to meet performance objectives?
3) Please describe your investment decision process with regard to the following:
a) Security selectionb) Sector selectionc) Liquidity considerations
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4) What is your expected and historical attribution from stock and sector selection? Please explain.
5) How many issues are contained in a typical portfolio? What is your maximum single stock position?
6) What is your minimum and maximum portfolio weighted average market capitalization?
7) What percentage of the strategy is typically invested in off benchmark names?
8) Are there any sectors or industries that you strategically choose not to invest in? Are there any that your approach has a bias towards overweighting or underweighting?
9) Provide the sector exposures, relative to desired benchmark, of a representative account for the proposed investment strategy:
Relative Sector Exposure (Note: Columns should approx. total 1)
Ex: 03/16 12/15 12/14 12/13 12/12 12/11 12/10
Energy -5.0%Materials +3.0%Industrials -2.0%Consumer Discretionary
+4.0%
Consumer Staples +2.0%Health Care +12%Financials +7%Information Technology
-5%
Telecommunications Services
-3%
Utilities -15%Other (please specify) Cash +2%
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10) Provide the security type exposures of a representative portfolio for the proposed investment strategy:
Common sharesPreferred sharesBonds / other CreditsWarrants and rightsDerivativesCashOther (please specify)
11) Please provide the following data for the indicative portfolio and the benchmark:
03/16 12/15 12/14 12/13Portfolio Index Portfolio Inde
xPortfolio Inde
xPortfolio Index
# of HoldingsPrice/Earnings (Forward 12)Price/BookDividend YieldMarket Capitalization (median and average)
12) Provide the active weights for the 10 largest active positions in the proposed strategy. Note: here we are looking for the 10 largest active positions (portfolio weight less benchmark weight); the 10 largest active positions may or may not be the 10 largest capital positions.
03/16 12/15 12/14 12/13Top 10 Holding
Port. Ind. Top 10 Holding
Port. Ind. Top 10 Holding
Port. Ind. Top 10 Holding
Port. Ind.
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13) Please submit an actual client portfolio (excel file including ticker and shares held) as of March 31, 2016, which closely reflects the investments proposed for this account.
14) Please provide a history of the underlying security turnover (i.e. “name” turnover, not “dollar” turnover). What is the expected annual portfolio turnover going forward?
As of December
31
TotalStocksOwned
# ofStocksAdded
# ofStocks
Removed2015201420132012201120102009
15) What is your preferred time table for getting a new portfolio invested in your strategy?
E. Trading
1) As stated in the minimum requirements and outlined in Exhibit B, OPERS requires that all trading for separate account mandates be done through the OPERS Trading Desk. Please describe how you plan to comply with this requirement (what rotation method would you propose, any trading processes that would need to be adjusted, etc). If hired, how will you evidence compliance?
2) Please complete a separate table for each of your 5 largest positions in the Mid Cap portfolio. Please submit in an Excel format as shown in the example below. Please include: The date of each buy/sell transaction, number of shares bought/sold, the average transaction price, and the Relative Benchmark (ie capital weight less benchmark) weight in the portfolio at the time of purchase/sale.
Date Shares Bought (Sold) Avg Transaction Price Basis Point Weighting in Portfolio5/14/2009 10,000 $8.45 20.05/15/2009 12,000 $8.43 38.06/3/2010 (5,000) $8.96 32.0
10/28/2015 9,000 $25.13 430.0
……
3) What type of electronic trading systems do you use?
4) What is the average commission cost for the composite portfolio for the last three years?
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F. Risk Management
1) What risks are inherent in your investment style and strategy? How do you measure and manage these risks?
2) Describe the risk management process within your organization and the degree of independence from your portfolio management process. Please describe how the firm assures the independence of risk management.
3) How do you think about risk? Is it volatility or the probability of permanent loss? Can it be predicted and quantified a priori? What is the best way to manage it?
4) What systems are used in the risk management area on a regular basis?
5) Please describe the process used to stress test the portfolio, if any. Please provide the output for the current portfolio based on the stress tests you run.
6) Historically, the 10 largest marginal contributors to active risk have been what percentage of the portfolio? How has this looked over the duration of your track record? (For example, on average, the 10 largest marginal contributors to active risk have been around 40% of our total risk budget; it peaked at 55% in 2011 and was as low as 35% in 2014.)
7) Provide your proposed investment guidelines for this product under a fully discretionary basis. Also include the following, if applicable:
a) Maximum ownership constraintsb) Typical number of securities held in the strategyc) Any security types that are prohibitedd) Maximum active risk allocation to a single security as a percent of total portfolioe) Minimum/maximum market capitalization rangef) Minimum/maximum sector allocationg) Maximum cash balanceh) Any ETF usage
8) What is the expected tracking error and actual tracking error since inception?
9) Are you willing to accept a maximum tracking error limit as part of the portfolio guidelines? If so, what limit would you propose? How would the tracking error be calculated?
10) Please describe how the firm monitors compliance with portfolio guidelines.
11) Are derivatives used in this strategy? If so, please provide a complete description of how they are used: a) Specific strategies and types of derivatives usedb) Portfolio limits on derivatives usage
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12) How has your risk management changed following the market volatility experienced in the last few years?
G. Performance
1) Given the current level of market volatility and your volatility outlook, what is a reasonable expectation for what your realized tracking error over the next 2 to 3 years? What is your strategy’s return objective expectation over that same period?
2) Describe what circumstances or market conditions would favor your investment strategy. When can it be expected to be out of favor or unrewarded versus the benchmark?
3) Please provide your monthly gross and net (of all fees) performance for the proposed product since inception through March 31, 2016. Data should be for a composite with the same objective. Simulated Results will not be considered and should not be submitted. Submitted returns should be calculated in accordance with GIPS standards. Please attach a completed Excel spreadsheet file in the following format:
Month Gross Return Net Return
4) Please provide a description of composite:a) Number of accounts and market value of assets represented in composite as of each
annual period shown.b) Include low/high and median return for each annual period.c) Has the composite been verified for compliance with GIPS standards?d) Is there a period for which composite is not in compliance?
5) Explain the performance during the three months when you experienced your highest and lowest relative quarterly excess returns since inception.
6) Provide performance attribution report for each of the last five calendar years. The analysis should include the impact of sector, market cap and cash allocation.
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H. Fee Structure and Costs
1) Please provide a proposed fee schedule for the account, including any breakpoints.
2) Will you certify that the fee schedule provided above is the most favorable fee schedule that the firm offers for clients with similar requirements? If not, please explain why.
3) Are you willing to negotiate fees? Are there any Most Favored Nations clauses that are binding on you at this time for a mandate of this size?
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EXHIBIT A - OPERS INSURANCE STANDARDS
Insurance Guidelines
Fidelity Insurance: Manager shall maintain insurance policies or bonds other than ERISA Bonds, pursuant to ORC § 145.113(E), that protect against fraudulent or dishonest acts of the Manager, its officers, affiliates or employees. Fidelity Insurance shall be written on a Surety and Fidelity Association of America form, or a substantially equivalent form, determined in accordance with the Manager’s legal status: Form 14 if Manager is a Mutual or Hedge Fund or Private Equity Firm; Form 15 if a Real Estate Investment Trust or Broker-Dealer; Form 24 if a Bank or Trust Company or Form 25 if an Insurance Company.
The Manager’s Fidelity Insurance must cover (1) acts of dishonesty, including but not limited to, employee dishonesty, (2) acts of fraud, including but not limited to, computer fraud, electronic funds fraud and wire transfer fraud, and (3) forgery and alteration, in at least these amounts:
Manager’s Assets Under Management * Minimum Required LimitUp to $500 million $1 million$500 million to $3 billion $3 million$3 billion to $10 billion $5 million$10 billion to $25 billion $10 million$25 billion to $50 billion $15 million$50 billion to $100 billion $25 million$100 billion to $250 billion $35 million$250 billion to $500 billion $50 millionOver $500 billion $50 million and subject to further review **
Errors and Omissions Insurance: The Manager shall also, during the term of this Agreement, maintain Errors and Omissions (“E&O”) Insurance to protect the Manager, its officers, directors and employees in the event they are sued for any actual or alleged negligent act, error or omission committed within the scope of performing professional services, including legal defense costs even where allegations are baseless, in at least the amounts set forth in the following table:
Manager’s Assets Under Management * Minimum Required LimitUp to $250 million $1 million$250 million to $500 million $2 million$500 million to $1 billion $5 million$1 billion to $10 billion $10 million$10 billion to $25 billion $15 million$25 billion to $50 billion $25 million$50 billion to $100 billion $50 million$100 billion to $250 billion $75 million$250 billion to $500 billion $100 millionOver $500 billion $100 million and subject to further review**
* “Assets Under Management” in both tables above means the higher of the Manager’s total assets disclosed in its most recently filed Securities and Exchange Commission Form ADV-1 or its Form ADV-2, or similar documents filed with other regulators if Manager is not SEC-registered, at the time insurance is issued or renewed.**For Managers with assets under management over $500 billion, OPERS and OPERS Insurance Consultant shall review the Manager’s insurance and may require that the Manager submit additional information.
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Standards for Fidelity and E&O Insurance: The Manager’s coverage must be written by an insurance company rated A (Excellent), or better, with a financial size category of IX (adjusted policyholder surplus of at least $250 million), or higher, as determined by A. M. Best at the time of issuance. The Manager’s Deductibles or Retentions may not exceed 5% of the Minimum Required Limits set forth above or 7.5% of the amounts purchased, if greater than the Minimum Required Limits.
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EXHIBIT B - OPERS TRADING GUIDELINES
Manager will place U.S. equity trades in the OPERS separate account through the OPERS Trading Desk with the following exceptions permitted:
Large blocks of stock offered at a discount Initial Public Offerings Other times at OPERS discretion
Trades given to OPERS must also meet the following criteria: Trading instructions must be given on a fair and equitable rotational basis, meaning
OPERS has an equal opportunity to receive the trade instructions first, second, last, etc. After a trade is communicated to OPERS, the manager will not place or execute orders in
the given name for remaining clients in the product until OPERS has completed the order.
Frequently Asked Questions:
Why is OPERS doing this? OPERS believes that commission dollars are an asset of the fund. As such, the best way for OPERS to capture these commissions is to handle all trades using our internal traders.
Is Commission Recapture a viable compromise?No.
Will OPERS consider a “Directed Trading” arrangement?No.
Does OPERS access the same Dark Pools, Crossing Networks, etc. that my firm does?Most likely. OPERS has relationships with over 30 dark pools and crossing networks, including Liquidnet. OPERS reviews and updates the list of Trading Venues on a ongoing basis.
We feel that part of the value we bring clients is our ability to trade stocks. Does OPERS feel they are better traders than us?While we have no basis to say which firm is better, that is not the spirit of this requirement. OPERS has a fundamental philosophy that commission dollars are an asset of the fund, and the most efficient way to capture those dollars is for OPERS to execute the trades.
Perhaps a bigger question is whether or not OPERS traders have the expertise necessary to execute the trades. For perspective, OPERS manages nearly $3B in internal active equity mandates and over $10.5B in internal passive equity mandates, all of which trade through our internal desk. In addition, effective February 2011, our traders began to handle the trading for all US long-only external equity managers. Below, we highlight the career summary of each trader.
Joan Stack – Head Trader-Equities
Ms. Stack joined OPERS as Trading Manager in 2003. She is responsible for the management of the OPERS Equity Trading Desk, which executes all global and domestic equities and equity derivatives for OPERS internally managed accounts, as well as domestic equities for externally managed accounts.
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Joan has 42 years of general investment experience with 33 years of trading experience, serving as head trader for the past 18 of those years. She holds a BA in Economics from Mount Holyoke College in South Hadley, MA, and an MBA in Finance/Investment Management from Fordham University in New York, NY.
Prior to joining OPERS, Joan was Senior Vice President and Head of Equity Trading at ING Group in New York. Other experience includes stints as Senior Trader at Strong Funds in Milwaukee, and Vice President, Equity Trading at Bankers Trust Company in New York. She serves on the Institutional Committee of the National Association of Securities Traders. Joan is a member of the National Organization of Investment Professionals and the Ohio Securities Traders Association.
Matt Sherman
Mr. Sherman joined OPERS as a Senior Equity Trader in May 2006. He executes domestic equity and equity derivatives as part of the OPERS Trading Group as well as international equity index trading and FX currency management for all OPERS internally managed accounts.
Matt has 22 years of general investment experience with 18 years of trading experience, including serving as the head trader for 4 years previously to joining OPERS. He holds a BA in Economics from the Ohio State University, and an MBA from Otterbein University.
Prior to joining OPERS, Matt was the Head of Equity Trading at National City Investment Management Co in Cleveland, Ohio. While there, Matt traded for multiple Large Cap and Small Cap strategies as well as trading the International EAFE and Emerging Markets products. Previous to that, Matt was a securities trader at STRS of Ohio where he traded domestic and international internal accounts. Matt is a member of the Ohio Securities Traders Association.
Christy Ruoff
Ms. Ruoff joined OPERS in 1982. She has progressively moved into positions of increased responsibility, including managing staff, during her tenure at OPERS, where she currently serves as an Equity Trader II on the OPERS Equity Trading Desk. Her current position entails the execution of all domestic equities and equity derivatives for both the internally and externally managed accounts, as well as equities and FX for international index accounts.
Christy has 33 years of fixed income and equity investment experience with 16 years of trading experience. She has a BS in Business Administration and Management & Leadership from Franklin University in Columbus, Ohio.
Lori Davie
Ms. Davie Joined OPERS in 1997. She has progressively moved into positions of increased responsibility, including Transaction Assistant performing investment operations and Proxy Voting Corporate Governance Specialist, during her tenure at OPERS. She currently serves as an Equity Trader I on the OPERS Equity Trading Desk. Her current position entails the execution of domestic equities and equity derivatives for both internally and externally managed accounts, as well as global equities and FX for internally managed index funds.
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Lori has 18 years of investment experience with 4.5 years of trading experience. She holds a Paralegal Certificate from American Institute of Paralegal Studies, Inc., a BA in Organizational Management from Ashford University, and is working toward her MAOM from Ashford University.
What percentage of trades do you expect will go through your desk? Or, what percentage of trades would qualify for one of the OPERS exceptions?Depending on the manager, between 99% and 100% of the trades will go through the OPERS desk; OPERS expects over the long run, very few trades will qualify as exceptions.
One exception is “Large blocks of stock offered at a discount.” If I see a large block via Liquidnet, can I access that on behalf of the OPERS account instead of placing the trade through your traders?No. Because we have access to many of the same trading venues, OPERS will execute those orders. Our intent with the “Large blocks of stock offered at a discount” language is to address the rare times your traders may receive a direct contact from a broker (phone call, IM, etc.) offering a large block of stock, at a discount, that is not being coincidently offered any other way (i.e. Liquidnet, etc.). Because OPERS will not receive that unique communication, you’ll have exclusive access to supply that we won’t; thus, in those rare situations it would be in our best interest if you execute that trade on our behalf.
IPO’s are an important part of our strategy and I see that is one of your exceptions. How do you envision IPO’s being handled?For IPO’s, we plan to operate in a cooperative fashion with your team depending on the situation. For instance, with “hot IPO’s” it may make sense for us to operate separately from you, allowing you to have a pro-rata larger allocation available to share with your other clients. Conversely, for other IPO’s, you may prefer to subscribe for your other clients and OPERS at the same time, thereby increasing your stature on the Street.
Please explain what you mean by “Trading instructions must be given on a fair and equitable rotational basis?”OPERS requires that all trades for our account be placed through the OPERS desk. Many managers are happy to trade through the OPERS desk each and every time, but only after they have traded for all other clients first. OPERS is unable to accept an arrangement where we always receive the buy or sell order last; over time, we believe this will result in OPERS obtaining less attractive prices. We require that a fair and equitable rotation be established for the product we are invested in so that there are times OPERS receives the orders last, and times OPERS receives it first. The rotation can take place on a per trade basis, a daily basis, weekly basis, etc. Any rotation manner that is reasonable, fair, equitable, and auditable will work.
Do I have to follow the trade rotation policy for all my firm’s products, or just the product(s) OPERS is invested with?Just the product OPERS is invested in.
Please explain what you mean by “After a trade is communicated to OPERS, the manager will not place or execute orders in the given name for remaining clients in the product until OPERS has completed the order.”Like the managers we hire, OPERS has a clear focus on obtaining alpha. In order to avoid both OPERS and the manager trying to access the same liquidity at the same time in the same name, OPERS insists that when OPERS is executing the trade, that the Manager NOT trade in that
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name for the given product until the Manager receives fill confirmations from OPERS. Fill confirmations will be communicated in real time to the Manager via a FIX connection. Note: This restriction does NOT apply to trading in any other product you run that OPERS is not invested in.
How do you reconcile a Manager’s fiduciary requirement to treat all clients fairly with OPERS requirement that the manager stay out of the market for a given name when OPERS is working the order? By staying out of the market during times when OPERS is first in rotation, I could potentially pass up liquidity on some hard to trade names, thus harming my clients.OPERS feels that a Manager staying out of the market in a specific name while OPERS is working the order is consistent with a Manager’s fiduciary responsibility to treat all clients fairly. Imagine a scenario where you are trying to purchase 100,000 shares of an illiquid name. A manager would not simultaneously place an order for 50,000 shares of the illiquid name with Goldman and 50,000 with Merrill; Goldman and Merrill would both be demanding inventory from the street at the same time, falsely signaling to the market that two separate clients are actively demanding the limited supply. Doing so could potentially cause both brokers to pay higher prices at the margin, harming your clients. Since OPERS is in the same product as your other clients, it is in both OPERS and the other clients’ best interest to not compete with each other.
I’ve never heard of a Plan doing this before. Do you know of any other firm that requires this?We know of several other large Public funds that have similar constraints. Also, we’ve spoken to equity managers who sub-advise for large Investment Banks that require underlying managers to trade through them with similar constraints.
How do you expect trade information to be communicated to OPERS?OPERS is to receive information via FIX, which provides a clear audit trail, removes risk of fat-finger mistakes from phone communications, etc. On the rare occasions when FIX is not operational, managers may trade away.
Will OPERS audit compliance? How would you even know if we were in the market at the same time you were or if we followed a rotation schedule or not?Yes. Expect to be audited within the first year of being hired; the audit would include a full review of time-stamped trade tickets. Further, each quarter your firm’s compliance officer will have to certify compliance with our Trading Policy.
Can you give an example of how you would expect a normal trade to be handled?Assume:
Manager has 50 clients invested in the Midcap Core product: OPERS and 49 other clients. OPERS represents 20% of the Midcap Core AUM The 49 other clients are traded as a block, with the fills being allocated pro-rata across all 49
accounts. In terms of rotation, Manager has elected to lump clients in the Midcap Core protect into two
groups: those without trading constraints (49 clients), and OPERS. Further, Manager has elected to rotate on an every-other-trade basis.
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For the 1st trade of the relationship, a coin-flip resulted in OPERS going first, and the 49 block clients going last. The second trade will be 49 clients first, and OPERS last
For the first trade, Manager elects to purchase 100,000 shares of XYZ, allocated as follows: 80,000 to 49 block clients 20,000 to OPERS account
Step 1: Midcap PM instructs his trading desk to purchase 100,000 shares of XYZ.
Step 2: Desk transmits order to OPERS: 20,000 shares of XYZ.
Notice: Manager is NOT working order for remaining 80,000 while OPERS is in market.
Step 3: Via FIX, Manager’s Desk receives real-time fill confirmation of all 20,000 shares being completed by OPERS.
Step 4: Desk begins working orders on remaining 80,000 shares for Midcap Core.
Assume for the second trade, Manager wants to purchase 200,000 shares of ABC, allocated as follows: 160,000 to 49 block clients 40,000 to OPERS account.
Step 1: Midcap PM instructs his trading desk to purchase 200,000 shares of ABC.
Step 2: Desk immediately works 160,000 shares of ABC.
Notice: OPERS is NOT working order for remaining 40,000 for while Manager is in market. In fact, OPERS is unable to work order because no order has been communicated to OPERS, so OPERS has no idea Manager is in market or that the Manager even is demanding shares in the name.
Step 3: Upon completion of 160,000 share fill, Desk informs OPERS of order for 40,000 shares of ABC.
Step 4: OPERS begins working orders on remaining 40,000 shares. Via FIX, Manager’s Desk receives real-time fill confirmation of all 40,000 shares being completed by OPERS.
