State Universities Retirement System
of Illinois (SURS)
Request for Proposal
U.S. Equity Mandate
Small Cap Growth
November 2011
Table of Contents
I.
RFP Summary Statement
1
II.
Background Information
1
III.
Specific Services Requested from the Investment Manager
2
IV.
RFP Specifications
2
V.
Projected Schedule of Events
4
VI.
Selection Criteria
4
VII.
U.S. Equity Investment Manager Questionnaire
5
State Universities Retirement System of Illinois (SURS)
Request for Proposal
November 2011
U.S. Equity Small Cap Growth Mandate
I. RFP Summary Statement
The State Universities Retirement System of Illinois (SURS) requests proposals from qualified
investment management firms to provide a U.S. Equity product which, after fees, exceeds the
return of the agreed upon U.S. Equity index.
II. Background Information
Agency Description
SURS is the administrator of a cost-sharing, multiple-employer public employee retirement
system. SURS membership includes employees of the Illinois public universities and other
affiliated organizations. Currently, SURS membership totals more than 213,000 active, inactive
and retired participants. SURS maintains both a defined benefit plan and a defined contribution
plan. Proposals are being solicited for the defined benefit plan.
Defined Benefit Plan Investment Program
SURS investment program, as of June 30, 2011, totaled $14.3 billion. The target asset allocation
as of June 30, 2011, is as follows:
U.S. Equities – public markets
U.S. Equities – private markets
Non-U.S. Equities
Global Equities
Fixed Income
TIPS
Real Estate
Opportunity Fund
30%
6%
20%
10%
19%
4%
10%
1%
As of June 30, 2011, U.S. public market equity holdings totaled $4.6 billion, of which $2.8
billion (61.4%) were passively managed. SURS employs a blended strategy of passive and
actively enhanced management for its large-cap and broad market equity exposure.
Legislated Investment Restrictions Relating to the Republic of the Sudan and Iran
In 2007 the Illinois General Assembly passed Public Act 095-0521, restricting investment in
companies domiciled in, managed or controlled by, or doing business with the Republic of the
Sudan. SURS investment managers are required by law to abide by the restrictions. Appendix A
provides information relating to these Sudan-related investment restrictions. This Public Act can
be found at http://www.ilga.gov/legislation/publicacts/fulltext.asp?Name=095-0521&GA=95.
1
Additionally, information pertaining to the Iran divestment law, Public Act 095-0616, approved
by the Illinois General Assembly on September 11, 2007, can be found at
http://www.ilga.gov/legislation/publicacts/fulltext.asp?Name=095-0616.
State & Federal Ethics Laws
SURS Investment Managers shall comply with all applicable laws and regulations of the State of
Illinois and the United States of America, including without limitation, the provisions of SEC
Rule 206(4)-5.
On April 3, 2009, Illinois Governor Pat Quinn signed Public Act 96-0006 into law. Public Act
96-0006 amends the Illinois Governmental Ethics Act and provides guidelines for ethical
practices concerning state pension plans. Investment managers seeking to be considered for this
mandate should be familiar with and must comply with the provisions of this Act. Public Act
96-0006 encourages the Board to increase the racial, ethnic, and gender diversity of its
fiduciaries, to the greatest extent feasible within the bounds of financial and fiduciary prudence.
In furtherance of this Act, it is the goal of the Board to use its best efforts to increase the racial,
ethnic, and gender diversity of its fiduciaries, including its investment managers. The Board
encourages minority, female and disabled-owned firms to submit proposals to this RFP.
A section of the Illinois Procurement Code concerning prohibitions of political contributions for
certain vendors, 30 ILCS 500/50-37 may or may not apply to SURS investment managers.
SURS is not subject to the Illinois Procurement Code generally (30 ILCS 500/1-15.100).
However, each investment manager should be familiar with the provisions of this section and
comply with this section if the investment manager deems it appropriate.
III. Specific Services Requested from the Investment Manager
SURS is requesting information from qualified investment managers to manage a U.S. Active
Equity Market strategy as identified on the attached letter. The overall goal of the fund will be
to exceed the return of the Russell 2000 Growth benchmark net of fees over a full business cycle
(3-5 year period). It is anticipated that this separate account portfolio will be initially funded
with approximately $50 – 75 million. The funding level will be dependent on then prevailing
market conditions as well as asset allocation mix considerations within the overall portfolio.
This search is specifically targeted for investment managers with small cap growth strategies in
the U.S. Equity asset class. A small market capitalization strategy is defined as a portfolio
consisting of companies with a market capitalization ranging from $300 million to $5 billion.
IV. RFP Specifications
If, in response to this RFP, trade secrets or commercial or financial information are furnished
under a claim that they are proprietary, privileged or confidential and that disclosure of the trade
secrets or commercial or financial information would cause competitive harm to the person or
business, such claim must be clearly made and such information must be clearly identified. The
information must be identified in the RFP response and provided separately from the RFP
response. Such a claim is not definitive. SURS has the right and obligation to determine
initially whether such information is exempt from disclosure under the Illinois Freedom of
2
Information Act. (5 ILCS 140/1 et seq.) However, no information will be determined to be
proprietary, privileged or confidential unless it is identified and separated as indicated here.
Submission Deadline
The completed RFP must be delivered by 5:00 p.m. PST Friday, January 6, 2012. Earlier
responses are welcome. Any RFP delivered after the deadline will not be considered. Please
send one hard copy and one electronic copy to both of the following individuals:
Ms. Lauren Etcheverry
Investment Consultant
Callan Associates
101 California Street, Suite 3500
San Francisco, CA 94111
[email protected]
Mr. Tony J. Lee
Investment Officer
State Universities Retirement System
1901 Fox Drive
Champaign, IL 61820
[email protected]
Submission of Questions
In order to clarify any issues in this Request for Proposals, the System will respond only to
questions that are presented in writing via e-mails to [email protected] and
[email protected] . All questions should be submitted to the System by 5:00 p.m. PST
Monday, December 12, 2011. These questions will be consolidated into a single Q&A document
and responded to by the System on or about Wednesday, December 21, 2011. The Q&A
document will be sent by the System to all parties receiving the RFP without divulging the
source of the query and the responses will be posted to the SURS website.
SURS Investment Policy
Please note the Quiet Period Policy that establishes guidelines by which Board Members and
staff will communicate with prospective service providers during a search process. The SURS
Board of Trustees adopted the Policy at their December 8, 2006, meeting. Currently in force, the
Policy is available at http://surs.org/pdfs/invinfo/policy.pdf Please review Section 8 of the
Policy and be familiar with Quiet Period guidelines.
Rights Reserved
SURS reserves the right to amend any segment of the RFP prior to the announcement of a
successful contractor. In such an event, all responders will be afforded the opportunity to revise
their proposal to accommodate the RFP amendment.
SURS reserves the right without prejudice to reject any or all proposals submitted. There is no
express or implied obligation for SURS to reimburse for any expenses incurred in preparing
proposals in response to this request.
Ex-parte Communications
Public Act 93-617, which became effective December 9, 2003, brought about new Illinois ethics
procedures. All “ex parte communications” concerning investment, rulemaking or quasiadjudicatory matters pending before a State agency must be documented and some must be
reported. An “ex parte communication” is any written or oral communication by any person that
3
imparts or requests material information or makes a material argument regarding potential action
concerning an investment, a rulemaking process, or a quasi-adjudicatory matter. An ex parte
communication does not include statements publicly made in a public forum or communications
among employees of the State agency.
An ex parte communication from an interested party or his or her official representative or
attorney to an employee or the agency must be memorialized and made a part of the record. An
“interested party” is a person or entity whose rights, privileges, or interests are the subject of or
are directly affected by an investment, regulatory or quasi-adjudicatory matter.
An ex parte communication other than that just described must be reported by the staff
member or Trustee immediately to the agency’s Ethics Officer. The communication must
be memorialized and made a part of the record. The communication must be filed with the
Executive Ethics Commission, accompanied by a memorandum from the ethics officer.
Specific Items Requested from Respondent Firms
Enumerated below are the specific items requested from respondent firms.
1) Letter of Transmittal. A letter of transmittal must be submitted on the Proposer’s official
letterhead. The letter must identify all documents provided collectively as a response to
the RFP, and must be signed by an individual authorized to bind the Proposer
contractually. An unsigned proposal shall be rejected. The letter must also contain the
following:
a) Statement that the proposal is being made without fraud or collusion; that the
Proposer has not offered or received any finder’s fees, inducements or any other
form of remuneration, monetary or non-monetary, from any individual or entity
relating to the RFP.
b) Statement that discloses any current business relationship or any current
negotiations for prospective business with the Consultant, any SURS Board
Member, or SURS Staff.
c) Statement that the proposing firm has been in compliance with the System’s Quiet
Period Policy and Ex-Parte Communications Policy.
d) Statement that discloses the nature of any relationship you now have, or have had
in the past five years, with the Consultant, any SURS Board member, or SURS
Staff.
2) Questionnaire. The proposer must address the questionnaire items in the RFP in the
order in which they appear in the RFP. Further, each question number and question in
the RFP shall be repeated in its entirety before stating the answer. Certain questions may
require supporting documentation, which should be submitted as attachments to the
questionnaire.
3) As part of this RFP, all respondents must also complete or update Callan Associates’
Manager Questionnaire which can be found at www.callan.com. If your firm is not
already in the Callan database, please send an e-mail to [email protected] to request a
user name and password. Callan’s Manager Questionnaire must be completed no later
than 5:00 p.m. PST, January 6, 2012.
4
V. Projected Schedule of Events
Discussion with the SURS Board of Trustees is planned to occur in April 2012. Listed below is
a projected timeline of the U.S. Equity Small Cap Growth search process:
November 28, 2011
December 12, 2011
December 21, 2011
January 6, 2012
January/February 2012
February/March 2012
March/April 2012
April 26, 2012
Dissemination of RFP
Deadline for questions to SURS
Responses to questions submitted to SURS
RFP responses due by 5:00 p.m. PST
Review responses
Identify firms for further consideration
Interviews with selected firms
Firms recommended to SURS Board of Trustees
VI. Selection Criteria
SURS will consider the following in making its decision:
A. Organization, Structure, and Personnel
B. Assets Under Management and Client Base
C. Investment Philosophy, Policy, and Process
D. Research Capabilities and Resources
E. Historical Performance/Risk Factors
F. Evaluation and Relative Comparison of Fee Structure
G. Investment Operations, Compliance, and Internal Controls
H. Product and investment style fit to existing portfolio
I. Ability to comply with applicable legislative mandates (i.e., Iran, Sudan, Anti-Predatory
Lending legislation)
J. Record of trade utilization with minority-, female- and persons with a disability- owned
broker dealer firms
VII. U.S. Equity Small Cap Growth Manager Questionnaire
Firm Name:
________________________________________________
Contact Person:
________________________________________________
Telephone:
________________________________________________
E-mail:
________________________________________________
Date Completed:
________________________________________________
If any of the following questions are not applicable, please respond with N/A.
5
A. Investment Management Agreement
1) The investment manager will agree to the language in the standard Investment
Management Agreement, see http://www.surs.org/pdfs/invinfo/IMA_2009.pdf for
additional details.
2) Are these terms acceptable?
Yes______
No________
a. If you answered no, please provide a detailed explanation.
B. Organization
1) Please indicate whether your firm is a Bank or Registered Investment Advisor.
2) Provide a brief history of the firm including:
a) The month and year of SEC 1940 Act registration.
b) Form of ownership (if an affiliate, designate percent of parent firm’s total revenue
generated by your organization).
c) If the firm is a joint venture partner, identify the percentage of ownership and
revenues recognized by each partner to the combined association.
d) If applicable, please provide a copy of your Minority-, Female- and/or Persons with a
Disability- owned certification. If your firm has not attained this certification, please
provide an explanation outlining the reasons for not doing so.
3) Provide an organizational chart diagramming the relationships between the professional
staff as well as the parent-subsidiary, affiliate, or joint venture entities.
4) Describe the levels (U.S. dollar amounts) of coverage for SEC-required (17g-1) fidelity
bonds, errors and omissions coverage and any other fiduciary coverage which your firm
carries. List the insurance carriers supplying the coverage.
5) Over the past five years, has your organization or any of its affiliates or parent, or any
officer or principal been involved in any business litigation, regulatory or legal
proceedings? If so, provide a detailed explanation and indicate the current status. Also
provide complete Form ADV (Parts I and II).
6) Has your firm been the subject of an audit, censure (fine), inquiry or administrative action
by the SEC, IRS, or DOL in the past 7 years? If so, explain findings and provide a copy,
as well as evidence of any changes in procedures implemented as a result of such audit.
7) Please describe the impact as a result of the passage of SEC Rule 206(4)-5. How do you
intend to comply with the compliance requirements of this new Rule? Details regarding
SEC Rule 206(4)-5 can be found at http://www.sec.gov/investor/alerts/paytoplay.htm
6
8) Describe the material developments in your organization (changes in ownership,
personnel, business, etc.) over the past five years in detail.
9) Discuss your organization’s compensation and incentive program. How are professionals
evaluated and rewarded? What incentives are provided to attract and retain superior
individuals? If equity ownership is possible, on what basis is it determined and
distributed? How is the departure of a shareholder treated?
10) Describe succession plans for the management of the firm and the continuity of
leadership within the investment team.
11) Please provide details on the financial condition of the firm (i.e., most recent annual
report filed with the SEC as well as the firm’s most recently audited financial
statements).
12) Has your firm adopted the Principles for Responsible Investment? If so, when? If
adopted, please include a discussion of any actions taken, if any, as a result of the
adoption of PRI.
13) If your firm has not adopted the PRI, has there been any discussion regarding the
Principles? If so, what were the key issues or concerns surrounding the PRI?
C. Clients/Assets
1) Complete Table 1 (page 12 of the RFP) with information as of September 30, 2011. If
there any client gains/losses or significant in our outflows of assets realized in the fourth
quarter of 2011, please note these in your response.
2) Provide the number of accounts and assets under management for all U.S. equity
strategies as of September 30, 2011, and each of the prior four calendar year-ends.
3) For each of the last five years, provide the number of accounts gained and the number
lost, and the respective asset values for the product under consideration. Include the
client type and a brief explanation for each account lost.
4) If possible, provide the names of clients who are invested in the product being considered
by SURS. Be sure to include all large statewide investment programs.
5) What is the estimated capacity of this product? What factors are used in determining
when the product will be closed?
D. Management Fees
1) Please provide a proposed fee schedule for the proposed strategy, including any
breakpoints. Are these fees negotiable?
7
2) Will you certify that the fee schedule provided above is the most favorable fee schedule
that the firm offers for accounts of similar size? If not, please explain why.
3) Would you be willing to include a “Most Favored Nations” clause in your contract? If
not, please provide an explanation of why not.
Once a manager has been selected, negotiations of the fee structure may become necessary in
order to account for the size of funding, the increments of funding, and any clarification. In no
case will the negotiations result in a fee that is higher than the fee contained in the proposal.
E. Staffing
1) Provide the following information about your staff:
a) Number of investment professionals
1) Number of Domestic Equity investment professionals
2) Number of Domestic Equity portfolio managers
3) Number of Domestic Equity traders
4) Number of research analysts
5) Number of client service personnel
b) Number of other staff members
c) Total staff
2) Investment Professionals:
a) Please provide biographical information for all senior investment professionals and
portfolio managers in the domestic equity group. Please also provide an organization
chart for the domestic equity group. Highlight the person(s) who would be
responsible for the subject product and for this account.
b) Indicate when and why any investment professionals involved with the subject
product left or joined the firm in the last five years. For personnel who have left,
indicate job titles and years with the firm. Please include all additions and departures,
regardless of seniority.
c) Describe your firm’s backup procedures in the event the key investment professional
assigned to this account/product should leave the firm.
3) Provide any other information about your staff that you consider material, including
reassignments of responsibility, committee changes, prospective additions, etc.
F. Investment Process
1) Describe in detail the firm’s investment philosophy and process with regard to the
product. Include discussion of portfolio construction guidelines.
8
a) Under what circumstances, if any, would you deviate from the disciplines associated
with this methodology?
2) Have you made or are you planning any modifications to your overall investment
philosophy or process? If so, discuss.
3) When was the last time a “significant” change was made to the investment process?
Describe the process used to identify and effect the change. Evaluate the relative success
and/or challenges that resulted from this change.
4) Compare the portfolio’s characteristics to the Russell 2000 Growth as of September 30,
2011.
5) Discuss the risk control and monitoring systems utilized by your firm.
6) What percentage of assets do the top ten holdings comprise of the product?
7) On average, how many securities are in the product? Has this number been increasing,
decreasing or holding constant over the last three years?
8) What has been the annual portfolio turnover during each of the last three- and five-year
periods?
9) Describe the firm’s use of cash in its investing process. What has been the average cash
balance as a percent of assets in the product’s composite during each of the last three
years?
10) Are futures, options or other derivatives utilized (when and how much)?
11) Provide the firm’s fully discretionary investment guidelines for the product.
12) Under what market conditions will this product perform well? Poorly?
13) Describe your firm’s process for executing trades. Include information regarding:
a)
b)
c)
d)
Does the firm use electronic trading systems?
How are trading costs monitored? How are costs minimized?
What is the firm’s average commission (cents/share) for the product?
Are soft dollars utilized? What goods/services are purchased with these dollars?
Provide a copy of the firm’s soft dollar policy.
e) Do clients direct trades? If so, what percent of trades are directed by clients?
f) SURS encourages its investment managers to utilize the services of minority-,
female- and persons with a disability- owned brokerage firms. For the one year
ending September 30, 2011, what percentage of brokerage commissions was
9
executed with minority-, female- and/or persons with a disability- owned firms?
Please comment as to your ability to utilize these firms and provide the portion of
trades that were indirectly executed with these firms.
G. Performance History
1) Provide monthly gross and net of fee composite performance in the subject product, since
inception of the product, in an attached Microsoft Excel spreadsheet file.
2) Provide an attribution of investment performance for the past one-, three-, and five-year
periods ending September 30, 2011, for the product relative to the relevant benchmark.
3) What is the expected contribution to excess return as a result of sector allocation and
security selection?
4) What is the expected tracking error for this product relative to the relevant benchmark?
How does this compare to the actual tracking error of the product?
5) Discuss the dispersion of returns in this product’s composite.
6) Are composite return calculations compliant with Global Investment Performance
Standards? If so, at what level? Are returns verified by a third party? Does a period
exist where the product was not in compliance?
H. Client Service Capabilities
1) Who will serve as the client service officer for the account? How often will the person be
available for client meetings?
2) Provide samples of client reports and indicate their frequency of issuance.
I. Compliance/Internal Control Structure
1) Provide a detailed summary of your firm’s internal control structure. Does the firm
conduct periodic risk assessment? Provide a copy of your internal control review
documentation, preferably prepared by an independent third party.
2) Have you ever violated a client guideline in an actively-managed portfolio? If so, please
describe the violation and the resolution.
3) Is your firm, its parent, or affiliate a broker/dealer? Does your firm trade for the
management of client accounts through this broker/dealer?
J. Miscellaneous
1) Discuss proxy voting practices.
2) Since September 30, 2011, describe any other recent developments within your firm that
10
you consider material.
3) SURS currently utilizes a third-party securities lending provider. Have you experienced
any challenges managing a portfolio as a result of a securities lending program?
REFERENCES
1) Please provide three U.S. tax-exempt plan sponsors invested in the small cap growth
product. Please provide the names, addresses, telephone numbers, size of the accounts,
and dates the accounts commenced.
2) Please provide three U.S. tax-exempt plan sponsors that terminated your firm’s small cap
growth product. Please provide the names, addresses, telephone numbers, size of the
accounts, and dates the accounts commenced and ended.
11
Table 1
Product Under
Total U.S. Equity Assets Firm-Wide Assets Under
Consideration
Under Management
Management
# of
Market Value
# of
Market Value
# of
Market Value
Accounts ($'s in Millions) Accounts ($'s in Millions) Accounts ($'s in Millions)
Public Funds
Corporate Funds
Endowments / Foundations
Other
Total
12
Appendix A
Sudan Divestment Law in Illinois
SURS must obtain an annual certificate from each manager confirming that the investments in SURS’
account comply with the requirements of the Sudan Law. You must deliver the first such manager
certificate upon completion of the legal documents. Thereafter, annual compliance certificates must
be delivered to us as of June 30 of each year.
Managers of publicly traded securities will need to contract with a firm that specializes in global risk
management to identify companies that are considered forbidden entities under the Sudan Law, and
will be required to screen the investments in SURS’ account in order to avoid holding such securities.
The Sudan Law contains the following provisions that may impact compliance by SURS’ managers:
Mutual Funds.
Mutual funds are excluded from the definition of “forbidden entity” if they satisfy the requirements
under Section 1-113.2 of the Illinois Pension Code, which are:




The mutual fund is managed by an investment company as defined and registered under the
federal Investment Company Act of 1940 and registered under the Illinois Securities Law
of 1953.
The mutual fund has been in operation for at least 5 years.
The mutual fund has total net assets of $250 million or more.
The mutual fund is comprised of diversified portfolios of common or preferred stocks,
bonds, or money market instruments.
We are aware that under the National Securities Market Improvement Act of 1986 (“NSMIA”) states
were pre-empted from requiring registration of federally "covered securities," and that Section 1-113.2
of the Illinois Pension Code, which predated NSMIA, may also be pre-empted to the extent it would
require such dual registration. However, you should rely on your own counsel to advise you on
compliance with your duties under the Sudan Law.
Private Market Funds.
The Sudan Law includes special rules applicable to a “Private Market Fund”, which is defined as “any
private equity fund, private equity fund of funds, venture capital fund, hedge fund, hedge fund of
funds, real estate fund, or other investment vehicle that is not publicly traded.” A Private Market Fund
will not be deemed to be a forbidden entity if it delivers either an affidavit or certificate confirming
essentially that it does not own or control assets in the Republic of Sudan and does not conduct
business operations in the Republic of Sudan. (See paragraph (d) of the Sudan Act for the specific
affidavit or certificate requirements).