TEACHERS’ RETIREMENT BOARD
INVESTMENT COMMITTEE
Item Number:
5
SUBJECT: Special Mandates Policy – First Reading
CONSENT:
ATTACHMENTS: 1
ACTION:
INFORMATION:
DATE OF MEETING: June 8, 2016 / 30 mins.
X
PRESENTER: Christopher Ailman
POLICY
This matter has not been covered by a formal policy before. The Subcommittee of the Investment
Committee has expressed the need for a clear governance structure. This policy would be
integrated into the overall CalSTRS Investment Policy and Management Plan which covers the
entire investment program.
PURPOSE
The purpose is to consider and debate the initial draft of a Special Mandates Policy.
HISTORY
At the May 5, 2016 meeting, the Subcommittee of the Investment Committee reviewed the initial
draft Policy, made some adjustments and has referred the Policy to the Investment Committee
for a first reading.
BACKGROUND AND DISCUSSION
From the initial meeting last December 2015, the subcommittee has expressed the desire for a
more defined governance process for board members to refer and recommend special mandates
and investment strategies for the Investment Committee's consideration. At the May 5, 2016
meeting, the subcommittee reviewed an initial draft of a Special Mandates Policy. The
subcommittee discussed the elements of the policy and requested additional language be added
to clarify the evaluation criteria of a special mandate. The key focus was to ensure the analysis
included the economic justification and investment hypothesis for the mandate. Additionally, it
should include how the mandate fit within not just the asset class, but also how it impacted and
affected the sub-asset class structure. They also requested the analysis include the cost impact,
risk profile, and specify where the assets for the new mandate would come from within the
existing portfolio.
While CalSTRS has a history of considering and analyzing specialized mandates/investment
strategies suggested by board members dating back to the 1980’s, there is no formal mechanism
or policy for addressing these other than board members requesting they be included in the
annual Investment Committee work plan. Most of the mandates listed below were started as an
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Investment Committee – Item 5
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annual objective for the Investment Committee. Yet there are investment ideas that might not
rise to the significance of an Investment Committee objective and at other times, such as for FY
2016-17, the work plan is too full to allow another objective. This policy helps resolve that issue
and provides a clear governance structure for board member strategies and ideas.
While each of these mandates are closely monitored and managed by staff, their performance is
rolled up into the full asset class performance and often not broken out into a specific report.
This is in part due to their size within the asset class’s framework. As a result, the Investment
Committee has not regularly reviewed the individual mandate unless singled out by staff or the
Investment Consultant, or revisited the concept behind the mandate in order to adjust it for
current events. The policy has a clear reporting cycle and formal review process to allow the
committee to reaffirm its views or redesign the mandate.
The policy also seeks to memorialize the current special mandates that exist within the
investment program. The current mandates would be grandfathered into the policy and would
follow the new review cycle as of the adoption of the policy. It is important to note, these
programs are constantly reviewed by staff and monitored by the Investment Consultants.
However, they are not often broken out and placed on the Investment Committee work plan.
Based on the record of past meetings and Investment Committee minutes, the following are the
existing legacy special mandates:
Special mandate
Member Home Loan
Program
Underserved Urban &
Rural California
New & Next
Generation Managers
Developing Manager
Program
Corporate Governance
Activists
Energy Star Program
Clean Tech
Investments
Asset Class
Fixed Income, and
now Absolute Return
Private Equity
Allocation
Open ended
Date
1984
$200 million
Feb 2002
Private Equity
$150 Million
July 2002
Global Equity
$600 million
March 2003
Global Equity /
Corporate Governance
Real Estate –
Office properties
Private Equity
$700 million
March 2003
No set
allocation
$100 million - VC
$400 million -Energy
related
April 2004
Nov 2004
The goal for each mandate was to achieve some form of outperformance compared to other
options, but the amount of expected outperformance was not formally defined at the time.
Therefore, it is difficult to judge the relative success of these special programs. The
subcommittee desired the policy require a clear articulation of how the mandate fits within an
asset class and the expectation for return enhancement and the economic justification for the
special mandate.
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Investment Committee – Item 5
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RECOMMENDATION
At the May 5, 2016 meeting, the subcommittee referred the policy, with some revisions, to the
Investment Committee for a first reading. Staff, PCA, General Counsel, and Fiduciary Counsel
revised the initial draft to incorporate the subcommittee’s feedback and the revisions were
reviewed by a subgroup of two members of the subcommittee. Based on these enhancements,
staff and PCA recommend the committee review, adjust, and once acceptable, approve the
Special Mandate Policy.
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Attachment 1
Investment Committee - Item 5
June 8, 2016
CALIFORNIA STATE TEACHERS’
RETIREMENT SYSTEM
SPECIAL MANDATE
POLICY
INVESTMENT BRANCH
JULY 2016
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Investment Committee - Item 5
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Special Mandate Policy
SPECIAL MANDATE POLICY
As set forth in the California Constitution, Article 16, Section 17, and the California Education
Code, Section 22250, the Teachers’ Retirement Board, its Investment Committee, and staff have
fiduciary duties with respect to the system and the plan. These duties include duties of loyalty
and prudence to invest “with the care, skill, prudence, and diligence under the circumstances
then prevailing that a prudent person acting in a like capacity and familiar with these matters
would use in the conduct of an enterprise of a like character and with like aims.” (Ed. Code, sec.
22250(b).)
This policy sets forth CalSTRS’ policy and procedures for considering special mandates and
related investment strategies.
For purposes of this Policy, “special mandates” are defined as discrete investment strategies
(other than divestments which are covered by a separate Board policy) suggested by Board
Members that include, but are not limited to: environmental; social; governance (ESG); in-State
investments; or other factors that are expected to have a positive or neutral impact on the
economic performance of the fund over the long term.
PROCEDURES
At any Investment Committee meeting, during the Chief Investment Officer report or during the
review of the next meeting agenda, a member of the board may request an item be added for the
Investment Committee to consider a special mandate to be incorporated into the investment
portfolio. If a majority of the Investment Committee concurs, the chair will identify the proposal
as a “special mandate subject to this Policy” and initiate the following procedures:
1) At the next Investment Committee meeting, in Open Session, a special mandate action item
will be added to consider amending the Investment Committee current or future Fiscal Year
work plan. The theory, including any anticipated economic justification, for why the special
mandate can be expected to have a positive or neutral impact on the economic performance of
the fund over the long term must be articulated at the meeting to help inform the Investment
Committee’s consideration of amending the work plan. If added to the work plan by a majority
vote of the Investment Committee, staff and the investment consultant(s) will research and
evaluate the special mandate and report as follows.
2) The Investment Committee will not decide upon implementation of the special mandate until
it has received a written evaluation of the proposed special mandate including at least the
following:
(a) A detailed review and affirmation (or disaffirmation) of the theory and economic
justification for why the proposed special mandate satisfies the definition of a special
mandate;
(b) An analysis of the risk, return, and potential costs of the proposed special mandate;
(c) A forecast of the impact of including the proposed special mandate on the applicable
asset class and sub-asset class structure, within the overall investment portfolio;
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Investment Committee - Item 5
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(d) A determination whether there are elements of the special mandate that could be revised
or eliminated to improve the likely impact of the special mandate on the economic
performance of the Fund;
(e) A statement about the proposed special mandate’s consistency with the strategic policy,
the Investment Policy and Management Plan, and Investment Beliefs (when adopted);
(f) A proposed source of funding for the proposed special mandate and how that impacts
the asset class and overall portfolio.
In addition, the Investment Committee may also seek the input of legal counsel and external
experts or research firms (as needed) to better understand and evaluate the proposed special
mandate.
3) Based upon the analysis, staff and the investment consultant(s) will present their findings to
the Investment Committee and make a recommendation to pursue the proposed special mandate;
make a recommendation not to pursue the proposed special mandate; or, recommend a
modification to the proposed mandate for the Investment Committee’s consideration. Any
recommendation to pursue a proposed special mandate must include a recommendation about the
source of the funds to be allocated to the special mandate and the specific performance objective/
benchmark against which to measure the success of the special mandate.
4) If approved by the Investment Committee, the special mandate will be integrated into the
investment portfolio with a capital allocation and other terms as approved by to the Investment
Committee, together with any additional resources and staffing necessary to carry out the
mandate. The Investment Committee must also approve the appropriate benchmark to measure
the investment performance and clarify the overall goal of the any ancillary benefits of each
specific mandate, if proposed.
REPORTING
Annually after the fiscal year end, the Chief Investment Officer will prepare a streamlined
“Ancillary - Special Mandates” report that shows the risk and cost-adjusted performance of all
the various special mandates relative to their respective asset class or sub-asset class benchmarks
as identified under item 4 above.
From the date of initial adoption, each individual special mandate will follow reporting cycle:
• Every three years, on the anniversary of the initial funding of the mandate, the general
consultant will prepare and present a review of the special mandate, including an updated
review of the original expected economic risks and opportunities and any material
developments since approval of the mandate.
• Every six years, on the anniversary of the initial funding of the mandate, the Investment
Committee, as part of a fiduciary review, must affirmatively vote to continue the special
mandate on terms satisfactory to the Investment Committee under the circumstances then
prevailing. The Investment Committee may also terminate or revise the mandate at any
time.
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CURRENT SPECIAL MANDATES
The following are the special mandates that have been approved or directed by the Investment
Committee. These mandates shall be subject to this policy and their “initial funding date” for
purposes of this Policy shall be deemed the date on which this policy is adopted.
Special Mandate
Member Home Loan
Program
Underserved Urban &
Rural California
New & Next
Generation Managers
Developing Manager
Program
Corporate Governance
Activists
Energy Star Program
Clean Tech
Investments
Asset Class
Allocation
Fixed Income, and Open ended
now Absolute Return
Private Equity
$200 million 1
Date
1984
Feb 2002
Private Equity
$150 Million2
July 2002
Global Equity
$600 million3
March 2003
Global Equity /
Corporate Governance
Real Estate –
office properties
Private Equity
$700 million4
March 2003
No set
allocation
$100 mil - VC
$400 mil Energy related
April 2004
Nov 2004
Initially developed and approved: July 2016
1
The combination of Underserved Urban and Rural California and New & Next Generation intended to be
approximately 10 percent of the Private Equity portfolio.
3
4
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Set at five percent of U.S. equity or 12.5 percent of the active U.S. equity management.
Set initially at 5 percent of U.S. equity, but also included Non-U.S. mandates.
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