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tv   Retirement Commission  SFGTV  February 18, 2020 12:00am-3:01am PST

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[roll call] >> clerk: we have a quorum. >> okay. first item is we will go into closed session. we need a vote whether to disclose discussion held in closed session on the january
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21, 2020 special board meeting. >> move that we don't disclose. >> second. >> i do not believe there's public comment on that piece. all those in favor say aye. for closed session for today, before we go into closed session, is there public comment? seeing no public comment, weth. >> the other board members will join us shortly, but i do not want to lose a quorum. we have several action items -- important action items to hold this afternoon. with that, we need to come out of closed session. so moved. >> second. >> all those in favor? all right. we'll start with public comment. the general public meeting rules apply.
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please follow the normal rules that are posted about turning off your cell phone, etc., etc. open for public comment. >> my name's john stinson. i'm a 45-year member of our pension fund. there were two things the public pension funds have in common. number one, they're all underfunded. number two, one of the reasons why they're all underfunded is because they're over diversefied in high-risk investments like hedge funds. most pension funds want 7% to 7.5% return on their investments. to get a 7% to 7.5% return on investments, it's not necessary to invest in any high-risk
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investments like hedge funds. two months ago, i gave you multiple portfolios of your stocks and bonds went back 94 years, and the average return just on combination of stocks and bonds and passive investments in those were more than 8%. that's going back 94 years. fourth, you don't have to go back 94 years. let's just go back ten years, and investments in stocks, bonds, real estate, and public utilities, and passive investments in those investments. number one, s&p 500, and the passive investments. one year retained 15.48%. ten year retained 11.9%.
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60%-40%. ten-year average, 10.594%. real estate, passive investment in real estate. one year retained, 28.91%. ten year retained, 11.9%. >> okay. thank you, mr. stinson. >> one minute. >> no, please. >> -- this proves that you don't need any high-risk investments. all you need is stocks, bonds investments plus utilities. >> thank you. is there any other public comment? move onto item 5. >> item 5, action item. approval of the minutes of the january 8, 2020 meeting. >> so moved. >> second. >> any other corrections, additio
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additions, or deletions? i'll call the question. all those in favor? opposed? okay. next item -- oh, i forgot to ask for public comment on the minutes. motion shall stand. next. >> item 6, action on the -- items on the consent calendar. >> anyone wish to separate anything out? i'll move to public comment. all in favor? opposed? before we move onto item 7, i'll make a motion -- we have several items that require action today. i'm pushing things along so we do not lose a quorum because a couple of board members have notified me they must leave after 5:00. okay. that takes us to the investment
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calendar. >> board members, in october of last year, andrew provided some additional policy. the board asked for some additional information, and andrew here is to provide such. >> this is a follow-up update on the investment restrictions for companies operating in s sudan. the political climate in sudan has changed significantly over the last couple of years. beginning in 2017, sanctions were started against sudan.
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in 2017, president al bashirwas removed, really, with the goal of having a democratically elected civilian government in place by 2022. while there is certainly some uncertainty about the continued stability in the country, we've taken some steps to ensure there is good rule of law and protection of human rights in the country. this has been recognized by the u.n., by the international criminal court. pages 2 through 4 of the memo provide more detail around sort of recent developments politically in the country. so staff's here today because given the changes, the positive changes in political structure, we believe that there's increasing argument that a
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wholesale boycott of companies operating in sudan is potentially counter productive for economic stability in the country and ultimately the eradication of poverty in the country. they have significant challenges getting access to food, basic food and medicine. everyone that i've spoken to have greed to that boycotting the companies in that country is not necessarily productive to improving conditions in the country. what we're proposing here is that our restriction criteria would continue to restriction
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investment by sfers and companies that are providing military equipment in sudan as well as those that have been deemed c deemed complicit in the genocide. what we're proposing, and this is on pages 5 and 6 of the memo, we would conduct due diligence of those companies' activities to understand their compliance -- procedures -- governing procedures, risk mitigation strategies, social compliance, governance risk, and recommend that if we get uncomfortable with those, that the board does not restrict -- that if we get comfortable with
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those, that the board does not restrict sfers from investing with those companies. we've proposed new criteria as well as companies that we've brought to the board in october against this criteria. and based on that, we have four companies that we're recommending for continued investment restriction, but the removal of nine companies on our current restricted list as well as not adding additional companies to that restricted list. so what we've tried to do on page 25 is there's a restricted list, and then on page 21 would be the proposed list of unrestricted companies. again, the proposed criteria are on pages -- page 5 of the memo -- page 5 and 6. so i'll pause there, maybe let
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allen say a few words about this recommendation in the context of other plans around the country. >> and i advised special six plans. two never had any anti-sudan regulation at all. two of them did. most of them proposed to divest from sudan or anyone furthering the war on genocide. you are in good company. you are still retaining some company-level restrictions, but in the direction of moving toward relaxation of those constraints. >> question real quick. how is -- is there a tiering or
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an overlay that yes, sfers, in our direction in sudan, and also in companies that we're investing in or we're looking to do into funds or whatever, their e.s.g. plan, did we ever put metrics together or in the sudan, do those ever touch? >> we provide the list or plan to our managers or potential managers and instruct them to divest from those companies. not all do they hold, but if they do, they restrict investment in them. >> okay. >> question now is, one, i assume you'll go back and tell all the managers, plus the
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custodian that we're amending this list. thank you for that. i think this is a smart way of applying all our e.s.g.s. -- okay. thank you. i assume you'll apply that in other areas, what you just did. thank you. okay. go ahead. >> i'm prepared to make a motion to staff the changes. i also want to thank you to include the links to all the articles. that was very helpful. >> great. actually thanks to luke for doing that and providing a lot of the detail here. >> okay. i appreciate that. >> can i just tell you, the issue -- there are two motions. probably part of one motion on page 18, which you should
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probably, for the record, make. >> well, there's two parts to this. there's a motion for both items? yes. okay. the motion has been made by commissioner casciato, seconded by commissioner heldfond. any public comment? >> you shouldn't invest in any countries that are involved in civil wars. the civil wars have been going on for hundreds of years, and when it comes to civil rights abuses, the country that should be at the top of your list is china. they've been refusing people for the last 75 years. >> okay. no further public comment. all those in favor of the motion say aye? opposed? next item. >> item 8, 2020 proxy
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guidelines. >> members, there are eight recommended changes as summarized on page 2 of andrew's memo. andrew? >> thank you. as bill said, annually, we review our proxy voting guidelines to ensure that they're consistent with best practices in terms of governance and our expectations around that, and two, that they're reflective of any changes that we come across in the governance landscape in types of governance landscape, new shareholders expectations. few changes that we're recommending this year, but those eight changes are on staff's memo. i'll just highlight quickly two of those changes that we're making. one is we were previously voting against the chair of nominating governance committees at companies where the board is 100% male given
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that there is a reduction in the number of all male boards really across companies, we're now strengthening our expectations there and are recommending that we vote against the chair of a nominating governance committee if the board is not at least 20% women. and then two, we've worked with our new proxy research provider to highlight our expectations around our compensation plans, and we will vote against highlighted compensation plans if we determine the long-term incentives are not performance based in some way and then if we feel like there is not sufficient transparency around the way that short-term compensation has been highlighted by boards. the rest of them are fairly straightforward, but happy to answer any questions about
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those. >> any questions or a motion? >> i would move to approve. >> i'll second. >> any public comment? then we'll call the question. all in favor say aye? opposed? okay. l let's go to item 11. >> item 11, proxy voting report for 2019. >> we provide a report for proxy votes for the calendar year. andrew? >> so quickly, we'll just go through 2019 proxy voting season, and then talk about our voting activities during 2019 annual -- which is the calendar year 2019. relatively quiet year. a few things to highlight,
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there was a small uptick in the number of directors that failed to receive majority shareholder support due to mostly the board's failure to respond to executive com packages. more, i believe there were a number of directors that didn't get at least 70% shareholder support. and this is a trend that you've seen the last few years, so shareholders showing dissatisfaction with slates of board members. as i mentioned, boards continue to appoint additional women to close the gender gap that we see on boards. 19% of u.s. companies had no female companies in 2019. this is down from 26% in 2018. there was a decline in the
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number of shareholder proposals that came to vote, and this is a trend that we've seen over the last few years, and this is because of shareholders are finding ways to address concerns over environmental and social issues and are working together outside of the shareholder resolution process to address a lot of these concerns. the ones that did go to vote did receive on average about 30% shareholder support, which is relatively high. among those, the highest receiving support were related to human capital, so workplace diversity, sexual harassment policies. in terms of sfers voting, we took the hardest look at compensation policies, only supported 84% of those, which was lower than others. we supported a majority 32 of
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the 33 shareholders proposals on environmental and social issues that received majority shareholder support, including one at b.p. where we were actually a cofiler of that shareholder resolution around climate change. that's about it for 2019. i'm looking forward to 2020. i think we'll see similar focus areas around talent and human capital management, board composition and diversity and climate risk management that will be, you know, addressed through the shareholder resolution process. we're also tracking what's happening at the s.e.c. now. there's two proposals there, one related to the amendments to the shareholder resolution filing process, so making it harder for shareholders to file shareholder proposal, and then another proposal that would put
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limits on proxy shareholder and other shareholders. >> this is a discussion item. questions? i basically have one question. a lot of data in this report. one piece that could be useful, but it's not present. i'm concerned where we did not vote with management and it still passed. you made one reference in there, 50% of proposals received majority shareholder report. that related to shareholder proposals. my concern is when we vote for something that passes and management's against it, whether or not this then becomes a priority, whether or not we should do more
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engagement, that we didn't just buy it by accident. i don't know if that data is available by glass or they just don't decide to put it out there. it's like playing baseball but not knowing the final score. >> yeah. it's certainly available. the vast majority of shareholder proposals do not receive majority support, and management -- the b.p. case is actually a very, very -- extremely rare situation where management supported the proposal, but we can, yeah, provide a little more detail -- >> it's one of our major other partners, like calpers, are in the same situation. you've got a lot to do, but that's one issue, we've been talking about proxy voting, step one, when we go into all the confrontations. that's my observation. any further questions? i'll call -- go ahead.
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>> the p.r.i. report annually, as well or any type of reporting from the type of report that the p.r.i. is doing? >> in terms of engagement with companies? >> mm-hmm. >> that's a good question. i can look into that. >> is there any public comment? okay. that concludes item 11. let's take us back to item 9. >> item number 9, action item. approval of revised guidelines for public equity and fixed-income manager monitoring and retention. >> very good, board members. we have two suggested changes in the guidelines for public markets managers. the two items are related to frequency and reporting. this is in kurt's memo, and kurt will please provide some comments. >> sure.
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commissioners, you may remember in december, we described certain updates that were limited to certain goals and responsibilities. what may not be known is there's an appendix that provide a process by which staff and the general consultant who employ when making decisions and recommendations to the retirement board concerning manager retention, these were last updated in 2008. and so as we did with the overall investment policy statement, we want to bring it current. so in addition to routine changes to certain descriptions and/or clarifying language, it's still noted we are recommending two primary changes that we believe will
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accomplish three things. first, they will better reflect current practices and duties. two, they will involve reporting to reflect staff's resources, capablities, and really the sfers investment horizon, and the third is to make sfers as attractive as possible to the investment community. we are proposing a change in the frequency of the managers under review process, whereby we determine each managers' standing, whether in good standing or under review. we use this based on data of june 30 and december 31 each year, rather than on the quarterly process. we believe that while staff's continuous assessment of managers is continuous and ongoing, we think a semiannual review is more in keeping with sfers' long-term investment
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horizon, and we think that the depth of our evaluations will be improved. further, it'll reduce the time that staff spends on report production and presentation, and as you know, we generally feel like we're underresourced. the next thing is we're recommending a change in reporting. we wou we would like to have a report delivered to the managing director of public markets, my role, with the c.i.o., on his role as managing director of allocation of risk management, the executive director, and the board's consultant. any additions or deletions to that list, along with the general circumstance, will be noted in the report the month following the addition or
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deletion. again, staff believes that such changes with consistent with the duties delegated among the staff and consultants described in the i.p. in december. and further -- and i'll have allen comment on this, we do believe that the investment industry views detailing managers' existing concerns is disadvantageous to sfers. we believe this limits the number of managers that will partner with sfers. i should note that we provided the board with a red marked copy and a clean copy of the revised guidelines. so with that, i would ask allen to make comments. >> yeah. i would just make two comments. we're going to talk a little bit later about asset allocation, which would determine 92% of your returns, so the assess of commenting manager by manager distracted
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the board from more important duties. more importantly, reviewing each manager based on that manager underperforming in a particular period without the context of the total portfolio can be counter productive, so we do see more plans moving away from monthly reviews of managers who happened to have outperformed or underperformed in a particular period but less frequent, whereas an annual review, where you will go through your entire portfolio and discuss all of your managers and what they're trying to do in your portfolio rather than investment objectives. so we do find these more effective, and obviously, if board members want a copy of the report, they can request it. it just doesn't get discussed in a public meeting frequently.
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>> board members? questions? yeah, go ahead. this is an action item. >> shall we say twice a year, it would be brought before the board? >> it would not be brought board the before. >> it would only be done internally? >> that's correct. >> except for the deletions and corrections would be reported out in the c.i.o. report in the month following that action being taken. >> correct. >> so there will be a public disclosure of who was added to the c.i.o. report and who gets off the list. >> yeah. and if someone's added, we'll note the general circumstance. >> right. >> performance, and staff turnover, etc. >> so i was going to say i appreciate delegating to staff
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and not everything comes to the board. i would just say there might be a little bit here, at least from a perception standpoint, that things are not coming to the board to talk about, which can be desirable in certain circumstances. how do we have comfort with the fact that we know what's going on with these managers and provide the oversight that everyone expects us to provide? >> a couple of points, and i'll ask allen to provide -- the board's consultant is a recipient of this report. second is if we were to take any action, meaning termination of a manager, it still has to come to the board. >> i guess it's the scenario that -- one of the scenarios that potentially bothered me is let's say someone was been on the watch -- has been on the watch list for someone, and
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maybe the board would have seen this and say, you know what? it's time to move on, and we disagree with staff. i think that's the one scenario that's a downside scenario for the board in terms of our responsibility. how do we get comfortable with that? >> that scenario is -- again, i want to make sure, again, is a manager is on that list forever or for a long time. >> yeah, a long period of time. >> how does the board know that staff's taking action there? in that case, i think that's the role of your general consultant to inform you of that. >> one, we're not stopping the production of the report. we're still going to use it, we're just not trying to circulate it and make it a focal point of a meeting. you could do we're going do do that, and you could agree that the board is going to report additions and deletions. you could add that managers are
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added to the list after x period of time, but we would certainly be doing that on your behalf. >> how would you feel about that additional staff, where you just bring it to the board's attention that manager x has been on it 18 months or 24 months? >> you know what i'd propose? we did our last general update in january for public equity. maybe that could be something, to know who's on the list and for how long? >> and if a board member wants to ask specific questions about a manager once we, you know, find out manager x is -- whatever the scenario might be, what's your -- what if a board member wants a deeper dive on a particular manager? >> you have that ability right today. we're not --
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>> it doesn't need to be a publa -- it would still be a public report. the only difference is we're not discussing it as a separate item and publishing it to the world. but i think as has been said, you know this report is being prepared. you can request it from kurt, from bill, from allen. the public has access to it. the issue is we are not, on a quarterly basis, bringing it here as a topic of discussion. >> okay. thank you for the explanation. >> it's available to you upon request. >> and the public. >> yeah. >> we request it. that was my question, as well. how do we get the information? >> my questions -- two questions, actually. in the march copy, where you strike the word general in
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general consultant, you have to know who it is. now it's become vague. >> do you have a suggestion then? >> huh? >> do you have a suggestion? >> not off the top of my head, i do not. i'd identify which consultant it is so we don't have to shop around for consultants. >> when we hired a p.c.a. and we did the r.f.p. search, that role was filled, the general consultant. >> that i understand, but you take out the word general, we have other consultants, who wears other hats. >> on page 1, the general consultant here on out, with a capital c. so from a policy perspective, we have defined general
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consultant with a capital c to be a consultant. i'd just sort of like to make that statement publicly. >> that may solve the problem. i'm not sure. i'm more concerned about trying to understand this report, that there are managers who may not want to work for us because of how we do things. the question is how and when to look at a manager's performance. we don't hire them based on quarterly numbers, right? >> certainly not. >> it was a much, much longer period of time. and therefore, i assume we terminate them based on a much longer period of time, right? >> correct. >> so my point is -- i'm not trying to raise the issue of transparency, but what are we going to look at if there's a problem with a manager? >> well, again, staff's review of managers, we don't look at
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them quarterly or monthly. we look at them continuously. >> are you going to bring it to us, or do we have to ask for staff's report. >> when we ask to terminate a manager, we have to bring it to the board. >> what about before? >> i guess i don't understand, what about before? managers, you either like them or you don't. there is no -- all right. >> one is by termination, and the other is repairing and meeting the benchmark. so with an ongoing report, bringing someone a month in advance of us deciding we're going to recommend termination, it -- you know, the issue is when we're ready, and we believe that they need to be terminated, we need to bring it to the board. we brought it to the board in the past, and we continue to bring it to the board in the past. we don't know if we're two quarters away from recommending
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someone. we can, based on a tie, know how long managers have been on the report. we can certainly make that part of the report out on the c.i.o. report, but i guess i don't understand -- it's a discussion item only until we bring a recommendation to terminate the manager, and that's how the report's been designed in your policy. >> with regard -- there are reasons that money is reduced or taken away to a manager or money is added to a manager, correct? >> absolutely. >> that's correct. >> we used to be able to see that. now we won't see that, will we? >> well, that may be true, but that's not a part of this policy. >> again, but that's position that triggers the board, maybe i should go ask for this report to see what's going on, okay? i'm just trying to point out if this is the way you want to do it, you're basically telling the board, ask for the report.
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>> any objection to including the board members in the distribution of the report? is distributing to a quorum of the report -- it's still a public document, but we're just not calendaring it for a public discussion. so can we add in the policy that in addition to the board's consultant that the board members get a copy of the semiannual report? >> i defer to you guys. that -- >> yeah. >> but there is -- this is a discussion item only. >> i always defer that to the discretion of the board. if that's what you wish, then -- >> i would like to get a copy of it. >> then we don't need to ask for the report. there's no problem in providing a copy of the report. >> electronic copy when it comes out. we can read it at leisure. >> yeah, be glad to. >> i think that'll solve my
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issue. >> okay. >> comment? >> commissioner -- okay. go ahead. sorry. >> thank you, kurt, for reaching out in advance to brief me on this. i do appreciate it. i actually appreciate the fact that we are going to be taking some things off of the slate of things that we currently have in order to focus on some of the areas where we should spend more time, asset allocation being one of them, risk, etc. so i guess one of the things that i would say brings my comfort is that we're going to see the discussion with the c.i.o. of the report. it brings me comfort that the staff is going to be doing the same evaluation that we've been doing, that that will go on. and i guess one piece that i would like some clarification and description on. i think this would be something that would be beneficial to the public. from allen's perspective, when
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you receive these reports, what do you do with it as a consultant? >> yeah. in addition to this, we continually monitor managers. we find there's the four p's that really drive manager results. and so we have a process internally, if anything changes in any of those, we issue a 48-hour letter to staff that says so-and-so, who was a senior investment officer at x-y-z resigned, and we'll issue a comment on that. so that happens continuously. it's not on a schedule, and this report would be involved in that. we're involved in producing it, and we're involved in reviewing that, and if we see anything that's part of a process -- it's usually not the case, that just because a manager underperformed on a benchmark for a while, it's not something that causes a concern. it's more likely they had an
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ethics issue, they had a person leave, they tried to change their philosophy. those are events, and those are events that happen or don't happen on a noncalendar schedule. so we look at those things continuously and make sure that staff is aware of them. >> and based on the disclosures that we would be seeing through staff, through the c.i.o. report on any potential changes, do you have any additional concern that we ought to be seeing things that we're not? >> there was one mention about someone who continuously was on the list and no action was taken, and i think that is something that you should be aware of, and as we've talked about, we can fix that. >> thank you. >> i'll just make the observation, that the plan that you all have proposed and the board has accepted, in the particular area, not
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justificationjust fixed income, we allowed tracking to allow higher active share. therefore, the board needs to watch you do this even more so than before. we don't need to talk about it, but now, you've given us a reason to really look at those performance reports more regularly, more thoroughly, so i appreciate the less frequent but deeper reports. understood they shall be sent to the board? >> well, we need a motion. >> well, we have to amend the recommendation? >> -- not have that in the text. what do you call it? not the red line, the -- >> the marked version. >> the marked version of it. so we will go ahead and include each retirement board member in the redistribution of this semiannual report. >> yeah. on the report, we would be
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added. >> right, and we'll just send it to you electronically. >> okay. we have a motion on the floor yet? >> i would move that we approve the recommended changes for sfers policies and guidelines as presented with the addition of the reporting of the report -- as the providing of the report to the board per our discussion. >> is there a second? >> second. >> public comment? >> what you board members need to listen to is a passive money investment consultant. the only people you seem to listen to all year-round are asset sales men and investment consultants, and they gave you fraught advice. if you have a passive
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investment consultant, let me tell you what your ten-year returns would be. 10.6%. your one-year returns would be 8.6%, and i would say you'll be lucky over the next few years to get a 6.5% return. >> i'll call the question. all those in favor, say aye? opposed? next. >> item 10, action item. recommendation to issue a request for proposals for investment consulting services. >> very good, board members. in 2015, we issued an r.f.p. for real assets. cambridge was hired shortly thereafter, and it's come time to reissue the r.f.p. tanya? >> yeah. not much to add. i would just say it's part of
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the normal board process, where every five years or so, we're to go and test the market and see what's available. in 2015, the contract was awarded to cambridge associates with several extensions. and we're on the last extension, which gives us time through october 2020. and we're pleased to answer any questions you may have. >> i'll make a motion to issue the r.f.p. for consulting services. >> second. >> motion has been made by commissioner chu. questions? i have one suggestion to the r.f.p. and one other observation. one, i was not able to determine which one of these
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duties would suggest the consultant should have experience counderwriting coinvestments. since we've been doing coinvestment, and we have plans to do more, we should spell it out that we have a certain expectation that a consultant should be able to help us in this area. >> definitely. it's listed in there. i'll have to find the exact wording that, you know, we noted that consultant should have experience in primary fund investments, core investments, but maybe not as prominently as you are suggesting. >> okay. it is a different level or skill of underwriting as opposed to taking funds. that's one. two, it's not clear from the r.f.p. or from reading the current contract whether the -- how the consultant should understand what the relationship should be or must be with the board.
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there's a question that they need to understand they are the board's consultant or maybe we don't want them to be the board's consultant. >> the language in the r.f.p. is consistent with the board policy, and these folks are hired to assist staff. certainly, the board determines who hires them, but certainly, on the -- and they report to the board, but they have a different relationship, then, for example, the general consultant. but at the same time, staff doesn't differentiate how we work with any p.c. versus cambridge on anything. but this reflects the policy, the wording that's in the board ka boaboard 's policy. >> i'll put it this way. if a consultant wants to come
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and talk to the board, do they have to tell staff? >> no. we don't tell them who they can meet with or who they don't meet with. we use them as a resource, and that's the only way we use them. in prior days, yeah, they sort of directed staff as to what to do, but now, we just use them as an additional resource. >> they are a resource, but they also have a duty and responsibility to tell the board, talk to the board. >> we can give them assignments. we can ask them to do assignments, and the board member can ask them to do assignments, and they routinely do. but i don't know if they've ever gotten into a situation where they can talk to a board member. i don't know that it's ever come up because we're just using them to get to where we want to get, you know, as far as due diligence. >> if we want them to be the board's consultant, i want it
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to be clear, and i didn't read that in this. >> well, if you say that, that puts them in a different position vis-a-vis staff, and i think the difference has been made in your policy that the general consultant is the board's consultant. you selected the consultant over the years. we bring you general candidates for the consultant. under the board's policy, we bring a recommendation for these consultants, and the board either takes it or leaves it, as you like to say. they either approve the recommendation or send it back. so there has long been a distinction between the general consultant, capital g, capital c, relationship with the board and staff, versus the other consultants. the other consultants are just a resource to staff, and a resource, obviously, to the
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board, and their subject matter experts. >> okay. well -- >> the board certainly -- >> okay. i need clarification, because i thought these consultants mean for private equity and the board should be the same firm. >> -- of who they can talk to and who they can take assignments from. i'm hoping you feel like you can approach any of the consultants and ask them any questions. >> i understand that i can ask them questions. i'm trying to ask if they understand what the relationship is. >> i guess i don't get it. >> if the board decides to promote more responsibilities to staff, it's up to the board to have a discussion amongst ourselves, do we want to change the reporting role of the consultants? but i don't think that's in front of us today. i think that's a much larger discussion that we've had from
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time to time. it certainly has come up, but i think it's obviously something that the board needs to do, and we need to talk about it. >> i wanted to assure you that we're not gatekeepers to the board, right? it's a very collaborative relationship, and if any of the consultants wanted to communicate to you directly. they don't ask us, and they don't have to ask us. >> they're at our elbow, not over our shoulder. >> i guess it. that's a much clearer explanation. i'm just asking what the relationship is between the board's subject matter experts and the board. >> they are the board's subject matter experts. >> yeah. and i want the board to understand that and the consultant to understand that. >> yeah. i think that will become pretty obvious to them once they are introduced to the board, and they understand that, you know, they're at the service of the
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board, and they're here to help staff. >> because i do know boards that have separate consultants for the board and a separate consultant -- >> and we've had that discussion, and we found out that it doesn't always work, and it actually, you know, costs twice as much money. >> it doesn't add any value. >> it doesn't add much value. >> the understanding between this board and the consultant -- >> i think when the board warrants to act as a staff member and needs a consultant to do that type of work, yeah, i can understand why the distinction might be important. but we're operating under the board's policy that's been in place for many, many years. and we -- i know of no instance where we have ever restricted any consultant, including or actuarial consultant, including our risk consultants that we've had in the past from having a direct understanding that, yes,
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the retirement board's paying them, but we have access to them five days a week or seven days a week as a resource to help us do our business. >> can i make a suggestion? i think this is a big discussion as we think about how the system and decision making and investments are going to change, and delegation of responsibility. maybe this is something that's off-site -- >> this is an r.f.p. request. >> i understand, but the discussion that -- >> i understand. >> we have a lot of business today. let's get it done. i'd like to call for the vote. >> commissioners, i'd like to add that in december, we reviewed the i.p.s. investment policies statement that clearly outlined the responsibilities and expectations from general consultants and other consultants, and that's in line with what jay just described.
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and general consultants, approved and searched by the board. other consultants are reviewed through the r.f.c. process, and comes to the board. so just in december, we had an opportunity to review the policy, and we are operating under that policy now. >> but we can bring it back as a separate discussion. you probably need to call for public comment. >> well no, i was actually going to go back and say the same thing that she just said. we did all review this in december and we all agreed to come back with this type of recommendation. i would move that we move to adopt staff's recommendation for this r.f.p. process because it it's an item that we already discussed and approved, what
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staff presented a couple months ago. >> there's a motion and second made about the r.f.p. or what? >> yes. [inaudible] >> public comment? >> the only thing i'll say, commissioner, is i'm supportive of your comments on this. >> thank you. everybody understanding their ro roll -- roles is the key to decision quality. so yes, we'll issue the r.f.p. public comment? call the question. those in favor, say aye. opposed? next. >> item number 12, discussion item. asset allocation study kickoff,
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introduction to leverage. >> board members, this is an introduction to a new concept that sfers consider leveraging its portfolio to improve its returns, and to precede that, i'm going to provide some information about the volatility of our returns. you'll see in my memo on the first table, you see computation of three asset class, the three private market assess classes, and then the realized volatility for that period of time because the asset classes is not that old. and you see two very, very large differences. the customary practice of computing volatility for private markets assets has been to take a public market
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equivalent volatility and just that based on the characteristics of a private market asset class. for example, the volatility for any p.c.s expected for public equity is 17.79. that's roughly right in line with history. and the customary practice has been, then, to take and adjust that volatility for public equity based on things like leverage and other characteristics -- time, etc. and that's how an estimate of 27 27.3 has customarily been used. and then, you'll see the assets of public and private credit. however, our realized or actual
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volatility has been much lower. you can see that that's because our public markets are priced very infrequently, and that drives down the volatility of these asset classes. their actual volatility theoretically, you know, would be higher if they were priced daily, but they're not. what we care about as a plan is the actual volatility of our returns, and you see here that our actual returns for these three asset classes has been considerably lower than the computed volatility. and it affects the volatility of our composite portfolio. for example, historically, we've been using about 13 -- and this is now the second table. we've been using about 13.7% annualized expected volatility. that's roughly in line what we've used in prior years.
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but when we skewed the volatility or our actual realized volatility of private market classes, we come up with a volatility that's much lower, 10.3 that you see here. and then, you'll see what -- our actual volatility, so what has been the volatility of our returns year to year? it's been more like 8%, and even 5.5% over long periods of time. and then if we take a look at the tables on the following page -- for example, is, say, on the 20-year volatility for private equity has been 16.4. so we have been suggesting to any p.c. that we should, rather than use computed volatility,
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which theoretically certainly has merit, but what we care about is our actual volatility, and let's use our actual volatility rather than computed for private markets. and then, adjust that historical volatility that we've had for private markets based on how we're doing things differently now and in the future than we did in the past. this is important because a volatility of 13.7 versus 10.3 significantly overstates our probability of incurring a loss, and it significantly overstates our possibility of incurring a large loss, okay? when you use 13.7, a standard deviation of 2, you have a standard deviation
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event - 27.2, a 5% expected return, you have a probability of losing 20%, but it's actually a lot less than that. and the computations are listed at the bottom of page 2. so we're recommending a change in practice. it's based on actual results, not based on theoretically computations. i'll ask ann if she has any comments, and i'll ask allen if he has any comments on this subject, as well, and then, we'll get into the subject of leverage. >> commissioners, this is an important subject. i know that allen is going to comment on that, and also i welcome our actuarial's view on that. we are adjusting volatility which is one of the most important estimates of risk. and as we went through the risk
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attitude of the total portfolio, we're seeing that the way we calculate risk in the portfolio and the standard deviation of expected annual returns, we feel that we need to adjust it, and lower. so this is one of the most important risk numbers, and it's a big discussion that we had with allen for years. particularly since i've started, and i've started that conversation to make sure that we reflect the private exposure properly in the risk estimate. >> and this is not an sfers issue, this is an industry issue. it's a bigger issue the more private assets you have because the private assets are those that generally have less realized volatility for the reasons bill mentioned. so we have developed a set of
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volatility forecasts for private markets that do we reflect the realization of that volatility as observed through time. you'll see later when we talk about this, your expected volatility of your portfolio's 10.3, not 13. so we're in full agreement that indeed this is a better process in terms of looking at the volatility of portfolio. when you talk about leverage, which we are going to talk about, as bill said, you've got an expected return of the portfolio that you're over time going to earn, but the probability of having an adverse outcome is directly related to how wide that distribution is. so a portfolio that has a possibility of - 13%, if it's got an expected return of 13 and a vol of 13, the probability of a return below zero is significantly different than if the volatility of that
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portfolio with the same 13% is 10. it cuts off the downside of that tail, so it does have real impact. we will be talking to kyron about that at the end of the day. we will be talking about a smooth volatility on private assets. >> questions? i have one technical question, then. this lower real volatility number, or the private equity real estate, is that a san francisco only number or is that any p.c.s generally in the world? >> that's p.c. that has public and private assets. >> that's everything, you just
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us. >> the only thing we do for you, joe, is we used to have one forecast for private equity, for example. we've now got a forecast for venture, for buyouts, for private equity. we put those together for you because you have a different viewpoint for underlying strategies. for you, it's not, but to makeup a number, 7 # 5 venture capital and 25% buyouts, whereas for someone else, those numbers could be different, but the atomic results are the same. >> and i hope i'm not jumping too far forward, but on 26, was this presented on -- >> the correlation on all of the underlying forecasts tend to be historic, but then known sort of differences going
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forward for behavior of markets. we don't make a lot of adjustments for the volatility piece, per se. >> it seems they're very infinitesimal changes. i'm going to ask you, subsequently, for previous years correlation matrixes. with that, i'll stop my questions. are there any other questions? >> let me see if i understand this correctly. we are changing forecasts volatility for a portfolio based on our actual experience for private markets? >> yes. >> i've been advocating for this since 2012, and every time i brought it up, i was told i was wrong, so thank you for getting us there. >> i have a plan that has a permanent benefit increase formula, that over ten years, if they outperform 10%, they
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pay a special benefit increase. that's an option. options have costs. costs are based on the volatility forecast, so they would have had to pay a higher amount to account for that if you hadn't made these adjustments, so this makes a big difference in terms of approach. and brian, ten years ago, when you didn't have that much -- i don't mean you, but you didn't have much in these private asset classes, the public weren't aware of that. it's a much bigger deal when the public is 40 to 50 #% in -- 50% in public assets. >> brian, if you've seen the numbers for the last 20 years that includes the internet bubble, including 2008, they're still substantially lower for
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public and private equity that we're estimating. it's 50% lower, including one of the most volatile times. >> ythat's what i've been sayig since 2012, and i've been saying why are we building on an expected volatility that's not even close to our actual experience. i didn't agree with that. >> i'm sorry. i didn't hear you say that. i've been advocating for this, as well. >> it's not often a board member is not that far ahead of the curve. any way, i just wanted to bring that up. probably another ten years, i'll get another one. >> on page 2, on the first table, the 7.74 volatility, realized volatility for two classes over ten years, that's not a typo, it's just
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circumstances. the -- i did want to note, we're using volatility, realized volatility for -- well, for 20 years, not ten. the reason why we're doing that is because the last ten years, there hasn't been a sufficient amount of longer duration volatility in public markets for private markets to then just adjust their pricing. so i do think that those ten-year numbers are too low, but 27 has been way too high. >> do you plan on explaining more about leverage? because basically telling us about the lower volatility just means we achieved our rate of return for efficiently, but i want to go back and talk about rates of return. i associate leverage with making more money for more risk. >> yes, absolutely true. >> are we going to talk about
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that today or -- in the presentation. >> that's exactly what we're going to talk about. >> you haven't talked about that -- >> i haven't reached that in my presentation. >> oh. >> we're ready to go. this is an action item to start off on the capital market outlook and revised capital market forecast on your policy portfolio returns. we do this every year. historically, we've looked out five to seven years and 30 years. you'll see that this year, we're going to look out ten years and 30 years. the reason we're increasing that intermediate term forecast is because originally, that's -- if you look back to the period where we all grew up, an economic cycle was typically four to six years long. they varied. this most recent cycle is the longest recovery cycle that we've had since the civil war. where there's concerted
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government action, it creates longer cycles, so you're going to see a 10 to 20-year cycle. if you go to the next page, the practice has been to create an espers study every few years. we've taken the policy and outlined the steps -- if you go -- no, you're on the leverage one. go back -- it's the -- go back to the asset class assumptions and returns first. [inaudible] >> the table you have on page 2 is the process you've used historically, so this is a kickoff february meeting.
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what we're going to do is review the capital market forecast and the impact on your portfolio. that is a starting exercise. at the april meeting, we will get direction from the board on whether or not we might want to add asset classes, and i would suggest probably not. we already have plenty. we're going to go through the capital market assumptions in more detail, so today, i'm not going to spend too much time talking about where these forecasts come from, but i want to give you enough background that you know, and then, we'll bring one of our experts out. and what we most importantly will do is try to identify five to six alternative mixes that might make some sense. so we don't want to go into an asset liability study modelling an infinite number of asset classes, so we boil that down into a smaller number. in the june meeting, we will take those asset class
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scenarios, and asset class returns and integrate that with a projection of liability. so instead of talking about expected return and variability of the investment portfolio, you can look at expected contributions and funding ratios. so it starts to translate it into things that are more important to you. at the end of the day, we want to fund the commitments you've made at the lowest possible cost. at the july board meeting, we talk about asset allocation policy, and at the august meetings, you'll remember we bring to the board a full presentation with one or two suggestions that you vote out on. you'll recall we brought four or five consequences. there was a discussion of the board, and p.c. of the staff recommended one particular
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outcome. brian asked one question at the meeting whether there were any increased volatility risks going forward, and the answer was yes. it's important that you understand where the numbers came from, what the implications are, and that you are, in an informed way, choosing the level of risk you want to take, and that will dictate your return. if you go to the next page, the output of that process on page 3 is this is what you approve. you will approve which asset classes you're invested in, how much money on average you want to invest in each asset class, arrange around those asset classes because that's your direction to staff to be able to operate the plan within board approved ranges. on this page, you happen to see what your actuals were as of 9-30. you see whether you're in
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compliance or not. this is what we report to you quarterly, and then, you see a benchmark for each particular asset class, so that page is what you actually adapt. if you go to the next page, page 4, you can see how that has changed through time, and you will see that roughly every three years, there's a new policy. someone might ask how come 2011 goes to 2016, not 2014? because the current policy was adopted in 2017. you did do the study in 2014 and then two years later, the board adopted the addition of a 5% commitment to absolute return, and so that is the number we're putting in here. so every three years, the board has gone through this process. and you can see how it's changed through time. this page illustrates the changes to policy historically.
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and it graphically points out what we've talked about derisking. so bill mentioned earlier, if you look at the dark green, that's public equity, and the light green is private equity. since 1995, the total has gone from 51 to 49. that's not a huge change, but if you look at the underlying components, the public equity component has gone from 44 to 31, and the private equity component has gone from 7 to 18. we are fully supportive of that. we do believe that your ability to outperform in private markets is more deliverable, and private markets are becoming increasingly important to equity raising in this country. public markets are actually shrinking. more importantly, if you look at public debt, the blue line, that is tradeable bonds. it's gone from a fairly high portion of your portfolio,
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public fixed income from 41 to 9. the reason for that is over this period, interest rates have been dropping. so today, when you buy a newly issued government bond, you're getting 1.92%. and your return from holding that bond over the next ten years is going to be roughly that 1.92%. if interest rates go down, it might be a little bit higher. if interest rates go up, it might be a little bit lower. so we're looking at asset bonds having generated 6% to 7% over the last 100 years. unfortunately, today, they're starting at 2, and that's what the market is going to give you. you can't wish it's going to be 6 because it's 2. and equity concerns add onto
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that. and we're not looking at 10% in equities and 6% in bonds. if we were, we'd say passively index and be done with it. we're looking at 2% in treasuries and 6% in equities. you can't get to 7.4 with any combination of that without leverage, which is one of the ways to deal with it. so this is just a nice picture of how you've changed your portfolio over time. this is what the board will be working on this year. it's not a one-and-done. we will have several meetings to go through this. i would urge you to understand this very importantly because this decision is about 92% of your return going forward. so that's the process, that's where we've been. if you go to page 7, the process we go through is every year at the end of the year, we take each of 40 asset classes, and we look at what its returns are going forward.
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2019 was a year of very robust returns. u.s. equities were up 31.5% in 2019. if you looked at what revenue growth in those same companies was in 2019, i'll give you a hint. it wasn't 31.5%, it was 4% or 5%. our economy is growing fairly slowly. overall economic growth translates into revenue growth for companies that are proponents of that, and that growth has been 4% to 5%. so how did we get out of companies whose revenues grow 4% to 5% economic growth of 31.5%? we've had a dramatic run up in p.e. ratios, the price per unit
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of earnings. that's caused by if individuals can only get 2% from their friendly bank, and that's lucky if you put your money away a long time, and the guy next door has been investing in the stock market, a massive amount of money has infused into risk asset. that number does not go up forever. that's a cyclical number, and at some point, people are going to realize it's going to come down. looking forward, we don't think we're going to earn 31.5% and 10% in bonds. it's a much lower number, and that's what we're going to talk about. on page 8, again, just process. we have ten-year returns and we have 30-year returns. we share both with the actuary. the actuary has a longer term horizon to think about. we tend to look at the ten-year
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number as what we drive our policy around. the punch line is now on page 10, so page 10, there are four columns of data. the column labelled 2019 is what the forecast were last year. looking out five to seven years, and this years, there's a little apples to oranges in the first two columns, and then, what your 30-year forecast, what it was the beginning of 2019 versus 2020. so let's go down the first two columns, the expected return on your portfolio last year was 7 -- 7.7%. that same forecast today is 7.1%, so not as high as your forecast. for 30 years, it's still above the forecast. the expected volatility, as
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bill and ana mentioned, we're using the smooth number, so 10.3% for vol, and a sharp ratio of .5, a certain ratio f of .9. the possibility of greater return under your assumed rate is 53%. so more than a 15% chance that you will not achieve your 7.4 returns in this ten-year period. or you can take action, and the action you can take it try to change the mix in your portfolio to increase your return, which is a good idea, but i'm going to tell you it's
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hard to find one that doesn't have a lot more volatility, orror we're going to talk about leverage in a minute of the one of the things that's nice about having a low volatility portfolio, your portfolio would earn 7.1% every single year. if you knew that and could borrow money at 2%, you'd want to borrow a lot of money and earn at 7% because there never would be a possibility that you would earn less than the 2%. now, the real world doesn't operate that way. if the volatility is very high, there's a high probability that at some point, the portfolio you've invested in will earn less than your borrowing costs. people who went through the financial crisis experienced that with their mothrtgages, a that's the reality here.
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it's not a panacea. it does, in today's markets, where rates to borrow are very low relative to the anticipated return in your portfolio are an option that should be considered and who's doing it. >> can i comment on that real quick? >> yeah. >> so the expected return, there's three ways to increase that. one is to change the mix, so take more risk. second is leverage, and thing is alpha, so those are three options. >> and, in fact, if you know go to the next page -- well, i had one more. >> okay. >> so -- and also, the expected return is a 50-50 probability. so 50% of the time, the future will end up being less than 7.1. if you think about it as i do along probableistic thinking
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that i was a 7 -- i want a 75% or 80% probability of being right and not that 50%, that 7.1, that number would need to be well into the eights to have and to get a 75% probability. if you had a 75% probability, then, you're saying that i'm three times more likely to achieve my, say, 7.4 than i am to achieve less than that. so any ways, i just wanted to point out that this is a 50-50 distribution. and if you want an error rate of comfort is you would want those numbers to be materially higher. >> yeah, that's exactly right. and what we did on the next
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page, page 11, you'll see seven columns of data. the first column is what we just talked about. it's the expected return over ten years, and what that portfolio looks like using your current target. the next two columns simply say what if we simply indexed the portfolio in a globally diversefied equity portfolio and a globally diversefied bond portfolio? that is the next column. that's the 60-40, and i've never seen this in my history, and it's not a typo. the next column is a domestic 6 # -- 60-40. that's because international bonds don't look at good as equity domestic, but the two
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tend to be resultlatively clos. this is the 60-40 portfolio. this is looking forward from where we are today and putting 60% of your money in index, in let's say equities and 40% in u.s. bonds. the expected return on that portfolio is 4.4%. and i will show you later, when we talk about leverage, pinco's number would be 4%. every other consultant that i've talked to would be between 4 and 5%, given that we're starting with interest rates lower than they have ever been at any point in your history, we can't get to 6% on bonds. and if we can't get to 6% on bonds, we certainly can't get to 10% on bonds. now, can it happen? i said we couldn't get a 31% in
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equity, and we got a 31% last year in equity. but they're not going to continue to go up, and when they don't, it's not going to be pretty, it's going to be a major downside correction. so that is the driving factor here, is we have very low interest rates. not just here, but around the world. guilt bonds were issued in the 1800s and 1700s, and they are at the lowest level ever. that's the rate. 60-40, whether it's domestic or international, gets you 4.4% and higher volatility. now, how do we get to our 7%? the last four columns, the leverage columns simply say let's borrow money and make the portfolio size 5% bigger, so we have $1.05 for every dollar.
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that gets you to 5.3% on a 7% leverage and 7.3% on a 10% leverage. and then, to bill's point, we took the current and added alpha with no new resources on the staff projection in the markets and interestingly, that also gets you to 7.5%. so we can get to the 7.5 through leverage, we can get it through alpha. i don't believe that kyron accepts alpha. most actuaries don't. we would argue in private market that there's enough history that we believe it's there. but again, it may or may not translate through to your assumed rate, but it certainly, from a projected standpoint,
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adds to the portfolio. and again, today isn't to pick or decide, it's to really set up the discussion that says, one, i don't want to be the bearer of bad news, but the outlook looking forward from today is not as rosy as last year, and that's because this big runnup in equity risk prices, we've got to pay that back at some point. and two, we shouldn't be despondent because there are things we can do to improve our circumstances, but there are things you'll have to approve, and nothing is free. so we'll have to talk about, it does zbgive you a higher expecd return, but it does have more volatility. the rest of the book goes
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through the detail on where the forecast came from. if you have questions, i'm happy to answer them, but this is sort of the punch line process that we're going to get you to the point where sometime in august, you're going to say i want to change the mix or i want to add. questions? >> important subject. i would say difficult subject because there's so many things involved here, but board members want to start with the opportunity to ask some questions? >> and i can do the leverage presentation now or stop here and get questions and then we'll do the leverage presentation. >> are we on time, commissioner driscoll? >> we're almost 4:30. we have one more until the next board member will leave with several more action items to go. >> when will we lose a quorum?
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>> well, we won't lose a forum until 5:30. >> i can do the leverage in five minutes, ten minutes. >> why don't you start and see if the board stops you. >> okay. one strategy we talked about was to increase the expected return was leverage. this was in that other presentation, which we can put up. leverage simply means borrowing at a low rate to invest in an assess -- a risk asset that will earn a higher return. it's particularly effective when the risk asset has low volatility associated with it. in preparing for this, ana and i probably looked at 400 to 600 pages of information. i'm trying to boil is down to the first step of fundamentally understanding what it is and how you would do it, but obviously, we will have more to say going forward. >> can i ask you, where are you
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looking at in the package? >> take a look at introduction of the package, and now, if you go to page 4 -- >> toward the back of it? >> toward the back. [inaudible] >> brian, i can just put it on screen. just put it on the screen. >> thank you. >> so leverage sounds like a fancy word. it's simply a technique that seeks higher investment profits about i using borrowed money. those profits come from using investment returns on the borrowed capital versus the cost of that. virtually everyone in this room who owns their own home subject to a mortgage has experienced leverage. if you can borrow at 3% to 4% that buy a house that deappreciates at 5% to 10%, however borrowers in 2007 and 2008, who borrowed against
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their house and found themselves upside down, that's the opposite. leverage is fairly common. you already have it in your institutional portfolio, your real estate portfolio, typically, the underlying assets you buy in the real estate portfolio or that your manager buys on your behalf are 40 to 60% mortgaged. your provide equity portfolio, particularly these days, the managers go out and borrow money to make investments before they call the capital from you, so you have leverage there. you have equityizing cash in your portfolio, you have cash that's idle, so you have futures to earn an equity like figure on your cash. this is not a new concept, it's not a foreign concept.
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what is new is thinking about it at the total portfolio level. >> allen, the total ratio of the s&p is like 50% to 75%. >> i mean, when you buy a stock, you're buying a leveraged instrument versus the bond. turning to page 5, why do we think about it? leverage is used by several of your current managers in their strategies, and more recently, many large pension funds have g begun to employ this. the state of wisconsin has begun to do this five to ten years now. to tell a story, san diego this. they had a leveraged portfolio that for four or five years, they were the best performing public fund in california. and then in may and june of 2017, if you recall, interest rates went up a little bit, and asset prices went down, and
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they lost about a half a year of their advantage, and the board got together and said wow, this stuff is risky. let's get rid of it. they got rid of it right at the wrong time. if they'd kept it, today, they'd still be the best performing public fund. so one of the cautions here is leverages will have periods where there are adverse returns. and if you as a board will have fears when there are average return periods, it takes an informed board to make a leveraged risk strategy, because the highs will be higher, and the lows will be lower. there are lots of ways you could add leverage to the portfolio. the city and county of san francisco could issue a pension obligation bond. this is not your choice. they could go out and borrow money at 2% and prepay their
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contributions. you could directly borrow from a bank. some pension plans have done that. it may not be legal. i didn't check the law in california. i don't know if you as a pension plan can borrow independent of the city, but the simplest way is to fill out and borrow money, and for every dollar in your portfolio, you create $1.05. the most efficient way to do this is by using the leverage in a future or derivative instrument, and we're going to talk about that in a little more detail because if you do this, you're going to want to do it that way -- you're not going to want to do it that way. if we go to the next page, i want to sort of build the case here. go to page 6. why now, so if you go to page 7, one more, the current economic cycle is the longest since the civil war.
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we've put that on here. that blue line is our current economic expansion. it's very long, and it's very weak, and that has been conditioned by very, very low interest rates and a massive deficit. the u.s. government spend $1 trillion more the year prior, and it did it again. massive interest rates of borrowing that keep interest rates low that keep interest rates positive but not -- but not enough to generate returns. asset class returns from been exceptional since the bottom of the crisis in 2009: lo. look at u.s. equities in the last ten years.
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as i mentioned earlier, that has borrowed from the future, so you see in the next column, pinco's future looking forward in this case for those same asset classes. so 15.3% has been the return in u.s. equities. expected by pinco is 3.5. for emerging market equities, line versus 8.6, ours is 9. again, i picked pinco because they're a big company that everybody knows. that's the challenge, and what you have to do is have a portfolio that's going to earn 7.4% when the underlying asset
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classes you've traditionally invested in are not going to get you there. our forecasts are on the next page. i'm not going to go through them in detail, but you can see the last column is the change in our ten-year forecasted return going from 2019 to 2020, and they're all down. for your portfolio, it dropped as you saw, about 60 basis points. so now, the case to use leverage in theory, one of the tools that we and almost everybody else used to think about your portfolio is this green line is the efficient frontier. it is the projected return for the best portfolio at every level of volatility risk as you
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go along this axis. if you want to get a higher return, you take higher volatility. san francisco's portfolio would be roughly if you -- if you kind of looked at where 10.3 was, that was the vol, and went up, it would be 7.1. so this is the kind of best you can do. if we were to borrow, we can borrow money, and once we hit that tangent point, borrowing takes us along that straight line, whereas increasing the risk of the portfolio puts us on the curve line. so this is -- the theory of leverage is we can get better outcomes by leveraging the portfolio rather than playing around with the asset mixes and trying to move out on that green line. >> allen, the green line is changes in asset allocation. >> yeah. >> and the purple line is leverage. >> yep. >> this is the theoretical case
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for leverage. using leverage efficiently, if we go to the page 12, to understand leverage, we think it's first important to understand how derivatives can be used without creating leverage, so there's an example here that says rather than borrow from a bank, let's purchase $100 of s&p futures. so that combination, we earn the return of cash plus the future, which is roughly equal to what we would have earned had we just held the stock. that's assuming we keep that margin in cash. that's no leverage. we don't have to keep it in cash. we can actually put it in a risk asset, and that's how we create leverage. you do something now in cash
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equitization. so again, if we go to page 13, if you borrow money explicitly, you create leverage. if you make an investment in a derivative, you go to the right there, you buy a derivative. if the collateral is invested in cash, you don't have leverage because you've got cash to deal with the movement up and down in the future that you've bought. but if you don't put it in c h cash -- and you don't have to, then you create leverage. that's the mechanism by with you you would create leverage. you don't go to the bank and borrow, you take a portion of your portfolio that might be in index stocks, for example, and you buy a financial future to earn the same kind of return, but you have the collateral which can then be invested in something other than cash to create leverage.
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is that -- is that clear? the next page just walks you through an example of that in dollars. why would you do this? because the costs are much, much less. you may invest in securities or asset classes that perform differently in the futures market, and you can create combinations of this. it's not riskless. the investor could face a loss should the collateral investments underperform cash. and the very last page, page 15, talks about the risks of leverage. it uses up liquidity, so you don't want to use too much of it. you it lead to higher or lower market risks, depending on how you use it, and it with create a market's active risks. this is where i kind of wanted to stop, is one, what is it?
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why is it interesting to use it today, when might you do it, and how might you do it? if it appears interesting to you, the next point we would go through is deeper education. i've really glossed over how this works. you'd want to see this in the real world. there is no proposal that staff will figure out with our advice or without our advice. the result would be a proposal that we do an r.f.i. to hire a manager engaged in this process, and you'd hire a manager to operate the portfolio. you can do that statically and say we want 5% exposure or you can vary that based on economic output. their -- there are managers that do that at that timecally. this is an -- tactically. i will tell you arizona state
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is engaged in looking at this. new mexico teachers, the board has approved the policy to do this, and we're doing the homework. wisconsin is doing this. their $111 billion plan that's 110% funded, interestingly enough, although they have a very different liability structure than you do, and we should say that in big capitals, but they've been leveraging the portfolio. so it's not a crazy idea but it's not an idea that very many small plans would even contemplate, but we could do think it makes sense to at least explore this further, and we're prepared to do that, first with education and then ultimately issuing an r.f.p. and i know i said a lot in new concept, but that's it. >> board questions? >> this is discussion only
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today. >> yes, this is discussion only today. >> what is the next step? >> well, we wanted to get some feedback from the board on your appetite for this idea, whether to -- is it a full stop? is it something you'd like to see modelled, learn more about? we would propose if we do do this, propose to start it small, you know, 5% or something like that. the key take away is really i think the time horizon. the costs are low, but you need enough time for what you have borrowed to earn a return higher than cash. so, you know, it can be quite prof profitable if you have a
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one-year time horizon. if you have a ten-year time horizon, it's at the purviews of the market. >> personally, i think it's incumbent on a board member to look at viable investment strategies, and this is viable. and it's our -- we should flush out the best advisor that we can and probably through an r.f.i. as part of the learning process basically, for us -- for me. i'll just speak personally -- and then make a decision on it. it's an excellent presentation, and i'd really like to take it further to make a decision. >> when rates are low, you want to be -- you know, you want to be a lender. excuse me. when rates are high, you want to be a lender, and when rates
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are low, you want to be a borrower. >> and that requires some flexibility and being able to turn pretty quickly. and the more information we have, and the more options we have in our tool box allows us to make those bobs and weaves. >> i'd just offer my two cents. i think it's always smart to look at other possibilities, especially to increase returns. i think i am -- i'll just tell you my sense of this. i have a hard time using leverage for a multitude of reasons, not the least of which is if something goes wrong, people are going to have a hard time understanding this, regardless of how good a decision it was. we live in a world where there's politics surrounding pension systems. i'm of course always happy to see more, and i think it's good
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to bring this to the board and let the board decide, but just to kind of manage, so everyone knows where i stand, that's where i'm at, at this point. i think i'd like to see us doing building more credit, more private equity, and if i were to prioritize, it would be a lower priority for me. >> okay. others? >>. >> the question is why should we do this? i think you answered that question, but i think you didn't. the other way of looking at it is what if we don't do it? i like making money. i think the city wants us to get good returns because it mainly affects the contribution rates, but it also affects colas. i know of other plans that have
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done there, ais, and they lost. the question is what are the real borrowing costs? what are the odds are that we will make enough to cover those costs. we have to make enough one way or the other? it is so great. you've given us all kind of accolades compared to our peers. why should we do this? >> to answer your question, it's a third tool in our toolkit to answer returns. one is asset allocation, and that's your beta risk. you can take more beta risk to earn higher returns, and also what coincides with that is greater volatility. the second is alpha, which you
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know we pursue that vigorously, you know, to earn higher returns than index returns. and then, the third toolkit would be leverage. and -- and any p.c. events have estimated it as a 5% leverage, with about 50 basis points of extra volatility, and an extra 1% of volatility. >> i know that numbers was on that particular table. i didn't ask how you came up with those numbers because where is the money invested to, because i assume those are the rates of return. i assume we would not do private equity because it's too liquid, although the returns are there. i'm just trying to figure out the spread that justifies doing
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it. because you might say yes, i am watching this spread. because what you just told us, mr. martin, we're going to have to really do a lot of footwork to justify this 7.4% return that you're currently using. maybe the city said, yeah, if you want us to do that, we're going to have to take on more risk, not just more volatility. why should we do this? if we don't want to raise contribute rates, why should we do this? >> this is your decision, not mine. i'm just saying i don't think you're going to get comfortably to 7.4 simply changing the asset classes. the asset classes, if you looked on our page 13, that helped you get a higher return are emerging international equities, private equities, private credit, natural
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resources, real assets. you know, at some point you don't want to have more in private equity even if you think it's going to get you a higher return. so the ability to do this through beta, as bill said, you're taking on other risks to do that. to do that in alpha, which we're big advocates of, runs across the issue -- we may be happy it's there, but it's not going to directly influence, i think, your assumed rate. so the reason to consider it is a tool that will help us get to 7.41%. like any tool, it's downsided. brian, you're exactly right. there is public pressure. when san diego had their issue, the treasurer asked me to go down there and do a presentation. i went down there and said tool
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isn't a bad thing. if you don't have the strategy when you get a few bad out comes, then don't do it. >> i think san diego levera's e rate was really high. >> and that was what i was thinking. we now have all the pipes on the transparency and the reporting, so we understand and can calculate that leverage. we are also -- will recommend the plan design that is very reasonable on the leverage, and we will not go to the -- cigna will not go to the 10 por 30% where san diego was. so what we are trying to do is start the education, but to
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make sure that we are all comfortable with the reporting, with the transparency, and start really small. >> one concern that i would have is we've got a constricted budget. we've got a big plan for a growth curve that we talked about, and we're going to talk here -- continue talking about it. do you see us going down this path of studying it, discussing it, peeling back the layers of the onion. your professional staff time, is this going to take away from some trying times that we're going into? that would be my -- >> yeah. so in exchange for 25 basis points of access returns, if this is worth us devoting staff time and consultant time to do, it's worth it to do that. just the m.p.vs of t -- m.p.v.
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the dollars would be worth it. it would be worth it also to find an allocation in alpha. this is just a third tool in our toolkit. >> go ahead. >> so i would say, like all investment tools, some have flaws, some do not, but it's how you deploy them and how you use the tool that you have, and how the investment professionals plan to put the strategy in place. i would prefer to continue to study this as a third investment to build this team, to continue to do the research and see additional information on it. again, i've seen issues with wisconsin and others. and again, it depends on the investment professionals and
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how they deploy the strategy for the asset allocation and how to use it, so i would be a proponent of seeing additional research on the model. >> i share some of the concerns that brian had mentioned. i would say if you were to ask if it was my favorite tool, i would say no. it does create some concern whether our system would weather the storm and continue on the path if we were to have several bad patches, so it does make me concerned. i'm willing to be educated and have some lessons on it, but -- >> if we were good investors or we believe we have the ability to find and hire good investors, we should use tons
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of leverage. if we don't feel we're good enough, it goes principlely through investmanager and gene manager investment. i know people who have borrowed money and they didn't do we we -- very well, and i know people who have borrowed money, and they knew exactly what they were doing. this is just a discussion item. i'm anxious to keep moving the calendar along without stopping anybody from asking any further questions. we will be coming back to this a couple times, correct? >> yes. and we understand where you stand, so that's helpful to know. >> we need to understand how
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much risk we want to take. public comment -- >> just one more point -- >> just let her finish. >> i think as part of our conversation, we are -- i know kyron's going to talk to us, and we're going to hear more about our actuarial liabilities, but i think we have to take a look at our assumed rate, as well. >> you shouldn't take upon anymore high risk investments. you already have enough right now. and beyond that, mostly columnists think that the next recession will be brought on by a global credit crisis, and you shouldn't have any investments with credit in its name. you all know what happened in 2000. what happened to all the
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dot-com names? they all went belly-up. if we have a global recession, the same thing is going to happen to anything with credit in its name or leverage in its name. so you should be doing what i have been advocating for in the last two years. a passive investment in stocks, bonds, and real estate and they will produce more 8% returns. you can go back ten years, 15 years, 20 years, five years. that proves my point. >> mr. martin, if we were to borrow $1 billion, could we invest it all in the stock market? >> yes. >> yes, we could. okay. i just wanted to make sure i understood. let's move onto the next item. >> board members stock report.
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>> i'll just be real salient. in 2019, the markets were up north of 3%, and then, the coronavirus in the market gave it all back. fiscal year to date, we're up 5.42%. i did want to highlight on page 2 just how much of the return last year was due to an increase in price earnings ratio. and you see it's about 26 of the 32% last year, and that's something that's not sustainable. now to be sure, the prior year, earnings growth was really good, and the market was down 4%. you put the two together, and there's a -- earnings growth was fine. but the point is is that now that we've had this, in the long run, returns are not
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generated by expansion of p.e. ratios. [inaudible] >> -- we did get $200 million. insight, a growth equity, private equity strategy. we asked for $75 million, the board approved. we were allocated 50 million for a biotech specialist in the absolute return portfolio. we requested 150 million. we are going to get substantially all of that over a period of time. they accepted 35 million. that will be staged in as the manager calls capital. wind church, which is a distress for control strategy. in the buyout portion of our public equity strategy, we asked for 75 million.
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we knew we weren't going to get all of that. i think previously, we got something like 23 million, and were cutback to 30. they were capital constrained. we're very close to hiring a security analyst for venture capital. i believe we'll have an announcement to make for that next week. we have recruitments underway. even though there have not been hirings, the method continues to advance for a manager for security investment and provide equity -- private equity. the initiatives that you see underway, there's nothing new. a little bit updated here and there, but mostly not particularly new. i did add the section on coinvestments, and you see the strategy updates. we just did public equity and fixed income last month. an update for accepting the
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calendar year for 2019 for absolute return will be in return. these will all now be done once a year in this kind of calendar order. and with that, i can turn it over to the board. >> any further questions from the board? public comment? next item. >> next item is 14, action item. approval of recommended action manager for the sfd global mandate. >> thank you. good afternoon. this item was initially proposed at the d.c.c. meeting
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on september 17, where cal and sfpd recommended putting morgan stanley on its watch list after decreased performance on their outputs. cow an and staff completed the search and identified three finalists on-site on november 12 after factors all the investment criteria as well as an assessme an assessment. details of the recommendation are outlined in the attached presentation, which was made to the d.c.c. on december 18. upon receipt, the d.c.c. voted to approve, forwarding this recommendation to the full
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board with a recommendation for approval. so should it serve the pleasure of the board, cow an is prepared to make a five-to-ten-minute presentation to detail the nomination. otherwise, we are prepared to ask the board to approve principal as the investment manager and the global mandate today. >> i believe that's why the committee reported to the full board. >> is there a motion? >> i'll move the item. >> is there a second? >> second. >> okay. i don't want to cut you off, mr. unger, but it just goes to show that whoever gets called at the end of the agenda sometimes doesn't get to speak. questions in favor of the comment? call the question. all those in favor? opposed? next item. >> approved revisions of the
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sfdcc proposed policy statement. >> thank you, commissioners. before you is a proposed revision to the sfdcc's proposed policy change to include access to e.t.s. and u.s. change securities in in addition to the mutual fund platform. a red line has been included for your reference, and the changes are shown on page 9. the i.p.s. was brought to the d.c.c., and changes were to be forwarded to the full board with a recommendation for approval, so we are asking the board to approve revisions to the i.p.s. today. >> any questions or a motion is in order. >> this was forwarded from the committee, correct? >> correct. >> yes. >> motion's been made. i didn't hear the second yet. >> yes, he had a question, reported from the committee.
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reported from the committee from the december 4 meeting. >> yes. >> and i move to adopt this recommendation from the committee. >> motion and casciato seconded. >> i'll make a comment, because this has directed from the second -- this was directed from the secondary brokerage, we'll need to look at this. >> we'll discuss this as part of the economic waiver as part of the manager report. >> okay. great. no further questions, public comment. i'll call the question. all those in favor, say aye. opposed? next. [inaudible] >> -- sfdcp investment performance for the second half of 2019. >> thank you. commissioners, twice a year, we conduct a performance review of all the sfdcp performance within the plan. callen is year to present the
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plan for the second half of 2019. if we are on time, we suggest a five-minute presentation if the report is a strong one, that the board would be interested? >> i suggest you hit the highlights. >> very happy to, and we've prepared on page 2, a summary of the highlights. plan ended the year at $3.9 billion. the change, given the great market outlook or experience in 2019 increased over $600 million. it's actually $1.2 billion it's grown over the last five years, so certainly, steady growth. the target date funds experienced strong returns. 3.9 was for the income fund, the most conservative of the target date funds, out to 8.6% for the quarter. longer term results as you look through the balance of the report remain very favorable. given the strong equity markets, all the funds have
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done well. there's two funds on watch list. one was just taken care of with the morgan stanley, the two refunds, and one for the galliard. they've had some leadership changes. >> nothing related to performance. >> nothing related to performance. i'll skip over the capital market overview on the next few slides and just turn your attention to slide 8 for the individual market values. and you can see where participants have allocated their assets, importantly target date funds, roughly 21% of the assets. we see on a net-flow basis, this is the largest increase as it relates to participants choosing where to put their moneys. stable value was the largest, but it's been overtaken by large cap equity, is up about
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30%, stable value about 24%, and we've seen this concerning the relative stable value funds. you'll note in 2018, we added a bond index, a small cap, and an international index fund. they're combined for 463 million, so there's certainly a big uptick there in just a few short years. and i would end for your review, page 9 shows the target date funds, and you'll see each one is performing at or ahead of the benchmark that they've -- that this custom benchmark across the different vintage years. they've arranged by the most conservative or near dated retirement fund at the top out to the more equity heavy longer dated funds at the bottom, and
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you'll see very strong returns across the board. >> are these returns metafees? >> they are metafees. page 10 gets into the core option, so these are for participants building their own allocation vehicle, so the asset class funds. the color coding, the green means it's in the top half. metafees. you can see across the board, fantastic results and very strong results across the board. the results continue on page 11. the loan manager, you didn't see any red on the previous pages. the morgan stanley fund, and again, we've already taken action there. the page i'll end on is page 12, and this is the component fund. so these are funds that are
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only available to rustle your target availability funds. you can see green across the board with the exception of the morgan stanley global real estate in the third column, and again, that is something we took care of. the last two are d.f.a. funds, value oriented. it's been a very strong growth market over the last decade, and that explains a lot of their performance. not by much, but third quartile over longer term periods. so i'll take a breath and see if there's any questions to follow up on. >> no board questions. this is a discussion item. public comment? thanks again for the thorough report. i know you'll have more time at the committee meeting to talk about things.
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>> yeah, absolutely. >> that's it? >> deferred compensation manager report. >> thank you, commissioners. last, but certainly not least on the d.c. calendar today is the quarterly manager report. i've been looking forward to this opportunity to update the board on the sfdcp since i may not be here to provide a quarterly report in may. in short, the plan is in a really strong position. in fact, looking at s.b.d. and outstanding loan balances, we are looking excellent. this demonstrates the confidence our participants have in the plan where they choose to place any residual income they have left after contributing to their insurance, pension, and other benefits.
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assets were just over $2 billion when i joined four years ago, so the plan has really grown and modernized to be attractive to new hires as well as retaining the same participants. contributions are up, total number of participants have increased, and total participation has never been higher, 55%. over the last couple of years, staff has done a tremendous job in integrating dbdc communication efforts to present a more holistic communication efforts. a demoof the actual experience will be presented to the d.c.c. at the march meeting. so i'm aware of the hour. i will move onto the four pillars that's included in the quarterly report. on the investment front, we are currently in the middle of a
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stable value search as mentioned by mr. ungerman earlier, and we are prepared to forward two semi finalists to the d.c.c. at the march 4 meeting. as the board is aware, galliard is the incumbent and has actually lowered their manager fee to a flat seven bits earlier this year. the plan also offers future ready portfolios, which are designed by financial engines. future ready portfolios are off the shelf asset allocation strategies that automatically rebalance over the course of one's life. this is done for free, and participants simply pay for the services in the portfolios, the majority of which are index based, so they're very low
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cost. they must review their financial engines annually and are proposing some slightly changes in anticipation of the coming markets. those changes have been outlined for you on page 3 in the manager memo. moving onto marketing and communications, staff have been working on three participants letters expected to drop this quarter. a target date fund 2020 letter, which has just dropped earlier this week, a self-directed brokerage letter to advise on the e-consent required for expanded brokerage access, which was covered earlier and an all-participant letter to aunited states announce changes to the real estate fund. in addition, the new sfdcp fact sheets which are designed by morning star are now available on sfdcp.org or the proponent
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transactional website. i know that in the past, the work sheets have been a little bit harder so read, so i believe this is an improvement. moving onto operations, we are pleased to announce that overtime pay will now be included as eligible for sfdcp contributions. this is particularly meaningful to safety as overtime can makeup a considerable portion of their pay but may not have been able to contribute previously. this'll be featured in our quarterly sfdcp newsletter that drops in march and will go into effect no earlier than q 2. we are working with payroll on this, so we are working with their timeline. in addition, as mr. huish mentioned in the last board meeting, details on the secure act are now available, and we are considering its impacts to the plan. page 5, in the memo details which provisions actually
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impact the sfdcp, and of those, which ones are mandatory such as the r.m.d. age moving up to 72, which ones are voluntarily, such as reducing the age to 59.5 for in-service withdrawals, and those that are still subject to clarification, such as supportability of renewability options. staff is working to implement the changes and will work with d.c.c. on whether the voluntary items make sense for the plan. finally for our record keeper, we are continuing to see improvement in the managed account offerings and will continue to monitor the clientele. details on that makeup and participant use of other complementary advisory services such as the phone calls and on-line advice can be found on page 7 in the memo.
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and that concludes my quarterly report. i am happy to answer any questions that you may have. >> i just have a comment. i would like to suggest that when you put out the quarterly newsletter that there be some type of complimentary -- a compliment of some type to mr. joe collins for his work on the overtime for that because his work and your work and i think it's something that should be acknowledged. both of you should be acknowledged, and i think jay gave us input on that. so however you want to put it, but you know that work, i -- i think is something the members need to hear. thank you. >> no, i certainly appreciate your enthusiasm, and we will try and factor that in as -- as it makes sense for the general audience. i'm not conditioned to generally doing that, but we
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will certainly make it known that joe collins was instrumental, i think, in championing that effort in other ways in addition to the newsletter, if that makes sense. i understand what you're saying. >> regarding the law change to the r.m.p., please test to see what voyas retirement counselors and particularly the people on the phones handle that so we do not have the same problems we had with the previous record keeper multiple times. >> i understand. >> anymore board questions? public comment? >> mr. coker and all the other members think this is a good investment. there's mutual funds out there that you can buy into hedge funds, so is there any reason why you can't make that available to our deferred
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compensation, members? >> that concludes this item. >> excuse me, mr. chair. i would just like to thank everyone for the thorough research done and all the -- well, i would say the meetings. we had numerous meetings prior to coming to the full board with our service provider, so thank you very much. >> thank you. >> next item. >> -- travel expense report. >> we provided a detail of the second quarter of the fiscal year, through december 31. we expended $128,000 in travelex pences wi travel expenses. we have a remaining budget of over $700,000 available for the next six months, so if you have
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any questions not related to any of the travel that's reported here, i'd be happy to answer them. >> any questions on this discussion item? any public comment? next item. >> action item, review and approval of basic cola, effective july 1, 2020. >> we're going to do 18, 21, 20, right? >> this is number 19. >> go ahead. >> good afternoon, commissioners. san francisco bay area c.p.i. was almost 2.5%, which allows us to grant the full 2% basic cola. sorry, i'm going to pass this over to mr. homark so he can
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set up this presentation. this allows us to extend our 2% cole -- grant our 2% cola, and we ask that the board adopt the recommendation. >> make a motion to adopt the recommendation. >> is there a second? >> second. >> questions? public comment? make it clear, it's a 2% cola. >> 2% basic cola. >> basic cola. >> effective july 1, 2020. >> public comment? all those in favor, say aye? opposed? item 20. >> item 20, action item. termination -- determination and approval of credit interest rate for fiscal year 2020-2021. >> commissioners, consumer interest rates remain the below minimum 4% as stated in the city charter, so we ask that you approve the analysis and approve the proposed interest rate for 2020.
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>> so moved. >> second. >> any questions? public comment? all those in favor, say aye. opposed? okay. before we go to the next item, we're supposed to take one out of sequence. >> yes. we're supposed to do item 23 before 22. >> right. 23, please. >> commissioners, bill homark and ann harper here from kyron to discuss the results of the actuarial evaluation, and it looks like they're set up. >> given the time here, we will just hit a couple slides to hit the highlights of the valuation. employer rates are up, but it was expected. the projections are almost identical to what we showed last year, but from here going forward, there's significant downward pressure on the rates.
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so i'll let ann do a quick overview of the projections. >> so this graph here is showing the projection of the contribute rates. the current valuation is for the fiscal year ending 2021. the contribution rate before any employee cost sharing went up from 25.2% to 26.9%, and as bill indicated, these projections and the actual rate for this year is right in line with our 2018 projections, which are shown on that blue -- with the blue line, and you can see -- you can't see, without looking at the numbers, that these projections are any different from last year's projections. so that's a very positive thing. we always want to see that what we are projecting is really what is happening, and that doesn't always happen. so one thing to note, the
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contribution rate after cost sharing is 23.5% for the employer, and then, the employee rate is about 11% of pay. there is significant downward pressure on the future contribution rates for a couple of reasons. first is there are about $875 million in deferred investment gains that will be recognized over the next five years, and there's also some of the amortizations that are going to be paid off over the next five years, and those are almost 8% of pay, so again, there's significant downward pressure on these contribution rates as you can see in the projections. >> so just to highlight that, on slide 11, we're showing what the contribution rate would be
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next year, given an investment return over the next year. so x axis, the bottom shows investment ranges from - 19 to 30% of pay. the goal line is the 26.9% rate that we are putting in for fiscal year 20-21. so 2022 rate is most likely going to belower. -- be lower. you'd have to get a 12% loss or worse for rates to go up so much as to trigger the next employee cost sharing. so that's the effect of all that build up and downward pressure. now, the other interesting thing here is between 7% and
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8.25%, those are the returns that would generate a supplement c supplemental cola, and the immediate returns of that cola, and from there, you get the benefit of the returns in immediately lower rates. so looking beyond, and the gray cloud is a projection between the 5th and 95th percentile. there's a wide range in contribution rates, but just to emphasize the point we're making, the high end here is pretty close to the current rate fore the next five years. that downward pressure protects us against higher contribution rates for the next four years. after that, there is the potential for significantly higher rates. in the shorter term, there's the potential for much lower
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rates. >> i wanted to add one more thing that i didn't on the slide that i was presenting is that the funded ratio for your plan is now 90.6%, so you've crossed over that 90% threshold, close to 91% funding on a market value of asset basis. >> so with that, we'll take any questions. >> these are all based on our current assumptions, which we haven't changed. >> correct. so it's the 7.4% expected return, and all the other assumptions. >> and the projections actually include an assumption that we'll be paying a supplemental cola 50% of the time. >> can you go back one slide. i forget what you call that. you know, one more. the one with the long arc, that what you call it?
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yeah. is that the a.r.c.? >> actual returned contribution, yeah. >> a lot of factors keep it that level. as long as the covered payroll, you used last year's covered payroll because this percentage has got to be -- whatever our schedules are for the liability and how we want to -- the number of years we want to smooth it or pay it off, that's where the percentage comes in? >> that's correct. >> and you use last fiscal or calendar year's payroll? >> we get a payroll data as of july 1, the valuation date, and then, we also know the collective bargaining increases across the board effective as of that date. we factor those in along with our future payroll increases.
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>> so when payroll grows, it helps keep the percentage down. >> correct. >> yes. >> it's -- they're sort of not connected, but we watch the different triggers. okay. we've got good payrolls in the city. granted, there's participants -- well, actually, i don't want to say that all participants are in. some are not. i'm just checking on the covered payroll. if there was a radical change, the city had to do something different, the contribution would drop. >> right. so this year, the participation increased 5% from last year, so we anticipated it would increase by 3.5%. so that additional payroll served to decrease the contribution rate by 20 basis points because you're spreading that contribution out over a larger payroll. >> okay. thank you. board questions?
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it's a seemingly dry subject, but it's a very, very important subject. this is a discussion item only. so item 23 requires action. is there any board comment? okay. let's move onto item 23. >> we need to adopt the report. >> we need to adopt the report. >> i move to adopt the report. >> second. >> motion has been made and seconded. public comment? hearing none, all those in favor say aye. opposed? we'll adopt the report. item 23, the contribution rates. >> adoption of contribution rates for fiscal year 19-20 and 20-21. >> and i'd just like to comment that as the board goes forward and considers the next asset liability study, that they do
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give some strong considerations to the liability of the plan, the maturing of the plan, and how volatility might affect employer contribution rates and whether we -- with the lower projected contribution rates in the future, it might be an opportunity for the board to step back and take in less risk, just to consider in the future. >> and i'd also like to point out that we have kept the mayor's office, in particular the mayor's budget office, apprised of the actual numbers. we provide them projections that they sometimes adjust and use in their budget projections, but we anticipate this is lower than what they had assumed the contribution rate was going to be, so there will be some budget savings as a result of this calculation. even though it seems very high, 26.9, there will be some budget savings based upon the fact
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that they had projected the contributions to the budget to be higher. >> maybe they'll increase our budget. >> item number 23, commissioners, the development of contribution rate of 26.90% is included in the actuarial report, which the board has just accepted. as a matter of form, we ask you to accept the contribution rate of 26.90% for fiscal year end 20-21. >> i'll motion. >> second. >> motion has been made by commissioner chu and seconded by casciato. any questions? i'll just make the footnote that this increase, however, does not trigger an increase to what the employees must contribute. >> that is correct. >> people have asked at their union meetings about that, so they'll hear it officially. no contribution increase for the members, but there will be a slight increase for the city.
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>> anticipated. >> motion is made and seconded. any questions? public comment? all those in favor say aye? next. >> -- action item. selection of actuarial consultants. >> commissioners, our current contract with kyron expires at the end of may. we have recommended that we retain kyron. they've demonstrated the reporting, the quality of the
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written reports, and the responsiveness to all 30 separate questions that we asked, and may i answer any questions that you have that are not in the sheet? >> i'll make a motion that we recommend to staff to retain kyron. >> second. >> motion has been made and seconded. any questions? any public comment? all those in favor say aye. opposed? next item. [inaudible] >> -- of fiscal year 20-21, department budget. >> good afternoon -- or good evening, commissioners. i will provide just a very high level overview of the budget. first of all, this budget that we're proposing represents a decrease of over 6% decrease from last year's budget, but
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the decrease is due to the fact that we are decreasing the investment management fees that we normally include by $10 million, and as we discussed earlier, it's more of a direction of lower fees by coinvestments as well as we have terminated some managers over the past year. but the two major strategic initiatives included in this budget, one which was presented to the retirement board in january related to the road ahead for us to meet the obligation to have funding for a $40 billion liability associated with the promises that the city has made to the plan participants. so this budget includes all of the new staff that was proposed by the investment division, and
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it was asking for all of them in year one, and it also includes the middle position on the career path, the investment officer position, which we've already done considerable work on. second is one that came out of the funston retreat in 2017. hard to believe it's been three years ago, but it's been three years ago. that was that we create either an external or internal audit function on the operations side of the house. and so over the last two budget cycles, we have gotten approval both from this board as well as the mayor's office and the board of supervisors to create what we're going to call a chief quality assurance director or an auditor. karen and i have been working over a year with a candidate that has built an internal
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audit program in one of our sister plans down in l.a., and we've been talking to him for over a year. and two weeks ago, we got a verbal commitment that he will accept the offer to come up and build out the plan here. it's an operational risk management as well as quality insurance and there's going to be some training. we've asked him what kind of staff he needs. he's identified the type of skill set, so there are four new positions in the retirement services division. they are quality auditors positions as well as an administrative or a management assistant position. so this is a very unusual budget. i've never presented a budget where we've asked for 11 new positions, and so it's going to be a challenge, but i think focusing on those two major initiatives and -- and certainly, we might need to ask for some help from the board members to support us on both
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of those initiatives. not inconsequential is auto enrollme enrollment. i've talked to the board and they've assured us that there's certainly an additional workload involved in managing the auto enrollment, so we are asking for another benefit technician position in that budget, but again, being very sensitive to this budget is supported by participant fees. it is more than offset by the reduction in the city attorney's budget. we generally have to pump up the city attorney's budget when
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we go out for r.f.p. with the idea that if we change negotiations with our custodian, we would not have a lot of auditors. even with the new position and also a promotion position, that would recognize the level of supervision that mary ann is exercising in the department. the other issue i will touch on -- two other issues that i'll touch on, we have included in this budget an additional attorney resource, a deputy city attorney that would be working on the benefit side as a resource to help us get more on top of the disability. i believe a review of
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disability applications with the idea that we need to -- this is a workload that is not, you know, necessarily having a high priority at this point. and so we have that included. and also, i believe, there's a 15% increase in the outside legal work order with the city attorney based on the -- on the idea that as we go into more direct investments and coinvestments, we don't believe the contracting and the paper review is going to get less or less complicated, and so we want to make sure we have sufficient resources to do that. and so last but not least, and i don't mean this to be controversial, i've included in the administration budget a $630,000 increase in the lease revenues that would be available for us to use. we have certainly run out of
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space here at 11:45. over the last two years we have run out of space on two floors, and the tenth floor is available on this building, so i've started preliminary discussions as to what it would cost should we decide to lease the tenth floor for the remainder of our lease here in this building, which runs through 2024, and that would be a way for us to have the space that we need as we go forward into the next two budget years. and so that is a $630,000 allocation. that's just an estimate from the building as to what they would charge us to rent that space. that rate is based on what they
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most recently negotiated with the city with the law library, and it is higher than what we're sitting at today. but the rules say they would have the same term of the lease. we're paying $44 a square foot for the space we have in this building, but that was a lease we entered into back in 2014. this represents roughly $60 a square foot for the additional space on the 10th floor. and with that, i would be happy to answer any questions. >> questions? comments? >> i have a couple comment questions -- okay. i take it that finance committee went through all this stuff already and voted with or
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without any changes? >> right, with -- >> no, there was no -- there was no finance committee. >> no. >> okay. you guys didn't talk about it. >> no. there's been no -- there's been no operations over -- we don't have a finance committee anymore. >> well, whatever the name of the committee is, not meant to have this. i mean, this is -- >> being okay. if you didn't meet, you didn't meet. first observation, the plan increase in the deferred compensation program, basically, by hiring another person, that's great. it was done without increasing fees. there's an important things, since the members do pay attention to the fees that they are paying. secondly, you made the statement about it's the $9 million reduction in fees in the investment division.
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the way the budget works, and how the cash flow works, that number may be true, but our overall fees are not really going down. >> budgeted fees are. >> but only because we have to do other fee reporting, and how we've decided to hire managers with higher fees and other performances, how that's done, the way they are structured, it doesn't show up as a cash flow from us, but in fact it affects our net performance. >> i just want to get what you said not to be misinterpreted. >> and certainly, we did not reduce the investment management fees to go forward. i think it's great to say, you know, this represents overall, you know, over a 6% reduction in approved budget from last year, but we've always left probably 20 to $25 million in investment management fees in
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the trust as unexpended probably on an ongoing basis, but we have to budget for it in the event that assets grow or we change manager. >> but people who say the fees, hey, they went up, not down, when we thought they would go down. >> we report out every year in our annual report what our actual investment expenses were, meaning expenditures versus budget. we don't show that necessarily in the annual report, but we report, like you say, did the fees that we paid for investment management go up from year to year? that is part of the annual report that will be coming to you, i believe, next month, so you can see that on the only financial statement. >> well, then how do we report fees in a commingled fund where they're not taken off the top? >> well, a budget doesn't include any payment.
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the budget is just for invoices that we receive that we have to process. >> right. >> and so you're absolutely right, on the private equities side, on commingled investments, that is not even part of the budget because that's not something that we have to pay via an invoice. >> yeah. i just want to make it clear so people don't think we're hiding or misrepresenting how the fees work. >> right. >> part two, it's not on the budget, but the issue on rent in this building, please try to find from the august 2014 memo about real estate. we'll write out plans for this. >> president driscoll, this is probably a very limited short-term chance for us to say yes, we're interested in the 10th floor. >> well no -- >> well, but what i'm saying is otherwise, we're going to be looking for space as we grow in another building. as much as we don't want to
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increase our presentation here in this neighborhood or in this building, i think from a practical perspective, we have to plan for it. >> yeah. we thought about not doing it. i just reminded you to ask for the memo. that's what this is about. okay? thank you. >> i've shown you the august memo, but there was never follow up on that. >> it wasn't done -- >> well, no, it was a follow up in an april meeting in a report from art wong related to his idea of what resources we needed to go forward to purchase our own building, so there was a report out to the board, but not as a separate board information. i'll be happy to provide it to you. >> okay. we'll follow up on that. i didn't mean to take us off the budget issue. any further discussion? does this require action? >> so moved. >> motion made by commissioner casciato. is there a second?
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>> i'll second. >> public comment? >> if mr. huish wants more office space, why don't you purchase a building? if you purchased a building, it would have doubled in value by now, and the average rate of retain would be 50%. what's your average rate of return in hedge funds or real estate? >> no further public comment, all those in favor say aye. opposed? next? >> item 25, discussion item. educational presentation on fiduciary duties, part 11, practice. >> i would propose we continue this. the important of the -- >> okay. can you continue this item? >> can we continue this to the
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meeting next week? >> no, there's a full agenda, i believe, for the retreat, is that correct, president driscoll? >> okay. i'm sorry. i asked. >> we'll do it for the march meeting. >> okay. calendar it for the march meeting. hopefully, it won't be as long of a meeting. although it is the performance report. >> we'll have a garage closure in a few minutes across the street. >> yeah. other than that, executive director's report. >> i presented the december dashboard. reminder that the retreat is next wednesday, starting at noon, at nossaman's office. i have to remind you that your form 700 and ethics training is due this year by april 1, 2020. also, i would like to say that darlene has already e-mailed
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you or will e-mail you tomorrow related to the harassment prevention training that is mandatory that all of us complete, and i believe that completion day is april 10 of this year. so it's roughly a two-hour -- i think they require you to stay on-line for two hours. so it's a two-hour on-line course, and the link that carlene sends to -- darlene sends to you will provide the link to get in. i wanted to provide the update on the coronavirus or covid virus, but basically, we've suspended all travel, business travel to china until further noti notice. we are also asking if we have meetings with manager, that we
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get assurances that none of the folks that will be on-site will have travelled to china within the last 30 days, and that we are encouraging staff to conduct their due diligence via skype, zoom, or facetime for the time being until we have more information. and then, there was one other thing, but i forgot -- oh, a request to attend conferences where there's going to be a large group of folks that will be considered on a one-by-one basis to make sure that if it appears there would be a risk of exposure, we might ask people not to go to those conferences. but we have folks here in the department who are expecting children and have, you know, sensitive aging systems, so
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we're trying to be cautious, and these are in line with the guidelines of the city that have evolved as we've gotten more information. but we've been dealing with this for, like, two or three weeks, and i think it should be in your consideration also as you approach conferences you might want to attend. we won't pay for travel to china, so you'll be on your own for that. >> you just popped the idea in my head. could we get a nice certificate and go to all the staff that have had children while they're working, a nice certificate that says thank you for coming to work with your mom or something. >> oh, while they're pregnant? >> yeah. some have had two children, so you'll need two or three
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certificates. [inaudible] >> well, it's been frustrating because as we've called the city and d.p.h., they were not prepared. we thought they would have to be prepared for the plane load of folks, the embassy folks at s.f.o., but the message is we're open for business and we can't restrict people from coming to work. all we can do is encourage them to stay home if they're showing any symptoms. again, from our perspective, we have plenty of managers who want to meet with us who might be from china or might have been traveling in china. the date is february 3. somehow, that's a magical dat anyone who had been there in the last 30 days, before february 3.
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hopefully, everybody understands. we posted the signs all over the building, please make sure you wash your hands often. that's sort of all the information we've gotten from the city actually. that's all i have. >> okay. that report is a discussion item only. public comment? motion to adjourn is in order. >> so moved. >> second? >> second. >> all in favor say aye. meeting's adjourned. thank you very much.
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>> at the meeting will now come to order. welcome to the january 301st special meeting of the joint city school school district and city college select community -- committee. i am supervisor haney, chair of the committee. are there any announcements? >> silence also phones and electronic devices. completed speaker cards and copies of documents will be included as part of the file should be submitted to the clerk

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