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PPIDX™ Private Placement Bond Index

A Proposal for the Creation of a new Index for Private Placement Corporate Bonds

Presentation to PPIA

January 2015

a Sagamore Advisors, Inc. & initiative

PPIDX™ – Goals and Objectives

Provide a quantifiable investment performance index that could be used to compare returns in private corporate bonds with those of other investment asset classes, such as public bonds, commercial mortgages or equities; and

Serve as a benchmark for privately held corporate bonds so that an owner of these instruments could compare its investment performance with that of an aggregate private placement portfolio.

January 2015 Distribution reserved - PPIA Forum 2

PPIDX™ – Benchmarking Criteria

No comparative performance data is specifically available for private placement corporate bonds

Inability to demonstrate investment value added for the private corporate bond asset class against other fixed income investments

Need to assess the impact of strategic decisions, i.e. asset allocation and individual asset selection with a comparable and robust benchmark

Attribution analysis must be available to determine factors driving performance as well as measure their contributions


PPIDX™– Total Return Index as Benchmark

Total return captures both effective yield income and market value changes, while cash yield captures only coupon income returns

Total return takes into account realized and unrealized capital gains

Total return provides a more consistent basis for comparison against other fixed income asset classes

Modified Dietz formula:• ((EOP mktval–BOP mktval) + flows)/(BOP mktval+time wtd flows)


PPIDX™– Market Values

Market values for each security are determined by each PPIDX Participant and reflect its expert staff’s evaluation of risk rating and pricing based on on-going internal and/or third party research and surveillance

PPIDX Participants holding the same security may therefore differ in the final internal market value for a given security held by multiple Participants

The proposed final price of any security held by multiple Participants will be the market value weighted average price across all the PPIDX Participants. This value, automatically calculated within the aggregate index, should be used within all attribution analyses. As the number of Participants grows, this aggregate valuation becomes more refined.

All such analysis and disclosure of aggregate values for common securities will be subject to strict antitrust requirements


PPIDX™ Applications– Uses of the Index

Performance Measurement: Credit risk of private corporate bonds vs. other asset

classes Portfolio allocation vs. other asset classes Asset allocation using attribution analysis Total return peer group comparisons Total return for incentive compensation


PPIDX™ – Benefits to Participants

Asset allocation, total return, new investment yield could be evaluated within such an index with the collection of comprehensive asset level periodic data (quarterly)

A private corporate bond index based on market values would reflect the true economic value of the assets, as long term total return performance incorporates all economic factors


PPIDX™ – Benefits to Participants (cont.)

Attribution analysis (industry, country, duration, risk rating, internal for privates or external if available) would show portfolio positioning relative to the industry (participants in the study or smaller peer groups within that overall group) and break performance into sector allocation and selection performance effects. The analysis will reflect the duration effect on returns. Attribution by components of return would also inform the comparative analysis.



Origination yields and new commitment spreads could be measured on a standardized basis against a common curve

Outlier screening and ordinal/percentile ranking would add to the understanding of competitive position and the effectiveness of an investment strategy.

Third party investor efforts would be enhanced by the ability to produce benchmarks for private placement returns.



Relative performance could be included as part of overall compensation over the longer time horizon, along with other factors. Long term commitment would be essential.

Data could be pulled from existing systems used internally already so reporting should not be burdensome.

Initial collection of data would seek to load at least five years of data on start up so the long term performance of the index would be available immediately, allowing PD and LGD to begin to be captured



Third party data manager role would assure confidentiality and compliance with applicable antitrust requirements (for insurance companies) as to disclosure of results only where the aggregate results do not permit identification of any individual participant to any other participant. Individual participant data would be validated by each participant before compilation of the aggregate index for the period to assure high data quality.

Returns on book and on par value would also be included in the periodic reporting

Index construction and maintenance costs would be shared among participants


PPIDX™ – Confidentiality and Antitrust Guidelines for Insurance Companies

Collection and analysis of competitively-sensitive data is managed by an independent third party and not by any Participant.

Competitively-sensitive data collected is at least two months old.

Any reporting matrix must include at least four Participants and no one Participant may dominate to the extent of 50% or more of the data within a reporting matrix; any matrix not meeting this criteria will not be reported

Any PPIDX comparative report shall be tailored to the individual Participant, and information about other Participants aggregated so that no Participant receives unaggregated data regarding any other Participant. This requires (at a minimum) that the data be reported so that it is not linked with specifically identifiable companies (although Participants in the study may be identified).


PPIDX™ – Sample Index and Attribution Reports

Sample five year index for the PPIDX Participant and PPIDX Aggregate. Geometric returns for three year, five year and cumulative returns. Rolling four quarters total return and rolling four quarters income return, with rolling four price return set to rolling four total return - rolling four income return to avoid cross product.

Rolling four is ((1+r1)*(1+r2)*(1+r3)*(1+r4))-1 Three year return from cumulative index latest 12 quarters to

1/3 root; five year latest 20 quarters to 1/5 root; cumulative annual total period to root of number of quarters/4

Sample nominal quarterly attribution by rating class where comparative performance is decomposed into sector allocation and selection components such that these total the excess return for the participant.

Three sample reports follow (all dummy data)


PPIDX™ – Sample Index Report - Aggregate


PPIDX™ – Sample Index Report - Participant


PPIDX™ – Sample Attribution by Rating Class


PPIDX, Inc. will own and market the data, making only aggregated data available to parties other than Participants who will have access to extensive attribution analysis and a set of standard reports and dashboard, forms of which will be determined by Participant needs

Sponsors of PPIDX are: OTCFin

• Founded in 1990, OTCFin is a financial and technology consulting firm that provides investment decision-support solutions to clients worldwide, including insurance companies, asset managers, pension funds, hedge funds and fund of hedge funds.

• OTCFin’s PATOne® platform which includes a Data Management framework and its financial data specialists will support the production of the PPIDX.

PPIDX™ – Sponsors


Sagamore Advisors, Inc.• Founded in 1989, Sagamore developed the prototype

for the LifeComps Commercial Mortgage Index in 1995 and maintains the index and performs return and performance analysis under contract with LifeComps for the last 18 years

• Sagamore was the consultant to the Intercompany Investment Performance Study (IIPS) a cross company, cross asset class study during the period 1999 though 2008 when the study ended.

PPIDX™ – Sponsors (cont.)


LifeComps background - Sagamore Advisors, Inc.• LifeComps was initiated in 1996 after an intensive

planning phase by five founding life companies• Created to become a benchmark for commercial real

estate mortgages based on real transactions• Currently $97 billion principal balance with 4,800 U.S.

loans of all major property types from eight LifeComps Participants: Allstate Life, CIGNA, Equitable, John Hancock, Northwestern Mutual, Principal Financial, Prudential, and TIAA

• 21,000 loans for more than $270 billion have been in the database since its inception generating 3.4 million transactions in the database

• www.lifecomps.com for returns and report details

PPIDX™ – Sponsors (cont.)


http://www.lifecomps.com/

Targeted audience: 10 participants minimum representing not less than 25% market share

Prototyping fee: $250,000 fixed fee – to be shared by the group of participants

Production and maintenance Fees per Participant :• One time On-Boarding and Go to Production fee : $25,000

including load of all historical data• Yearly Annual maintenance $25,000 including quarterly

load of data sets and production of reports Participant Responsibilities:

• Data must be submitted in accordance with the data specifications

• Participants must pay fees in a timely manner• Participants should be actively engaged in PPIDX

meetings, calls, and committees

PPIDX™ – Participation


PPIDX™ – Data Workflow

Insurance Companies Private Placement groups

PPIDX Reports

REPORTING & Data Sets

DATA INTEGRATION

QUALITY CHECKS

PPIDX CENTRAL

DATAWAREHOUSE

Aggregation Rule Engine

OP

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AT

ION

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PPIDX - Aggregated Data Sets

OTCFin’s PATOne® Data Management platform is used to source, check and store all required Private Placement data as well as perform the calculations and produce the PPIDX outputs data


PPIDX™ - Data Repository and Security

Proven, Robust, and Scalable Technology:• Extensive data types coverage: Security master,

hierarchy, benchmarks and portfolios holdings, transactions, market data, analytics, market/credit risk and performance metrics, etc.

• Time Intelligence: Stores time-series data

• Golden Copy: Ability to define hierarchy of data sources to produce a Golden Copy of data as well as full audit trail capability

50,000

Unique Securities

across all asset classes

30,000

Securities with FI sensitivies,

risk & perf metrics

processed daily

400,000+

Positions

4,000

Funds & Sleeves for Traditional & Alternative managers


PPIDX™ – Contact us for next steps

Next Steps and timeline Introduction of the initiative to target contributing members -

Current Confirmation of an initial founding membership of 10

contributing members – 03 2015 Launch and first steering committee – 4 2015 Finalizing of the Data requirement and Prototype– 6 2015 Data contribution (specified formats) from each member – 09

2015 Release of the first PPIDX with 5 year historical data – end of

2015


1 ppidx™ private placement bond index a proposal for the creation of a new index for private...

Documents

ppidx total return index

asset classes asset

participants asset allocation

investment asset classes

ppidx benefits

ppidx applications

ppidx goals

ppia forum