approvalofagenda approved 2 approval of …€¦ · approvalofagenda approved 2 approval of minutes...

ACTION SUMMARY

STATE INVESTMENT COUNCIL

August 25, 2015

Item Action $

APPROVALOFAGENDA Approved 2

APPROVAL OF MINUTESJuly 28, 2015 Approved 2

Investment Matters Requiring VoteInvestment Committee Report Reported by Harold Lavender 2Real Estate: Angelo Gordon Core Plus IV Approved 2International Equity: Restructuring Plan Approved 4International Equity: new manager contracts & Approved 4current manager renewalsReal Return: MLP follow on investment Approved 6

INVESTMENT MATTERSSIC Performance Report, TUCS & Monthly Activity Summary Informational 6012015 Real Estate Performance Report Informational 7012015 Real Return Performance Report Informational 7012015 National Private Equity Performance Report Informational 7012015 New Mexico Private Equity Performance Report Informational 8Educational Presentation: Real Assets & Commodities Informational 8Memorandum: NM private equity stock distributions Informational 801 2015 NM Co-Investment fund review Informational 9National Private Equity reporting items Informational 9New Mexico PE Program reporting items Informational 9

STATE INVESTMENT OFFICER’S REPORT Reported by Steve Moise 9

FINANCE MATTERSAudit Committee Report Reported by Peter Frank 10CFO Report Reported by Brent Shipp 10FY17 Appropriation Request Approved 10

GOVERNANCE MATTERSGovernance Committee Report None 10

CLOSING MATTERSOld or New Business 11Next meeting date: 9/22/15 at 9:00 am

PUBLIC COMMENT None 11

EXECUTIVE SESSION Not held 11

MINUTES OF THE

NEW MEXICO STATE INVESTMENT COUNCIL MEETING

Santa Fe, New Mexico

August 25, 2015

1. OPENING MATtERS

a. Roll call and introduction of guests: quorum present

A regular meeting of the New Mexico State Investment Council was called to order by Peter Frank, Vice-Chair on this

date at 9:00 am. in the Governor’s Cabinet Room of the State Capitol Building, Santa Fe, New Mexico. A quorum was

declared:

Members Present:

Mr. Peter Frank, Public Member

Ms. Linda Eitzen, Public Member

Mr. Harold Lavender, Public Member

Mr. Leonard Lee Rawson, Public Member

Mr. John Young, Public Member

Mr. Tim Jennings, Public Member

The Honorable Aubrey Dunn, Commissioner of Public Lands

Mr. Tim Jennings, Public Member

Mr. Scott Smart, Public Member

The Honorable Tim Eichenberg, State Treasurer

Members Absent:

The Honorable Governor Susana Martinez

Dr. Thomas E. Clifford, Secretary of Finance & Administration

Staff and Committee Members Present:

Mr. Steven K. Moise, State lnve5tment Officer

Mr. Vince Smith, Deputy State Investment Officer

Mr. Brent Shipp, Chief Financial Officer

Mr. Charles Wollmann, Director of Communications

Ms. Geraldine Barlow, Director of Real Return

Mr. Wade Franks, Stable Value Director

Mr. Greg Kulka, Director of Private Equity

Ms. Starla Bennett, Director of Public Equity

Mr. Bruce Brown, Deputy General Counsel

Ms. Kern Segell, Executive Assistant, Recorder

Guests Present:

[See Sign-in Sheet.]

State investment Council Meeting: August 25, 2Q15

b. Approval of agenda

Mr. Young moved approval of the agenda, as published. Ms. Eitzen seconded the motion, which passedunanimously by voice vote.

c. Approval of minutes: July 28, 2015

Mr. Rawson commented on the matter noted in the July minutes under NM private equity reporting itemsregarding stock distributions, stating the minutes did not capture the level of concern he articulated at the meeting. Herequested that further attention be accorded to the issue in the minutes. Mr. Moise pointed out that a memoregarding stock distributions was included in the Council’s materials: Item 3G.

Mr. Rawson moved approval of the minutes of July 28, 2015, meeting, amended as suggested. Mr. Lavenderseconded the motion, which passed by voice vote, with Treasurer Eichenberg abstaining, as he was absent in July.

2. INVESTMENT MATtERS: INVESTMENTS REQUIRING VOTE

a. Investment Committee Report (Harold Lavender)

Mr. Lavender reported that the Investment Committee had an extensive meeting, much of which would bepresented to the Council for approval today. He stated that the opportunity for education is becoming one of the moresalient aspects of recent Committee meetings.

b. Vote: Real Estate: Angelo Gordon Core Plus IV (Vince Smith, Geraldine Barlow, & Townsend)

The Townsend Group recommended a commitment of $75 million to Angelo Gordon Core Plus IV (AGCP IV) forthe SIC’s tactical real estate portfolio. Mr. Koch presented the investment, discussing Angelo Gordon’5 successful coreplus fund series and the SIC’s previous commitments to and performance of Funds I, II, and III. AGCP IV targets a $1.0billion fund-raise and will focu5 on the acquisition and turnaround of sub-performing properties utilizing a well-established network of local joint venture operating partners in a broad range of property types. The fund will target a11-12% net IRR, with 7% of that comprised of current income, and the remaining return will be through value-addactivities and appreciation. The fund will seek out investments in the primary markets of the U.S. and selectively in Asiaand Europe. Approximately 20% of the fund’s investments have been pre-specified.

Mr. Koch reviewed the SIC’s total allocation to AG, across all funds, and stated the new investment would bringthe full market value in unfunded exposure to AG to $213 million, or 9.7% of total fund assets, which was well below thepolicy parameter of 35%. Early funds were currently liquidating assets, lessening the total exposure. AGCP IV is anopportunity to continue investing with a manager that has been successful for the SIC.

Angelo Gordon representatives Colleen Casey and Reid Liffmann appeared before the Council to make theirpresentation. Ms. Casey provided a general overview of the firm and discussed Angelo Gordon’s attributes and core plustrack record. Mr. Liffmann gave the Council a summary of its commitments to the AG Core Plus Fund Series and AGRealty Fund VII, including commitment amount, capital called, capital distributed and IRR of each fund.

Mr. Liffmann continued, reviewing market fundamentals, valuations, and opportunities. He emphasized thefirm’s conservative investment principles, modest use of leverage and focus on capital preservation. The AG real estateteam has extensive experience and utilizes an operating partner model. Mr. Liffmann described the specifics of AG’score plus real estate strategy, noting target returns, property and geographical focus, and generation of returns throughcurrent income. Fund terms were reviewed.

2State Investment Council Meeting: August 25, 2015

Mr. Young asked whether previous funds had a similar small allocation to Asia and Europe. Mr. Liffmann repliedthat all fund documents provided for up to 25% to be invested in these areas, but in reality, it has been approximately 8to 10%, and the investments have been additive to returns.

Ms. Eitzen questioned at what valuation will the SIC come into existing properties. Mr. Liffmann responded, atcost.

Treasurer Eichenberg asked how the allocator model used by AG fits into the SIC’s manager approach. Mr. Kochexplained the differences between the allocator and operator models. As an allocator, AG partners with operatingpartners or JVs, rather than directly investing with the operator. The operator approach tends to have a niche focus witha particular mandate. The allocator model offers a more broad-based diversified portfolio, and also provides the abilityto over or under-weight property types or regional exposure, and to react to market macro-fundamentals. Townsendfavors the compliment of both models when constructing a diversified real estate portfolio.

Treasurer Eichenberg questioned the pace with which real estate investments are being made, commenting thatit seemed accelerated. Mr. Koch responded by describing the development and implementation of the SIC’s annual realestate pacing model. The Treasurer also asked whether the policy limit of 35% under one manager was calculated basedon market value, or total commitment. Mr. Koch answered that it is based on market value, but unfunded commitmentsare also considered to ensure the policy parameters are not exceeded in any investment period.

Treasurer Eichenberg inquired whether the correct benchmark was being used for the SIC’s international realestate exposure. Mr. Koch explained that in real estate there was not a strong international benchmark, as both theODCE and N are U.S. based benchmarks, which do not have an international component. The lack of an establishedbenchmark in the international real estate market continues to be discussed among institutional real estate investors.Townsend will provide the SIC quartile rankings against other funds invested similarly.

Treasurer Eichenberg requested clarification on the 75 bps of fee costs, or leakage, incurred with the AGinvestment. Mr. Koch explained that in the allocator model, operators are compensated for their work, and this cost of75bps is taken before the fee becomes a fund level gross return. The fee cost is at the low end of market of what istraditionally paid to operators.

Treasurer Eichenberg asked whether the fund terms ofAGCP IV were industry standard. Mr. Koch replied thatalthough Townsend’s preferences were for shorter fund terms, and extensions only at the advisory board level, thesefund terms were standard market terms. Mr. Liffmann added that AG has a good track record of liquidating assets, withextensions coming into play when there are one or two deals remaining in the fund.

Treasurer Eichenberg inquired as to how the commitment size of $75 million was decided. Ms. Barlow explainedthe pacing plan for the year, and that this fund may be the final closed-end real estate fund for the calendar year. Staffand Townsend look carefully at each real estate strategy — core, core plus and opportunistic - and determine theappropriate commitment size taking into account various factors to ensure exposure in any one particular sector is notover or under-weight, especially in the middle-risk specter of core-plus. Mr. Frank gave a brief historical perspective ofcommitment size, and remarked that the Council is moving towards larger commitments with fewer managers. Mr. Kochstated that between $50 and $125 million is the range of commitment size they recommend for a fund of the SIC’s size,given the commitment schedule and expected distribution of capital.

Mr. Koch discussed with Treasurer Eichenberg the method of value placed on investments. It is typical thattransaction price (cost) is used.

Based upon the recommendation of the Council Investment Committee, the Townsend Group, SIC staff, andgeneral fiduciary oversight of RVK, Mr. Lavender move that the SIC approve a commitment of $75 million to the

3State Investment council Meeting: August 25, 2015

Angelo Gordon Core Plus Realty Fund IV, L.P., subject to and contingent upon New Mexico legal requirements, NewMexico State Investment Council policies, negotiation of final terms and conditions and completion of appropriatepaperwork. Mr. Young seconded the motion, which passed by voice vote, with Commissioner Dunn voting against themotion.

c. Vote: International Equity: Restructuring Plan (Smith, Starla Bennett & RVK)d. Vote: International Equity: new manager contracts & current manager renewals (Smith & Bennett)

[Although the two items above appear as separate items on the agenda, they were discussed together as reflected in theminute below.]

Mr. Smith began the international equity restructuring presentation by recapping the actions taken by theCouncil over the past year beginning with the asset allocation study in August 2014, the passage of the constitutionalamendment removing the 15% international cap in November, followed by the international equity structure study inFebruary, and culminating in today’s recommendations to hire two new international managers, select a smart betaimplementation manager, and select a transition manager. Staff was also looking for approval to renew the contracts forthe SIC’s five existing international equity managers, expiring in 2016, as the international equity restructuring plan isviewed as a complementary package.

Joe Ledgerwood, from RVK, reviewed the RFP process undertaken to select new international equity andemerging market managers, the results of which, Neuberger Berman and William Blair & Company respectively, arepresented to the Council today for approval. Mr. Ledgerwood explained the effects on the portfolio of removal the 15%international cap and compared the current allocations to international and emerging markets to the potentialallocations.

Mr. Lavender, as a member of the RFP evaluation committee, spoke of the thorough vetting process. Both theevaluation committee and the CIC were unanimously in favor of Neuberger Berman and William Blair & Company.

Paul Sauer and Brian Faleiro were present on behalf of Neuberger Berman to introduce the firm to the Council.Mr. Sauer began with a brief overview and the capabilities of Neuberger Berman. Mr. Faleiro outlined the internationalequity all cap strategy of the firm, which uses a fundamental bottom-up process and specific criteria to selectinvestments, and he reviewed Neuberger Berman’s risk-adjusted returns and MSCI EAFE benchmark. The firm’s portfolioteam was described, and Mr. Faleiro emphasized the international experience and breadth of the team. He furtherdetailed the investment screening process which underscores the firm’s strategic analysis and risk management.

Treasurer Eichenberg remarked on the timing of increased international exposure, and Mr. Ledgerwoodremarked on current global opportunities, and stated that specific timing was less important than the broader structureof the portfolio for long-term multigenerational funds like the SIC.

William Blair & Company representatives, Jeff Urbina and Wally Fikri, made their presentation to the Council.Mr. Fikri introduced the firm and described the values and tenure of the William Blair team. Mr. Urbina discussed thefirm’s strategy, integrated investment sourcing process, and methods employed to create value and wealth forshareholders. In the emerging market sector William Blair looks for industry leaders in both their local geography andglobal industries. Business fundamentals, sustainable growth, good management, transparency, and corporategovernance are closely analyzed.

The current emerging market environment was assessed by Mr. Urbina, and he discussed the opportunities,risks, and anticipated performance and characteristics of the portfolio..

4State Investment council Meeting: August 25, 2015

Ms. Eitzen asked about turnover, and Mr. Urbina responded that turnover is typically 80 to 100%, with anaverage eighteen month holding period for the average stock. She also asked about country concentration. Mr. Urbinaexplained the limits on regional, country, and sector exposure.

Starla Bennett, Director of Public Equity, continued the presentation on the overall international equityrestructuring plan, detailing proposed target geographical exposure, active/passive split, up market and down marketcapture ratio, and estimated fee savings. She reviewed the proposed international equity portfolio including the additionof two smart beta strategies, an allocation to Neuberger Berman, and an allocation to William Blair. Ms. Bennettsummarized that the target portfolio would increase excess returns, decrease volatility and offer improvement in theinformation ratio.

Based upon the recommendation of the Council Investment Committee, RVK and SIC staff, Mr. Lavendermoved that the State Investment Council restructure the international equity portfolio under terms and conditionsreviewed and discussed by the Council today. Mr. Frank seconded the motion.

Commissioner Dunn commented on his overall difference of opinion on the international investments the SIChas been making, remarking that he voted against the Constitutional Amendment removing the internationallimitations, and that he believed the SIC was investing in markets that will make us less competitive as a state andcountry. He will vote against the restructuring of the international portfolio, as well as vote against the new and existingcontracts.

A vote was taken, the motion passed by voice vote, with Commi5sioner Dunn and Treasurer Eichenberg votingagainst the motion.

Based upon the recommendation of the Council Investment Committee, RVK and SIC staff, Mr. Lavendermoved that the State Investment Council approve individually the contract renewal or hiring of each internationalequity manager contract below, under terms and conditions reviewed and discussed by the Council today, subject toand contingent upon New Mexico legal requirements, New Mexico State Investment Council policies, negotiation offinal terms and conditions and completion of appropriate paperwork.

1. Blackrock Institutional Trust Co (International Emerging Markets)The motion passed by voice vote, with Commissioner Dunn voting against.

2. Templeton Investment Counsel LLCThe motion passed by voice vote, with Commissioner Dunn voting against.

3. LSV Asset ManagementThe motion passed by voice vote, with Commissioner Dunn voting against.

Mr. Rawson brought up for discussion the generation of excess returns, and whether these returns supportmanagement fees, specifically for MFS. Mr. Smith responded that these investments must be viewed over a full marketcycle, rather than as a snapshot in time within a shorter time period. It is staff’s opinion that all managers wereperforming their specific role within the portfolio, and evaluation of managers is continual.

The Council discussed the length of the contracts, and whether all contracts approved will have the sametermination date. The consensus was to have all contracts terminate in four years, in 2019. This would mean four yearcontracts for Neuberger Berman and William Blair, and three year contract extensions for existing managers.

4. MFS Investment ManagementThe motion passed by voice vote, with Commissioner Dunn voting against.


5. T. Rowe Price Associates, Inc.The motion passed by voice vote, with Commissioner Dunn voting against.

6. Neuberger Berman LLCThe motion passed by voice vote, with Commissioner Dunn voting against.

7. William Blair & Co. LLCThe motion passed by voice vote, with Commissioner Dunn voting against.

Ms. Bennett presented to the Council staff and RVK’s analysis of transition managers and smart betaimplementation managers, reviewing efficiencies, resources, and capabilities.

8. Blackrock Institutional Trust Co (Smart Beta Implementation Manager)The motion passed by voice vote, with Commissioner Dunn voting against.

9. Citi Global Markets Inc. (Transition Manager)The motion passed by voice vote, with Commissioner Dunn voting against.

e. Vote: Real Return: MLP follow on investment (Smith & Barlow)

Mr. Smith presented staff’s recommendation of an additional commitment of up to $150 million to Harvest FundAdvisors for the MLP strategy, a component of the Real Return portfolio. In April 2015, the Council approved a $300million investment in Master Limited Partnership (MLP) assets and selected manager Harvest Fund Advisors to managethe portfolio. Mr. Smith reviewed the current market environment for these securities, and although MLP revenuestreams are not particularly correlated with the prices of the commodities that they transport and store, negativesentiment regarding the securities developed in conjunction with the fall in oil prices, and prices corrected significantly.Because of this, Mr. Smith believes that presently MLPs offer an excellent value and opportunity, and staff wasrequesting an up to an additional $150 million to add to the SIC’s MLP position. Mr. Smith described how tactically theadditional commitment would be deployed, putting $100 million to work immediately.

Ms. Eitzen expressed her support of the additional commitment. Mr. Young commented on the PIE ratio, as wellas the spread over 10-year yields, and stated that this was a good time to put money to work in this sector.

Based upon the recommendation of the Council Investment Committee and SIC staff, Mr. Lavender movedthat the State Investment Council approve a follow-on commitment of up to $150 million in the MLP separate accountwith Harvest Fund Advisors LLC, subject and contingent upon New Mexico legal requirements, New Mexico StateInvestment Council policies, negotiation of final terms and conditions and completion of appropriate paperwork. Ms.Eitzen seconded the motion, which passed unanimously by voice vote.

3. Investment Matters: Reporting, Investment Performance & Market Updates

Chairman Frank commented that there was a great deal of performance reporting items on the agenda, andasked that the reports be kept brief.

a. SIC Performance Report, TUCS, & Monthly Activity Summary

Marcia Beard presented the quarterly performance report for the second quarter, ended June 30, 2015. Severaladditions had been made to the quarterly report at the Council’s request, including a written executive summary. Shebegan with a capital markets review as of June 30, remarking on significant market activity.


Total fund allocation was reviewed and Ms. Beard commented on the asset allocation graph which now containsadditional information on minimum and maximum ranges for asset class allocation, as well as current, interim target,and long-term target data.

Ms. Beard reviewed investment policy objectives, short-term performance attribution, performance relative topeers, LGPF policy index performance, among other total fund performance measurements. Performance by asset classwas examined, and Ms. Beard pointed out the new significant event information now included on each asset class detailpage.

Chairman Frank commented on the improvements in the report and the tremendous amount of data included.Ms. Eitzen concurred.

b. Qi 2015 Real Estate Performance Report (Townsend)

Jack Koch and Seth Marcus, on behalf of Townsend, led the Council through the 2015 first quarter real estatereport. Mr. Marcus reported that the SIC’s current real estate portfolio is 6.7% of total fund assets, moving towards the10% real estate allocation goal and continuing to provide positive performance. As of 1015, the SIC outperforms theNFI-ODCE Index over the one-year, and three-year periods. Net underperformance over the quarter and three-yearperiods was primarily due to underperformance by the legacy portfolio, valuation timing, as well as a strengthening USDollar compared to other major currencies.

Mr. Marcus discussed historical and projected commitments, portfolio construction, and the rebalancing of thereal estate portfolio since 2011. In light of recent Council discussions on international exposure, Townsend has added anew chart to their report, showing U.S. versus international real estate exposure. International exposure on a fundedbasis is 6.6%, and 14.1% on a funded plus committed basis.

The legacy investments of Trammell Crow were reviewed on the request of Mr. Rawson. Mr. Rawson requestedmore documentation on legacy investments, particularly original commitments, returns, and losses.

c. Qi 2015 Real Return Performance Report (Townsend)

Mr. Marcus began by commenting that the SIC’s real return portfolio is still in an early implementation stage,most funds are in the investment period and only a small portion of the SIC’s committed capital has been called.

The SIC’s current target allocation to real assets is 9%, however as of the end of the first quarter the marketvalue of the SIC’s real assets represented only 1.7% of total assets. When unfunded commitments are included, thisnumber increases to approximately 7.1%. Since the Council began investing in real assets in 2011, and through 2015,approximately $1.5 billion across 21 funds has been committed, with a significant dollar amount of that yet unfunded.

Short term performance of the overall portfolio was impacted by fluctuations in energy prices during the firstquarter. Energy investments currently represent approximately 40% of the portfolio. Longer term performance remainsstrong, generating 10.3% over the three year period and 20% since inception.

Mr. Marcus reviewed pacing and commitments, strategy specific performance, sector diversification, andgeographic diversification.

ci. Qi 2015 National Private Equity Performance Report lIP Capital)

Richard Pugmire, LP Capital, led the Council through the first quarter national private equity report. Recommented that since inception of the program in 1988, the SIC has contributed $2.9 billion to the program, received$2.8 billion back in distributions, and currently has $1.4 billion of private equity assets under management. There has


been an 11.4% net IRR since inception. Quarter-over-quarter PE net asset value has increased $21.5 million, andcontributions continue to outpaced distributions.

Mr. Pugmire reviewed performance by vintage years; including vintage year 2ollwhich was tracking in the topquartile against the PE benchmarks on both a net IRR and a net multiple basis. Public market equivalent performancewas also analyzed.

e. Qi 2015 New Mexico Private Equity Performance Report (Sun Mountain)

Lee Rand, from Sun Mountain, highlighted several items from the Qi NM private equity report for the Council.Mr. Rand referred to the page on performance data, reminding the Council that they had requested that performancebe bifurcated into two segments: the first ten years when the focus of NM private equity was economic development,and 2004 to the present, where the program’s focus is on financial returns. Since the program has switched its focus tofinancial returns, performance has increased markedly, and just as significantly, outside capital has been attracted toNM. $254 million in capital has been deployed in the program, representing 5.4% of the STPF. 72% of vintages since2004 have performed above median as compared to the national venture capital benchmark.

Mr. Rand remarked on the economic impact of the program, and stated that because of an investmentmultiplier effect, calculated at 6.2x, the program has a bigger impact than the dollar amount suggests. Third partyverification of the total impact is being undertaken. Mr. Smart commented on expanding the data currently reporting ontotal current full-time jobs to reflect total jobs created since the inception of the program.

The NM private equity program is well-diversified across industries and Mr. Rand made brief comments on thepacing plan and future potential investments.

Chairman Frank brought up the matter of the statutory constraints within the NM private equity program. Thelegislative working group has discussed the matter and requested that Sun Mountain examine the statute and providecomments and suggestions for the legislative group’s consideration.

f. Educational Presentation: Real Assets and Commodities

[Informational item]

g. Memorandum: NM Private Equity Stock Distributions

In response to the Council’s inquiries at the last meeting, Greg Kulka, Director of Private Equity, hadprepared a memo regarding the matter of stock distributions. Chairman Frank elucidated the circumstances, describingthe ownership of assets through managers, and when liquidated, in limited cases, the SIC receives stock distributions,rather than cash. Mr. Frank emphasized that this does not necessarily imply a reduction in return. Mr. Kulka explainedthat the majority of these distributions are publicly traded stock, are valued as of the trading date, and the SIC’s policyhas been to sell the shares as soon as practical after the distribution date. Infrequently, the SIC may receive privatestock that cannot be sold, and staff and consultants are investigating ways in which the private stock would be combinedin a portfolio that could be marketed, albeit at a discount to their carry value.

Mr. Rawson referred to the previous month’s NMPE capital calls and distributions report, questioning inparticular, the stock distributions listed for Holochip Corporation, Comet Solutions, Capstone Therapeutics and VitalTherapies. His concern was that the SIC has received over $500,000 in stock distributions, not cash, from small nonperforming private equity investments that cannot be disposed of. Mr. Kulka clarified that both Capstone and VitalTherapies were listed on Nasdaq and therefore will be sold. Holochip is a private company and discussions are underway for them to repurchase the shares.


Mr. Rand further explained that these investments in companies are made at the fund level, and these are notdirect investments made by Sun Mountain. In addition, all the distributions under scrutiny where made prior to theestablishment of Sun Mountain as consultant to the SIC.

The Council discussed the mechanisms of liquidation and value of bundling the non-tradable stock.Commissioner Dunn commented that in his experience minority interests in privately held companies have very little tono value. The Council recommended to staff to dispose of stock distributions as quickly as possible.

h. Qi 2015 NM Co-investment Fund Review


National Private Equity Reporting Items


j. New Mexico PE Program Reporting Items


4. STATE INVESTMENT OFFICER’S REPORT (Steve Moise)

Investment Matters: The current intra-month NAy, as reported by JP Morgan, is $19.471B. Distributions to theState over the past twelve months from LGPF and STPF have been $790.SM.

IPOC has requested the SIC, ERB, and PERA determine a method to uniformly report investment fees. Meetingsare taking place, and the three entities will report to IPOC on September 15. Council Members were invited to attendthe IPOC meeting.

The international investment summary requested by the Council had requested last month had beendistributed. Mr. Moise offered to answer questions or provide further detail if needed.

In response to a request by the Council, an investment manager list was provided in their meeting materials.

On September23 the CEO of Brookfield, Bruce Flatt, will be at the SIC office for a presentation on real return.Mr. Moise invited the Council and Committee Members to attend. Mr. Flatt’s presentation is scheduled for 10:30 A.M.

Council Matters: The September Audit Committee meeting time has been changed to 2:00 P.M. on September21.

Calendars for the remaining months of 2015, as well as the Council’s 2016 meeting calendar had beendistributed. The November/December Council meeting date was confirmed to be November 30.

As discussed earlier, enhancements to the NM private equity program are being examined, and a report will bemade to the CIC and the Council in September.

Mr. Shipp will present the SIC’s FY17 appropriation request during his financial report.

External relations: Staff will be speaking to NMOGA on October 6.


Mr. Moise commented that the SIC currently has eighteen clients, which hold a total of thirty-five accounts. Anupdated WA with the Public School Insurance Authority has been signed and additional investments by PSIA areanticipated. JPA discussions continue with Clovis Library’s Carver Trust and Clovis Community College to invest theirendowment funds. MFA has requested that a core bonds pool be made available to them; currently only a core-pluspool is available. If this takes place, the pool will be offered to all SIC clients. NMHU will be making adjustments to theirinvestments, and a meeting is scheduled for next week.

Mr. Moise asked the Council to consider whether a policy requiring a minimum investment amount should beestablished for clients, citing the time and work involved at no additional cost to clients over and above the expenses.The Council discussed the pros and cons of setting limits, political implications, and the economics and practicalities ofmanaging funds for clients. Staff will examine the matter and provide the Council with commentary.

5. FINANCE MAUERS: DISCUSSION

a. Audit Committee Report (Peter Frank)

Mr. Frank reported that the Audit Committee had a productive meeting the day prior. Among matters coveredwere:

• The meeting served as the required entrance conference between the Committee and CLA for the FY 15 externalaudit;

• REUW continues their internal audit work on performance reporting;• The FY17 appropriation request was reviewed; and• Staff presented a newly developed contract management system, as part of the SIC’s compliance program.

b. CFO report (Brent Shipp)

Mr. Shipp reviewed the FY17 appropriation request, due to DFA September 1, which had been distributed tothe Council. The appropriation request shows s a $2.6 million budget decline from the previous year; assumptions formanagement fees had been reduced to reflect current market conditions, and increased reallocations to smart beta andother passive strategies provided additional savings. Mr. Shipp reviewed the fee projector developed to estimateexternal manager fees. Fees in the amount of $41,509.585 have been estimated for FY17, and Mr. Shipp remarked thatbased upon his inputs, the model reflected a 68% confidence level, or certainty, that the $41 million dollar request willbe sufficient to cover costs. The Audit Committee, at its meeting, recommended that the model’s confidence level ofbudget sufficiency be increased to 95%, by adjusting the standard deviation input to 2x, which added $1.7 million to thepresented budget request. Any unspent dollars would revert back to the permanent funds. Mr. Smart commented onthe substantial decrease in employee liability insurance under the employee benefit category. Mr. Shipp explained thatthis expense is an assessment for liability coverage, determined by GSD which had been significantly reduced for FY 17.

Based upon the recommendation of the Audit Committee, Commissioner Dunn moved that the SIC approvethe FY17 appropriation request, incorporating investment management fees calculated at two standard deviations.Mr. Lavender seconded the motion, which passed unanimously by voice vote.

6. GOVERNANCE MATTERS: DISCUSSION

a. Governance Committee Report

No report.

7. CLOSING MATTERS


a. Old or new business

Ms. Eitzen commented that the Sun Mountain contract, as consultant for New Mexico private equity, will expireon December 1, 2015. The Council briefly discussed whether it was their preference to issue an RFP. The Councildecided that an evaluation committee would be appropriate, given the limited responses to RFPs in the past. Ms.Eitzen and Commissioner Dunn volunteered to participate on the evaluation committee.

Treasurer Eichenberg raised the matter of Mr. Moise’s evaluation. Chairman Frank explained the annual processand documentation of goals and accomplishments. Treasurer Eichenberg addressed the changes in 510 language inSB 174. It was clarified that it was only a language change, which now reads “The state investment officer shall serveat the will of the Council.” Treasurer Eichenberg requested copies of the accomplishments and goals memos.

The Governance Committee will review the process for the selection of vice-chair and committee assignments.

b. Next SIC meeting date: Tuesday, September 22, 9:00 am, Santa Fe, NM

8. PUBLIC COMMENT PERIOD

None.

9. VOTE TO ENTER EXECUTIVE SESSION PURSUANT TO NMSA. 1978

No Executive Session held.

10. ADJOURNMENT

As SIC business was completed, Mr. Lavender moved to adjourn. Mr. Frank seconded the motion and themeeting was adjourned at 12:20 p.m.

Approved:

Peter Frank, Vice-chair


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