Section_J_Attachment_2_Technical_Approach.docx

VOLUME 2 - PHASE 2 - TECHNICAL PROPOSAL

· Factor 1- TECHNICAL APPROACH

PLEASE RESPOND TO EACH OF THE QUESTIONS IN THE

FORMAT BELOW

A. INVESTMENT PHILOSOPHY

1. Describe your investment philosophy, including your basic investment beliefs and assumptions reflected in your investment strategy. Please discuss your views about market efficiency in the International Equity (MSCI EAFE) sector.

2. Why do you believe this philosophy will be successful in the future? Provide any evidence or research that supports this belief.

3. Describe your investment strategy (e.g., bottom-up, top-down, fundamental, quantitative, etc.) in detail, the performance objectives the strategy seeks to achieve, the benchmark against which the strategy has historically been managed against, and the benchmark with the highest correlation to the 1, 3 and 5 year performance record of the strategy.

4. Explain how you earn excess return. Describe the unique competencies of your firm. What are the sources of value-added performance (e.g., security selection, sector selection, geographic exposure, market timing, information advantage, etc.) of this strategy? What is your expected excess return over the MSCI EAFE Index?

5. Describe the circumstances or market conditions that would favor the prospective return, on both a relative and absolute basis, of your investment strategy. Under what conditions would you expect diminished prospective return potential for your investment strategy, and how would you position your portfolio in such an environment?

B. INVESTMENT PROCESS

1. Describe how you source investment ideas:

a. What is the universe of securities considered for investment? Are there any non-benchmark areas that you normally include in your investable universe or benchmark areas that you normally exclude?

b. What is the fund’s market capitalization focus?

c. What securities do you exclude from the investment universe (e.g., what is the market cap or average daily volume that is too small to invest in)? What sectors or industries do you exclude?

d. Describe how you generate investment ideas and what sources are used. Do you identify major secular trends to guide the search process? What proportion of total investment ideas are identified internally? To what extent do you use external sources to generate investment ideas and, if so, what are those sources?

e. Describe any quantitative screening used, the factors screened, and why those factors are considered important in identifying superior investments.

2. Describe your investment research process:

a. What are the specific purposes of internal research activities (e.g., confirm intrinsic value, estimate free cash flow, estimate total expected return, perform stress tests on cash flow, etc.)?

b. Describe the structure and organization of your firm’s research capability. Are the research analysts centralized or dedicated to this mandate or team? Do portfolio managers conduct research? If research coverage is specialized, please indicate the segregation of coverage within the team. State the location(s) where such research is carried out and what specific research is conducted at each location. Please include biographies for each member of your research team within the staffing section of the RFP.

c. What research activities (e.g., rigorous financial analysis, company visits, market analysis, etc.) are conducted to evaluate investment ideas? Please be specific. What output is produced (e.g., investment reports, financial forecast spreadsheets, occupancy models, etc.)? Is a detailed financial model prepared and updated for each investment candidate and portfolio company? Please provide a representative sample of your research product.

d. How is research disseminated and evaluated? Are there recurring meetings to review investment recommendations or is the process more ad hoc and fluid? What recurring meetings/disciplines support the investment process?

e. Does your research process incorporate top-down macroeconomic information used to determine portfolio positioning or factor exposure such as beta, sector, style, inflation sensitivity, interest rate sensitivity, or size? If so, please describe.

i. What data sources do you use to inform country, sector or style weighting or inflation or interest rate sensitivity?

ii. What is your comparative advantage in interpreting this Macro information?

iii. How do you evaluate the effectiveness of your Macro calls in your attribution?

f. Describe how you cover your investable universe. How is ongoing monitoring conducted once invested?

g. If your strategy relies on quantitative models or screens to generate research ideas, alpha signals or to assist in portfolio construction, please answer the following questions concerning data collection (if your process does not use quantitative models or screens please skip this question):

i. What data sources do you rely on for 1) financial data; 2) company-specific information; 3) market valuation tools (e.g. HOLT); 4) market technicals (e.g. price momentum, STARMINE for consensus estimates); 5) other investment data such as bond prices or underlying derivatives; 6) other (e.g. S&P rankings)?

ii. Are you accessing proprietary data not available to the outside public?

iii. Please articulate what makes your information gathering process unique relative to other strategies that rely on quantitative models.

iv. What kind of back-end checks do you incorporate to ascertain the quality and the meaningfulness of data?

h. Describe the major investment research and technology initiatives implemented in the past three years. How did these initiatives enhance your firm’s capabilities?

i. Describe how the firm evaluates its internal investment research effort and ensures consistent and uniform adherence to high due diligence standards by all its analysts. Describe how the firm achieves and maintains an information advantage through its research effort.

3. Describe your security selection and divestment process.

a. Describe the decision-making process for the purchase of a security. Who is involved in considering the security for purchase? What information is considered? Is technical analysis considered? What criteria must be satisfied to purchase a security? Who makes the final decision to invest in or reject a proposed investment?

b. Describe the decision-making process for the sale of a portfolio holding. Who is involved in considering the sale of a position? What information is considered? Is technical analysis considered? What criteria must be satisfied to sell a security? Who makes the final decision to sell a security? Describe your sell discipline.

c. Do you expect to add value by trading around positions based on price movements? Do you tend to let your winners run and occupy the largest weights in the portfolio, or do you actively reinvest into positions with more uncertainty, but more upside?

d. Describe the following attributes in terms of relative important in your evaluation of a security. Discuss how you evaluate each attribute:

i. Country selection, including geopolitical risk considerations

ii. Company Focus/Strategy

iii. Management Quality

iv. Management Compensation

v. Capital Structure/Balance Sheet

vi. Price

vii. Other (please specify)

4. Describe the role of quantitative modeling within the investment process (please skip this question if your investment process doesn’t use quantitative modeling).

a. Provide a brief description of the underlying factors used to model return expectations along with the forecasting techniques used to process the data.

b. How dynamic is the process with respect to weightings, factor choices and modeling techniques?

c. Why do you believe your approach to modeling publicly available information is superior to your competitors? How are you processing information such a fashion that can be considered proprietary versus a straight factor-loading approach?

d. What qualitative information or subjective judgments do you incorporate into the modeling process? If applicable, please provide an example of a past qualitative input or instance where the model was overridden.

e. Does your process seek to formulate investment rationales for highly-ranked or bottom-ranked securities or assets before portfolio implementation? How do you treat information that is not easily “captured” by the model?

f. How often are model forecasts generated? Who is responsible for maintaining the model?

g. Please describe the process for enhancing your quantitative model(s).

h. With what frequency is the model(s) reviewed for enhancement?

i. Please provide a timeline of past enhancements to your model(s).

5. Describe your portfolio construction and management process.

a. How many securities are typically held in your portfolio? What is the average position size? What is the average holding period for an individual security?

b. Describe how your firm’s investment process evaluates liquidity constraints for the subject product’s universe of stocks. What rules does the firm employ in its process to ensure an appropriate level of liquidity exists for the portfolio holdings? Does liquidity affect the level of turnover in the portfolio? In the past, has there been an adjustment to the firm’s process to address liquidity limitations due to growth of the size of its assets under management?

c. What is the expected level of annual portfolio turnover of the strategy (both name and dollar terms) over a full market cycle?

d. Describe the quantitative and qualitative process used to establish and manage exposure levels in a portfolio to maximize risk-adjusted returns. Who determines security and sector weightings? How are those exposures established and changed? What factors are considered in making those decisions?

e. Do you use an optimizer for portfolio construction? If so, please discuss your optimization process. How often is the portfolio rebalanced and what is the process for doing so?

f. How often is the portfolio rebalanced and what is the process for doing so?

g. Describe how you use benchmark tracking error to construct and manage a portfolio. What is the expected annualized tracking error for the anticipated portfolio over a one-year period and over a market cycle (i.e., 3 to 5 years)? How is tracking error measured and managed?

h. Do you consider active share when constructing portfolios? Please fill out the table below:

i. Describe in detail your use of derivative instruments (e.g., options, futures, forwards, ETFs, etc.) to manage portfolio exposures, achieve performance objectives, or modify portfolio or security risk. Discuss how such investments contribute to implementing successfully your investment strategy. Explain the risks involved in using derivatives.

j. Provide details of your firm’s currency management strategies. Does your firm employ hedging or cross hedging strategies? If so, what hedging instruments does your firm use? Are active currency positions managed separately or are currency positions managed in conjunction with country or security selection?

1. Does your investment strategy include the active management of currency exposure as a way to add value over the benchmark?

2. If yes, please explain the process you employ in active currency management, the research that backs the opportunity for active currency management, and support your claim that the return exceeds transaction costs.

3. If no, please explain why your strategy does not include active currency management as a way to add value over the benchmark.

k. What is the role of cash in your portfolio? Do you adjust cash levels to manage portfolio risk? Would you accept a 5% cash constraint? If not, why? Please fill out in the table below:

i. To what extent, and in what form, does your strategy rely on the use of financial leverage to achieve its objectives, if at all?

6. Describe your portfolio monitoring and evaluation process.

a. Describe what activities and analysis you conduct to evaluate the performance of your portfolio and to improve your investment process. How frequent is this self-evaluation conducted?

b. Provide a geographic breakdown of BOTH the proposed product and its benchmark in the table below. Please also provide in an Excel format and specify the benchmark used.

c. Provide the portfolio characteristics for BOTH the proposed product and its benchmark in the table below for the given periods. Please also provide in an excel format and specify the benchmark used.

d. Provide the sector allocations of BOTH the proposed product and its benchmark at the end of the periods indicated in the following table. Please also provide in an excel format and specify the benchmark used.

7. Please provide your internal guidelines for the proposed product under a fully discretionary basis.

a. What are the maximum and minimum security and sector exposures versus the benchmark? What is the maximum and minimum number of securities allowed?

b. What is the permissible range of exposures to out of benchmark securities? What is the formal constraint?

8. Under what circumstances would your firm deviate from its discipline?

9. Provide the market capitalization percentage breakdown for the holdings in the subject product and benchmark for the following ending periods.

10. Provide a summary of the out of benchmark exposures of the portfolio.

C. PORTFOLO RISK MANAGEMENT

1. Briefly describe your risk control procedures for the total portfolio. Please distinguish the portfolio management process from the security selection process.

2. Describe any risk measurement models used and how this analysis is incorporated in the portfolio management process. Do you explicitly constrain systematic factor risk (e.g. market risk, size, style, etc.)?

3. Describe the use of stress testing or scenario analysis in managing the portfolio.

4. Does the investment process incorporate discreet risk parameters (e.g., standard deviation, drawdown potential, etc.)? If so, describe any acceptable tolerances for those parameters for this Product.

5. Describe the use of any other quantitative tools or models (not covered above) used in managing and monitoring the portfolio risk.

6. Who is responsible for risk monitoring? Do you maintain an internal, dedicated risk team? If so, who does that team report to and what is the process for monitoring and effecting portfolio changes when necessary? Please describe the interaction between risk professionals within your firm and the investment team responsible for this strategy.

D. TRADING

1. Is your firm, its parent, or other affiliates a broker/dealer?

a. Does your firm trade for client accounts through this broker/dealer?

b. If so, state how much trading, and the reason for trading with this related party.

2. Outline your internal trading capabilities, as follows:

a. Number and experience of trading staff. Is the trading staff segmented by product/asset class?

b. Number of dedicated International Equity and FX traders. Describe their experience and tenure at the firm as well as the sector(s) they are responsible for trading. Provide biographical information of the senior trading personnel in an attachment.

c. Current actual trading volume.

d. Current capability for trading volume and asset levels.

e. Procedures for monitoring and minimizing trading costs of securities and foreign currencies. Are external transactions cost analysis firms used? Which ones?

3. Provide your estimate of average commissions per share, market impact per share, and any other transaction and custodian costs incurred for the different types of trades you have executed for this subject product.

4. How do you choose to access restricted markets and what types of securities do you utilize? In what instances would you use proxy securities to build your desired portfolio (e.g. ADRs, ETFs, p-notes)?

5. Discuss your policy regarding, and current use of, "soft dollars" or “Commission Sharing Agreements” (CSA), directed trades and recapture programs. If you have soft dollar relationships or CSA’s with broker-dealers, disclose the percent of trades executed tied to soft dollar/CSA relationships and a list of resources funded by soft dollars.

6. Provide a description of your trading platform, including systems (proprietary and off-the-shelf) for execution and processing. Describe the allocation objectives and implementation procedures across all accounts. What is the process by which trades are allocated? Describe both the tactic of allocating the initial trade as well as the strategy of building positions across accounts.

7. Describe how you monitor compliance with client and firm guidelines, including systems/software you use. What processes do you have in place for ensuring pre- and post-trade guideline compliance? What functions are automated? What process do you have in place for human verification? Who signs off on final trading? Describe the oversight procedures that would minimize the risk of traders acting outside of their given latitude in executing trades.

8. Has your firm violated an investment guideline over the past three years? Explain the violation(s) and how the issue(s) was (were) resolved.

9. Indicate any enhancements your firm is contemplating to its International Equity trading capabilities.

10. Does your firm affirm its own trades? If not, who does and why?

11. For the subject product, provide a summary of trade execution performance over the last year. Describe how performance is measured and indicate if this is evaluated internally or externally. If externally, what service or services are used? Include details on how this information is integrated into the overall trading strategy.

E. CUSTODY

1. PBGC prefers to invest in a separate account for this mandate. What type of investment structure is your firm proposing for the subject fund (separate account or commingled trust fund)? Is your firm amenable to managing a separate account at PBGC’s custodian?

2. If a commingled trust fund structure is proposed, where is the fund custodied? Is the custodian affiliated with you? How many years has the firm been in the custody business?

3. If a commingled trust fund structure is proposed, please provide a copy of the trust agreement, any trust fund prospectus or offering documents, and any other commingled fund documentation that PBGC would be required to sign or review.

F. PROXY VOTING

1. Describe your proxy voting process.

2. Do you use third parties to assist in the process?

3. Do you have a committee that sets proxy voting policies? If so, name the members, their titles and provide bios.

4. Do you have a separate committee that addresses proxy votes? If so, name the members, their titles and provide bios.

5. Please provide a copy of your most recent proxy voting policies.

J. SAMPLE PORTFOLIO

1. Submit a sample portfolio as of 12/31/15, in the following format, for the proposed product. Provide in an Excel spreadsheet.

K. PERFORMANCE (Simulated results are not acceptable.)

(Note: All performance data must also be provided on a computer disk in a Microsoft Excel file where all formulas are visible.)

Provide quarterly, annual and long-term performance on a total return basis in a manner consistent with the Global Investment Performance Standards (GIPS) as espoused by the Chartered Financial Analyst Institute (CFAI) to the extent possible.

1. Provide quarterly and annual performance on a total return basis GROSS OF FEES for the proposed product in a manner consistent with the Global Investment Performance Standards (GIPS) as espoused by the Chartered Financial Analyst Institute (CFAI) to the extent possible. Provide necessary certifications that all performance is GIPS compliant. If they are not compliant, explain why not. Simulated returns are not acceptable and the proposed active MSCI EAFE strategy must include a continuous track record. In the table, please provide data to at least two decimal places. Please use composite performance and present all performance data against the composite’s stated benchmark (the benchmark used to calculate the information ratio in Volume I, Mandatories).

2. Provide the same information on an annualized basis over the following periods. List the inception date of the product.

3 Years Ended 12/31/15 5 Years Ended 12/31/15 10 Years Ended 12/31/15 Since Inception to 12/31/2015 Subject Product Benchmark Alpha Tracking Error Table 10 - Annualized Returns of Portfolio and Benchmark

3. Provide in the format below the annual returns for the best and worst performing accounts contained in the above composite. Please use GIPS standards.

4. Provide the average of all rolling 36-month Information Ratios over the last ten years, or since inception if track record is less than ten years through 12/31/15, using the methodology below: (Please attach an excel spreadsheet formatted as follows.)

The rolling 36-month average Information Ratio must be calculated as follows: calculate the monthly geometric[footnoteRef:1] excess return for each month of performance. Then, calculate the annualized 36-month excess return for each rolling 36-month period. Divide this by the annualized standard deviation[footnoteRef:2] of excess returns for each rolling 36-month period. Finally, calculate a simple average of these results. For example, if the product has 24 rolling 36-month periods since inception, provide the simple average of those 24 Information Ratios. [1: Geometric Excess ((1+A/100)/(1+B/100))-1 A – Monthly Product Return B – Monthly Index Return ] [2: To annualize risk – must multiply by square root of 12 (for monthly)]

5. Please provide the key risk statistics (using a monthly basis) of the product in the table below. (See definitions and required formulas in your calculations below the table).

Alpha - The incremental return of a portfolio over the benchmark.

Alpha (α) = X - Y X = the annualized return for the manager Y = the annualized return for the index

Beta - This is a measure of a portfolio’s volatility. Statistically, beta is the covariance of the portfolio in relation to the market.

Beta (β) = [(n)*Σ(xi*yi)] - (Σ xi)(Σ yi)]/[(n)*Σ(yi2) – (Σ yi) 2] n = the number of observations xi = the return of the first data series (ith observation) yi = the return of the second data series (ith observation) Generally, xi = the portfolio's return series and yi will be a specified index (benchmark)

R-Squared - Otherwise known as the Coefficient of Determination, this statistic, like beta, is a measure of a portfolio’s movement in relation to the appropriate benchmark.

R-Squared = (r)2

(r) = {[(n)*Σ (xi*yi)] - (Σ xi)(Σ yi)}/{[(n)*Σ(yi2) - (Σ yi)] *[(n)*Σ(xi2) - (Σ xi)]} n = the number of observations xi = the return of the first data series (ith observation) yi = the return of the second data series (ith observation) Generally, xi = the manager's return series and yi will be a specified index (benchmark)

Upside Market Capture Ratio - A measure of the portfolio’s performance in up markets relative to the market itself. The return for the market for each quarter is considered an up market if it is greater than or equal to zero. The Upside Capture Ratio is calculated by dividing the return of the portfolio during the up market periods by the return of the market for the same period. The number of up periods for a given series (x1, … , xn) is the number of positive (and zero) returns in the series.

UMC Ratio = { (1+Rm1)*(1+Rmi)^1/N } – 1/{ (1+Ry1)*(1+Ryi)^1/N } – 1 Rm = return for time period when benchmark (Ry) is positive or zero N = Number of years (e.g. 6 quarters = 1.5 years; 20 months = 1.667 years)

Downside Market Capture Ratio - A measure of the portfolio’s performance in down markets relative to the market itself. A market is considered down if the return for the benchmark is less than zero. The Downside Capture Ratio is calculated by dividing the return of the portfolio during the down market periods by the return of the market during the same periods. The number of down periods for a given series (x1, … , xn) is the number of negative returns in the series.

DMC Ratio = { (1+Rm1)*(1+Rmi)^1/N } – 1/{ (1+Ry1)*(1+Ryi)^1/N } – 1 Rm = return for time period when benchmark (Ry) is negative N = Number of years (e.g. 6 quarters = 1.5 years; 20 months = 1.667 years)

Standard Deviation - A measure of the average deviations of a return series from its mean.

StDev = [[ Σ (xi-X)2 ] ½]/n Ann StDev = SD * √(Ny) xi = the ith observation X = mean return for series n = the number of observations Ny = the number of periods in a year (4 if quarterly data, 12 if monthly data)

Tracking Error – The standard deviation of the excess returns of the portfolio versus its benchmark.

Information Ratio - This statistic is computed by subtracting the return of the market from the return of the portfolio to determine the excess return. The excess return is then divided by the standard deviation of the excess returns (or Tracking Error) to produce the information ratio.

IR = Excess Return/Tracking Error

Excess Return = Annualized Manager Return - Annualized Index Return Tracking Error = Standard Deviation of Excess Return

Sharpe Ratio - This statistic is computed by subtracting the return of the risk-free index (typically 91-day T-bill or some other cash benchmark) from the return of the portfolio to determine the risk-adjusted excess return. This excess return is then divided by the standard deviation of the portfolio.

Sharpe = [Ann Rtn(x) – Ann Rtn(Rf)]/Standard Deviation of x

Batting Average - Batting average is a measure of the frequency of success. This ratio is calculated by taking the number of periods where the portfolio equals or outperforms the selected benchmark, divided by the total number of periods.

Batting Average = numOutperform/numTotal numOutperform = the number of observations where the portfolio outperforms the benchmark numTotal = the number of total observations

6. If you have done an attribution analysis of your proposed product’s investment return variance (both positive and negative) from the stated benchmark return, please provide the annual attribution for each year of performance presented above as an attachment. In the attribution analysis, identify the contributions of country, currency, sector, security selection, out of benchmark allocations, and other. In addition to providing the attribution, please provide commentary of the reasons for significant performance variance from the benchmark that you think will help us understand the performance of the product. Attribution should be reflective of how the portfolio manager makes investment decisions. If a Brinson attribution is the most informative tool that the portfolio manager uses, please provide that. If not, please provide the most appropriate attribution.

7. Describe your attribution model and provide the name of the vendor, if appropriate.

8. Is your firm in compliance with the CFAI GIPS? Provide a description of any non-compliance. (IT IS IMPERATIVE THAT THIS QUESTION BE ANSWERED THOROUGHLY AND ACCURATELY).

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