TEACHERS RETIREMENT BOARD. INVESTMENT COMMITTEE Item Number: 3. SUBJECT: Approval of Minutes of the July 12, 2017, Investment Committee Open Session

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1 TEACHERS RETIREMENT BOARD INVESTMENT COMMITTEE Item Number: 3 SUBJECT: Approval of Minutes of the July 12, 2017, Investment Committee Open Session CONSENT: ACTION: ATTACHMENT(S): 0 DATE OF MEETING: INFORMATION: PROPOSED MINUTES Investment Committee July 12, 2017 OPEN SESSION LOCATION: Truckee River/Yosemite Falls Room; Board Room, 100 Waterfront Place, West Sacramento, CA COMMITTEE MEMBERS PRESENT Harry Keiley, Chairperson Tom Unterman, Vice Chairperson Dana Dillon Sharon Hendricks Joy Higa Paul Rosenstiel Nora Vargas Karen Yamamoto John Chiang, State Treasurer Eraina Ortega, representing the Director of Finance, Michael Cohen Michelle Zumot, representing the State Superintendent of Public Instruction, Tom Torlakson Betty Yee, State Controller OTHER BOARD MEMBERS PRESENT Steve Juarez, representing the State Treasurer, John Chiang Frank Moore, representing the State Treasurer, John Chiang Dianna Gutierrez, representing the State Superintendent of Public Instruction, Tom Torlakson Lynn Paquin, representing the State Controller, Betty Yee STAFF PRESENT Jack Ehnes, Chief Executive Officer Christopher Ailman, Chief Investment Officer Brian J. Bartow, General Counsel INV9

2 Page 2 Lisa Blatnick, Chief of Administrative Services Grant Boyken, Public Affairs Executive Officer Cassandra Lichnock, Chief Operating Officer Robin Madsen, Chief Financial Officer Michelle Cunningham, Deputy Chief Investment Officer Debra Smith, Chief Operating Investment Officer Mike DiRé, Director, Real Estate Glenn Hosokawa, Director, Fixed Income June Kim, Director, Global Equities Paul Shantic, Director, Inflation Sensitive Anne Sheehan, Director, Corporate Governance Steven Tong, Director of RMS and Innovation & Risk April Wilcox, Director, Operations Margot Wirth, Director, Private Equity Sandy Blair, Director, Retirement Readiness Aeisha Mastagni, Portfolio Manager, Corporate Governance Rob Ross, Portfolio Manager, Private Equity Mike Thompson, Portfolio Manager, Real Estate Lamont King, Senior Counsel OTHERS PRESENT Harvey Leiderman, Reed Smith, (Fiduciary Counsel) Allan Emkin, Pension Consulting Alliance Neil Rue, Pension Consulting Alliance Steven Hartt, Meketa Investment Group Steven McCourt, Meketa Investment Group Mika Malone, Meketa Investment Group Micolyn Magee, The Townsend Group Jennifer Urdan, Cambridge Associates Jared Carney, Lightdale, LLC Jonathan Gray, Blackstone Kirsten Spalding, Ceres Amy McDuffee, Mosaic Governance Advisors Pat Geyer, CalRTA Peter Morse, FACCC Phyllis Hall, CTA Denise Bradford, CTA Robert Rodriguez, CTA Ed Foglia, CTA/NEA-Retired Bob Fesler, UESF-Retired Paula H. Weiss, CalRTA Ivan Carrillo, AESA Loretta Toggenburger, UTLA-Retired A quorum being present, Chairperson Keiley called the Open Session meeting of the Investment Committee meeting to order at 9:40 a.m. I. APPROVAL OF COMMITTEE AGENDA (Item 1) MOTION duly made by Ms. Vargas, seconded by, and carried to approve the Committee Agenda. INV10

3 Page 3 Ms. Vargas Treasurer Chiang Ms. Zumot, for the Superintendent of Public Instruction RECESS The Open Session of the committee meeting recessed at 9:40 a.m. and the committee went into Closed Session. The committee reconvened in Open Session at 11:07 a.m. Chairperson Keiley reported that no actions were taken in Closed Session. Treasurer Chiang joined the meeting at 9:50 a.m. Ms. Zumot joined the meeting at 9:55 a.m. II. INVESTMENT INSIGHT SPEAKER (Item 10) The committee received the Investment Insight discussion with Mr. Gray, with Mr. Carney serving as interviewer and moderator. Mr. Gray is Global Head of Real Estate for Blackstone, which is the largest real estate platform in the world, with $102 billion in assets under management. The committee discussed current market conditions. The committee also discussed the impact of energy and the environment on real property and infrastructure investments, as well as the outlook for retail assets in the changing economy. RECESS The Open Session of the committee meeting recessed at 12:15 p.m., and reconvened in Open Session in the board room at 1:36 p.m. Ms. Glasser-Hedrick replaced Treasurer Chiang at the dais for the remainder of Open Session. III. APPROVAL OF MINUTES OF THE JUNE 7, 2017, INVESTMENT COMMITTEE MEETING OPEN SESSION (Item 9) MOTION duly made by, seconded by, and carried to approve the Minutes of the June 7, 2017, Investment Committee Meeting Open Session. INV11

4 Page 4 Ms. Vargas Ms. Zumot, for the Superintendent of Public Instruction IV. PUBLIC COMMENT The committee heard from Charles Sanchez, representing Unite HERE Local 2, and San Francisco Pullman Hotel employees Juan Chavez and Ms. Mitra, each of whom commented on an organizing effort by workers at the hotel, which is an asset in a CBRE real estate fund that CalSTRS is invested in as a limited partner. Each speaker asked the committee to encourage CBRE to execute a card check neutrality agreement. V. CHIEF INVESTMENT OFFICER S REPORT OPEN SESSION (Item 11) The committee received the Chief Investment Officer s Open Session report from Mr. Ailman. Mr. Ailman introduced the committee to students working as summer investment interns. Mr. Ailman highlighted the success of the program, commented on the diversity and variety of students represented, including an intern from the Girls Who Invest program. Mr. Ailman informed the committee that the portfolio was valued at approximately $208.7 billion as of June 30, The committee discussed the current asset allocations relative to the policy targets. The committee also discussed current market condition and global risks facing the economy, including continuing tensions between the U.S. and North Korea, cyber threats, and U.S. political climate. The committee also discussed positive market conditions, such as low interest rates and expected GDP growth of 1-2%. VI. CORPORATE GOVERNANCE UPDATE 2017 PROY SEASON (Item 12) The committee received an update on the 2017 Corporate Governance proxy season from Ms. Sheehan and Ms. Mastagni. The committee discussed various Corporate Governance engagements, including those focused on the environment, majority voting and board diversity. The committee discussed the results of those engagements and initiatives. The committee also engaged in a detailed discussion about environmentally-focused corporate engagement, and the merits of focusing on corporate action, in addition to corporate disclosure of environmental risks and opportunities. The committee also discussed several other topics and issues in corporate governance. Ms. Vargas left the dais at 2:40 p.m. for the remainder of the meeting. INV12

5 Page 5 VII. DIVESTMENT POLICY REVISION ENGAGEMENT FIRST READING (Item 13) The committee received the first reading of the Divestment Policy revision from Mr. Ailman. The committee discussed the primary goal of the policy revision, which is to emphasize engagement first, with divestment serving as an option of last resort. The committee discussed various changes to the policy language. The committee also discussed the relationship between the 21 Risk Factors and the Divestment/Engagement policy, including consideration of how risk factors centered on governmental risk would be approached if the policy is focused on engagement. VIII. ESG/SUSTAINABILITY POLICY (IPMP ATTACHMENT A) THIRD READING (Item 14) PUBLIC COMMENT The committee heard from Kirsten Spalding from Ceres, who expressed support for the principles based ESG/Sustainability policy. Ms. Spalding also expressed a hope that the CVaR analysis would not merely be a quantitative analysis of materiality. The committee received the third reading of the ESG/Sustainability Policy revision. The committee discussed an example of how the conditional value at risk (CVaR) analysis would be utilized to inform the relative materiality of a given issue. The committee discussed whether CVaR analysis is utilized by peer funds, and the committee heard from Mr. Emkin, who informed the committee that CVaR is not commonly used to analyze ESG materiality, and that the CalSTRS investment committee is unique among its peers in the amount of time spent discussing the relative materiality of various ESG issues. RECESS The committee recessed at 3:42 p.m., and reconvened in Open Session at 3:52 p.m. The committee continued to discuss and question the application of ESG considerations across the portfolio, including the usefulness of CVaR analysis. The discussion concluded and no action was taken. I. INVESTMENT BELIEFS REVIEW OF BELIEF #8 ALIGNMENT OF FINANCIAL INTEREST (Item 19) The committee received two versions of Investment Belief #8 for consideration. The committee heard from Mr. Emkin, and reviewed and discussed two versions of Investment Belief #8, concerning alignment of financial interest. The committee discussed various changes to the policy language. MOTION duly made by, seconded by, to adopt version A, as amended to strike the word maximum. INV13

6 Page 6 The committee discussed the motion. SUBSTITUTE MOTION duly made by Ms. Paquin, seconded by Mr. Unterman, to adopt version B, as amended to strike all references to maximum. AMENDMENT to the SUBSTITUTE MOTION duly made by Mr. Unterman, seconded by Ms. Paquin, to insert such between created and alignment in the second sentence of version B. The committee continued to discuss the pending motions, during which time the SUBSTITUTE MOTION was rescinded by Ms. Paquin. The committee requested that the Review of Investment Belief #8, versions A and B, be placed on the agenda for the November committee meeting, and that each version be revised per the discussion to strike maximum and insert such where indicated. No further action was taken.. REAL ESTATE POLICY REVISION (Item 15) The committee received the Real Estate Policy revision from Mr. DiRé and Mr. Thompson. The committee discussed the proposed Transitional-Core sub asset category of the Core Portfolio, the addition of which will align the Core Portfolio with the ODCE benchmark. MOTION duly made by, seconded by, and carried to approve the Real Estate Policy revision. Ms. Zumot, for the Superintendent of Public Instruction I. INFLATION SENSITIVE POLICY REVISION (Item 16) The committee received the Inflation Sensitive Policy revision from Mr. Shantic. The committee discussed the proposed policy changes related to the Inflation Sensitive portfolio and its benchmark, which will provide for the opportunity to enlist an expanded set of benchmarks that reflect potential future sub asset categories of the Inflation Sensitive Portfolio. INV14

7 Page 7 MOTION duly made by, seconded by, and carried to approve the Inflation Sensitive Policy revision. Ms. Zumot, for the Superintendent of Public Instruction II. INVESTMENT POLCY AND MANAGEMENT PLAN REVISE FOR ASSET CLASS POLICY CHANGES (Item 17) The committee received the Investment Policy and Management Plan (IPMP) revision from Mr. Ailman. Mr. Ailman informed the committee that the last two sentences on INV135, in the section pertaining to the Inflation Sensitive Structure, will be deleted. The committee discussed the proposed changes to reconcile individual policy changes with the overall IPMP. The committee discussed the need to continue to balance short-term and long-term objectives with respect to benchmarks. MOTION duly made by, seconded by, and carried to approve the Investment Policy and Management Plan revision. Ms. Zumot, for the Superintendent of Public Instruction III. PENSION2 INVESTMENT POLICY REVISION (Item 18) The committee received Pension2 policy revision from Ms. Blair and Mr. Ailman. The committee discussed the proposed updates to the governance of the Pension2 Investment Policy, including the five-member Advisory Committee, comprised of the newly created Director of Retirement Readiness, one Investment Officer, and three INV15

8 Page 8 representatives from Defined Contribution Solutions. The committee also discussed whether new fiduciary rules impact the Pension2 program or the board s fiduciary liability insurance policy. MOTION duly made by, seconded by, and carried to approve the Pension2 Investment Policy revision. Ms. Zumot, for the Superintendent of Public Instruction IV. FISCAL YEAR INVESTMENT BUSINESS PLANS (Items 20) 10 Year Financial Plan (Item 20a) Global Equity Business Plan (Item 20b) Fixed Income Business Plan (Item 20c) Real Estate Business Plan (Item 20d) Private Equity Business Plan (Item 20e) Corporate Governance - Business Plan (Item 20f) Inflation Sensitive Business Plan (Item 20g) Risk Mitigation Strategies, Innovation and Risk Business Plan (Item 20h) Operations Business Plan (Item 20i) The committee received the Fiscal Year year Financial Plan from Mr. Ailman, and the asset class business plans from Ms. Cunningham, Ms. Smith, Ms. Kim, Mr. Hosokawa, Mr. DiRé, Ms. Wirth, Ms. Sheehan, Mr. Shantic, Mr. Tong and Ms. Wilcox. The committee considered direct and indirect costs associated with the 10 Year Financial Plan. The committee discussed various risks and opportunities concerning the challenges of office space in the headquarters building, and the anticipated need for additional office space for investment personnel by 2019, with possible consideration of satellite offices in San Francisco and/or Los Angeles. V. PRIVATE EQUITY POLICY REVISION FIRST READING (Item 21) The committee received the private equity policy revision first reading, from Ms. Wirth, Mr. Ross and Mr. Hartt. The committee discussed the proposed changes to the policy, including (1) the increase of delegated authority commensurate with the increase in the size of the portfolio since the last revision; (2) the revision of the secondary market transactions section to align with industry developments; (3) a revision of the co- INV16

9 Page 9 investment section to increase CalSTRS competitiveness; (4) the addition of interim subasset allocation targets for use during the transition to long-term targets for core private equity, and special mandates sub-asset sectors. MOTION duly made by, seconded by, to adopt the recommended revisions to the Private Equity Policy. The committee continued to discuss the proposed policy revision, including whether a coinvestment advisor could maintain alignment of interest as a fiduciary if investing alongside CalSTRS, and whether oversight and reporting obligations were adequately addressed. Following the discussion, the MOTION was rescinded by. The committee requested that the Private Equity Policy revision be placed on the November 2017 agenda for a second reading, with further changes to provide additional definitions and incorporate oversight and reporting mechanisms, as discussed by the committee. VI. INVESTMENT COMMITTEE WORK PLAN PROJECT REVIEW OF CURRENT CO-INVESTMENT PROGRAMS (Item 22) The committee received a review of the committee work plan project to review current co-investment programs from Mr. Ailman. The committee discussed its plan to study ways to expand direct investment and co-investment opportunities, including the use of traditional SWOT (strengths, weaknesses, opportunities, threats) analysis to evaluate relevant strategies. VII. ANNUAL REVIEW OF DELEGATION TO STAFF (Item 23) The committee received the annual review of delegation to staff from Ms. Smith, which included a comprehensive review of all changes to the investment discretion delegated to staff for the fiscal year VIII. REVIEW INFORMATION REQUESTS (Item 24) Pursuant to Item 12, the committee requested that the Corporate Governance plan include specific actions targeted towards specific companies to reduce carbon emissions. Pursuant to Item 18, the committee requested a discussion of whether, and to what extent, new fiduciary rules impact board oversight of Pension2, and the fiduciary liability insurance policy. I. DRAFT AGENDA FOR THE NOVEMBER 1, 2017, INVESTMENT COMMITTEE MEETING (Item 25) The committee reviewed the Draft Agenda for the, committee meeting.. OPPORTUNITY FOR ADDITIONAL STATEMENTS FROM THE PUBLIC There were no additional statements from the public. INV17

10 Page 10 I. ADJOURNMENT There being no further business to conduct, Chairperson Keiley adjourned the meeting at 6:00 p.m. Harry Keiley, Chairperson Jack Ehnes, Chief Executive Officer And Secretary to the Teachers Retirement Board Prepared by: Lamont King, Senior Counsel INV18