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Approve Hiring General Pool Fixed Income Manager UM

Approve Hiring General Pool Fixed Income Manager UM. University of Missouri System Board of Curators July 22, 2011 FINANCE COMMITTEE. c. General Pool Fixed Income Manager.

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Approve Hiring General Pool Fixed Income Manager UM

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  1. Approve Hiring General Pool Fixed Income ManagerUM University of Missouri System Board of Curators July 22, 2011 FINANCE COMMITTEE c

  2. General Pool Fixed Income Manager • Approximately 74% of General Pool funds are managed directly by the Treasurer’s office and held in commercial paper, US Government Agency securities and corporate bonds. • Approximately 18% of General Pool funds are invested in the University’s Balanced Pool. • The remaining 8% is held in an externally-managed TIPs portfolio d

  3. General Pool Fixed Income Manager • An investment of $350 million has been proposed in two funds managed by PIMCO. • Funding would come from the following sources: • Liquidation of internally-managed corporate bond portfolio (approximately $158 million) • Liquidation of externally-managed TIPs portfolio (approximately $137 million) • Liquidation of internally-managed US Government Agency securities (totaling approximately $55 million) • Upon completion of transaction, internally-managed funds would decrease from 74% to 61% of General Pool. e

  4. General Pool Fixed Income Manager • The primary objective of this recommended investment is to further diversify the risk exposures of the General Pool. More specifically, it allows for a diversification of the interest rate risk exposure of the internally-managed portfolio as we face prospects of a rising rate environment. • The secondary objective of this recommended investment is to increase the returns of General Pool investments. Portfolio modeling has suggested an increase in overall General Pool returns of 50-70bp. f

  5. General Pool Fixed Income Manager • PIMCO Global Advantage Strategy • High quality portfolio offering broad, diversified exposure across developed and developing markets’ fixed income sectors and currencies. • Fund started in 2009; currently $5.8 billion under management. • At June 30, 2011, 95% of portfolio had an investment grade credit rating. Typical separate account guidelines require “A-” minimum average credit rating for the portfolio. • Similar to PIMCO Global Fixed Income funds held by Retirement and Endowment, but with added flexibility for portfolio managers. g

  6. General Pool Fixed Income Manager • PIMCO Unconstrained Bond Strategy • Absolute return oriented, high quality bond portfolio designed to represent PIMCO’s best ideas, unbounded by traditional benchmark constraints. • Designed to provide positive returns across most market environments; targeted return is 3 month LIBOR + 300/400bp. • Fund started in 2008; currently $25 billion under management. • At June 30, 2011, 97% of portfolio had an investment grade credit rating. Typical separate account guidelines require “BBB” minimum average credit rating for the portfolio. h

  7. General Pool Fixed Income Manager • With additional $350 investment, total exposure to PIMCO will be approximately $900 million. • Similar to Retirement and Endowment, separate accounts will be utilized. • PIMCO manages approximately $1.3 trillion in total assets, as compared to the estimated $89 trillion size of the world’s bond market. i

  8. General Pool Fixed Income Manager • Concurrent with the proposed $350 million investment, we have been able to negotiate a more favorable fee structure for our entire relationship. • Savings for Retirement and Endowment estimated to be a minimum of $240,000 annually. • Savings on additional $350 million investment estimated at $500,000 annually as compared to standard fees. • Global Advantage fees = 38bp vs. 51bp standard • Unconstrained fees = 43bp vs. 60bp standard j

  9. Global Fixed Income Manager • The General Pool investment policy as written (either before or after today’s revisions) does not require Board approval to hire external investment managers. • However, given the evolving approach to the management of the General Pool, the magnitude of the proposed investment, and the resulting concentration with PIMCO across General Pool, Retirement, and Endowment, we are proactively seeking from the Board an endorsement of this investment. k

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