Upload
hahanh
View
232
Download
1
Embed Size (px)
Citation preview
Memorandum
To: Investment Committee State Universities Retirement System of Illinois (SURS)
From: Ryan Ball, CFA and Lauren Etcheverry, CFA
Date: May 31, 2012
Subject: U.S. Equity Small Cap Growth Search Recommendation
Search Overview
In August 2011, Callan completed a Manager Structure Review. The intent of the review was to identify and recommend changes for any unintended biases or missing components in the current portfolio. The review identified a slightly higher market capitalization and modest value bias within the small cap equity allocation. This search was undertaken to find a U.S. equity small cap growth manager that will complement the existing portfolio and help offset the above tilts.
Search Process
The search process began with the drafting of a Request for Proposal (RFP) by SURS and Callan which was subsequently posted on the SURS website, as well as Callan’s website. There were 72 respondents to the RFP including 10 MFDB firms. This initial respondent list was narrowed based on the following qualifications:
� Style: Seven year average Z-scores below 0.53 were removed to include only managers with true growth characteristics. 0.53 is the score of the replaced manager, ensuring remaining candidates would have more prominent growth characteristics. (Z-score is a measure of a manager’s growth or value investment style. Higher values represent a more aggressive growth style.)
� Capitalization: Seven year average weighted median market capitalizations above Callan’s median small cap growth manager of $1.23 billion were removed to include only managers with true small capitalization exposure.
� Performance: Managers with less than a 43% from Callan’s performance score1 were removed.This minimum performance score was chosen as it represents the value of this metric for the manager previously terminated from the investment style.
The above screens resulted in 15 remaining candidates (including 1 Illinois and 2 MFDB firms) (See Appendix A):
The remaining candidates were presented to Callan’s Manager Search Committee comprised of 15 senior consultants for review. These managers were evaluated based on the following:
1 Historical performance criteria are scored based on the following: Cumulative 4, 5 and 7 year data relative to the Russell 2000 Growth Index and the Callan Small Cap Growth Style Group; Rolling three-year periods based on quarterly data compared to the Index and Style Group. Performance is evaluated relative to each criterion thus there is a maximum of 40 points possible (17 rolling three-year periods and 3 other cumulative periods for one market measure and one comparative group). Candidates receive one point for each standard passed.
Exhibit 5
2
� Characteristics to move SURS equity portfolio characteristics closer to those of the overall equity universe.
� Organizational strength and stability of firm.� Qualifications and stability of portfolio management team.� Performance track record.
Callan’s Manager Search Committee recommended seven semi-finalist candidates to be interviewed by Callan and SURS staff. SURS staff and Callan elected to include Fortaleza Asset Management, an Illinois based minority-owned firm, as an eighth candidate despite the firm’s failure to meet some of the qualifications and criteria previously listed.
Callan and SURS staff conducted meetings with the eight semi-finalists to interview key personnel and better understand the investment process and philosophy of each firm. As a result of the interview process, two finalist candidates, Nicholas Investment Partners and CastleArk Management, LLC, were identified to be presented to the Board of Trustees. Reasons for exclusion for the six firms eliminatedduring the interview process can be found in Appendix B.
Search Conclusion
Upon review by the Board of Trustees, Callan recommends the selection of one of the previously mentioned finalist investment managers to complement the existing small cap structure.
Exhibit 5
App
endi
x A
Org
aniz
atio
nPr
oduc
tSt
age
of
Excl
usio
n R
easo
n fo
rExc
lusi
on30
0 N
orth
Cap
ital,
LLC
Smal
l Cap
Gro
wth
Equ
ityPr
elim
inar
yC
apita
lizat
ion,
Per
form
ance
Allia
nceB
erns
tein
Allia
nce
US
Smal
l Cap
Gro
wth
Prel
imin
ary
Cap
italiz
atio
nAl
lianz
Glo
bal I
nves
tors
C
apita
lSm
all C
ap G
row
thC
alla
n Se
arch
C
andi
date
Less
com
petit
ive
perfo
rman
ce a
nd
risk/
rew
ard
char
acte
ristic
sAl
phaO
ne In
vest
men
t Se
rvic
esFu
ndam
enta
l Sm
all C
ap G
row
thC
alla
n Se
arch
C
andi
date
Larg
er m
arke
t cap
italiz
atio
n an
d le
ss g
row
th th
an o
ther
can
dida
tes
AQR
Cap
ital M
anag
emen
tSm
all C
ap G
row
thPr
elim
inar
ySt
yle,
Per
form
ance
Arbo
r Cap
ital M
anag
emen
t (M
N)
Arbo
r Cap
ital S
mal
l Cap
Gro
wth
Cal
lan
Sear
ch
Can
dida
teAg
gres
sive
gro
wth
, poo
r ris
k/re
war
d ch
arac
teris
tics
Artio
Glo
bal M
anag
emen
t LL
CAr
tio U
.S S
mal
lcap
Stra
tegy
Prel
imin
ary
Styl
eAr
tisan
Par
tner
s Li
mite
d Pa
rtner
ship
Artis
an U
.S. S
mal
l-Cap
Gro
wth
Prel
imin
ary
Cap
italiz
atio
n, P
erfo
rman
ceAx
iom
Inte
rnat
iona
l Inv
esto
rs
LLC
Axio
m U
S Sm
all C
ap E
quity
Fun
dPr
elim
inar
yC
apita
lizat
ion
Benn
ett L
awre
nce
Man
agem
ent,
L.L.
C.
Smal
l Cap
Equ
ityPr
elim
inar
yC
apita
lizat
ion,
Per
form
ance
Bost
on T
rust
Inve
stm
ent
Man
agem
ent
Smal
l Cap
Equ
ityPr
elim
inar
yC
apita
lizat
ion,
Sty
leBu
ford
Dic
kson
Har
per &
Sp
arro
wSm
all C
ap P
ortfo
lioPr
elim
inar
yC
apita
lizat
ion,
Sty
le, P
erfo
rman
ceC
aden
ce C
apita
l M
anag
emen
tSm
all C
ap G
row
thPr
elim
inar
yC
apita
lizat
ion,
Sty
le, P
erfo
rman
ceC
astle
Ark
Man
agem
ent,
LLC
Smal
l Com
pany
Gro
wth
N/A
Sem
i-Fin
alis
tC
hartw
ell I
nves
tmen
t Pa
rtner
sSm
all C
ap G
row
thPr
elim
inar
yC
apita
lizat
ion,
Per
form
ance
Cle
arBr
idge
Adv
isor
sSm
all C
ap G
row
thPr
elim
inar
yC
apita
lizat
ion
Cop
per R
ock
Cap
ital
Partn
ers
LLC
Smal
l Cap
Gro
wth
Prel
imin
ary
Cap
italiz
atio
n, P
erfo
rman
ce
Exhibit 5
4
Cre
do C
apita
l Man
agem
ent,
LLC
U.S
. Equ
ity S
mal
l Cap
Gro
wth
Prel
imin
ary
Perfo
rman
ceD
rieha
us C
apita
l M
anag
emen
tSm
allC
ap G
row
th C
ompo
site
Prel
imin
ary
Cap
italiz
atio
nEl
k C
reek
Par
tner
s, L
LCSm
all C
ap G
row
thPr
elim
inar
yPe
rform
ance
Emer
ald
Advi
sers
Inc.
Emer
ald
Div
ersi
fied
Smal
l Cap
G
row
thN
/ASe
mi-F
inal
ist
Esse
x In
vest
men
t M
anag
emen
t Co.
, LLC
Smal
l Cap
Gro
wth
Prel
imin
ary
Perfo
rman
ceFo
rt W
ashi
ngto
n In
vest
men
t Ad
viso
rs, I
nc.
Smal
l Cap
Gro
wth
Prel
imin
ary
Cap
italiz
atio
nFo
rtale
za A
sset
M
anag
emen
t, In
c.Sm
all C
ap G
row
thN
/ASe
mi-F
inal
ist
Fran
klin
Tem
plet
on
Inve
stm
ents
Fran
klin
U.S
. Sm
all C
ap G
row
thPr
elim
inar
yC
apita
lizat
ion
Gan
nett
Wel
sh &
Kot
ler,
LLC
Smal
l Cap
Equ
ity G
row
th S
trate
gyPr
elim
inar
yC
apita
lizat
ion
Gen
eva
Cap
ital M
anag
emen
t Lt
d.G
enev
a Sm
allc
ap G
row
thPr
elim
inar
yC
apita
lizat
ion
Glo
beFl
ex C
apita
l, L.
P.G
lobe
Flex
U.S
. Sm
all C
ap G
row
thPr
elim
inar
yPe
rform
ance
ING
Inve
stm
ent M
anag
emen
tIN
G S
mal
l Cap
Gro
wth
Equ
ityPr
elim
inar
yC
apita
lizat
ion
J.P.
Mor
gan
Asse
t M
anag
emen
tSm
all C
ap A
ctiv
e G
row
thN
/ASe
mi-F
inal
ist
LaS
alle
Stre
et C
apita
l M
anag
emen
t LLC
Smal
l Cap
Prel
imin
ary
Cap
italiz
atio
n, S
tyle
, Per
form
ance
M &
I In
vest
men
t M
anag
emen
t Cor
pora
tion
M&I
Sm
all C
ap G
row
thPr
elim
inar
yO
rgan
izat
iona
l Con
cern
(rec
ent
inve
stm
ent t
eam
cha
nges
)M
anul
ife A
sset
Man
agem
ent
Smal
l Cap
Gro
wth
Equ
ityPr
elim
inar
yPe
rform
ance
Maz
ama
Cap
ital
Man
agem
ent,
Inc.
Smal
l Cap
Gro
wth
Prel
imin
ary
Perfo
rman
ceN
ew A
mst
erda
m P
artn
ers
LLC
Smal
l-Mid
Cap
Act
ive
Equ
ityPr
elim
inar
yC
apita
lizat
ion,
Sty
leN
icho
las
Inve
stm
ent P
artn
ers
Smal
l Cap
N/A
Sem
i-Fin
alis
tN
icho
ls A
sset
Man
agem
ent
LLC
Smal
l Cap
Gro
wth
N/A
Sem
i-Fin
alis
tN
orth
Poi
nte
Cap
ital L
LCFo
cuse
d Sm
all C
ap G
row
thPr
elim
inar
ySt
yle
Exhibit 5
5
Oak
Rid
ge In
vest
men
ts, I
nc.
Smal
l to
Mid
-Cap
Gro
wth
Por
tfolio
Prel
imin
ary
Cap
italiz
atio
nO
berw
eis
Asse
t M
anag
emen
t, In
c.C
once
ntra
ted
Smal
l Cap
Gro
wth
Prel
imin
ary
Cap
italiz
atio
nPa
lisad
e C
apita
l M
anag
emen
t LLC
Smal
l Cap
Gro
wth
Equ
ityPr
elim
inar
yC
apita
lizat
ion
Pere
grin
e C
apita
l M
anag
emen
t, In
c.Sm
all C
ap G
row
thPr
elim
inar
yPe
rform
ance
Perim
eter
Cap
ital
Man
agem
ent
Smal
l Cap
Gro
wth
Prel
imin
ary
Styl
ePi
onee
r Inv
estm
ents
US
Smal
l Cap
Gro
wth
Prel
imin
ary
Cap
italiz
atio
nPu
nch
& As
soci
ates
In
vest
men
t Man
agem
ent,
Inc.
Punc
h Sm
all C
ap S
trate
gyPr
elim
inar
ySt
yle
Que
st In
vest
men
t M
anag
emen
tSm
all C
ap G
row
th E
quity
Prel
imin
ary
Cap
italiz
atio
n, P
erfo
rman
ceR
ange
r Inv
estm
ent
Man
agem
ent,
L.P.
Ran
ger S
mal
l Cap
Gro
wth
N/A
Sem
i-Fin
alis
tR
BC
Glo
bal A
sset
M
anag
emen
t (U
.S.)
Inc.
Smal
l Cap
Gro
wth
Equ
ityPr
elim
inar
yC
apita
lizat
ion
RC
MR
CM
US
Smal
l Cap
Sel
ect G
row
thPr
elim
inar
yC
apita
lizat
ion
Ric
e H
all J
ames
&
Asso
ciat
es, L
LCSm
all C
ap E
quity
Prel
imin
ary
Cap
italiz
atio
n, S
tyle
Riv
erbr
idge
Par
tner
s LL
CSm
all C
ap G
row
thC
alla
n Se
arch
C
andi
date
No
sect
or g
uide
lines
, gro
wth
ch
arac
teris
tics
rang
eR
ockm
ore
Cap
ital,
LLC
Smal
l-C
apita
lizat
ion
Gro
wth
Prel
imin
ary
Cap
italiz
atio
n, S
tyle
Rox
bury
Cap
ital M
anag
emen
tSm
all C
ap G
row
th (P
ortla
nd T
eam
)Pr
elim
inar
yC
apita
lizat
ion,
Per
form
ance
RS
Inve
stm
ents
RS
Smal
l Cap
Gro
wth
Com
posi
tePr
elim
inar
y
Org
aniz
atio
nal c
once
rn (k
ey
portf
olio
man
ager
dep
artu
re in
20
11)
Secu
rity
Glo
bal I
nves
tors
Smal
l Cap
Gro
wth
Prel
imin
ary
Cap
italiz
atio
n, S
tyle
, Per
form
ance
Sega
ll Br
yant
& H
amill
Inve
stm
ent C
ouns
elSm
all C
ap E
quity
Prel
imin
ary
Styl
e
Shak
er In
vest
men
ts, L
LCSm
all C
ap G
row
thC
alla
n Se
arch
C
andi
date
Min
imal
firm
reso
urce
s, g
row
th
char
acte
ristic
s ra
nge
Sit I
nves
tmen
t Ass
ocia
tes,
In
c.Si
t Sm
all C
ap G
row
thPr
elim
inar
yC
apita
lizat
ion
Exhibit 5
6
Smith
Gro
up A
sset
M
anag
emen
tSm
all C
ap F
ocus
Prel
imin
ary
Cap
italiz
atio
n, S
tyle
, Per
form
ance
Spar
ta A
sset
Man
agem
ent,
LLC
Smal
l Cap
Gro
wth
Prel
imin
ary
Styl
e, P
erfo
rman
ceSt
oneR
idge
Inve
stm
ent
Partn
ers,
LLC
Smal
l Cap
Gro
wth
Equ
ityPr
elim
inar
ySt
yle,
Per
form
ance
Sum
mit
Cre
ek A
dvis
ors,
LLC
Emer
ging
Gro
wth
N/A
Sem
i-Fin
alis
tTh
e Bo
ston
Com
pany
Ass
et
Man
agem
ent,
LLC
US
Smal
l Cap
italiz
atio
n G
row
th
Equi
tyPr
elim
inar
yC
apita
lizat
ion,
Per
form
ance
Tim
pani
Cap
ital M
anag
emen
t LL
CSm
all C
ap G
row
thC
alla
n Se
arch
C
andi
date
New
er fi
rm, m
inim
al re
sour
ces,
le
ss c
ompe
titiv
e ris
k/re
war
dTo
dd-V
ered
us A
sset
M
anag
emen
tEa
rnin
gs, C
FRO
I Mom
entu
mPr
elim
inar
yC
apita
lizat
ion,
Per
form
ance
Turn
er In
vest
men
t Par
tner
s,
Inc.
Mic
ro C
ap G
row
th E
quity
Cal
lan
Sear
ch
Can
dida
tePo
or ri
sk/re
war
dTW
Ass
et M
anag
emen
t, LL
CTW
Sm
all C
ap G
row
th S
trate
gyPr
elim
inar
yC
apita
lizat
ion
UBS
Glo
bal A
sset
M
anag
emen
tU
.S. S
mal
l Cap
Gro
wth
Equ
ityPr
elim
inar
yC
apita
lizat
ion,
Per
form
ance
Wal
l Stre
et A
ssoc
iate
sIn
stitu
itona
l Sm
all G
row
thPr
elim
inar
yPe
rform
ance
Was
atch
Adv
isor
s, In
c.W
asat
ch S
mal
l Cap
Cor
e G
row
thPr
elim
inar
yC
apita
lizat
ion,
Sty
leW
ellin
gton
Man
agem
ent
Com
pany
, LLP
Smal
l Cap
Gro
wth
Inte
rsec
tion
Prel
imin
ary
Cap
italiz
atio
n
Wel
ls C
apita
l Man
agem
ent
Div
ersi
fied
Smal
l Cap
Gro
wth
Equ
ityC
alla
n Se
arch
C
andi
date
Poor
risk
/rew
ard
Exhibit 5
Appendix B
Emerald Advisers Inc.� The strategy has lower risk/reward characteristics and less competitive performance on a long
term annualized and rolling returns basis� Team dynamic in the interview process was a concern – some dominating professionals� Historical product asset decline presents some unease
Fortaleza Asset Management, Inc.� Lowest risk/reward and long term performance of the semi-finalist candidates on an annualized
and rolling returns basis� Consistent characteristics - however larger in market capitalization than what was accepted in the
initial screening process
J.P. Morgan Asset Management� Portfolio Manager was not present at the interview – SURS’s contact would be a portfolio
specialist � There is concern that minority brokerage requirements may not be met
Nichols Asset Management LLC� Newer team to the firm (joined in 2005 and 2007)� Smaller product and firm asset base than other candidates and assets are with manager of
manager programs only� Woman owned by the chief executive officer whose background is fixed income – not equity
investment related
Ranger Investment Management, L.P.� Performance contrasts with the investment process during some periods historically� There is concern that minority brokerage requirements may not be met
Summit Creek Advisors, LLC� Newer firm (2005) and very recent (and rapid) asset growth� There is concern that minority brokerage requirements may not be met
Exhibit 5
CastleArk Management, LLCOne North Wacker DriveSuite 3950Chicago, IL 60606
HistoryCastleArk Management LLC was founded in January 1999 by a group of investment professionals from Loomis Sayles’Chicago office where they managed both equity and fixed income products. The group began managing their first equityaccount at CastleArk in March 1999.
StructureFounded: 1999Ownership: Employee OwnedErrors and omissions insurance: YesIn compliance with SEC and DOL: YesGIPS Compliant: Yes
Contact: Steve ManusOne North Wacker DriveSuite 3950Chicago, IL 60606Phone: (312) 456-9682Fax: (312) 456-9690Email: [email protected]
Key Professionals Joined InvestmentFirm Experience1999 1979Jerry Castellini - President1999 1980Edward Clark - CEO
Employee Structure
Administrative 3Client Services/Marketing 3Dedicated Fundamental Analyst 4Dedicated Quantitative Analyst 1Operations 2Portfolio Manager 7Trader 3Total 23
Total Asset Growth
0
500
1000
1500
2000
2500
3000
3500
4000
2007
2634
2008
1700
2009
2428
2010
2900
2011
2825
$(M
illio
ns)
Total Asset Structure
Asset Type $(mm)U.S. Tax-Exempt 2,651 94%U.S. Taxable 101 4%Non-U.S. 73 3%
Total 2,825 100%
U.S. Tax-Exempt Separate/Commingled Assets as of December 31, 2011
Asset Class $(mm)Domestic Broad Equity 2,422 91%Domestic Broad Fixed-Income 229 9%
Total 2,651 100%
Client Type $(mm)Corporate 376 14%Endowment/Foundation 53 2%Public 2,114 80%Sub-Advised 61 2%Other 47 2%
Total 2,651 100%
Note(s): Asset decrease in 2008 was attributed to market depreciation. Asset decline in 2011 was attributed to timing of cash flows and client rebalancing."Other" assets represent religious accounts.
1
Exhibit 5
CastleArk Management, LLCSmall Company GrowthAs of December 31, 2011
Key Professionals Joined InvestmentFirm Experience
James Stark - PM 2007 1987Gregory Baxter - PM 2007 2002Austin Campbell - Dedicated FA 2010 2010
Investment Professionals5 Years
Function # Gained LostDedicated Fundamental Analyst 1 1 0Portfolio Manager 2 2 0
Portfolio Decision: Team Management
Total Asset Structure
Asset Type $(mm)U.S. Tax-Exempt Sep Acct 297 100%
Total 297 100%
Total Asset Growth
0
50
100
150
200
250
300
350
400
2007
69
2008
78
2009
145
2010
236
2011
297
$(M
illio
ns)
U.S. Tax-Exempt Assets
Largest # of $(mm) 5 YearsVehicle Acct Accts Assets Net FlowsSeparate 132 9 297 182
Fee Schedule:
Min Acct Size ($mm): 10
Account FeeSize ($mm) (%)Balance 1.00Client Allocation$70 1.00
Product Highlights:
Investment Style: Small Cap Growth
Benchmark: Russell 2000 Growth
Invest. Strategy: Fundamental Research (100% Bottom Up)
Investment Process:20% Industry/Sector Allocation80% Security Selection
YearPortfolio Characteristics End
% Mid Cap ($wgt) $1.5 - $10 B 44% Small Cap ($wgt) < $1.5 B 56Number of Holdings 92Annual Percent Turnover 196
Performance Composite:
Assets in composite ($mm): 297Number of Accts in Composite: 9
2011 Annual Dispersion Range:Composite Return: (0.11%)Highest Return: (0.04%)Lowest Return: (0.22%)
Note(s): The product incepted in May of 2007. Prior to joining CastleArk, the team worked at M & I Investment Managementand managed the firm’s Small Cap Growth product. Asset increase in 2008 was attributed to the gain of one account for $16million and subsequent inflows despite market depreciation. Asset increase in 2009 was attributed primarily to marketappreciation. Asset growth in 2010 was attributed to the gain of two accounts for $15 million and considerable inflows.
2
Exhibit 5
CastleArk Management, LLCSmall Company Growth
Investment Philosophy:CastleArk believes that excess returns can be achieved by investing in companies with improving business fundamentals,superior earnings and revenue growth rates where the direction of growth is more important than the absolute level ofgrowth.
Research Process:CastleArk’s research process is based on the internal analysis of the small cap team. The philosophy focuses on knownfacts and fundamentals, as well as avoidance of stocks whose raising value is due to opinions and speculation of others. Themajority of the research is internally generated through meetings with managements, discussions with industry consultantsand public filings. Outside research and Wall Street analysis is used to supplement the team’s internal research and tomeasure market expectations.
Security Selection:The security selection process begins with a universe of all companies with market capitalizations of between $150 millionand $3.5 billion, roughly the equivalent of the Russell 2000 Growth market cap range. Investment candidates are identifiedby the use of proprietary quantitative screens, company management meetings, and industry conferences. Once identified,candidates are researched to determine the drivers of their fundamental business improvement and to assess the magnitudeand sustainability of these drivers. Typical drivers include new products or services, new management, restructuring, changein pricing power, change in the secular growth rate of the industry, etc. The final step in the process is to determine whetherthe improvement is already fully reflected in the stock price.
Portfolio Construction:Portfolios typically hold between 85 to 100 securities and have an average annual portfolio turnover in the 200-250% range.Initial positions generally start in the 50-60 basis point range and will be increased in weight if the fundamental story andstock price are playing out as expected.
Sell Discipline:A security may be sold if one of the follow factors occur: 1) driver to fundamental improvement is no longer sustainable; 2)dramatic change in fundamentals; and/or 3) valuation suggests stock is fully valued.
3
Exhibit 5
Nicholas Investment PartnersP.O. Box 2828Del Mar, CA 92014
HistoryNicholas Investment Partners is a limited partnership with seven partners in investments, compliance/operations, clientservice and marketing and business administration. The firm is 100% employee owned, with the majority held by women.
StructureFounded: 2006Ownership: Employee OwnedErrors and omissions insurance: YesIn compliance with SEC and DOL: YesGIPS Compliant: Yes
Contact: Laura DeMarcoP.O. Box 2828Del Mar, CA 92014Phone: (858) 381-8181Fax: (858) 756-6542Email: [email protected]
Key Professionals Joined InvestmentFirm Experience2006 1984Catherine Nicholas - CIO, Dir of Dom Equity
Res, Managing Partner2011 1991Chris Siriani - COO2006 1993Arthur Gleeson - Director of Operations
Employee Structure
Administrative 3Client Services/Marketing 3Executive Management 1Operations 1Portfolio Manager 2Trader 2Total 12
Total Asset Growth
0
100
200
300
400
500
600
700
2007
246
2008
160
2009
272
2010
477
2011
491
$(M
illio
ns)
Total Asset Structure
Asset Type $(mm)U.S. Tax-Exempt 178 36%U.S. Taxable 313 64%
Total 491 100%
U.S. Tax-Exempt Separate/Commingled Assets as of December 31, 2011
Asset Class $(mm)Domestic Broad Equity 162 91%Domestic Broad Fixed-Income 16 9%
Total 178 100%
Client Type $(mm)Public 178 100%High Net Worth 1 0%
Total 178 100%
Note(s): Asset increase in 2010 was attributed to the gain of six accounts for $86 million. Chris Siriani joined the firm in 2011 to replace Greg Gleeson wholeft the firm at that time.
1
Exhibit 5
Nicholas Investment PartnersSmall CapAs of December 31, 2011
Key Professionals Joined InvestmentFirm Experience
Catherine Nicholas - PM 2006 1984John Wylie - PM 2007 1981Alexander Reison - Trader 2006 2006Cathy Newcomb-Burdick - Dedicated FA 2011 1989
Investment Professionals5 Years
Function # Gained LostDedicated Fundamental Analyst 1 3 2Portfolio Manager 2 1 0
Portfolio Decision: Individual With Backup
Total Asset Structure
Asset Type $(mm)U.S. Tax-Exempt Sep Acct 76 56%U.S. Taxable 59 44%
Total 135 100%
Total Asset Growth
0
50
100
150
200
2007
10
2008
18
2009
51
2010
121
2011
135
$(M
illio
ns)
U.S. Tax-Exempt Assets
Largest # of $(mm) 5 YearsVehicle Acct Accts Assets Net FlowsSeparate 38 10 76 20
Fee Schedule:
Min Acct Size ($mm): 5
Account FeeSize ($mm) (%)Balance 1.00Client Allocation$70 1.00
Product Highlights:
Investment Style: Small Cap Growth
Benchmark: Russell 2000 Growth
Invest. Strategy: Fundamental Research (100% Bottom Up)
Investment Process:5% Industry/Sector Allocation5% Risk Control
90% Security Selection
YearPortfolio Characteristics End
% Mid Cap ($wgt) $1.5 - $10 B 52% Small Cap ($wgt) < $1.5 B 48Number of Holdings 92Annual Percent Turnover 121
Performance Composite:
Assets in composite ($mm): 135Number of Accts in Composite: 11
2011 Annual Dispersion Range:Composite Return: (7.85%)Highest Return: (7.38%)Lowest Return: (8.18%)
Note(s): Product incepted July 2007. Asset increase in 2008 was attributed to the gain of four accounts for $18 milliondespite market depreciation. Asset growth in 2009 was attributed to the gain of four accounts for $7 million and subsequentinflows as well as market appreciation. Asset increase in 2010 was attributed to the gain of five accounts for $50 million.Analysts Jeff Smith and Ryan Beckham left the firm in 2008 and in 2011, respectively.
2
Exhibit 5
Nicholas Investment PartnersSmall Cap
Investment Philosophy:Nicholas Investment Partners believes that investing in successful, growing companies - ones that manage positive changeadvantageously and are poised to exceed expectations - has the potential to result in outstanding capital appreciation.
Research Process:Approximately 80% of investment ideas are internally generated. Each member of the investment team is actively engagedin the traditional fundamental research and confirmation process of highly ranked stocks generated by external and internalresearch sources including a multifactor quantitative model. The internal research model systematically and objectivelysources new ideas and monitors the strength of existing holdings. Idea generation and research is dynamic and combinestraditional fundamental analysis with the power of quantitative modeling. This quantitative effort is driven by experiencedinvestment professionals applying tools to identify and validate their investment ideas as well as manage the portfolio.Nicholas’ quantitative model is based upon their philosophy of positive change, supported by quality and timelinessmeasures.
Security Selection:Nicholas Investment Partners applies its buy criteria to a universe of 5,500+ companies within the market capitalization of theRussell 2000 Growth Index. The investment team closely follows 100-150 top-ranked stocks which typically include currentholdings plus eligible buy candidates. The firm’s buy discipline is to invest in companies demonstrating a combination of thefollowing: 1) Positive Change: Sources of positive change may include a new product, competitive advantage, industrydynamics, regulatory change or management change. 2) Sustainability: This positive change must also be sustainable andsupported by the company’s long-term earnings potential, financial strength and quality of management. 3) Timeliness: Thetimeliness of investment is confirmed by evaluating the stocks relative price strength, liquidity, institutional sponsorship,market sentiment and economic factors impacting the company. Companies meeting their investment criteria typicallyexhibit revenue and earnings acceleration, upward earnings revisions, improving credit profiles, gaining market share andstrong management teams.
Portfolio Construction:When constructing portfolios, the portfolio manager will typically adhere to the following general guidelines: positions areinitiated at 1 to 2% of the portfolios total market value and do not exceed 5%; there is an average of 75 - 100 holdings;market capitalization of a stock at the time of purchase is within the market capitalization range of the Index, but will typicallynot exceed 2x the upper limit of the Index as the stock appreciates; sector weights are typically no greater than 2x thebenchmark weight or 35% of the total portfolio market value; and cash levels are typically less than 2% and generally will notexceed 5% of the portfolio.
Sell Discipline:Stocks are sold out of the portfolio for any of the following reasons: 1) Better total return candidate. This is the mostcommon reason a stock is sold. 2) Reason for purchase is no longer valid. 3) Stock appreciates beyond the portfolioconcentration and capitalization limits: If a stock appreciates beyond 2x the capitalization range of the benchmark, theportfolio manager will sell the entire position and redeploy the profits to other US Small Cap positions meeting the buycriteria.
3
Exhibit 5
State Universities Retirement System of IllinoisPerformance vs CAI Small Cap Growth StylePeriods Ended March 31, 2012
Return RankingThe chart below illustrates fund rankings over various periods versus the CAI Small Cap Growth Style. The bars representthe range of returns from the 10th percentile to the 90th percentile for each period for all funds in the CAI Small Cap GrowthStyle. The numbers to the right of the bar represent the percentile rankings of the funds being analyzed. The table below thechart details the rates of return plotted in the graph above.
(20%)
(10%)
0%
10%
20%
30%
40%
50%
Last Quarter Last Year Last 3 Years Last 5 Years Last 7 Years
B(10)
A(97)
(72)
A(66)B(67)
(59)
B(4)
A(63)(62)
(56)
(60)
10th Percentile 17.59 10.08 34.01 10.07 11.7825th Percentile 16.04 5.88 32.82 7.13 9.31
Median 14.52 2.48 29.01 4.69 7.7675th Percentile 13.00 (1.97) 27.22 2.44 5.7890th Percentile 12.12 (6.61) 23.81 (0.17) 4.11
CastleArk A 10.78 (0.26) 28.34 - -Nicholas B 17.64 (0.47) 37.85 - -
Russell 2000Growth Index 13.28 0.68 28.36 4.15 6.86
Note(s): Performance is shown gross-of-fees.
State Universities Retirement System of Illinois
Exhibit 5
State Universities Retirement System of IllinoisPerformance vs CAI Small Cap Growth StyleRecent Periods
Return RankingThe chart below illustrates fund rankings over various periods versus the CAI Small Cap Growth Style. The bars representthe range of returns from the 10th percentile to the 90th percentile for each period for all funds in the CAI Small Cap GrowthStyle. The numbers to the right of the bar represent the percentile rankings of the funds being analyzed. The table below thechart details the rates of return plotted in the graph above.
(80%)
(60%)
(40%)
(20%)
0%
20%
40%
60%
80%
12/2011- 3/2012 2011 2010 2009 2008
B(10)
A(97)(72)
A(36)
B(83)
(59)
B(1)
A(52)(44)
B(9)
A(37)
(68)
A(12)
B(84)
(15)
10th Percentile 17.59 5.32 37.44 49.85 (35.78)25th Percentile 16.04 2.52 32.43 46.78 (39.77)
Median 14.52 (1.69) 28.81 38.09 (42.68)75th Percentile 13.00 (6.27) 26.94 28.49 (46.51)90th Percentile 12.12 (10.23) 21.64 19.99 (49.49)
CastleArk A 10.78 (0.11) 28.62 43.41 (37.78)Nicholas B 17.64 (7.85) 43.24 50.20 (48.52)
Russell 2000Growth Index 13.28 (2.91) 29.09 34.47 (38.54)
State Universities Retirement System of Illinois
Exhibit 5
State Universities Retirement System of IllinoisRisk/Reward vs CAI Small Cap Growth StyleFour and Three-Quarter Years Ended March 31, 2012
20% 22% 24% 26% 28% 30% 32% 34% 36% 38% 40% 42%(10%)
(5%)
0%
5%
10%
15%
CastleArk
Nicholas
Russell 2000 Growth Index
Standard Deviation
Re
turn
s
State Universities Retirement System of Illinois
Exhibit 5
Comparative Manager Matrix
This page allows for detailed comparisons of multiple managers against each other, as well as versus market indices andpeer groups. This comparative analysis can involve various types of performance statistics and holdings-based portfolioanalysis over multiple time periods. The number in the middle of each box is the relevant value for a given portfolio, and thesmaller number in the lower right corner is the relevant peer group ranking of that value.
Return Based Risk Statistics for 4-3/4 Years Ended March 31, 2012vs the Russell 2000 Growth Index and the CAI Sm Cap Growth Style PEER GROUP
(19) CastleArk 27.50%
(64)
8.92
(33)
4.70%
(56)
0.91
(82)
0.22
(14)
0.45
(23)
0.95%
(78)
(19) Nicholas 32.84%
(11)
7.54
(48)
4.70%
(56)
0.97
(21)
0.09
(37)
0.13
(37)
0.98%
(23)
(19)
Russell
2000 Growth
Index
27.62%
(63)
0.00
(100)
0.00%
(100)
1.00
(1)
0.07
(48)
0.00
(50)
1.00%
(1)
Correlation
Excess
Return
Ratio
Sharpe
RatioR-Squared
Downside
Risk
Tracking
Error
Standard
Deviation
State Universities Retirement System of Illinois
Exhibit 5