TEACHERS’ RETIREMENT BOARD

INVESTMENT COMMITTEE Item Number: 12

SUBJECT: Diversity in the Management of Investments - Long-Term Business Plan CONSENT: _____ ATTACHMENT(S): 2 ACTION: X DATE OF MEETING: June 8, 2016/20 mins. INFORMATION: _____ PRESENTER(S): Candace Ronan and Mike DiRé on behalf of the DMI Team Subcommittee

POLICY Investment strategy is governed by the overall CalSTRS Investment Policy and Management Plan, Teachers’ Retirement Board Policy Manual, Section 1000, page A-1, as well as all asset class and individual investment policies.

In addition, Senate Bill 294 (Chapter 701, Statutes of 2011), by Senator Curren D. Price, Jr., has multiple requirements regarding the utilization of emerging investment managers. The measure required the development of a five-year strategic plan and submission of an annual report to the Legislature providing an update on the progress toward the goals and objectives of the plan.

PURPOSE Since 2015 marked the culmination of CalSTRS original five-year plan, the DMI Team has now evaluated past experiences relating to diversity initiatives undertaken and formulated a new long-term business plan. This report is intended to present to the Investment Committee the proposed long-term business plan to advance Diversity in the Management of Investments. Further, we seek the Committee’s guidance and/or approval of the plan.

HISTORY OF ITEM Diversity within investments has been a strategic initiative of the Investment Committee (Committee) since 2003. Diversity is integrated into the overall CalSTRS Investment Policy and Management Plan, and in 2011, the Committee adopted a five-year business plan to focus and report on diversity in investment management. That plan culminated in 2015 and a new plan is proposed here.

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DIVERSITY ITEM – Long-Term Business Plan Investment Branch

BACKGROUND CalSTRS seeks to honor the philosophy of inclusion, long practiced by California educators, while maintaining a financially-sound retirement system. CalSTRS values diversity; so much so, that Diversity in the Management of Investments is interwoven throughout the Investment branch business goals.

Initiatives designed to meet this objective involve strategies to attract and retain a diverse work force, discover and hire diverse investment managers, and strongly encourage portfolio companies to embrace diverse leadership. Through these efforts, we demonstrate our commitment to ensure that CalSTRS’ staff, investment managers and company leadership more closely reflect CalSTRS’ educator membership, which is predominantly female, and far more ethnically diverse than the institutional investment industry within which CalSTRS operates.

DISCUSSION CalSTRS investment branch intends to increase understanding of diversity and inclusion inside and outside the CalSTRS Investment Branch and advance diversity among investment branch staff, external managers, portfolio companies, and service providers through education, engagement and outreach. Staff diversity will be increased by continuing to educate staff, creating and implementing recruiting strategies, including the student intern program, and continuing the mentor program. External manager and investment management industry diversity will be increased by rethinking and restructuring emerging manager programs and by surveying and publishing the results of surveys as annual diversity awards.

To meet the CalSTRS staff diversity goal, the investment branch has begun, and will continue, to partner closely with CalSTRS Human Resources diversity coordinator and training staff. Investment staff hopes also to initiate partnerships with Stanford University’s Clayman Institute and other external partners. These relationships will be leveraged to assist the diversity team in continuing to foster a culture of diversity and inclusion at the internal staff level.

A focus for increasing diversity in investment management will be to evaluate current emerging manager programs. Staff will investigate other potential approaches by engaging with manager-of-manager firms and researching best practices. Restructuring of current programs will focus on investing in less efficient markets and reducing fees.

To create impact on the investment management industry, the diversity team will partner with CalSTRS Human Resources to craft and conduct a biennial diversity survey, which will culminate in an award and top-ten list of firms and managers who are making important strides in diversity and inclusion. The survey will encompass CalSTRS selected current investment managers and brokers, portfolio companies and service providers. Staff will work closely with CalSTRS Communications on the branding and press releases surrounding the survey and its results.

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Investment staff will continue engagement with emerging managers and affinity groups by representing CalSTRS at annual diversity events and also by co-hosting events with CalPERS and others. Specifically, CalSTRS and CalPERS will co-host a diversity forum in 2017 and CalSTRS and State Street Global Advisors will co-host the second Beyond Talk gender diversity event in 2016. Investment branch staff, through their diversity team work will continue to proactively engage with organizations including, but not limited to, New America Alliance, National Association of Securities Professionals, Association of Asian American Investment Managers, National Association of Investment Companies, 100 Women in Hedge Funds and The Toigo Foundation. One to two diversity team representatives, primary liaison(s) with each organization, will rotate every two years, so that various staff members have the opportunity to take part in direct engagement.

Board diversity will continue to be a top priority for CalSTRS Corporate Governance (CG) unit as shared in the April 2016 Investment Committee. CG’s Board Diversity and Enhanced Diversity Initiative will be driven through company engagements and the Diverse Director Data Source – 3Di. As members of the diversity team, Corporate Governance, will leverage prior work as well as this enhanced initiative, to focus and engage selected financial and technology companies. CG staff plans to emphasize talent management and succession planning and the development of a gender and ethnically diverse human capital pipeline at portfolio companies.

All of this important work by investment branch staff and partners will result in greater diversity and inclusion within the Investment Branch and inspire diversity efforts within the broader CalSTRS organization, throughout the investment management industry and corporate culture.

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D i v e r s i t y i n t h e M a n a g e m e n to f I n v e s t m e n t s

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DIVERSITY IN THE MANAGEMENT OF INVESTMENTS

FAST FACTS Team Members: Alexandria Kinanahan, Christopher Ellis, Deborah Contini, Debra Ng, Delfina Palomo, Geetha Arani, Helena Posner, Jeffrey Jaro, John-Charles Gish, Josh Kawaii-Bogue, Ly Van, Mami Wong, Mary Morris, Matt Lisonbee, Michael Lawrence, Mike DiRe, Nick Chladek, Tejdeep Kochhar and Travis Antoniono

Executive Committee: Team Leader: Candace Ronan Immediate Past Team Leader: Solange Brooks Incoming Team Leader: Aeisha Mastagni Advisor: Geraldine Jimenez Support Staff: Cariza Rapolla

Objective: Increase understanding of diversity and inclusion inside and outside the CalSTRS Investment Branch and advance diversity among investment branch staff, external managers, portfolio companies, and service providers through engagement, education and outreach.

FY 16-17 GOALS

Investment Branch Staff:

Establish training program

Implement staff recruitment strategy

Engagement:

Carry out focused engagement with affinity groups, external managers and portfolio companies

Establish and conduct Diversity Survey and Awards

Transparency and Reporting http://www.calstrs.com/sites/main/files/file-attachments/diversity_in_the_management_of_investments_2016_progress_report.pdf

Link to the CalSTRS Investments Branch

CalSTRS investment branch will work to advance diversity in the management of investments over the coming years in three primary areas; internal staff, external investment managers and portfolio companies. Staff will do so by engaging with CalSTRS Human Resources and Communications and with external partners, as well as schools, affinity groups, portfolio companies, external investment managers and service providers.

LONG-TERM BUSINESS PLAN

INVESTMENT BRANCH STAFF

Ongoing training program

Introduction to diversity and inclusion

Inclusion/teamingo Myers-Briggs Type Indicatoro Color Code

Eliminating unconscious bias

Staff recruitment strategy

Increase outreach at the college levelo Continue to participate in career fairso Engage women and minority student

clubso Expand engagement to all northern

California UC and CSU campuseso Refocus and continue student intern

program

Diversity Business Plan

Invesment Branch Staff Engagement

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Extend outreach to the high school levelo Create educational programso Career fairso Student visits to CalSTRS

Incorporate use of technologyo Videoo Social media

Mentor Program

ENGAGEMENT

Focused engagement

Corporate Governance Teamo Build out and leverage enhanced

diversity initiative Select financial and technology

companies Talent management and

succession planning Pipeline of gender and ethnic

diversityo Coalitions – Thirty Percent, Human

Capital Mgmt.

Asset Classes – Asset managers

Diversity Teamo Diversity Forum with CalPERSo Emerging Manager Receptiono Beyond Talk Eventso Diversity Surveyo Annual report

Diversity Survey and Awards

CalSTRS Human Resources and consultanto Survey creationo Survey administration

CalSTRS Communicationso Brandingo Press releases

Current investment managers and brokers

Portfolio companies

Service providers

STRENGTHS OF THE PROGRAM

Long horizon: CalSTRS is committed to diversityfor the long-term.

Size and reputation: As a global investor withbillions of dollars to invest, the CalSTRS DiversityTeam has access to innovative ideas andorganizations throughout the world. CalSTRS iswidely recognized as a leader in diversity effortsand our initiatives reflect that position. Theability to combine the best minds on Wall Streetwith academia, affinity groups and our owninternal resources is a significant advantage.

Organizational support: Investment committeeand executive staff provide solid support andguidance.

The team: A talented group that integrates stafffrom across the Investment Branch and thelarger CalSTRS organization.

CHALLENGES

Attracting and retaining team members: It iscritical that the group is sufficiently staffed inorder to effectively implement the componentsof this proposed business plan.

o During fiscal year 2015-16, the teamsuccessfully recruited Aeisha Mastagnito assume leadership of the group forthe next two years beginning in Januaryof 2017.

o Several staff left the team in early2016, but new team members joinedwho are dedicated to achieving theInvestment Branch diversity goals.

Potential threats to achieving our objectives:

Generalo Limited staff time available for diversity

initiatives

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o CalSTRS Investment Committee changes focus

o Change in political administration o Cultural differences and inherent biases o Perception that diversity is a social

cause o Lack of understanding by stakeholders o Headline risk

Investment Branch staff o Tendency of women and minorities to

self-select out of finance as a career at early age

o Dearth of diverse candidates in finance industry

o Top talent are in high demand and many are priced out of CalSTRS reach

Engagement o Lack of SEC support o SEC provides limited or no guidance or

improvements to disclosures

External managers o Limited universe of institutional quality

emerging managers o Investment management firm formation

has declined o Diverse top-tier managers are in high

demand and may not need CalSTRS capital

o General funds-of-funds organizations are losing focus on emerging managers

o Fund-of-fund model has not worked historically

o Emerging manager definition not consistent across the industry

o Manager-of manager 2-tier fee structure results in higher fees

o Managers that lack scale can come under pressure to maintain profitable operations during severe economic downturn

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