Some interesting questions from STRS Board members Mayerfeld and Steen for Chief Investment Officer John Morrow at the October 2020 STRS Board meeting

Hmm.....does it seem to you that one of these guys keeps stumbling over his words and repeating himself? (Hint: it isn't Yoel.) 

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October 15, 2020 STRS Board Meeting Exchange between Yoel Mayerfeld and John Morrow

Yoel Mayerfeld: Again, confirming, um, what do you[?] Brady [?]...does it say in the policy that we use our own, I realize it's a complicated issue that we're looking into, does it say in our policy that we use our own performance? I, thought it, I think it just said the Russell, so, I just wanted to confirm that I don't think it says that in our policy.

John Morrow: Yeah, it says the Russell 3000, Russell 3000 Index. 11.2, 1%, earning at least 1% net of fees above the domestic equity public markets, Russell 3000 Index. In 11.2, and in 11.4, Russell 3000 Index, earning 1% net of fees below the domestic equities public markets, Russell 3000 Index. Let me point to it here... 

Yoel Mayerfeld : ...so it doesn't show our, our own performance as -

John Morrow : No, because in the asset class, that, that is the, and, and the key there too, over a moving 10-year periods, so, sorry, um...so,within the asset class, that is, that is the benchmark. And then, the total fund benchmark... alternative investment actual returns... now, up here you see we have, you know, for domestic equities, 28%, Russell 3000, 23%, International Blended Benchmark, which is a blend of the MSCI developed markets and emerging markets benchmark that's why it's called a blended benchmark, and the fixed income blended benchmark, which is, so on and on, that's - 

Yoel Mayerfeld : Got it. Why not, um, again I understand we're looking at it, looking at potential for change in the future, but why not those same challenges to use the Russell in that case don't those same challenges exist for the individual asset classes, um, why not use our benchmark for those asset classes too if, if it's not an accurate, a fully accurate benchmark?  

John Morrow : You mean for the other asset classes? 

Yoel Mayerfeld : Yeah. 

John Morrow : So, well, because you have a, for instance, domestic equities. We own -- 

Yoel Mayerfeld : [?] ...the alternatives?

John Morrow : Because there's, there has really never been established one industry standard benchmark like for instance in public equities. It's either The Russell 3000, The S&) 1500, I mean there's a couple of benchmarks that have just been established as an industry standard because you can have, you can replicate them in fact, that's passive management, so you can own every security in that benchmark, uh, in your portfolio. There's no benchmark to alternative investments in which you could do that. So you cant, there's never been -- because, private market assets are unique, us, there's thousands of funds out there that you could own, there's thousands of other assets you could own, and those have never been necessarily placed within just one single benchmark that has been established as an industry standard.

Yoel Mayerfeld : ...I guess I'm asking, why are we using the Russell then for the alternative asset classes if it's not, not an efficient benchmark? 

John Morrow :  Well, I think it is a benchmark that can be a good benchmark, a reasonably good benchmark over the long term, because the two values will converge together, because your private market assets should over a 10-year period, um, get through those valuation lags and the changes in, in what's happening in the private markets vs. the public markets and those should converge over a longer period of time. Over a one year period of time, they could be 10 or 15 percentage points different in one year period, and then you're, you've got 17% of your assets that is distorting essentially what's happening in the other 80% of the assets in all the other asset classes because it's such a big margin of difference.  

Yoel Mayerfeld : Got it. It works because of the time period. 

John Morrow : Yeah, yeah. 

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Wade Steen-John Morrow exchange, October 15, 2020 STRS Board meeting

Rita Walters: Mr. Steen?

Wade Steen: … I assumed, isn’t that proposed language?

John Morrow: It is, but back here, we had, as I said, that’s now a second reference to it, we have...here… and we’ve even further clarified the total fund policy return and put in parenthesis “blended benchmark” just so it’s crystal clear that’s what this is, and then we go through each of the asset classes and then we have alternative investments. We added the term actual return to make that crystal clear, that’s more than consistent with the footnote we use, uh on the performance page, page 5, of the gray book, uh, that’s in your materials each month. So, we’re just trying to make sure we’re, we’re consistent across how we, how we talk about it, and try to use returns that are even more clear than what...was even there before.

Wade Steen: I guess to clarify again...this is all new language, correct?

John Morrow : That is not all new, what is in there, the only parts that are new are the underlying [?]…

Wade Steen: ...alternative investments, third paragraph down, actual return underlined, so we did not return, I guess what I’m trying to get to is...I’ll make it simple, did we in our policy before these changes say that on a fund basis we use our own results as a benchmark, anywhere in our policy?

John Morrow : That what’s, that’s what’s included here.

Wade Steen: Being proposed, though.

John Morrow : No, in that section, as part of the footnote to the Trustee’s Summary Report – yes, that was in there. We’re adding a, we’re adding total and blended benchmark and then we’re adding actual return just to make it clear that that is actual return for that, for that total funded policy return. In the performance page, on, which you receive monthly, it actually says “actual return” so we’re just coordinating between the two, the two footnotes to have them have exactly the same language.

Wade Steen: Okay.

Rita Walters, Chair: Mr. Mayerfeld.

Yoel Mayerfeld: ...and that was approved, or you’re asking them to approve that?

John Morrow : Asking you approve everything that is either underlined or bolded or has a strikethrough.

Rita Walters: Any other questions? Okay.