8. Annual Presentation by Zeno Consulting Group-Trading ...retirement.ladwp.com/AgendaItems/20150819 - Item 8.pdf · Meaningful Trade Cost Analysis . Three Reasons Why Funds Come

8. Annual Presentation by Zeno Consulting Group- Trading Cost Analysis Provider

8

Los Angeles Water & Power Employees’ Retirement Plan August 12, 2015

Transaction Cost Analysis and

Annual Review

Confidential

Table of Contents

Tab 1 - Who Is Zeno? Tab 2 - Equity Transaction Cost Analysis Tab 3 – Market Review Tab 4 – Annual Review Tab 5 – Appendix - Biographies

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Who is Zeno?

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Meaningful Trade Cost Analysis Three Reasons Why Funds Come to Zeno • Satisfies legal obligation, as fiduciaries, to monitor your managers’ (and

their brokers’) Equity, FX and Fixed Income trading processes for Best Execution

• Provides critical transparency, substantive due diligence, and insight into how your managers are handling Fund assets (“What you don’t know, can hurt you!”)

• Helps control excessive trade costs (often the single largest expense of the Fund!)

Why is Trade Cost Analysis Important for Asset Owners?

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Zeno Consulting Group is a consulting firm, not a broker, that specializes in helping large institutional clients proactively monitor, and manage, their asset managers’ trading processes.

All analytical thought is a function of math, logic, and ethics – but math and logic must be subordinate to ethics.

Zeno of Citium c.335-c.263 B.C. (paraphrased)

As prudent fiduciaries, more than ever before, asset owners should understand their managers’ trading process, what they pay to execute trades, whether they obtained best execution, and its impact on performance.

The easiest route to the top quartile of performance

is to be in the bottom quartile of expenses. Jack Bogle

Who is Zeno Consulting Group?

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Long Track Record Providing Meaningful TCA

• Established in 1986 as “Plexus Group.” Operated as a privately-owned trade cost measurement, analysis, and consulting firm. Two lines of business - selling TCA services to Plan Sponsors and buy-side, respectively. • Developed reputation as thought-leader in trade cost analysis, including being named “Consultant of the Year” by PLANSPONSOR magazine and authoring the PBGC Standards on transition management. • Acquired by JPMorgan Chase in 2002 as part of initiative to develop in-house TCA capabilities. • Acquired by ITG (a specialized agency brokerage and technology firm) in 2006, who integrated the manager TCA services into existing ITG services, and established the plan sponsor TCA services as a wholly-owned subsidiary called “Plexus Plan Sponsor Group, Inc.” • In January 2010, Plexus Plan Sponsor Group, Inc. was re-established as an independent employee-owned consulting firm called: Zeno Consulting Group, LLC.

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• Independent trade cost consultant, and Registered Investment Advisor, acting solely in asset owner’s interest.

• Methodology for calculating and benchmarking costs. • Web-based drill down facility, peer group universes, and comprehensive

end-to-end analytics that calculate the true loss of asset value and its impact on performance.

• Specialist in constructing meaningful oversight programs that systematically identify trading outliers and flag key issues with actionable recommendations.

• Zeno consultants act as extension of your staff in reviewing reports and conducting manager follow-up.

Unique Consultative Differentiators

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Current Offerings Utilized By Our clients:

SPONSOR/FUND REVIEW – Equity Assists asset owners and general consultants in meeting legal and fiduciary obligations to ensure managers receive Best Execution and pay reasonable commission rates.

SPONSOR/FUND MONITOR – Equity

Goes beyond basic due diligence and provides asset owners greater transparency into their managers’ internal trading processes, enables constructive dialogue with managers, and provides consultative follow-up to reduce excessive transaction costs.

FX MONITOR Provides Fund fiduciaries with an accurate assessment of their managers’ foreign currency transactions , and consulting to help conduct follow-up on cost outliers and address potential trading abuses.

FIXED INCOME MONITOR Provides Fund fiduciaries with an accurate quantitative assessment of their managers’ fixed income transactions, and consulting to help conduct follow-up on cost outliers and address potential trading abuses.

DIRECTED BROKERAGE AND COMMISSION RECAPTURE AUDIT Offers asset owners an independent assessment of their underlying managers’ and funds’ execution efficiency, with particular emphasis on whether directed trades achieved Best Execution or incurred unnecessary hidden costs.

TRANSITION SERVICES Assists asset owners in navigating the complex marketplace known as Transition Management. As a Registered Investment Advisor, we offer several levels of service that range from pre-trade and post-trade analytics to strategic planning and transition manager selection.

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Online Drill Down From Fund to Portfolio Trade Level Detail

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Equity Trade Cost Analysis

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Transaction Costs: A Common Sense Definition

How to Measure Transaction Costs Value before the transaction $X Value after the transaction $Y Cost to complete the trade $X - $Y

—

The loss of asset value associated with Buying and Selling securities in your portfolio.

Nothing tricky here. Simple arithmetic.

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Monitoring Commission Recapture Program 1. A three-step approach to aid in satisfying a fiduciary obligation;

a) Measure Implementation shortfall costs and compare with difficulty adjusted benchmark.

Assess comparative efficacy of commission recapture and non-recapture trades. b) Measure Total Costs and Benchmark Adjusted costs against peer strategies for both

recapture and non-recapture trades. c) Measure commission rates in the context of total costs paid. Assess net and gross

commission rates and usage of brokers.

2. Once the relative efficacy of manager’s trade implementation processes are established through Zeno’s analysis, any follow-up issues or recommendations are identified.

3. Clarification: net commission rates are the actual rates paid to execute a trade: • Any commission savings accruing to the Fund, and achieved from commission

recapture programs, are extracted from the total commission expenditure. Remaining commissions can be expressed in cents and/or basis points.

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Market Review

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• Greater, broader, and deeper discussion within the investment community about trading and its impact on performance.

• Buyside firms are paying more attention and collecting data, to the extent that they have the resources to do, on all the data once an order is released to the broker.

• The number of relevant hedge funds participating in high frequency trading (HFT) strategies has been severely reduced.

• Greater oversight with FINRA requiring 125 or so HFT to record all their trading and provide to the agency upon request.

• Brad Katsuyama’s IEX is steadily gaining market share and intends to become a public exchange by the end of the year.

Flash Boys, One-year Later

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• As market volatility dropped from the highs in late-2008 and early-2009, Total Median Costs have normalized.

• Spreads between the best performing (top quartile) and worst performing (bottom quartile) funds have narrowed since 2011.

* Quarterly costs are reflective of a rolling 4-quarters worth of data.

Total Implementation Shortfall Costs* (basis points)

-50 -51 -49 -47 -51 -53 -51 -48 -44 -46 -44 -45

-46 -46 -43 -40 -41 -39

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0

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4Q10 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14 1Q15

5-Perc 25-Perc 50-Perc 75-Perc 95-Perc

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Commission Trends* in US Markets (¢ per share)

• Annual US trading volumes have steadily declined since 2009.

• Median US commission rates have remained stable over the last 3 years.

• $10.4B in brokerage commissions in 2014, this was a slight increase from $9.3B in 2013 according to Greenwich versus the peak in 2009 of $14B.

• Electronic trades accounted for 37% of institutional trading volume. * Quarterly costs are reflective of a rolling 4-quarters worth of data.

-2.4 -2.4 -2.4 -2.5 -2.5 -2.4 -2.4 -2.3 -2.4 -2.3 -2.3 -2.3 -2.3 -2.3 -2.3 -2.3 -2.3 -2.3

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4Q10 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14 1Q15

5th Perc 25th Perc 50th Perc 75th Perc 95th Perc

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Annual Review

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Trading Review of External Equity Portfolios Trading volume for the aggregate fund was slightly lower over the prior year. Gross commissions

expenditures also decreased slightly as a result.

Managers with greater levels of trading turnover have a greater effect on transaction costs for the overall fund.

Total costs for WPERP as a fund in aggregate improved slightly. In general, individual portfolios were traded efficiently and comparably with peer strategies. The

Pyramis Non-US All Country portfolio, displayed costs that were greater than average. T Rowe Price LC GR saw poor relative performance of recaptured trades, however volumes were very small.

Comingled portfolios BlackRock and LA Capital were efficient.

Costs for trades which participated in the commission recapture program were better than non-recapture trades. In general we find that the commission recapture program did not materially affect manager’s trade execution processes. In some situations recapture trades were more difficult than non-recapture trades. T Rowe Price LC GR also had poor relative performance, however recaptured volumes were very small. In total, 19% of all commission dollars were sent to the recapture program run by ConvergEx. This

was an increase from the prior year of 12%. The majority of commission recapture trading activity (56%) was executed by ConvergEx and

Lynch Jones Ryan (39%). Eleven other brokers were used to facilitate the remaining (5%) commission recapture trades.

Fred Alger (73%) provided the greatest revenues/credits from the program, followed by Frontier (14%), and Gateway (4%).

The commission recapture program further reduced gross directed commissions to 1.0 cps.

Confidential

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Trading Volumes (MM) and Participation Rates 2Q14-1Q15

• Trading volumes and directed volumes were driven by Fred Alger, of which directed trade volume more than doubled from the prior year of $307 mm.

• Directed participation volume increased to 19% from the prior year of 12%. • International managers MFS Intl and Pyramis did not participate in directed trades; Vontobel

executed 3 trades. • Manager’s have discretion for their participation rates.

Non-Directed Directed % Participation Earnest Partners 26 7 21% Fred Alger 2,100 754 26% Frontier 199 66 25% Gateway 0 183 100% MFS 132 21 14% MFS Intl 218 0 0% Pyramis 812 0 0% T Rowe Price LCG 640 18 3% T Rowe Price LCV 224 8 3% Vontobel 85 0 0% Total 4,436 1,057 19%

Comingled: Los Angeles Capital and BlackRock

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Executions vs Zeno Difficulty Adj. Benchmark 2Q14-1Q15

• The Fund as a whole performed inline driven by Fred Alger. • T Rowe LCG executed 17 directed trades in 1Q15 drove costs. However, those costs were

positive. • Vontobel executed 3 directed trades for the review period. • International managers MFS Intl and Pyramis did not participate in directed trades. • Comingled managers BlackRock and LA Capital did not participate in directed trades.

Confidential

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Directed

Non-Directed

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US Manager Commission Rates in cps 2Q14-1Q15

• Net commissions (after rebates) were efficient for US managers. • Directed trades improved overall portfolio commission rates for US managers. • Directed trades were executed at a net of 1.0 cps, this was an improvement of 0.5 cps over the

prior year. • Managers BlackRock and LA Capital did not direct any trades. • International commission rates were inline: MFS Intl (-10 bp), Pyramis (-12 bp), and Vontobel (-14 bp)

Confidential

0.0

0.5

1.0

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3.5

EarnestPartners

Fred Alger Frontier Gateway MFS T Rowe PriceLCG

T Rowe PriceLCV

BlackRock LA Capital

Gross

Net

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Trading Review of External Equity Portfolios Portfolio Strategy Metric Observations

Earnest Partners

Small Cap Value

Total Costs Costs increased over the prior year as the manager executed more difficult trades.

Execution Efficiency Average, when compared with peer portfolios.

Commission Recapture Average participation rate (21%).

Commission Rates

Gross rates (3.1 cps, 4th qtile) have been poorer than peer averages. Net of commission (recapture) savings, commission rates (2.6 cps. 3rd qtile) are average. Used Lynch Jones Ryan (37%), Liquidnet (36%), and ConvergEx (21%), and 3 other brokers (6%) for recapture trades, exclusively.

Fred Alger Large Cap

Growth

Total Costs Costs were essentially flat over the prior year.


Commission Recapture

Biggest participant in program (71%). Participation rate (26%). Largest revenues from any manager in WPERP’s commission recapture program.

Commission Rates

Gross rates (3.0 cps, 3rd qtile) have been poorer than peer averages. Net of commission (recapture) savings, commission rates (2.4 cps. 2nd qtile) are average. Uses ConvergEx for recapture exclusively.

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Trading Review of External Equity Portfolios

Portfolio Strategy Metric Observations

Frontier Small Cap Growth

Total Costs Increase in costs over prior year as the manager traded more difficult securities.

Execution Efficiency Average when compared with peer portfolios.


Participation rate is 19%. Second largest revenues from any manager in WPERP’s commission recapture program.

Commission Rates

Gross rates (3.0 cps, 3rd qtile) are average to their peers. Net of commission (recapture) savings, commission rates (2.4 cps. 2nd qtile) are better than average. Used Lynch Jones Ryan (73%), ConvergEx (27%), and 2 trades with other brokers for all recapture trades.

Gateway Large Cap Core

Total Costs Costs (positive) improved from prior year.

Execution Efficiency

Better than the average (1st qtile) for peer portfolios. Consistent top quartile ranking over the past year.

Commission Recapture Near 100% participation rate (except for 13 trades).

Commission Rates

Gross commission rates at the median (2.0 cps, 2nd qtile). Net of commission (recapture) savings, commission rates (1.1 cps. 1st qtile) are better than average. Used Lynch Jones Ryan (54%), ConvergEx (31%), and ESI (15%) for all recapture trades.

Confidential 23


MFS

Large Cap Value

Total Costs Costs improved from the prior year.

Execution Efficiency Average when compared with peer portfolios.

Commission Recapture Participation rate of 14%.

Commission Rates

Gross rates (2.7 cps, 3rd qtile) have been poorer than peer averages. Net of commission (recapture) savings, commission rates (2.4 cps. 2nd qtile) are average. Lynch Jones and Ryan (56%) and ConvergEx (44%) were the only recapture brokers used.

MFS Intl’ Dev Val

Non-US All Country

Total Costs Costs deteriorated from prior year driven by 1Q15.

Execution Efficiency Consistently in in the top quartile.

Commission Recapture Did not participate.

Commission Rates Commission rates (10 bps, 2nd qtile) are consistently in line with peer averages.

Confidential 24


Pyramis Non-US All Country

Total Costs Costs essentially stable over the prior year. Generally high cost.

Execution Efficiency Average as compared with peer portfolios.


Commission Rates Commission rates (12 bps, 3rd qtile) are consistently in line with peer averages.

T. Rowe Price

Large Cap Growth

Total Costs Costs improved over the prior year.

Execution Efficiency

Average as compared with peer portfolios. While recaptured trades had relative poor performance to non-recaptured trades, those particular trades/investment decisions showed strong positive absolute costs.

Commission Recapture Participation rate is 3%.

Commission Rates

Gross rates (2.1 cps, 2nd qtile) are above peer averages. Net of commission (recapture) savings, commission rates (2.1 cps. 2nd qtile) are efficient. Merrill Lynch (41%) and Piper Jaffray (27%) were the largest recapture brokers.

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T. Rowe Price Large Cap Value

Total Costs Costs were essentially flat from the prior year. Costs for recapture trades outperformed non-recapture trades.


Commission Recapture Participation rates of 3%.

Commission Rates

Gross rates (1.7 cps, 1st qtile) are above peer averages. Net of commission (recapture) savings, commission rates (1.6 cps, 1st qtile) are efficient. Piper Jaffray (63%), Bank of America (27%), Weeden & Co (6%), and Merrill Lynch (4%) were the only recapture brokers.

Vontobel Emerging Market

Total Costs Increasing quarterly costs.



Did not participate in a meaningful way. Only 3 recaptured trades executed in 3Q14.

Commission Rates

Commission rates (15 bps, 3rd qtile) are in line with peer averages.

Confidential 26



BlackRock Large Cap Passive

Total Costs Costs efficient versus the Close

Execution Efficiency Efficient quarterly executions.


Commission Rates

Efficient commission rates of (0.1 cps, 1st qtile).

LA Capital Emerging Market

Total Costs Slight increase in costs from the prior year.



Commission Rates

Efficient commission rates (10 bps, 2nd qtile).

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Conclusions and Recommendations

Trading costs and manager’s overall trading processes were not materially

affected by the Commission Recapture program.

LADWP’s commission recapture program has been implemented in a prudent manner.

Savings from Commission Recapture further reduced gross directed rates from 1.5 cps to 1.0 cps.

In general, overall US commissions for managers improved.

Recommend the continuation of the Commission Recapture program as long as it is fiscally viable.

New Commission Recapture program with Russell Investments started in 2Q15.

Expansion of TCA services in the number of portfolios reviewed and including FX. Confidential 28

Appendix

Confidential 29

Steven Glass, J.D. President and CEO

Steven Glass purchased Zeno Consulting Group, LLC, formerly known as Plexus Plan Sponsor Group, Inc. in January 2010, from its’ parent corporation Investment Technology Group, Inc. Steve first joined Plexus in 1996, and has headed up all client servicing, sales/marketing, and product development for institutional clients such as plan sponsors, mutual fund boards, and other entities exercising oversight over 3rd party investment managers. These services include fiduciary advice regarding: due diligence monitoring, transition management, construction of prudent directed brokerage programs, soft dollar audits, manager searches and terminations, and assistance to trading desks. In December 1999, his Division was named Consultant of the Year by Plan Sponsor Magazine. Prior to joining Plexus, he served as General Counsel to the District of Columbia Retirement Board, where he provided fiduciary guidance on investment management issues, and developed the Board’s Transaction Cost Monitoring Program. Steve received his Juris Doctorate from Drake University Law School and has a Master’s Degree in Law from Antioch Law School. He has written and spoken on trading costs, manager transitions and plan sponsor fiduciary obligations. Two articles (published in The Journal of Investment Consulting) have been cited as “seminal reading” for any plan sponsor concerned about transaction costs. In addition, an article on the fiduciary responsibilities of plan sponsors when implementing transitions (published in Institutional Investor’s 2003 Investment Guide), was selected by The Practicing Law Institute for inclusion in its "ERISA 2004 Course Handbook."

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Warren Chun, CFA Senior Consultant

Warren joined Zeno Consulting Group, LLC, formerly known as Plexus Plan Sponsor Group, in 2008. He provides consulting to plan sponsors, as well as supports plan sponsor clients through the preparation and production of Sponsor Monitor and Transition Management services. Warren also manages Zeno’s Fixed Income product. Prior to joining Zeno, he served as a Portfolio Manager at a convertible securities money manager and as an Analyst at Wilshire Associates, and has over 25 years of industry experience.

Vinod Pakianathan Senior Consultant

Vinod joined Zeno Consulting Group, LLC, formerly known as Plexus Plan Sponsor Group, in 1994. As Managing Director of Consulting, Vinod oversees Zeno's flagship product Sponsor Monitor. Vinod consults with some of Zeno's largest plan sponsor and fund oversight board clients, and supports product development for all Zeno services. Further, Vinod has primary responsibility for the Transition Services provided by Zeno. Vinod has a BS in Engineering and obtained his MBA from the University of Iowa. He has twenty years of industry experience.

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Chris Phillips, CFA Senior Consultant

Chris joined Zeno Consulting Group, LLC, formerly known as Plexus Plan Sponsor Group, in 2002. He services and advises institutional clients such as plan sponsors, mutual fund boards, and other entities exercising oversight over 3rd party investment managers by evaluating the trading activity and performance of managed portfolios. He provides support to Zeno through the ongoing development of products and new business. Additionally, he serves as the firm’s liaison to traditional investment consultants and other entities engaged in the use of Zeno services. Chris has over 15 years of investment related experience and served as investment analyst for the District of Columbia Retirement Board. Chris earned the right to use the Chartered Financial Analyst designation in 1998 and is currently a member of CFA Institute and the CFA Society of Washington DC.

Brian Greene Business Development

Brian joined Zeno Consulting Group, LLC, formerly known as Plexus Plan Sponsor Group, in 2006. He heads sales and business development of Zeno’s three product lines: Trade Cost Analysis, Transition Management Consulting and Directed Brokerage/Soft Dollar Audits. Prior to joining Zeno, Brian has worked for over twelve years in sales, marketing and servicing the plan sponsor community on trading costs, transition management and directed brokerage programs while working with such firms as BNY Brokerage, Lynch, Jones & Ryan and First Union Securities.

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Tracy Grassi Business Development

Tracy joined Zeno Consulting Group, LLC, formerly known as Plexus Plan Sponsor Group, in 2003. Tracy is part of Zeno’s business development team, managing all marketing campaigns, coordinating events and educating prospective clients. Prior to joining Zeno, Tracy worked for Catequil Asset Management, LLC supporting a team of equity traders. Prior to Catequil, Tracy worked for Brown Brothers Harriman & Co. as a short-term money markets trader. Tracy has more than 15 years of experience in the financial industry, most recently working with the Plan Sponsor community.

Cole Bovasso Investment Analyst

Cole joined Zeno Consulting Group, LLC, formerly known as Plexus Plan Sponsor Group, in 2003. As head of report production, Cole is responsible for overseeing the collection and processing of client data, as well as the timely delivery of finished reports. Cole also has primary responsibility for managing outside data vendors and software subcontractors essential to Zeno’s report production processes. Prior to joining Zeno, Cole worked in licensing for Virgin Records America.

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For further information please contact:

Warren Chun, CFA Senior Consultant

310.417.9042 [email protected]

The information contained herein has been taken from trade and statistical services and other sources we deem reliable but we do not represent that such information is accurate or complete and it should not be relied upon as such. No guarantee or warranty is made as to the reasonableness of the assumptions or the accuracy of the models or market data used by Zeno Consulting Group, LLC (Zeno) or the actual results that may be achieved. The screen shots provided in this presentation represent hypothetical examples of certain products available from Zeno. They contain sample data and are provided for informational purposes only. None of these materials is intended to be used for trading or investment purposes or as an offer to sell or the solicitation of an offer to buy any security or financial product. These materials do not provide any form of advice (investment, tax or legal). All trademarks, service marks, and trade names not owned by Zeno are owned by their respective owners. All functionality described herein is subject to change without notice. These materials are not to be copied, displayed or transmitted in any form without the prior written permission of Zeno.

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mailto:[email protected]

8. Annual Presentation by Zeno Consulting Group-Trading ...retirement.ladwp.com/AgendaItems/20150819 - Item 8.pdf · Meaningful Trade Cost Analysis . Three Reasons Why Funds Come

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