Download 149th REPORT!OF THE INVESTMENTS COMMITTEE

193rd report of the Investments Committee to the Secretary-General
Meeting held on 9 July 2007 at the United Nations Headquarters
1.
The following members of the Investments Committee attended the 193rd meeting held in
New York on 9 July 2007: William McDonough, Chairman; Masakazu Arikawa, Emilio
Cárdenas, Madhav Dhar, Hélène Ploix and Jürgen Reimnitz.
2.
Also present were: Warren Sach, Representative of the Secretary-General for the
investments of the United Nations Joint Staff Pension Fund (UNJSPF); Chieko Okuda, Director,
Investment Management Service (IMS); Zelda Tangonan, Secretary of the Investments
Committee; Ernest Hunt, Senior Investment Officer for Real Estate; Lenore Ivers, Senior
Investment Officer for North America; Anastasia Rotheroe, Senior Investment Officer for
Europe; Toru Shindo, Senior Investment Officer for Asia/Pacific; Fernando Torres-Torija,
Senior Investment Officer for Global Emerging Markets; Stefano Losi, Compliance Officer, who
represented the Secretary-General. Suzanne Bishopric, Treasurer of the United Nations, attended
the meeting as an observer. Linda Assante, Principal and Dan Stenger, Analyst represented The
Townsend Group, adviser on real estate.
3.
The Chairman convened the meeting at 9.00 a.m. and welcomed the participants. The
Chairman noted the absence of the following members of the Committee: Afsaneh Beschloss,
Fernando Chico Pardo, Nemir Kirdar, Khaya Ngqula and Ivan Pictet who had sent their regrets.
He informed with regret the tragic demise of Mr. Ngqula’s 15-month old daughter on 5 July
2007 and that condolences were sent on behalf of the Committee. He also noted the absence of
Mr. Bernard Cocheme, CEO and Mr. Sergio Arvizu, Deputy CEO of the Fund who were
attending the Pension Board sessions the same day.
4.
With regards to the confirmation of the approval of the minutes of the 192nd meeting held
in New York on 9 July 2007, two members of the Committee commented on minor changes in
paragraphs 32 and 33. The Chairman took note and requested incorporation of the revisions as
appropriate in the respective paragraphs.
5.
The members of the Committee approved the inclusion of F5 Networks Inc. (FFIV)
to the approved list.
6.
The Chairman also acknowledged the presence of Ms. Alicia Bárcena, Under-SecretaryGeneral for Management, who attended as an observer of the meeting proceedings during first
hour.
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Comments of the Representative of the Secretary-General (RSG)
7.
The Representative of the Secretary-General updated the Committee on the significant
changes that had occurred in the United Nations Secretariat since the last meeting with specific
reference to the approval of a new peacekeeping budget of US$5 billion, which was about two
times the size of the UN’s overall regular budget. Additionally, the Security Council intended to
seek approval for a larger peacekeeping mission in Darfur, Sudan, estimated at US$2.5 million.
The Secretary-General continued to make senior level appointments with three new UnderSecretaries-General for the Department of Economic and Social Affairs, the High Representative
for Least Developed Countries and the Department for Disarmament Affairs; and three new
Assistant Secretaries-General for the Capital Master Plan, the Department of Political Affairs
and Chief Information Technology Officer.
8.
The Representative of the Secretary-General drew the Committee on the draft
Compliance Policy which outlined the principles, objectives, guidelines and standards for
compliance monitoring and risk control measures for IMS. Compliance risk was defined in
terms of legal or regulatory sanctions, material financial loss or loss of reputation the Fund may
suffer resulting from its failure to comply with laws, regulations, rules, related self-regulatory
organizational standards and codes of conduct applicable to its activities. The draft was to be
reviewed by the Investments Committee and the Office of Legal Affairs. The reviewed and
revised draft would be developed into a Compliance Manual for IMS thereafter.
9.
As a result of the proposed new real estate strategies, the RSG informed the Committee
of a presentation to be made by The Townsend Group.
10.
The Representative of the Secretary-General further apprised the Committee on the
subject of indexation which the Pension Board, at its 2006 meeting in Nairobi, endorsed the
Secretary-General’s proposal to outsource the North American equities portfolio valued at
approximately US$9 billion. The proposal was reviewed the same year by the General
Assembly and was approved along with the funding for its implementation. The decision has
created much contention on the part of the Fund participants. With an aim to calm the upheaval
the issue had created at the Pension Board meeting in 2006, the Representative of the SecretaryGeneral, prior to the Investments Committee meeting, spent a week in Europe to address the staff
pension committee representatives and those of fourteen agencies. During the visit, concerns
relating to the indexation were addressed and the benefits to be derived as a result of the
outsourcing were also discussed. Although the staff appreciated the importance of the Asset
Liability Management (ALM) study and its outcome, it did not address the issue of indexation.
In this regard, the Representative of the Secretary-General informed the Investments Committee
that they might face questions on the subject at the Pension Board meeting on 10 July 2007.
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Review of the Fund portfolio
11.
The Fund value increased considerably to an all-time high of US$39.6 billion as of 7 July
2007. The Fund also outperformed the benchmark by 50 basis points for April and May 2007
and by 40 basis points for the year ended 31 May 2007. It has outperformed both 60/40 and
60/31 benchmarks for the past seven years. Since the global markets were favourable to equities
rather than fixed income, bond purchases of US$838.5 million were made in five currencies to
implement the new Tactical Asset Allocation for fixed income with an increase from 30 per cent
to 31 per cent since the Investments Committee meeting held in April 2007. Equities took
profits from net sales of US$344.8 million, mostly in Europe and Global Emerging Markets. As
most legal issues had been resolved with regards to real estate matters, draw-downs amounting
to US$11.5 million were expended while return of capital totalling US$10.2 million were
received. This resulted in a net increase of US$1.3 million in real estate asset value.
12.
The major positive performance contributors were overweight in equities, overweight in
non-US equities, underweight in fixed income, security selection in non-US equities, and
security selection in fixed income. The major negative performance contributors were security
selection in US equities and small caps in all regions.
13.
Equities were slightly ahead of the benchmarks for the quarter-to-date, 3- and 7-year
period ending 31 May 2007. However, they underperformed slightly in the 1- and 5-year period.
As to the equities performance by region, all regions outperformed the MSCI All Country
benchmark, except for US equities which slightly underperformed by 50 basis points. With
regards the global sector exposures of the equity portfolio, the Fund did not take too large
exposures in any sector for the quarter-to-date ending 31 May 2007.
14.
It should be noted that all of the Fund’s small cap investments underperformed the
benchmark for the quarter-to-date ending 31 May 2007. US small caps underperformed the
benchmark by 1.9 per cent, European small caps by 2 per cent and Japanese small caps by 10.3
per cent.
The Japanese small cap contributed most to the total Fund’s small cap
underperformance.
15.
Fixed income had consistently outperformed the benchmarks on the 1-, 3-, 5- and 7-year
period which made it a positive contributor to the Fund’s performance. For the quarter-to-date
ending 31 May 2007, fixed income was underweight in the US dollar, Euro, Japanese Yen,
Pound Sterling and Australian dollars and was overweight in the peripheral currencies; i.e.,
Canadian dollar, Norwegian Kroner, Swedish Kroner, Mexican Pesos, etc.
16.
Real estate also had consistently outperformed the benchmark on the 1-, 3-, 5- and 7-year
period which made it a major positive contributor to the Fund’s performance.
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Discussion on the review of the Fund portfolio
17.
IMS informed the Committee that a request for proposals for a new small cap manager
for Japan was issued and five companies have been short-listed. Due diligence would commence
sometime in August 2007 and the procurement process was envisaged to be completed by
September or October 2007.
18.
It was noted that although the Committee allocated certain amounts for small cap
investments, it never discussed the possibility of increasing its allocation thereby missing some
potential investment opportunities in the past years. IMS reiterated that although risk exposure
on the equity sector was discussed at a previous meeting, small cap was not part of any policy
benchmark. It was suggested that a discussion should take place to decide if small cap should
form part of the equity total index or a combined equity index. It would culminate into a longterm exposure strategy for small cap, as well as short-term tactical exposure movements in order
to better manage the risk strategies. The Chairman recommended the subject be revisited for
review as a policy issue during the next meeting.
Presentation on a proposal of new long-term strategy for real estate
19.
A joint proposal was made by IMS and The Townsend Group for a new long-term real
estate investment strategy for the Fund. This would entail the following changes in order to
provide diversification and generate alpha to the Fund’s overall investment programme: (a)
increase the core versus non-core investments to 50/50 per cent from a 60/40 per cent allocation;
(b) slightly reduce the allocation on public versus private investments from a maximum of 30 per
cent to a maximum of 20 per cent to be invested in public real estate; (c) increase the US versus
non-US investments from a 70/30 per cent allocation to a 50/50 percent in order to maintain
flexibility to over/underweight non-core investments depending on market conditions; (d) review
alternates to the current benchmark by changing the private market benchmark to NCREIF Open
End Diversified Core Equity Index (ODCE) from NCREIF Property Index (NPI); and (e) change
to a more active management on the publicly-traded real estate securities (PTRES). In respect of
ODCE vis-à-vis NPI, The Townsend Group articulated that the former would be a better
representative of the Fund’s portfolio because the index valuations were based on quarterly
valuations which would have more leverage and would fluctuate based on debt mark-to-market.
Hence, the recommended benchmarks for the current portfolio would be: (a) a stylized
benchmark weighted by quarterly market value of public and private portfolios; (b) NCREIF
ODCE plus 100 basis points for private investments; and (c) Wilshire Real Estate Securities
Index for public investments. The relevant benchmark for the recommended strategy would be
the same with the exception of the Wilshire index which would be replaced by the European
Public Real Estate Association/National Association of Real Estate Investment Trusts
(EPRA/NAREIT) Global Index for public investments.
20.
The Townsend Group’s proposal for the active management on PTRES would involve
three options; e.g. hiring an investment advisor to handle the type of securities, investing in a
commingled PTRES Fund with institutional fee structure, or indexing PTRES using a real estate
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sector index. With these in mind, IMS presented three operational scenarios: (1) to keep PTRES
in the real estate portfolio using active management; (2) to eliminate PTRES from the real estate
portfolio and include in the North American indexed portfolio; or (3) to partially move PTRES
to the North American indexed portfolio and actively manage the balance.
21.
The Committee concurred with the recommended benchmarks and decided to move
forward with the rest of the recommendations. However, in order to enhance such
recommendations, a request was made by a member of the Committee to be provided with a
comparative evaluation or analysis of the real estate performance with the recommended
benchmarks for the 1-, 3-, 5-year period in order to see how the Fund performed using the old
and the new benchmarks. Similar requests were also made on the breakdown of the managers’
performance and how far the Fund was on its strategic targets in terms of the core and non-core
investments. The Townsend Group would provide a simplified spreadsheet/s that would satisfy
such requests.
Comments of the members of the Investments Committee
22.
The United States (US) has a current account deficit of about 6 per cent of Gross
Domestic Product (GDP). Although it had a negative net investment position of about 20 per
cent of GDP, the capital flows related to income and the negative net worth would still be
positive. There was a great deal of equity investments by US investors in amounts larger than
the debt held by foreign investors in the United States. There could be a likelihood of it to
continue indefinitely where one would witness world capital flows from China, India, the oilproducing countries and some of the European countries like Germany, Holland, Switzerland,
etc. There simply has to be an adjustment to world capital flows as this would undoubtedly
mean greater investments. There could be a potential negative position in the social security
system and health care system particularly for the elderly to a point where even if the negative
balance of payments did not catch on, the economy would not be able to function very well. The
growth in the first quarter of this year was 0.7 per cent and was estimated to be around 3 per cent
in the 2nd quarter. The consensus of the economic forecasters on the growth rate for the second
half of the year would be around 2.5 to 3 per cent. The Federal Reserve (Fed) would keep the
interest rate policy on hold owing to inflation predicted to rise. With a 4.5 per cent
unemployment rate despite more employment opportunities in the badly-damaged construction
industry, it would be unlikely that the Fed would ease interest rates in the near future. The
weakness in the US dollar would continue.
23.
In the short-to-medium term, a reasonably attractive environment for the US and the
ably attractive environment for the US and the global equity markets would exist. However,
three relatively salient points needed to be considered: (1) the worsening sub-prime business;
(2) the declining housing market; and (3) the expectation of a recovering US economy. These
three factors were viewed as neutral to negative. If one would look at a pattern of the US
economy and the corresponding movements in asset prices, the current circumstances would
resemble that of the economic environment in late 1986 and early 1987 when the US economy
saw a 5-6 year boom in 1982 and again in 2002; exactly 20 years later. There was a sense of
anxiety that the equity market would not be able to handle a weak dollar, rising interest rates and
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a US deficit. This was the exact same scenario being experienced by the US economy today.
With that picture in mind, the US economy might be reaching the end of a cycle and the last
stage of the bull market. As the US economy would start to pick up and the global economy
would be seen as relatively firm, interest rates, being the backbone of asset prices, would keep
rising a bit more. It would be too early to be concerned about decreasing the equity position but
it would not hurt to evaluate other alternatives. In respect to the global economy, two important
differences in the sequence of events would find some tremendous parallels between 1987 and
today. Overall valuations were slightly lower and rate increases were significantly lower. The
general level of inflation in the world would be considerably lower.
24.
The forecasted growth rate in France for 2007 would be around 2.1 per cent which was
lower than expected. France’s growth rate has been on a plateau since 2004 and below the
average growth by 70 basis points in comparison to other European countries. Further growth
should be fostered by the increase in purchasing power due to the most recent policies instituted
by France’s newly-elected president, Mr. Nicolas Sarkozy; e.g., reduction in income tax, more
pay for overtime, and other factors like limited price growth, and reduction in unemployment
rate which stands at 8 per cent. Investments by companies also should be a positive factor this
year with a growth of 5.4 per cent. Corporate earnings have been progressing very well.
President Sarkozy created an atmosphere of confidence. A pragmatist, he seemed determined to
achieve as much as possible and seeks to be very well-briefed before any decision is made. He
has decided to implement his programme despite opposition. With regard to the stock market in
France, three salient factors need to be considered. Firstly, there seems to be a big difference
between the most liquid stocks and others; the former being correctly valued and the latter,
overvalued. Hence, investing in large caps would be reasonable. Secondly, to justify the present
stock prices, assumptions on companies, Revenues, EBIT, Profit for the period 2006-2011
should be twice higher than today. In other words, today’s stock prices are overvalued by a third
based on the historical stock return compared with bond return. Lastly, the current difference
between stock return and the bond rate has steadily declined with 2.8 per cent vis-à-vis 5.6 per
cent during the same period in 2005 and in December 2003. If interest rates were to increase,
then the stock market prices would be unstable. However, it is anticipated that interest rates
would not drastically change so long as the Asian countries provide liquidity. (Presently, spreads
are increasing, not interest rates). China, in particular, is expected to make its economy robust
and buoyant until after the Olympic Games in 2008 and the Shanghai Fair in 2010. Following
those events, China would have to lift its banking system from bad debts which might reduce
liquidity causing exertion for global economy.
25.
Although any move by the Federal Reserve in the direction of hiking interest rates would
normally affect the European Central Bank (ECB), the latter would maintain interest rates at its
current level. The Euro was at a level which was considered to be about 15 per cent overvalued.
If the situation in the US economy would persist and with China investing more in the normal
stock markets, the Euro would continue to appreciate further. It was estimated that by 2010, the
Euro would have about 30-40 per cent in currency reserves which would have a negative effect
on the US dollar. Germany continued to have a positive outlook regardless of the overvalued
Euro. Although there were some European countries seeking a weaker Euro, ECB President
Jean-Claude Trichet remained strong its policy. Germany has profited also in the foreign trade
development of Poland, Czech Republic and Hungary. However, it is apparent that growth
6
during the next year predicted to be around 2 per cent, would be less than the current year’s rate
of 2.7 per cent. Unemployment was at 7 per cent and at its lowest level since 1991.
26.
The Bank of Japan (BOJ) kept a very slow and steady approach to interest rates. It could
raise interest rates two times by the end of this year. The real problem for the Japanese economy
would be the unstable political situation that has already resulted in the Minister of Agriculture
committing suicide and the Minister of Defence forced to resign. The popularity of President
Shinzo Abe has been declining and if the trend continued, there was the likelihood that he would
consider resignation. The July elections would be the deciding factor.
27.
The agricultural protectionism in Latin America was no longer damaging to the region
since the agricultural exports in Argentina and Brazil were booming. Brazil was defined as
Europe’s strategic partner in the region. The link between Europe and Brazil would probably
affect Mercosur. As it is, Mercosur was in a state of chaos since two of the member states; i.e.,
Brazil and Paraguay, have not approved Venezuela’s entry. The Brazilian parliament refused to
grant its approval until Venezuela’s President Hugo Chavez issues a letter of apology recanting
his statement alluding to it being a parrot of the United States. Pres. Chavez has continued to
challenge its neighbouring countries. He opened an office called Alba; his own version of an
economic integration effort with members such as Cuba, Bolivia, Peru and Venezuela; in the
southwest region of Peru. This office has been used to generate unrest among the Indian
population basically curtailing all mining activities in the area which caused pollution. Once
again, Peru and Venezuela were accusing each other of violating the non-intervention principles.
He also has favoured candidates for the presidential elections in El Salvador, Guatemala and
Paraguay. His candidates in Guatemala and Paraguay stood a good chance of winning the
elections. Pres. Chavez was also getting closer to Russia and Iraq by increasing its military
purchases. This was indeed a growing problem in the region. Latin America’s three major
economies; i.e., Mexico, Brazil and Chile, were in good shape. Since Mexico’s President
Calderon was elected by a thin margin last year, things have changed dramatically for him
politically. His popularity has declined to less than 30 per cent which could make him lose the
elections. In the meantime, Mexico has been enjoying a good economic health. Chile’s
economy grew stronger this year with the mining industry, wood and other commodities they
export at reasonable prices. Argentina has been plagued with a serious energy crisis. Some
companies were forced to close down a couple of times a day due to blackouts. Employees were
receiving forced vacation leaves. Social climate has also been deteriorating. Despite these,
growth was still forecasted at 7.5 per cent since all commodities have very strong demand. The
highest source of revenue for the Argentinian Treasury has been the export duties for which the
government would take 30 per cent off soya beans, wheat and corn exports. Colombia and Peru
would be disappointed since the trade agreement with the United States would not be easily
approved.
Short-term tactical asset allocation
28.
The proposed asset allocation recommended by IMS staff and adopted by the Committee
was as follows:
7
Type of investment
Percentage
Equities
Bonds
Real estate
Short-term investments
61
31
6
2
29.
The proposal took into consideration the position of the investment advisers and IMS
where they felt that the although the overall environment was favourable to equities rather than
fixed income, the persistent volatility of the equity market has reduced its attractiveness.
Corporate earnings would still be positive but they were not as robust. The Committee
concurred with the recommendations.
Monthly summary report of the Fund’s risk exposure
30.
With respect to the request made by the Committee in the last meeting, a risk exposure
report as of 31 May 2007 was submitted to the members in June 2007 for their review. The
Committee found the report to be informative and recommended no changes.
Update on Citigroup Japan Investments LLC’s acquisition of Nikko Cordial Corporation,
parent company of Nikko Asset Management Co. Ltd. (UNJSPF’s investment adviser for
Asia-Pacific) and Nikko AM International, Inc. (for UN University)
31.
IMS informed the Committee on the steps and measures undertaken with regards to the
May 2007 acquisition of the parent company of Nikko Asset Management Co. Ltd, the Fund’s
non-discretionary investment advisor for its Asian equities portfolio; and Nikko AM
International, Inc., adviser for the United Nations University Endowment Fund’s (UNUEF)
investment by the Citigroup Japan Investments LLC. The Fund was informed by Nikko of the
intended takeover and requested its written consent to the transaction.
32.
IMS requested legal opinion from the UN Office of Legal Affairs as to whether the Fund
should consent to the proposed assignment of adviser responsibilities from Nikko to Citigroup,
comprised of two agreements, stemming from the takeover. Given that both agreements
involved the Fund’s fiduciary responsibility for the investment of assets held in trust on behalf of
the participants and beneficiaries of both the Pension Fund and the UNUEF, the Fund was
required to carefully select the persons or entities to which the fiduciary responsibility was to be
delegated and entrusted to. Therefore, the Fund had not selected nor evaluated Citigroup as an
investment advisory service provider under the two agreements.
33.
Moreover, merely allowing the transfer of such investment advisory services from Nikko
to Citigroup without a competitive procurement exercise on the part of the Fund would be a
breach of the UN Financial Regulations and Rules for effective competitive procurement of
services for the Organization. Accordingly, it was the advice of the Legal Office that the Fund
8
should terminate the agreements and conduct a new procurement exercise in order to select a
service provider for investment advisory services required by the Pension Fund and the UNUEF.
Both agreements with Nikko provided either party (Fund/Nikko) to terminate the contracts for
any reason upon 30 days advance written notice, provided that the Representative of the
Secretary-General request the automatic extension of the agreements up to 270 days. The 270day extension would facilitate a transitional period of service from the predecessor to the
successor. On 14 May 2007, the RSG issued the letter providing notice of termination to Nikko.
34.
Although the current contract with Nikko Asset Management is due to expire early
March 2008, the request for proposals currently underway would enable the selection and
appointment of a new adviser by January/February 2008.
Review of Compliance Policy
35.
A presentation was made by IMS on the Compliance Policy of the Fund describing the
compliance principles of the Fund’s activities. IMS outlined the governance; the consultations
made in its development; the definition of compliance risk; the areas of compliance risk;
responsibilities (advice, guidance and code of ethics, education, assessment and monitoring of
compliance risk, reporting, statutory responsibilities and liaison and compliance programme);
and independence.
36.
The Committee commended the presentation.
During the ensuing discussion,
clarifications were raised and IMS addressed concerns raised by the members. It was explained
that real estate compliance monitoring would be reflected in the Compliance Manual that would
be developed after the UN Office of Legal Affairs expressed its opinion on the policy. With
respect to procedures on conflicts of interest, it was indicated that all IMS staff were required to
complete the annual financial disclosure form for review by Price Waterhouse. Any
discrepancies would be discussed by the UN Ethics Office with the concerned staff. As to the
question on the Fund’s policy of proxy voting, it was explained that the IMS Investment Manual
had specific guidelines and the Compliance Manual would specify the method as to how the
votes would be reviewed.
37.
A member of the Committee opined that the Compliance Officer should have direct
access to the RSG and the Director of IMS. His activities and work programme should be
delineated and achievements thereof periodically reported to the Audit Committee and reviewed
by the Investments Committee. A high level review to ensure compliance was recommended by
the UN Office of Internal Oversight. It should be noted that the Committee was presented
with the outline of the draft Compliance Policy.
Review of matters for discussion at the Pension Board meeting
38.
The Committee was briefed on matters to be discussed at the Pension Board meeting on
10 July 2007. There were three documents submitted to the Board for review; (a) Proposed
amendments to the Fund’s practice on administrative costs as they relate to IMS budget and record
9
keeping, (b) Membership of the Investments Committee, and (c) Management of the investments of
the Fund.
Other matters
39.
The Chairman, on behalf of the Committee, expressed his appreciation to the dedicated
service extended by Ms. Chieko Okuda during her tenure of service as Director of IMS. She, in
turn, thanked the Chairman for aiding IMS to move forward in a positive direction, the members
of the Committee for their wisdom and advice over the years, the RSG for his guidance and
instruction, and the IMS staff for their support and cooperation in doing a great job despite many
challenges. Ms. Okuda’s resignation would take effect on 13 July 2007.
2008 Meeting Schedule
40.
The following is the meeting schedule for 2008.
Date
Venue
Monday, 4 February
Monday, 5 May
Monday, 7 July
Tuesday, 8 July (Pension Board)
Monday, 8 September
Monday, 10 November
New York
New York
Rome
Rome
New York
New York
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Forthcoming meeting
41.
The next meeting will take place on 29 October 2007 in New York.
42.
The meeting was adjourned at 12.35 pm.
Submitted
Approved
(Signed) Zelda Tangonan
Secretary
(Signed) William J. McDonough
Chairman
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