For the purpose of this document, any reference to the "Trustees" shall be to the Board of Trustees of the Retirement Plan for Chicago Transit Authority Employees.
The Retirement Plan for Chicago Transit Authority Employees (the "Plan" or "Plan") is a defined benefit plan, which is considered a "going concern." Trustees, who are responsible for setting investment policy, take a long-term investment perspective in planning policy, and employ independent investment consultant(s) acting in a fiduciary capacity to assist with formulating and implementing an investment policy in a systematic manner. Material, relevant, and decision-useful sustainability factors have been or are regularly considered by the Trustees, within the bounds of financial and fiduciary prudence, in evaluating investment decisions.
Implementing the investment policy is accomplished through the use of outside investment professionals; no money is managed "in house." Outside investment managers (also sometimes referred to herein as "managers") are hired to implement specific aspects of the investment policy and the managers act as fiduciaries to the Plan. Investment managers have discretion to buy and sell assets within the scope of written investment guidelines.
In accordance with the provisions of the Plan and Trust Agreement, the Trustees select the investment managers. Investment managers must have a history of proven successful performance in the management of significant sums of invested assets in the asset class and style for which it is being considered. The Trustees retain authority to select, under limited circumstances and for relatively small sums, managers who do not yet satisfy the historical standard set forth above.
This SIP has been developed after a comprehensive study and evaluation of other alternative investment approaches and reflects a consensus of input from the Plan’s office of the Executive Director the Investment Consultant, General Counsel, and the Plan’s actuary. It further reflects a commitment by the Trustees and the Investment Consultant, as fiduciaries, to act as prudent persons would be expected to act, with discretion, skill and diligence in fulfilling their responsibility to invest the Plan’s assets. The Trustees and all Plan fiduciaries operate subject to all applicable state and federal laws and the terms of the documents governing the Plan. As such, the investment policy reflects the requirements, among other things, that the fiduciaries invest Plan assets and administer the Plan solely in the interest of the participants in the Plan and for the exclusive purpose of providing benefits to participants and their beneficiaries. Therefore, this investment policy is not and cannot be guided by the interests of a third party.
The Trustees are responsible for adopting this SIP, retaining investment managers, and allocating assets among these investment managers. The investment managers are responsible, in accordance with the investment guidelines for each investment manager, for managing the assets allocated by the Trustees including the selection and disposal of individual securities, and diversifying assets within the investment manager’s portfolio.
The Trustees expect the investment return of the Plan to exceed the Plan’s assumed rate of return over the long term and, therefore, it must consider investment alternatives which are not without risk. It is also understood, however, that diversifying among various assets classes may lower risk without a commensurate lowering of returns.
The Trustees will attempt to select investment managers with the best prospects for superior risk adjusted performance as measured against the investment manager’s applicable benchmark.
The following criteria for selection of investment managers also include:
Additional guidelines and expectations will be set forth in each investment manager’s investment management agreement.
The CTA Retirement Plan Board of Trustees values diversity, inclusion and equity, and believes that effectively accessing and managing diverse talent— inclusive of varied backgrounds, age, experience, race, sexual orientation, gender, ethnicity, and culture— leads to improved outcomes.
The Trustees expect external asset managers and other third-party providers to respect and reflect the Board’s value of diversity, equity and inclusion. The Trustee’s ongoing monitoring of third-party service providers incorporates an assessment of vendors’ commitment to, adherence with, and track record of accessing and retaining diverse and inclusive workforces – including Executive Management and Board Representation- as well as making investments that further diversity, equity and inclusion.
Additionally, the Board of Trustees will require the underlying managers in the portfolio to report on a periodic basis how their firm as well as the underlying investments in their portfolio are furthering the causes of diversity, inclusion and equity.
The purpose of this SIP is to set out the long-range goals and short term needs of the Plan, establish the overall asset allocation of the Plan, and describe the structure of and guidelines for the investment managers.
This SIP will provide a documented structure for the implementation of investment strategies which suggest the highest probability of maximizing the level of investment return within acceptable parameters for the total Plan’s volatility and risk.
The Trustees have the ability to delegate fiduciary duties to other parties relating to the prudent investment of Plan assets. The following is a description of the primary investment-related responsibilities of these parties. This summary is meant to serve as a guide and a communication aid for the parties with responsibilities related to the Plan’s investment program.
The Trustees have established an Investment Sub-Committee with responsibilities which include, but are not limited to, the following:
The Investment Consultant has responsibilities which include, but are not limited to, the following:
The investment managers shall:
The Plan's custodian shall:
The Trustees recognize that an asset allocation policy reflects a target for the allocation of assets. The Trustees recognize that since the market value of securities will fluctuate, it is not possible to meet these specific targets at all times. Plan Staff and the Investment Consultant will monitor this allocation and report to the Trustees on a quarterly basis. A formal asset allocation study and presentation will be completed approximately every 3 to 5 years, unless extraordinary Plan or market circumstances compel an earlier analysis.
From time to time, the Trustees may reallocate assets among investment managers to better meet these targets. In the event the Trustees elect to move money from one active account to another, the Trustees may choose to utilize an appropriate passive index fund on an interim or emergency basis. The target asset allocation for the Plan is shown on the following page. The asset allocation will be maintained by periodic rebalancing when allocations approach plus or minus 5% of the target allocations.
| Asset Class | |
|---|---|
| Universal Fixed Income* | 15.0% |
| Total Fixed Income | 15.0% |
| U.S. Large-Cap | 20.0% |
| U.S. Mid-Cap | 5.0% |
| U.S. Small-Cap | 5.0% |
| Total U.S. Equity | 30.0% |
| Global Low Volatility | 10.0% |
| Developed Large-Cap | 8.0% |
| Non-U.S. Small-Cap | 2.0% |
| Emerging Market | 4.0% |
| Emerging Market Small-Cap | 2.0% |
| Total Non-U.S. Equity | 26.0% |
| Real Estate | 12.0% |
| Infrastructure | 7.0% |
| Total Real Assets | 19.0% |
| Private Equity | 10.0% |
| Total Private Equity | 10.0% |
| Total | 100% |
| *Bank loans and Emerging Market Debt are included within the Universal Fixed Income composite | |
The Trustees set the goals and objectives of the investment portfolio solely in the interest of the Plan, its participants and their beneficiaries. The performance objectives of the Plan are to:
Investment manager goals and objectives are outlined below:
The Trustees will select a combination of active and passive investment strategies to implement the above asset allocation. General investment guidelines for active investment managers are listed below. Specific investment guidelines for each investment manager are contained in Exhibit F of the respective Investment Management Agreements. Active investment strategies were selected based on their performance and fit; therefore, the investment guidelines that generated those results must also be accepted. It is understood that the tools that are available for measuring investment performance are limited and need to be understood in the context of the active strategy. The Trustees understand that a strategy that too closely emulates a benchmark index is not active.
The Board of Trustees recognizes that, as a fiduciary, it must act solely in the interest of the participants and beneficiaries of the Plan. The Board has an obligation to protect Plan assets and minimize the risk of investment losses. Consistent with the Board's fiduciary duties, and subject to an investment manager's exercise of fiscal and fiduciary duty, an investment manager should refrain from purchasing or holding securities of an assault weapons manufacturer if the investment manager determines that the same investment goals concerning risk, return and diversification can be achieved through the purchase or holding of another security. For purposes of this policy, "assault weapon" shall mean a weapon identified as an assault weapon the civilian possession of which is prohibited by the Municipal Code of Chicago or the laws of the State of Illinois and "assault weapons manufacturer" shall mean any entity that derives revenue from the sale of such prohibited assault weapons for civilian use.
Equity investment managers serve in a specialist role managing equity securities. Unless otherwise authorized in writing by the Trustees, the following guidelines apply to each equity investment manager, as defined by their role with the Plan's asset allocation. Equity managers must stay "fully invested", with the exception of the equity income manager who may from time to time have a fixed income allocation usually to meet overall portfolio yield requirements.
Commingled funds and collective trust funds may be utilized with the approval of the Trustees as long as the investment parameters of the trust funds are in substantial agreement with the remainder of the Plan's investment policy.
Large company equity managers may invest in the common stocks and convertible bonds of U.S. companies, ADR's with respect to companies organized under the laws of countries other than the U.S., and equity securities of foreign companies trading in the U.S. markets and capable of settlement in the U.S. They may also invest in the short term investment funds of the Plan's custodian and individual securities that qualify for investment as detailed below.
Investment managers are selected based on their style of management such as Value, Growth, or Core. It is expected that the selected large cap investment managers will outperform the median return of a representative database of investment managers with a similar style, on average, over multiple rolling periods of one, three, and five years. Over the same periods of time, it is expected that these managers will exceed the return of the S&P 500 or similar benchmark index. Passive or index fund managers are expected to approximate the returns of the benchmark index.
Mid size company equity managers may invest in the common stocks and convertible bonds of U.S. companies, ADR’s with respect to companies organized under the laws of countries other than the U.S., and equity securities of foreign companies trading in the U.S. markets and capable of settlement in the U.S. They may also invest in the short term investment funds of the Plan’s custodian and individual securities that qualify for investment as detailed below.
Investment managers are selected based on their style of management such as Value, Growth, or Core. It is expected that mid-cap investment managers will outperform the median return of a representative database of investment managers with a similar style, on average, over multiple rolling periods of one, three, and five years. Over the same periods of time, it is expected that these investment managers will exceed the return of the Russell Mid-Cap Index or similar benchmark index.
Small company equity managers may invest in the common stocks and convertible bonds of U.S. companies, ADR’s with respect to companies organized under the laws of countries other than the U.S., and equity securities of foreign companies trading in the U.S. markets and capable of settlement in the U.S. They may also invest in the short term investment funds of the Plan’s custodian and individual securities that qualify for investment as detailed below.
Investment managers are selected based on their style of management such as Value, Growth, or Core. It is expected that small cap investment managers will outperform the median return of a representative database of investment managers with a similar style, on average, over multiple rolling periods of one, three, and five years. Over the same periods of time, it is expected that these investment managers will exceed the return of the Russell 2000 Index or similar benchmark index.
Non-U.S. equity managers may invest in non-U.S. dollar denominated securities and ADRs. They may also invest in the short-term investment fund of the Plan's custodian and individual securities that qualify for investment as detailed below.
These investment managers may hedge the currency risk of their portfolio by utilizing currency derivatives. At no time may a manager use currency derivatives to leverage the portfolio or for speculative purposes.
It is expected that the Non-U.S. Equity managers will exceed the return of the MSCI EAFE Index or similar benchmark index, on average, over multiple rolling periods of one, three, and five years.
Equity managers are prohibited from investing in venture capital, private equity, options, futures (except for the non U.S.-equity managers), and other derivative investments.
The equity managers are expected to diversify their portfolios to avoid large losses.
Fixed income managers serve in specialist roles managing debt securities. Unless otherwise authorized in writing by the Trustees, the following guidelines apply to each fixed income manager. Bank commingled funds and collective trust funds may be utilized with the approval of the Trustees as long as the investment parameters of the trust are materially consistent with the remainder of the Plan's investment policy.
Domestic fixed income managers' investments may include (i) U.S. dollar denominated obligations of the United States Government and its Agencies and instrumentalities, and U.S. corporations, (ii) mortgage-backed securities including Collateralized Mortgage Obligations ("CMO's"), (iii) Asset Backed Securities ("ABS's"), (iv) municipal bonds, (v) short term securities, (vi) securities of foreign companies denominated in U.S. dollars, trading in the U.S. markets and capable of settlement in U.S. markets ("Yankee Bonds"), and (vii) dollar denominated obligations of U.S. companies or foreign companies trading outside the U.S. ("Eurobonds"). Fixed income securities must be rated at least Baa3/BBB- or higher by Moody's or Standard & Poor's, respectively at the time of purchase. Short-term instruments may include the short term investment fund of the Plan's custodian or its affiliate and individual securities that qualify for investment as detailed below. In addition up to 15% of the value of the fixed income portion of the portfolio may be invested in securities rated below Baa3/BBB- and private placements (limited to 144A securities). In the event of a split rating, the higher rating will prevail.
If a security held in the portfolio is downgraded below the above stated limitations, the portfolio manager will immediately notify the Trustees in writing of the event and describe the portfolio manager's plans for dealing with the security. Should the portfolio manager decide to continue to hold the downgraded issue, the portfolio manager will report to the Trustees quarterly in writing as to the status of the security.
The domestic fixed income investment manager is expected to outperform the appropriate fixed income benchmark index over a market cycle or three years, whichever is shorter.
No purchase shall be made which would cause the holding of any one issuer, excluding the U.S. Government and agencies of, or securities guaranteed by the U.S. Government, to exceed 10% of the investment manager's portfolio valued at market.
The Trustees may utilize a cash manager to manage un-invested cash held in investment manager accounts. In the event a cash manager is utilized, the cash manager is responsible for the investment of cash not invested by the investment managers and cash held for Plan benefit or expense payments. The custodian is responsible for sweeping all investment manager accounts daily so that no cash is left un-invested each night.
The cash manager may include (i) U.S. dollar denominated obligations of the United States Government and its Agencies and instrumentalities, and U.S. corporations, (ii) Mortgage-backed securities including Collateralized Mortgage CMO's, (iii) ABS's, (iv) municipal bonds, (v) short term securities, (vi) Yankee Bonds, and (vii) Eurobonds. Fixed income securities must be rated at least Baa3/BBB- or higher by Moody's or Standard & Poor's, respectively at the time of purchase.
Short-term investments may include certificates of deposit, bankers acceptances and commercial paper of banks subject to regulation by the U.S. Government and having total assets of $1 billion or more, commercial paper rated A1/P1, repurchase agreements backed by U.S. Government and U.S. Federal Agency collateral, and U.S. Treasury Bills. Commingled short term investment funds may be used whose investment guidelines, as identified in the fund prospectus, are materially consistent with these guidelines. The cash manager must maintain sufficient liquidity to meet the needs of the investment managers and the Plan's expenditures.
The average option adjusted duration of the portfolio may not exceed 3 years.
It is expected that the annual return of this portfolio will exceed the Salomon Brothers 1 Year Treasury Index.
A short term investment fund, offered by the Plan's custodian or its affiliate, will be used to invest cash not invested by the investment managers, and cash held for Plan benefit or expense payments. The Plan's custodian is responsible for sweeping all manager accounts daily so that no cash is left un-invested each night.
Short term investments may include certificates of deposit, bankers acceptances and commercial paper of banks subject to regulation by the U.S. Government and having total assets of $1 billion or more, commercial paper rated A1/P1, repurchase agreements backed by U.S. Government and U.S. Federal Agency collateral, and U.S. Treasury Bills. Commingled short term investment funds may be used whose investment guidelines, as identified in the fund prospectus, are materially consistent with these guidelines.
It is expected that the annual return of cash portfolio will exceed the Donoghue's Money Market Fund Average.
Fixed income managers are prohibited from investing in venture capital, private equity, options, futures (except the non-U.S. fixed income managers) and other derivative investments (except Collateralized Mortgage Obligations or CMO's).
CMO's are limited to Planned Amortization Class (PAC's) and Sequential issues so long as their inclusion is consistent with the letter and spirit of the above stated guidelines. Specifically prohibited are companion tranches or support bonds, floaters, inverse floaters, income only, and principal only CMO's and structured notes, unless specifically allowed in writing. At no time may derivatives be utilized to leverage the account fund or for speculation.
The fixed income managers are expected to diversify their portfolios to avoid large losses.
The fixed income managers are responsible for notifying the Committee if in the manager's judgment it is imprudent to manage these assets within any of these guidelines.
Passive equity and fixed income managers are responsible for matching the financial and risk characteristics of the specific benchmark assigned them, such as the S&P 500 or Barclays Aggregate Index. They may only invest in the securities that comprise the assigned index. S&P 500 Index managers may use Index futures to expedite cash investments.
Within the stated investment objectives of this Policy, any investment managers servicing the Retirement Plan for CTA Employees shall, where possible, seek to identify, recruit, and recommend fund managers that have demonstrated experience and/or an express ability to invest in (a) portfolio companies that are more than 50% owned and/or managed by underrepresented racial or ethnic groups women, military veterans, or persons with a disability, and/or (b) portfolio companies geographically located in diverse communities or low-to-moderate income ("LMI") communities. A company is in an LMI area if it has an office in a census tract deemed "underserved," with 20% or more of the population beneath the poverty line or earning a median family income of 80% or less than the metropolitan area’s median family income (per the standards of the Federal Financial Institutions Examination Council).
Mortgage managers serve in a specialist role managing real estate debt. Unless otherwise authorized in writing by the Trustees, the following guidelines apply to each mortgage manager.
Mortgages may be created directly or purchased through commingled funds. Selection, evaluation, and servicing of loans shall be assumed by each mortgage manager utilizing prudent underwriting criteria including, but not limited to, debt service and loan to value ratios and risk adjusted spreads over comparable maturity U.S. Treasury securities. It is expected that these managers will exceed the return of the 10 year U.S. Treasury by 2% per year, on average, over multiple rolling periods of one, three, and five years. Mortgage funds which are made up exclusively of government guaranteed issues are expected to exceed the return of the 10 year Treasury by 1% per year, on average, over multiple rolling periods of one, three, and five years.
The Real Estate investment policy adopted on May 23, 2000, shall be adopted and incorporated by reference.
The Plan's investment in Private Markets (also known as Private Equity) shall be implemented through investing with one or more Private Market Managers via a direct investment or through an allocation to a fund of funds. The Plan may also choose to select separate manager(s) for investments in venture capital, buyouts, and other categories of the Private Markets, including international. The Plan shall seek a diversified portfolio of private market investments, including early-stage and later-stage venture capital funds, buyout funds, and mezzanine capital funds. It is expected that the cash-on-cash return on these investments, after all fees and expenses, will exceed the return of the S&P 500 Index plus 3%, on average, over multiple rolling periods of one, three, and five years.
The Plan has a target allocation of 10% of total assets to private markets. Achieving the 10% target allocation objective is complicated by several factors. First, there is a time lag between commitment of capital and when it is drawn down. This time lag is primarily related to market conditions and the ability of the Private Market Managers to find attractive investments and invest in the same. Second, the timing and magnitude of distributions (return of invested capital) from Private Market Managers is uncertain and dependent on overall conditions in the equity market.
In recognition of the issues associated with achieving the target allocation for private market investments, the Plan has adopted a “multiple commitment strategy”. The Plan will maintain commitments of 1.25 times the target 10% allocation to Private Market Managers. New commitments will be based on the current allocations (called and committed) to sub-strategies and investment opportunities. This approach will enable the Plan to maintain an invested portfolio in Private Market Managers that approximately equals the target allocation.
The selection of a Private Market Manager will include the following factors:
The portfolio represents diversified investment interests in equity or equity like securities principally through intermediary manager entities. The portfolio objective is to achieve equity-like returns, including an appropriate risk premium, on portfolio securities, although the actual investment securities may be equity, debt, or equity-like (hybrid securities). While the predominant focus is on private securities in middle market companies through specially structured investment vehicles, the portfolio should reflect a balanced exposure to the full range of private equity strategies, ranging from venture capital to late stage large buyouts. Acceptable secondary strategies include:1) co-investments with private equity investment funds, 2) secondary interests in funds (i.e. repurchases of others' portfolios), and 3) investments in specialty private equity investment opportunities. Secondary strategies will be evaluated, approved, and undertaken on a case-by-case basis under a specifically proposed transaction or program. Investment interests may reflect control or minority positions, provided sufficient control elements exist to ensure protection of the Plan’s investment interest. Investment interest may be in funds (e.g., limited partnerships) or fund-of-fund structures. The objective is to opportunistically allocate the portfolio over time, emphasizing seasoned management teams and attempting to capitalize on attractive market opportunities.
The portfolio will be allocated overtime with a blend of several sub-strategies with certain structural characterizations (e.g., core, specialty, custom, or direct). Although these groups are somewhat subjectively defined when applied to individual transaction proposals, the overall objective is to diversify the portfolio among the below listed groups overtime. The target allocation represents the longer-term target allocation; the actual allocation may significantly deviate from the target allocation based on Private Market Managers' capital calls and distributions and market opportunities.
| Private Market Strategy | Target Allocation (within Private Markets) |
|---|---|
| Core Strategies – Fund of Funds | 75% |
| Specialty/Custom Strategies – Single Funds/Direct | 25% |
| Total | 100% |
| Buyout Capital | 50% |
| Venture Capital | 25% |
| Other | 25% |
| Total | 100% |
| Other includes Expansion Capital, Mezzanine Debt Capital, Distressed Debt Capital, and Non-U.S. Buyout Capital |
| Manager Allocation / Participation Constraints | Committed Capital within Private Markets |
|---|---|
| Fund of Funds Allocation | 25% Maximum |
| Single Manager Allocation | 10% Maximum |
| Single Fund Participation | 20% Maximum |
Commingled funds, mutual funds and limited partnerships may be used from time to time. The funds and limited partnerships used by the Plan must adhere to the written objectives and guidelines as established in the contract, prospectus, or Private Placement Memorandum. If at any time the fund or limited partnership deviates from these guidelines or investment objectives, liquidity permitting, a new, limited partnership or separate account manager will be substituted for the current option.
The Investment Consultant and Investment Sub-Committee will recommend terminating a manager when confidence is lost in the firm or the management of a strategy; when the characteristics of the portfolio no longer satisfy the desired or expected elements of the mandate, or the current style is no longer deemed appropriate.
Listed below are scenarios that would lead to a loss of confidence in an investment manager:
The Investment Sub-Committee, with assistance from the Investment Consultant, will conduct a critical review of investment managers as necessary and provide recommendations to retain, modify, or terminate relationships. These recommendations will be brought to the Trustees for a final decision.
The following terminology has been developed to facilitate communication among the investment manager(s), Investment Consultant, the Investment Sub-Committee and the Trustees. Each term signifies a particular status with the Plan and any conditions that may require improvement. In each case, a change in investment manager status is made only after consultation with the Investment Sub-Committee, Plan Staff and the Trustees:
"In-Compliance" – The investment manager is in accordance with its Investment Policy Guidelines.
"Alert" – The investment manager is notified of a problem in performance (usually related to a benchmark or volatility measure), a change in investment characteristics, an alteration in management style or key investment professionals, and/or any other irregularities.
"On Notice" – The investment manager is notified of continued concern with one or more "Alert" issues. Failure to improve upon stated issues within a specific time frame justifies termination.
"Termination" – The Trustees have voted to terminate the investment manager. The investment manager is notified and transition plans are put into place.
Contributions are not expected to cover the benefits and expenses of the Plan. Consequently it will be necessary to withdraw cash from the Plan's investment managers to cover these liabilities.
The Plan staff will estimate annually the amount of cash needed to meet the Plan's expenditures. Cash will be drawn from each investment manager in a manner to improve compliance with the Plan's target asset allocation described above.
Each investment manager shall have full discretionary authority and responsibility to exercise the proxy voting rights related to securities held on behalf of the Plan. As fiduciaries, investment managers shall exercise voting rights in a manner consistent with the economic best interests of the Plan, its participants, and their beneficiaries. Each investment manager shall avoid conflicts-of-interest in exercising voting rights.
Each investment manager shall provide the Trustees with a copy of its proxy voting policy and on or before January 31,st of each year provide a report detailing each proxy vote made during the prior calendar year.
The Plan will participate in the securities lending program of the Plan's custodian. The specific terms of the program are described in the executed securities lending agreement.
Investment objectives and guidelines for investing cash collateral funds shall be adopted from the Securities Lending Policy of the Securities Lending Agent.
Investment guidelines for eligible securities and credit quality shall be adopted from the Securities Lending Policy of the Securities Lending Agent.
The securities lending manager is expected to diversify their portfolio to avoid large losses. The average option adjusted duration of the portfolio may not exceed 2 years.
This Statement of Investment Policy was adopted December 22, 2009, and amended February 25, 2021.