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Education Trust BoardINVESTMENTS AND PENSIONS OVERSIGHT COMMITTEEJuly 28, 2014Dr. José Z. Garcia, ChairmanRobert J. Desiderio, Vice-ChairTrevor SerraoKevin Deiters, Executive Director
About the ETB The ETB is the governing body for New Mexico’scollege savings programs ( 2.3 billion). The ETB is responsible for making rules andregulations for the development andimplementation of the Education Trust Act. The Education Trust Act was amended in 2014with the enactment of HB215 (by Jim Trujillo). The ETB does not receive any general funds andis funded entirely by fee revenues. The ETB is administratively attached to theHigher Education Department.7/25/2014Investments and Pension OversightCommittee - July 28, 20142
About the ETBEducation TrustBoardJose Garcia,ChairExecutiveDirectorKevin DeitersPlan llsInvestments and Pension OversightCommittee - July 28, 2014LitigationCounselFreedmanBoydAudit FirmREDW3
About College Savings:529 Plan Basics A 529 Plan is an education savings planoperated by a state or educationalinstitution designed to help families setaside funds for future college costs. Federal tax benefits: 529 accounts growtax-free, so you pay no federal tax on yourearnings. Withdrawals: Withdrawals for qualifiedhigher education expenses are distributedfederal tax free.7/25/2014Investments and Pension OversightCommittee - July 28, 20144
About College Savings:State Tax Benefits State tax benefits: All earnings of a NewMexico Account Owner or DesignatedBeneficiary are exempt from NewMexico individual income taxes, subjectto exemptions. Contributions by a New Mexico taxpayer may be deducted from netincome for New Mexico individualincome tax purposes.7/25/2014Investments and Pension OversightCommittee - July 28, 20145
About College Savings:National Asset Growth 250 200 150 100 50 billions 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 20137/25/2014www.theeducationplan.com6
About College Savings:New Mexico Asset GrowthTotal Assets 2009-2013 ( millions) 1,827 1,657 1,539 1,507 1,410 2762009 323 30120102011Scholar's Edge7/25/2014 3762012 4422013The Education Planwww.theeducationplan.com7
NM College Savings:Plan OptionsThe Education PlanScholar’s Edge Direct-Sold Plan20,412 Accounts 450.0 millionNo-Load FundsAge-Based and StaticPortfolios7/25/2014Advisor-Sold Plan125,650 Accounts 1.84 billionAge-Based, CustomChoice and StaticPortfoliosInvestments and Pension OversightCommittee - July 28, 20148
NM College Savings:Program HighlightsQuarter Period Ending 3/31/2014PlanAssetsScholar's EdgeThe Education PlanTotal 450,076,801 1,845,818,224 2,295,895,02520,412125,650146,062AccountsAvg. Balance 22,050 14,690 15,719Contributions 9,429,281 37,789,741 47,219,022Redemptions 7,846,033 37,124,311 44,970,344Net Flows 1,583,248 665,430 2,248,6787/25/2014www.theeducationplan.com9
NM College Savings:Recent Board Action ETB continues to take steps to improveperformance and reduce fees. ETB refunded 274,841 to NM residents foradministrative fees paid during 2013. Approved 450,000 marketing campaign fortelevision, radio, and print. Approved 750,000 for collegescholarships. ETB issued RFP for program manager.7/25/2014Investments and Pension OversightCommittee - July 28, 201410
NM College Savings:Investment PerformanceThe Savingforcollege.com PlanComposite Rankings are derivedusing the plans relevant portfolioperformance in seven uniqueasset allocation categories.Plan Composite Performance Rankings forthe three-year period ending March 31,2014: Scholar’s Edge is the seventh bestperforming advisor-sold plan in thenation. The Education Plan is the eighth bestperforming plan direct-sold plan in thenation.7/25/2014www.theeducationplan.com11
NM College Savings:Lower Fees Lowered investment fees by convertingmost underlying mutual funds from “Y”class shares to institutional shares. Lowered administrative fees for NMresidents by issuing fee refunds.7/25/2014www.theeducationplan.com12
ETB Scholarships ETB made changes to its scholarshipprogram to better address student need. Provided financial aid departments withmore flexibility to serve both new andcontinuing students. ETB scholarships will now cover tuition,fees, supplies, and books.7/25/2014Investments and Pension OversightCommittee - July 28, 201413
ETB ScholarshipsNew Allocation Method for FY15ETB allocated its scholarshipfunds among all institutions basedupon student need and GPA thatresulted in in a shift of fundingaway from UNM and NMSU to theComprehensive universities andtwo-year colleges.Historically, the Researchinstitutions have awarded 76percent of ETB scholarships.7/25/2014www.theeducationplan.com14
Program Manager SearchTentative Schedule RFP Issued (5/6/2014)Proposal Due Date (7/2/2014)Proposal Report to ETB (8/20/24)Presentations to ETB (10/15/2014)Board Vote (12/10/2014)Transition Period (Dec – June)Contract Start Date (7/1/2014)7/25/2014Investments and Pension OversightCommittee - July 28, 201415
Need more Kevin DeitersEducation Trust BoardKevin.deiters@state.nm.us7/25/2014Investments and Pension OversightCommittee - July 28, 201416
Education Trust Board of New MexicoINVESTMENTS AND PENSIONS OVERSIGHT COMMITTEEJuly 28, 2014Presented by:Kay Ceserani
AgendaPageIIntroductory Comments3II.Board Governance and Oversight Process5III.New Mexico 529 Programs Structure7IV.Program Performance9V.Overview of 529 Fees11Appendix13-Fund Monitoring Process-529 Team BiographiesEducation Trust Board of New Mexico PCA Presentation2
Introductory Comments:PCA/AKF 529 Team Organizational StructureEric White, CFAKay Ceserani,Sean Copus,Ashley Yoshida,PrincipalSenior AnalystPrincipal, CCOAnalystSoohyang LeeManaging DirectorOversight & SeniorManagementInvestment andPerformanceAnalysisAnalysis / SupportSenior FinancialAnalystEducation Trust Board of New Mexico PCA PresentationAndrea Feirstein3
Introductory Comments: PCA is an independent, full-service investment consulting firm providing a broad rangeof investment advice to a wide variety of sophisticated institutional investors Total client asset under advisement 1.1 trillionPCA began consulting to the Education Trust Board (ETB) in December 2011 Founded in 1988Strategic alliance with AKF Consulting Group, one of the leading strategic advisor to thecollege savings industryInvestment consulting is PCA's only line of business About PCAPrior to this, PCA did not provide consulting services to any 529 programs run by OppenheimerPCA now provides investment consulting services to 8 state-run 529 College SavingsPlans totaling 42.4 billion in client assets Additional project work for several other 529 College Savings PlansEducation Trust Board of New Mexico PCA Presentation4
Board Governance and Oversight Process ETB’s Investment Policy and Performance Monitoring Guidelines providethe framework to make decisions Integration across these major areas is key to best practice processesStrategicPlanningAsset Allocation/Glide pathAnalysisPolicyDevelopmentMonitoringEducation Trust Board of New Mexico PCA PresentationImplementation5
Board Governance and Oversight Process ETB utilizes its team of consultants to develop and implement a monitoring andguidelines process:1. Established Monitoring Criteria via Investment Policy and Monitoring Guidelines document2. Consultant reports criteria breaches and communicates with Program Manager3. Consultant monitors and reports on changes in performance and continues dialogue with ProgramManager4. Recommendations to terminate, restore to normal status, or continue to monitor are made within a12-18 month time period ETB responsible for final decisions to add/remove funds from the “Watch” list Reports provided by PCA to the Education Trust Board Monthly “Performance Flash Report” on all underlying mutual funds Monthly “Investment Risk Metrics Report” Quarterly “Investment Monitoring Report” Quarterly “Watch” list Review and Update Memo Assessment of Oppenheimer’s (OFI) Annual Program Review ETB and PCA conduct site-visits with OFI for review of risk managementEducation Trust Board of New Mexico PCA Presentation6
New Mexico 529 Programs Structure Recall that the New Mexico College Savings Programs consist of twoseparate programs The Education Plan – sold directly to participants The Scholar’s Edge Plan – sold through investment advisors Most participants in each plan tend to select an age-based portfolio option Utilizes a glide path structure typically 20 – 22 years in length Typical glide path begins with equity allocation 80% at age 0 Adjusts asset allocation over time away from volatile equities and toward more stable fixedincome/short-term bond classes near the “draw down” period (college age) See chart on next pageEducation Trust Board of New Mexico PCA Presentation7
New Mexico 529 Programs StructureThe Education Plan Direct-Sold Program100%90%80%Money Market70%Bank Loans60%High Yield50%Fixed Income40%Global Equity30%Domestic Equity20%10%0%0123456789101112131415161718 The Scholar's Edge Advisor-Sold Program100%90%80%70%60%50%40%30%20%10%0%Money MarketGlobal Fixed IncomeBank LoansHigh YieldUS Fixed IncomeGlobal EquityDomestic Equity0123456Education Trust Board of New Mexico PCA Presentation7891081112131415161718
Performance as of 3/31/2014:QuarterReturnRankTEP and SE1 YearReturnRank3 YearsReturnRank5 YearsReturnRank19.8621.2311218.5821.1216.97252NM Age Based 0-5NM Edu Pl Age-Based 0-5 YrsNM TEP 0-5 Benchmark1.761.91311620.8621.414311.8412.8761NM Edu Pl Age-Based Idx 0-5 YrsNM TEP Index 0-5 Benchmark1.731.69343820.4721.495312.3013.1431NM Scholar'sEdge Age 0-5 Aggr ANM SE 0-5 BenchmarkMorningstar US 529 Age 0-6 .16161NM Age Based 6-11NM Edu Pl Age-Based 6-11 YrsNM TEP 6-11 Benchmark1.631.76382414.5414.8018169.7710.131211NM Edu Pl Age-Based Idx 6-11 YrsNM TEP Index 6-11 Benchmark1.691.86301213.7414.52231810.4710.09615NM Scholar'sEdge Age 6-11 Mod Agg ANM SE 6-11 BenchmarkMorningstarUS 529 Age 7-12 .78207NM Age Based 12-17NM Edu Pl Age-Based 12-17 YrsNM TEP 12-17 Benchmark1.241.2449496.246.2441415.815.813636NM Edu Pl Age-Based Idx 12-17 YrsNM TEP Index 12-17 Benchmark1.641.7318135.405.6649466.546.692634NM Scholar'sEdge Age 12-17 Cnsv ANM SE 12-17 BenchmarkMorningstar US 529 Age 13-18 NM Age Based 18 NM Edu Pl Age-Based 18 YrsNM TEP 18 Benchmark0.810.8150502.132.135050NM Edu Pl Age-Based Idx 18 YrsNM TEP Index 18 Benchmark1.291.3411111.381.50NM Scholar'sEdge Age 18 School Yrs ANM SE 18 BenchmarkMorningstar US 529 Age 19 2.523431Rank: 1 highest, 100 lowest; GREEN indicates above median resultsSome Age-Based results have been aggregated for comparison purposesSource: Morningstar DirectEducation Trust Board of New Mexico PCA Presentation95.805.515.574950 Latest quarter and 1-year resultsfor the majority of the ActiveTEP and SE portfolios were in linewith or above median peers 3-year benchmark results wereabove median to top decile,indicating the Program’s assetallocation is working 5-year benchmark results werein line with top quartile to topdecile in the early stage of theglide path, and above medianin the later stages of the glidepath, also indicating theProgram’s asset allocation isworking 5-year portfolio results versuspeers due primarily to the CoreBond Fund (removed from theProgram in 2009)
Performance as of 3/31/2014:TEP and SE3-Yr Risk Adjusted Results (Sharpe Ratio) – As of .261.121.041.030.920.880.500.00Median 0-6NM TEP NM SE AgeAge-Based0-50-5Median 7- NM TEP NM SE Age12Age-Based6-116-11Median 13- NM TEP NM SE Age18Age-Based12-1712-17Age 7-12Age 13-18Age 0-6Median 19 NM TEP NM SE AgeAge-Based18 18 Age 19 NM portfolios have better risk-adjusted results than their median peers Reveals that the NM portfolios achieve a higher return per unit of risk Sharpe Ratio (Portfolio Return – Risk Free Return) / Standard DeviationEducation Trust Board of New Mexico PCA Presentation10
Select Direct Plan Maximum Fees2.00%1.50%1.00%Average of Max 0.79%0.50%0.00%Underlying Fund ExpensesOther FeesSource: Savingforcollege.com and Plan Offering Documents as of July 24, 2014Graph does not include (1) Bank Plans in AZ, CO, IN, MT and VA; (2) Fidelity-managed Plans in AZ, DEand MA; (3) Upromise-managed Plans in HI, IA, ND and NV; and (4) TFI-managed Plans in MI and MNWith DC 529 included, average maximum fee would be 0.82%Education Trust Board of New Mexico PCA Presentation11
Select Advisor Plan Maximum Fees2.00%Average of Max 1.57%1.50%1.00%0.50%0.00%Underlying Fund ExpensesOther Fees(1) Does not include the DWGI fund (Total Fee of 1.53%) due to unknown reimbursementsSource: Savingforcollege.com and Plan Offering Documents as of July 24, 2014Maximum Fees represent A SharesEducation Trust Board of New Mexico PCA Presentation12
APPENDIXEducation Trust Board of New Mexico PCA Presentation13
Appendix: PCA Fund Monitoring ProcessEducation Trust Board of New Mexico PCA Presentation14
Appendix: PCA Fund Monitoring Process Having a process in place helpsensure that trouble spots areidentified early This continual monitoring isessential as it reveals performancetrends Process triggers deeper analysisEducation Trust Board of New Mexico PCA Presentation15
Appendix: PCA/AKF 529 Team BiographiesEric White, CFAPrincipalRoseville, CAKay CeseraniPrincipal, CCOPortland, ORMr. White joined PCA in 2009 and serves as the head of PCA’s529 Practice Area. He currently provides consulting services toPCA’s 529 College Savings Plans and is the lead consultant onfive of these relationships.Mr. White’s focus includes riskbudgeting, portfolio and manager attributions analysis, assetclass structure reviews, investment manager searches, glidepath analysis, and program manager searches.Ms. Ceserani joined PCA in 2008 and provides consultingservices for PCA clients across all asset classes. Ms. Ceserani hasworked in the investment consulting industry in various roles since1993.She has extensive experience in the development,execution and monitoring of investment programs forinstitutional clients across client types, as well as expertise inperforming due diligence on money management firms andtheir products. Ms. Ceserani currently serves as the leadconsultant on three 529 College Savings Plans.Previously, Mr. White served as an Intern at Merrill Lynch. Hisresponsibilities included asset allocation modeling and analyzingindividual securities and investment products. Prior to joiningPCA, Mr. White graduated from the University of San Franciscowith a Masters degree in Economics with an emphasis inFinance. His thesis topics included a history of recent financialcrises and the role of the Federal Reserve, and the cause andeffects of the Yen carry trade.Prior to PCA, Ms. Ceserani was a Consulting Project Manager atYanni Partners in Pittsburgh, PA for six years. Her responsibilitiesincluded quarterly analysis of client portfolios, asset allocationstudies, asset transitions, manager selection and monitoring andspecial research projects. Ms. Ceserani has also served as theDirector of Operations at Greycourt & Co., Inc in Pittsburgh, PA,the Director of US Equity Research and Consulting Manager atEnnis, Knupp & Associates, in Chicago, IL. She also spent sixyears at R.V. Kuhns in Portland, OR.Mr. White received his Bachelor of Science degree in Economicsfrom the University of Oregon and is a CFA holder and amember of the CFA Society of Sacramento.Education Trust Board of New Mexico PCA PresentationMs. Ceserani earned a BS in Political Science at the University ofOregon.16
DISCLOSURES: This document is provided for informational purposes only. It does not constitute an offer of securities of any of the issuers that may be described herein. Informationcontained herein may have been provided by third parties, including investment firms providing information on returns and assets under management, and may not have beenindependently verified. The past performance information contained in this report is not necessarily indicative of future results and there is no assurance that the investment inquestion will achieve comparable results or that the Firm will be able to implement its investment strategy or achieve its investment objectives. The actual realized value of currentlyunrealized investments (if any) will depend on a variety of factors, including future operating results, the value of the assets and market conditions at the time of disposition, anyrelated transaction costs and the timing and manner of sale, all of which may differ from the assumptions and circumstances on which any current unrealized valuations are based.Neither PCA nor PCA’s officers, employees or agents, make any representation or warranty, express or implied, in relation to the accuracy or completeness of the informationcontained in this document or any oral information provided in connection herewith, or any data subsequently generated herefrom, and accept no responsibility, obligation orliability (whether direct or indirect, in contract, tort or otherwise) in relation to any of such information. PCA and PCA’s officers, employees and agents expressly disclaim any and allliability that may be based on this document and any errors therein or omissions therefrom. Neither PCA nor any of PCA’s officers, employees or agents, make any representation ofwarranty, express or implied, that any transaction has been or may be effected on the terms or in the manner stated in this document, or as to the achievement or reasonableness offuture projections, management targets, estimates, prospects or returns, if any. Any views or terms contained herein are preliminary only, and are based on financial, economic,market and other conditions prevailing as of the date of this document and are therefore subject to change.The information contained in this report may include forward-looking statements. Forward-looking statements include a number of risks, uncertainties and other factors beyond thecontrol of the Firm, which may result in material differences in actual results, performance or other expectations. The opinions, estimates and analyses reflect PCA’s current judgment,which may change in the future.Any tables, graphs or charts relating to past performance included in this report are intended only to illustrate investment performance for the historical periods shown. Such tables,graphs and charts are not intended to predict future performance and should not be used as the basis for an investment decision.All trademarks or product names mentioned herein are the property of their respective owners. Indices are unmanaged and one cannot invest directly in an index. The index dataprovided is on an “as is” basis. In no event shall the index providers or its affiliates have any liability of any kind in connection with the index data or the portfolio described herein.Copying or redistributing the index data is strictly prohibited.The Russell indices are either registered trademarks or trade names of Frank Russell Company in the U.S. and/or other countries.The MSCI indices are trademarks and service marks of MSCI or its subsidiaries.Standard and Poor’s (S&P) is a division of The McGraw-Hill Companies, Inc. S&P indices, including the S&P 500, are a registered trademark of The McGraw-Hill Companies, Inc.CBOE, not S&P, calculates and disseminates the BXM Index. The CBOE has a business relationship with Standard & Poor's on the BXM. CBOE and Chicago Board Options Exchangeare registered trademarks of the CBOE, and SPX, and CBOE S&P 500 BuyWrite Index BXM are servicemarks of the CBOE. The methodology of the CBOE S&P 500 BuyWrite Index isowned by CBOE and may be covered by one or more patents or pending patent applications.The Barclays Capital indices (formerly known as the Lehman indices) are trademarks of Barclays Capital, Inc.The Citigroup indices are trademarks of Citicorp or its affiliates.The Merrill Lynch indices are trademarks of Merrill Lynch & Co. or its affiliates.FTSE is a trademark of the London Stock Exchange Group companies and is used by FTSE under license. All rights in the FTSE indices and/or FTSE ratings vest in FTSE and/or its licensors.No further distribution of FTSE data is permitted with FTSE’s express written consent.
529 Plan Basics A 529 Plan is an education savings plan operated by a state or educational institution designed to help families set aside funds for future college costs. Federal tax benefits: 529 accounts grow tax-free, so you pay no federal tax on your earnings. Withdrawals: Withdrawals for qualified
