I. Purpose of the Portfolio
The International Equity Fund - Active Portfolio (“Active Portfolio”) is one of the investment alternatives offered by the Plan to Participants. The investment alternatives are intended to provide Participants with a variety of investment options with differing risk and return characteristics in which to invest deferred compensation under the Plan. The purpose of the Active Portfolio within this group of investment alternatives is to provide exposure to stock markets based outside the United States.
II. Investment Objective
The investment objective of the Active Portfolio is to provide long term growth of capital through exposure to the broad international stock market. The Active Portfolio is designed to invest substantially all of its assets in equity securities of non-U.S. based companies and to diversify broadly among developed markets with modest exposure, up to 16%, to the developing or emerging markets.
The Active Portfolio is made up of three or more underlying managers who together will provide a “core” or “style neutral” portfolio which is benchmarked to the MSCI EAFE. The underlying portfolio managers will encompass value, growth and index style orientations. Individual manager portfolios will be broadly diversified by country, sector and industry. This approach seeks to mitigate style risk and individual manager risk.
The Active Portfolio has exposure to the potential risks and rewards of foreign markets, including currency fluctuations and political developments. International securities may also be subject to higher transaction fees and less liquidity compared to domestic investments. These types of risks may make the Active Portfolio more volatile than domestic equities however, over full market cycles this type of option may offer higher return potential compared to other options.
V. Investment Return Objectives
The objective of the Active Portfolio is to exceed the return of the MSCI EAFE benchmark net of fees over rolling three-year periods and the median of a universe of non-U.S. equity managers. Each active sub-manager will be further compared to their style benchmark and their style oriented peer universe.
VI. Trading Restrictions
Exchanges into the Active Portfolio will be prohibited for 60 days following the most recent exchange out of the Active Portfolio or the International Equity Fund – Index Portfolio. New deferrals are not subject to this restriction.
As of the date set forth above, there are five sub-managers for the Active Portfolio. The target allocation of the Active Portfolio assets among the five sub-managers is as follows:
MFS Institutional Advisors (25-35%)
Dimensional Fund Advisors (12-18%)
Wellington Management Company (25-35%)
Northern Trust Global Investments (5-15%)
All new monies directed to the Active Portfolio will be invested in that portion of the Active Portfolio managed by the index manager in order to maintain broad international equity market exposure until the time comes for the Active Portfolio to be rebalanced. Each quarter the custodian will review manager allocations in light of target percentages. If a manager(s) allocation exceeds or falls below the established target range then the Active Portfolio will be rebalanced.
VIII. Replacing Managers
Managers will be monitored on a quarterly basis in comparison to the MSCI EAFE benchmark as well as a secondary style benchmark as appropriate (MSCI EAFE Value or Growth). Managers will also be compared to a universe of non-U.S. equity peers.
A manager may be replaced for consistent under-performance or if there is a material development at their organization that requires immediate action, for example, if the international equity investment team departs.
IX. Commission Recapture
The Board may choose to institute a commission recapture program. If so, each of the international equity managers will be notified of a list of commission recapture brokers and the managers will be requested to allocate a portion of their trades to the approved commission recapture broker of their choice, subject, in all cases, to best price and execution. The proceeds will be directed to benefit the Active Portfolio only. Managers will not be encouraged to make additional trades in order to accommodate this policy. The purpose of this program is solely to reduce costs to the Plan.
On a monthly basis, the managers will provide detailed reports to the Board listing individual holdings, transaction history for the period, portfolio composition, including country and investment sector composition, and a summary of results for the most recent quarter, year to date and other specified periods.
Periodically managers will be called upon to present to the Board. The presentations should include investment results compared to objectives, investment strategy and philosophy and discussion of any meaningful changes at the manager’s organization.
Investment management and custodial fees will be assessed against the Active Portfolio on a daily basis. The net asset value of the Active Portfolio will be reported on a net of fees basis.
XII. Proxy Voting
Proxy voting will be conducted at the manager level.