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HomeMy WebLinkAbout2007 01 31 Document Given To Board Members During The Meeting For Regular 302 - MBIA Asset Mgmt.Date: January 31, 2007 THE FOLLOWING DOCUMENT WAS GIVEN TO THE BOARD OF TRUSTEE MEMBERS ON JANUARY 25, 2007 FOR REGARDING REGULAR AGENDA ITEM 3 02 . ~~ MBIA Asset Management Group MBIA Asset Management Group is pleased to submit its response to the City of Winter Springs' questionnaire for Investment Management Services. January 24, 2007 Mr. Kevin Smith General Services Director Winter Springs Employees' Pension System 1126 East State Road 434 Winter Springs, FL 32708-2799 Dear Mr. Smith: With more than $63 billion of assets under management, MBIA Asset Management Group is a leading provider of investment management services to public sector entities. Please contact me at 800-937-2624 or Tom Tight, Regional Director, at 888-231-8995 if you have any questions or requests for additional information related to our investment management services. Sincerely, M. Corinne Larson, CTP Vice President 113 King Street Armonk, New York 10504 Tel 800-395-5505 www.mbia.com MCL/ef Enclosure City of Winter Springs General Employees Pension Plan January 24, 2007 ~Q~ Thomas N. Tight, II Regional Director 301 East Pine Street, Suite 150 Orlando, FL 32801 888-231-8995 ~~ ~` :, mar "~t.: '' fir' Table of Contents I. Firm Background II. The Investment Product/Process III. Research IV. Miscellaneous Exhibit 1 Exhibit 2 Pages 1 - 4 Pages 5 - 11 Page 12 Pages 13 Organizational Chart Sector Allocation Spreadsheet Ma~ WINTER SPRINGS EMPLOYEES' PENSION SYSTEM I. Firm Background 1. Please provide the following contact information: Name Mr. Thomas N. Tight, II Title Regional Director Address 301 East Pine St. Suite 150 Orlando, FL 32801 Email Address Thomas.tight@mbia.com Phone Number 407-210-6612 Facsimile Number 407-835-3601 Firm's Internet (www) Address wvvw.mbia.com 2. Please give a brief history of the firm. Include the date the firm was founded, and how long the current portfolio management team has been together. Include any special expertise or experiences that would be relevant to the board. MBIA Asset Management Group (MBIA) is a member of the MBIA family of companies, which includes MBIA Insurance Corporation, the nation's largest triple-A rated financial guarantor. MBIA Inc. is listed on the New York Stock Exchange and is a component stock of the S&P 500. MBIA Asset Management Group is comprised of three firms (MBIA Capital Management Corp., MBIA Investment Management Corp., and MBIA Municipal Investors Service Corp.) that were created in the early 1990s. The various MBIA companies and their relationships are listed in the chart below: MBIA Inc. Publicly traded (NYSE) MBIA Asset Management LLC Subsidiary of MBIA Inc. MBIA Municipal Investors Service Corp. Subsidiary of MBIA Asset Management LLC MBIA Investment Management Corp. Subsidiary of MBIA Asset Management LLC MBIA Capital Management Corp. Subsidiary of MBIA Asset Management LLC MBIA Insurance Corp. Subsidiary of MBIA Inc. MBIA Asset Management aims to set the standard for excellence in providing innovative fixed-income management services to the institutional and public sector marketplace. We have extensive experience managing public sector funds for governmental entities in Florida and across the country. The senior portfolio management team has worked together since the founding of the MBIA Capital Management Corp. (MBIA-CMC) in 1994. Having such a seasoned and steady team of leaders within the portfolio management team has allowed MBIA Asset Management to have an unusual degree of consistency in our investment philosophy and process. MBIA's special expertise is its deeply rooted credit culture. Our world-class credit skills provide the basis for our investment approach and infuse every investment decision with the perspective of the lender. For example, like a lender, MBIA evaluates Ma~ WINTER SPRINGS EMPLOYEES' PENSION SYSTEM securities based on management depth and experience, competitive advantages (niche players, low-cost providers, favorable regulatory environments) and overall financial strength. This long-term perspective aids in avoiding catastrophic credit events and thereby produces returns that experience lower volatility. Because of the depth of the credit team's knowledge, portfolio managers at MBIA view the credit analysts as partners in sound investment decision making. 3. Please state the percentage of the firm owned by the employees. MBIA-CMC is 100 percent owned by MBIA Asset Management LLC, a wholly-owned subsidiary of MBIA Inc. MBIA Inc. is a publicly traded company listed on the New York Stock Exchange. All employees of MBIA Asset Management own shares of MBIA Inc. stock through the corporate Long Term Incentive Program (LTIP). In addition to the stock awards, under this program, key employees are granted stock options for retention purposes. 4. Please provide an organizational chart for your organization with personnel tenure. Staff members who will be associated with this engagement are highlighted on the organizational chart found in Exhibit 1. Tenures with the firm and years of industry experience of key personnel are listed below. Clifford D. Corso President, Chief Investment Officer 12 22 E. Gerard Berrigan Managing Director, Portfolio Manager 12 22 Eric Williamson Managing Director, Global Credit Research 16 23 Robert T. Claiborne, CFA Director, Credit Research 6 25 Jesse L. Fogarty, CFA Director, Portfolio Manager 10 14 Jason Celente, CFA Vice President, Portfolio Manager 9 10 5. During the last three years how many professional employees have left the firm? Please state the reason. Four professionals have left the firm during the last three years. Three investment professionals left the firm to work for a competitor and one investment professional left the investment management industry. 6. Provide the coverage amount of your Errors and Omission (E&O) insurance policy and the name of the insurance carrier. MBIA maintains Investment Advisors Errors and Omissions (also known as Investment Advisor Professional Liability) coverage through the Chubb Group of Insurance Companies. The underlying policy provides coverage in the amount of $75 million. Additional coverage is available through MBIA's Executive Risk Insurance Program. /I~IQ~ WINTER SPRINGS EMPLOYEES' PENSION SYSTEM Errors and Omissions Executive Risk Indemnity Inc. $75 million $2.5 million Fidelity Liability Federal Insurance Company $75 million $ 5 million' Fidelity Bond Federal Insurance Company $75 million $ 1 million 'The deductible for Fiduciary Liability is $5 million for securities based claims and $1 mm for other claims. 7. Have there been any claims paid against the E8~0 policy in the last 18 months? If so, please state the amount paid and the nature of the claim. No claims have been paid against the Errors and Omissions policy in the last 18 months. 8. Has your firm ever been cited by any regulatory agency that resulted in a fine, cease and desist order or other disciplinary action? If so, please explain. MBIA Asset Management Group has not been cited by any regulatory agency that resulted in a fine, cease and desist order, or other disciplinary action. In 2005, MBIA Insurance, a separate firm affiliated with MBIA Inc., came under investigation by government regulators examining several past reinsurance transactions. These insurance-related matters have in no way impaired MBIA Asset Management Group's ability to meet its obligations to its clients. 9. Please provide by calendar year for the trailing five years the firm's total assets under management, the total number of accounts and the percentage of assets by client type (i.e. public, corporate, high net worth)? FIXED INCOME ASSETS (as of December 31, 2006) Total Assets Managed (in millions) $63,935 $48,767 $45,984 $39,366 $36,829 Current Fixed Income Accounts 295 222 190 153 131 Ma~ WINTER SPRINGS EMPLOYEES' PENSION SYSTEM ASSETS BY CLIENT TYPE (as of December 31, 2006) Corporations 57% Corporations 47% Corporations 35% Corporations 28% Corporations 10% Foundations 0% Foundations 0% Foundations 0% Foundations 0% Foundations 0% Healthcare 0% Healthcare 0% Healthcare 0% Healthcare 0% Healthcare 0% Insurance - Corporations 19% Insurance - Corporations 24% Insurance - Corporations 39% Insurance - Corporations 40% Insurance - Corporations 45% Multi- Employer 0% Multi- Employer 1 % Multi- Employer 1 % Multi- Employer 1 % Multi-Employer 1 Public 23% Public 27% Public 24% Public 23% Public 29% Mutual Fund 1 % Mutual Fund 1 % Mutual Fund 1 % Mutual Fund 8% Mutual Fund 15% Ma~ WINTER SPRINGS EMPLOYEES' PENSION SYSTEM II. The Investment Product/Process 1. How would this product be delivered (i.e. separate account or commingled)? In addition, please provide the fee schedule. This product would be delivered as a separate account for a flat fee of 20 basis points. The fees for investment advisory services are based on the average market value of the assets under management. A pro rata portion of the annual fee (1/4) is billed at the end of every quarter based on the average market value of the portfolio. The average quarterly market value is calculated by averaging the ending market value of portfolio holdings reported for each month during the quarter. The fee shall be payable upon receipt. 2. What index is the best performance benchmark for this strategy and why? The Lehman Brothers U.S. Aggregate Bond Index is the best performance benchmark for this strategy. The Lehman Brothers U.S. Aggregate Bond Index has strategic allocations to most sectors of the fixed income marketplace and we believe this index is the best measure of a broadly diversified fixed income portfolio. In addition, with a duration of 4.46 years, this index is positioned at the most advantageous point along the yield curve to achieve the return objectives for the City of Winter Springs Employees' Pension System's (the Pension Board) portfolio. 3. Please provide (in a spreadsheet) the sector allocation for the product by quarter relative to the benchmark index for the trailing three-year period. A spreadsheet containing the sector allocation for the product by quarter relative to the benchmark index for the trailing three-year period is included in Exhibit 2. 4. Equity Only: Please provide (in a spreadsheet) the market capitalization allocation of the portfolio by quarter for the trailing three-year period, using the following breakpoints: < $1 B, $1 B to $5 B, $5 B to $10 B, $10 B to $20 B, $20 B to $50 B and > $50. Additionally, please provide the product's weighted-average market capitalization for each period. Not applicable. 5. Fixed Income Only: Please provide an explanation of product focuses including approach to duration, sector, and curve. Additionally, please provide a historic representation of attribution based on key rate duration, or contribution to duration. MBIA seeks to provide its clients consistent, competitive returns with minimum portfolio volatility. In order to achieve this goal, MBIA's investment strategy focuses on a conservative investment selection process. Specifically, MBIA uses avalue-driven, bottom-up investment selection procedure. Active management with risk-controlled target duration around the client's benchmark underlies the management approach across the spectrum of fixed-income mandates. Recognition that interest rate M •Q~ WINTER SPRINGS EMPLOYEES' PENSION SYSTEM movements are uncertain and that yield is the dominant source of return drives the decision to keep duration controlled around the client's benchmark. The key to performance enhancement is MBIA's ability to find cheap cash flows. That is, buy yield at the right price, in the right sector, and in the right part of the yield curve. MBIA has found that incremental value over and above the client's benchmark can consistently be added using this rigorous, research-intensive security selection process. Portfolio managers focus 20 percent of their time on duration and 80 percent of their time on yield curve positioning, sector allocation, and security selection. Safety of principal is always paramount. DURATION Given MBIA's relative value focus, portfolios are structured within a plus or minus 10 percent duration band around the client's selected benchmark. Target duration is achieved by purchasing securities that contribute the highest risk adjusted yield per unit of duration available. The longer a portfolio's duration, the more sensitive a portfolio will be to a change in interest rates. Therefore, portfolios with durations greater than 110 percent of the targeted index duration assume unnecessary interest rate risk. Conversely, portfolios on the other end of the duration spectrum (90 percent of the duration target), carry lower levels of interest rate risk, but less opportunity for principal appreciation. To derive a 10 percent band around the targeted duration, MBIA takes into account several factors including monetary and fiscal policy and leading economic indicators. SECTOR SELECTION In determining our sector allocations, MBIA uses a mix of qualitative and quantitative techniques. Although MBIA's sector philosophy is primarily driven by relative value modeling, the experience of our sector specialists and their in-depth understanding of the technical and fundamental state of their markets, adds significant value. Our core fixed income product invests in all the sectors present in the Lehman Brothers Aggregate Bond Index including Treasury, agency, mortgage-backed, asset-backed, and commercial mortgage-backed securities, and investment-grade corporate bonds. In addition, MBIA will make tactical investments in non-benchmark sectors. Such non- benchmark allocations are typically made to either enhance return when unique relative value opportunities are present or to diversify the risks within the portfolio. Given MBIA's intense focus on risk management, we recognize that non-benchmark sectors may increase tracking error; therefore, we only make such investments when the return/risk ratios are supportive. These allocations dynamically shift as opportunities arise in different fixed income sectors. YIELD CURVE POSITIONING Yield curve analysis is critical to MBIA's investment process. Given target portfolio duration, MBIA seeks to construct an optimal portfolio allocation along the curve to benefit from future expectations on the shape of the yield curve. This process includes analysis of yield pick-ups along the curve per unit of duration as well as key-rate durations of MBIA's portfolio relative to its index. In addition, MBIA adjusts its yield curve position to reflect economic conditions. Therefore, in a slowing economic environment, the yield curve is likely to steepen; a beneficial strategy would likely be a "bullet" position which overweights intermediate-term securities. When the economy is experiencing strong growth, the more beneficial strategy would likely be a "barbell" position which underweights intermediate-term bonds. /NQ~ WINTER SPRINGS EMPLOYEES' PENSION SYSTEM 8% ~% 6% 5% 4% 3% 2 4 6 8 10 12 14 16 18 20 Average Porttblio Maturity (Years) 8% 7% 6% 5% 4% 3% 2 4 6 8 10 12 14 16 18 20 Average Porttblio MaturirS~ (Years) CONTRIBUTION TO DURATION ANALYSIS MBIA evaluates the allocation to corporate credit securities and other spread assets by using contribution to duration as an indicator of portfolio sensitivity to spread volatility. Large nominal percentages with low contributions to overall portfolio duration are less sensitive to spread volatility than smaller nominal percentages with higher contributions to duration. Securities with longer durations will contribute to greater portfolio spread duration than securities with shorter durations. MBIA achieves its portfolio strategy by managing these partial durations relative to the benchmark index. We calculate these statistics monthly using several in-house analytics systems and then compare each sector's contribution to duration versus the benchmark index. Index providers publish the statistics necessary to make this comparison. Historically, MBIA will overweight or underweight sectors based on this measure. 6. Please describe the investment process for the product. Include specifics, such as how the initial universe of securities is defined, the screening process, the buy and sell decision process, whether there is a targeted tracking error to the benchmark, number of holdings, and maximum sector and security positions, etc. MBIA's investment philosophy and methodology is structured to generate an attractive amount of excess returns while carefully managing the associated risk. A critical element of our strategy is to add incremental income to the portfolio through intelligent allocations to the "spread" sectors (corporates, mortgages, and asset-backed securities) of the market which offer various yield premiums. We attempt to add 50 to 100 basis points of net-of-fees excess return while maintaining a risk level that is essentially the same as our benchmark. MBIA's investment philosophy incorporates both the top-down economic and market forecasting "investment style" as well as elements of the bottom-up sector and security selection "investment style". We recognize that the top-down factors such as interest rate moves and yield curve shifts heavily influence the returns of a fixed income portfolio. We also recognize that forecasting such factors is very challenging. Given the importance of such volatile influences, MBIA attempts to manage the associated risks by carefully developing portfolio guidelines and practices. Ma~ WINTER SPRINGS EMPLOYEES' PENSION SYSTEM SECURITY SELECTION A vital element to active portfolio management is the selection and review of the individual securities used for each market sector. Securities are evaluated for both structure and credit quality. Security structure can greatly affect the duration target and therefore the overall return of the portfolio. MBIA uses different security structures at different periods in the interest rate cycle. As an example, MBIA favors non-callable securities when rates are above their long-term averages, and increases exposure to callable securities during periods when interest rates are likely to rise. Actively shifting among security structures reduces overall portfolio volatility and produces additional portfolio return. Since security selection infixed income is most intensely focused on corporate bonds (corporate credit risk), we will focus on this sector in addressing this topic. With nearly one trillion dollars of credit exposure through its insurance business, MBIA is one of the largest managers of credit risk in the financial industry. This excellence in credit analysis is a cornerstone of MBIA's investment process as well. MBIA Asset Management's corporate credit team has seven dedicated credit analysts. In addition to this dedicated team, our portfolio management team can tap the resources of more than 120 analysts within the insurance company. With this wealth of credit resources, virtually all investments in corporate credits are based on MBIA's internal credit analysis. Individual credits are assessed based on management depth and experience, competitive advantage, market position, and overall financial strength. Along with levering the resources of MBIA Insurance, our asset management division has adopted the insurance company's long-term perspective in evaluating credit risk. Although relative value and pricing clearly are important and evaluated, at MBIA we take more of a longer-term lender's perspective in evaluating credit quality. We believe that this philosophy helps avoid the chance of experiencing significant losses and helps reduce the volatility of returns in our clients' portfolios. BUY AND SELL DECISIONS MBIA's buy and sell decisions are imbedded in its investment philosophy. Unlike some stock buy/sell disciplines which may be hard coded on price/earnings, price/book, or other valuation metrics, fixed income asset management buys and sells are more often a result of broader portfolio management changes in the portfolio, typically driven by shifts in interest rates or changes in sector spreads. Because of this, most of MBIA's buys/sells are driven by macro portfolio management decisions more than unique bond-specific determinants. Individual corporate securities, which are subject to idiosyncratic credit risk, are an exception to the portfolio-context buy/sell discipline mentioned above. In the case of corporate bonds, MBIA's buy/sell discipline is based on its internal assessment of the creditworthiness of the issuer and the security's yield premium. The risk/reward tradeoff must be attractive for the credit team to recommend a purchase. On the sell side, if the risk/reward tradeoff shifts substantially, MBIA will evaluate selling the security. This tradeoff can result from either an increase in valuation or an increase in risk, either of which may make the security less attractive prospectively. BENCHMARK TRACKING ERROR MBIA uses benchmark tracking error in the construction of client portfolios and pays particular attention to this gauge. Our goal is to construct portfolios which have a high probability of outperforming their indices with a minimal amount of volatility over market cycles. In constructing our portfolios we carefully measure our potential volatility or tracking error around our benchmarks utilizing our in-house portfolio management /I~IQI~ WINTER SPRINGS EMPLOYEES' PENSION SYSTEM systems as well as other quantitative analysis. This analysis centers on quantifying risks we are taking relative to our benchmarks by breaking down the index and taking active beats on a contribution to duration basis by sector, quality, maturity, and duration. Our results validate our philosophy by consistently outperforming our benchmarks with a lower degree of volatility such that the risk adjusted returns are consistently ranked in the top quartile of our peer universes. MAXIMUM SECTOR AND SECURITY POSITIONS A portfolio the size of the one proposed for the Pension Board (over $14 million) would typically contain 30 to 50 holdings, which implies a 2 to 3 percent weighting per security. Within the corporate credit sector, industry concentrations are managed according to market conditions and pricing. Generally speaking, MBIA will allocate larger portfolio positions to bank and finance credits because they are usually "A rated" or better, fairly priced, liquid and, most importantly, highly regulated. Bank and finance companies are usually required by ratings agencies and insurance regulators to set aside adequate capital reserves versus their liabilities. This creates a natural layer of credit surveillance for this specific industry. MBIA will allocate to industrial, telecommunications, and other corporate credit sectors when market conditions provide an opportunity for that allocation to benefit the portfolio. Historically, these sectors may comprise up to 25 percent of total portfolio value. Bank and finance allocations have been as high as 50 percent of portfolio value. 7. Describe the use of cash in the investment process. What range of cash is typical? Do you utilize the cash holding to enhance returns? MBIA's investment philosophy is to minimize the amount of non-strategic cash in client portfolios, given the drag that cash tends to create on longer-term portfolio returns. There are times, however, when our yield curve position may dictate that we maintain a significant allocation to securities on the shorter end of the yield curve. For example a strong barbelled position may entail holding a significant amount of short, cash- equivalent instruments. Naturally, portfolios for clients that have routine liquidity needs also necessitate higher static levels of cash. 8. Is there a single policy regarding industry or sector diversification? What is the maximum concentration allowed in a single industry or sector? To what extent might you have large concentration in specific industries? MBIA currently does not have a single policy regarding industry or sector diversification. As mentioned previously, within the corporate credit sector, industry concentrations are managed according to market conditions and pricing. A portfolio the size of the one proposed for the Pension Board (over $14 million) would typically contain 30 to 50 holdings, which implies a 2 to 3 percent weighting per security. The types of sectors represented in most of MBIA's clients' portfolios benchmarked against broad fixed income benchmarks include Treasury, agency, mortgage-backed, investment-grade corporate, and high-quality asset backed securities. Given the Lehman Brothers U.S. Aggregate Bond Index benchmark in the Pension Board's case, MBIA will work closely with the Pension Board to determine which sectors would be optimal for a tailored strategy. MBIA strongly believes that adequate diversification is fundamental to the management of any investment portfolio. MBIA's client portfolios reflect this belief, and are managed to appropriate sector, sub-sector, issuer, and issue concentration limits. Concentrations Ma~ WINTER SPRINGS EMPLOYEES' PENSION SYSTEM within any sub-sector are limited to 25 percent of assets. Issuer concentrations are capped at 5 percent, and in practice are rarely above 2 percent. 9. Please provide the number of institutional accounts lost in the past five years and the reason for the loss. We have lost 25 institutional accounts in the past five years. The loss of these accounts is not representative of the normal turnover at the firm; it represents the sale by MBIA of 1838 Investment Advisors in 2004. 10. Detail the account turnover and trading costs. Does the firm employ a specialized trading procedure? If so please explain. ACCOUNT TURNOVER Turnover in all separately managed portfolios has been declining year-over-year and is currently approximately 30 percent. The primary reason for this decline results from a management style shift that now focuses on a long-term view of sector allocation and excludes short-term new issue market trading. Portfolio objectives generally include principal protection and liquidity as primary objectives. Higher levels of market volatility imply more opportunities for relative value trading strategies, and vice versa. The investment strategy has gradually moved toward putting more emphasis on long-term secular trends for sector allocation and security selection, thus requiring less trading. MBIA expects the turnover rate to remain in the 30 to 50 percent range, with the disparity largely driven by market volatility and associated relative value opportunities. TRADING PROCEDURE MBIA believes that efficient and consistent trade execution can only be accomplished by those who are most familiar with the various market sectors. Therefore, all MBIA fixed income trades are executed by the sector specialist portfolio manager rather than a dedicated trading staff. These sector specialist portfolio managers are responsible for obtaining multiple bids and negotiating the best price for each trade. This arrangement provides the best execution, and trades can be aggregated for better pricing and then electronically allocated across the different portfolios by the trade order processing system. MBIA has been able to consistently provide its clients with the most efficient execution and low trading costs. The electronic trade order management system cross- checks all trade descriptions against client-specific guidelines to prevent any trades which may be out of compliance with these parameters. The check is made twice- before the security is purchased and after it is received at the custodian bank-to ensure that guidelines are not violated. The MBIA trade order processing system is fully integrated into MBIA's portfolio accounting system to provide straight-through processing of each trade, ensuring efficiency and reducing the possibility of processing errors. Processing takes place in real time and provides an audit trail that is monitored by a compliance team. 11. What methods do you use to insure "best price and execution" in trading? MBIA seeks to obtain the most favorable terms available for the execution of portfolio transactions for advisory clients. The placement of orders with a particular brokerage MQ~ WINTER SPRINGS EMPLOYEES' PENSION SYSTEM 10 firm will be based on MBIA's good faith determination that the firm offers the best price and execution available under the circumstances. Broker Selection Factors: ^ Execution capabilities ^ Availability of product ^ Competence of sales personnel Order Placement Procedures: ^ Negotiation ^ Reasonably seek best price and execution ^ Periodic monitoring of trading activity by MBIA supervisory personnel To ensure a seamless transition between setting strategy and execution of that strategy across accounts, portfolio managers execute all trades on behalf of their clients. Portfolio managers seek best price and execution on each transaction. When possible, more than one bid or offer is received when executing a buy or sell transaction. Periodic reviews of our execution procedures are conducted by senior MBIA personnel. 12. What criteria does your firm use to determine that there is sufficient liquidity for the firm's total position in a security? The majority of MBIA positions are in registered fixed income securities that trade over- the-counter at negotiated prices. MBIA counterparties in these transactions are registered broker-dealers and banks of the highest quality. Liquidation of these securities is achievable within one to three business days in almost any market environment. 13. Please provide by calendar year for the trailing five years the assets under management and the number of accounts in the investment product. MBIA BROAD MARKET HIGH QUALITY PORTFOLIO COMPOSITE (as of December 31, 2006) 2006 $74 6 2005 $140 2 2004 $117 3 2003 $120 5 2002 $252 11 2001 $305 13 The fluctuation in the number of accounts in this composite is the result of restructuring the composite. Accounts that did not fit the investment strategy of the composite were removed. The reduction in the number of accounts in this composite is not necessarily representative of lost accounts. ML'.';~ WINTER SPRINGS EMPLOYEES' PENSION SYSTEM 11 III. Research 1. What percentage of research is generated internally? As mentioned previously, virtually all investments in corporate credits are based on MBIA's internal credit analysis and subsequent decisions. MBIA has a wealth of analytical and credit resources available to portfolio managers. The investment management team benefits from the work of seven dedicated analysts and more than 120 taxable and municipal bond analysts employed by MBIA Insurance Corporation. MBIA's research analysts comprise a significant proprietary resource that supplements external "street" research. Analysts are organized by sector and by geographic region. We proactively manage risk and relative value considerations assisting in the buy/sell/hold decisions. 2. Please describe how your firm obtains and pays for outside research reports. MBIA's external fixed income research is generated daily by contact with major Wall Street firms, direct communications with each firm's chief economists, market strategists, and credit analysts. MBIA does not enter into soft-dollar arrangements for these reports. 3. Please name the three primary sources of data and/or analyses upon which your firm relies. MBIA has an experienced credit team that performs its own analysis on each credit. Our analysts use rating agency, sell-side, and independent sources of credit research and data. One source, CreditSights is a valuable provider of in-depth independent credit research. We also use CreditSights' Bond Score as well as Kamakura credit scores, both model-based default probability scores which we use to screen the portfolios and provided relative comparisons across issuers. For asset-backed securities, in addition to the above sources, we use Intex, Trepp, and other tools to model and stress test transactions for asset and cash flow performance. We also use a variety of internal tools, including a daily rating change report, and CreditTracker, a credit tracking database for corporates. ~Q~ WINTER SPRINGS EMPLOYEES' PENSION SYSTEM 12 IV. Miscellaneous 1. Please state whether you are willing to acknowledge that you are a fiduciary of the fund as defined in the Employee Retirement Income Security Act of 1974 ("FRIBA") and Section 112.656, Florida Statutes. MBIA will comply with the fiduciary standards as defined in the Employee Retirement Income Security Act of 1974 ("FRIBA") and Section 112.656, Florida Statutes. 2. Please state whether you agree that the agreement shall be construed under the laws of the State of Florida and federal law where applicable. MBIA agrees that the agreement shall be construed under the laws of the State of Florida and federal law where applicable. 3. Please state whether you agree that the venue for any judicial proceeding will be in the county in which the Board sits. MBIA agrees that the venue for any judicial proceeding will be in the county in which the Board sits. M~~ WINTER SPRINGS EMPLOYEES' PENSION SYSTEM 13 ORGANIZATIONAL CHART Clifford Corso, Chief Investment Officer, President of MBIA Asset Management Group Pertfelie Manaas Gerard Berrigan, Managing Director John Cutting, III, Managing Director Craig Armstrong, CFA, Director Jason Cameron, CFA, Director Jesse Fogarty, CFA, Director Jason Celente, CFA, VP Mary Donovan, CFA, VP Randy Palomba, CFA, VP Thomas Vandermark, CFA, CPA, VP Jake Danaher, AVP Neil Waud, CFA, AVP Byron Gehlhardt, Portfolio Manager Matthew Bodo, Senior Analyst Jennifer Gosselin, Senior Analyst Patricia Abt, Senior Administrator Danette Desiderio, Senior Administrator Gt1 07 Eric Williamson, Managing Director Robert Claiborne, CFA, Director Roger Shields, Ph.D., Managing Director, Senior Economist Sharon Fera, Director Gautam Khanna, CFA, CPA, Director Laura Thorne, VP Richard Talmadge, CFA, AVP 120 MBIA Credit Analysts David McCollum, Managing Director Chris Moros, CFA, Managing Director Andrew Dixon, Director Bertha Lui•McKee, Director Gefiard Obefiolzer, Ph.D., Director Laura Schnieder, Director Matthew Sleight, Ph.D., Director James Binette, VP Eric McAlley, VP David Wilson, VP Kimberty Boeheim, AVP James DiChiaro, AVP Kevin Loesher, AVP Maggie Walsh, AVP Ines Beato, Senior Analyst Julie Ng, Senior Analyst Shazia Malik, Analyst Sal D'Addio, Senior Associate Odette Haynes, Associate Joanne Pugni, Senior Administrator Jonathan Moll, CFA, Managing Director Thomas Jordan, Managing Director Andrew Goodale, VP, Dir. Mrktg David Witthohn, CFA, Director Corinne Larson, CTP, VP Stephen Dixon, AVP Thomas Tight, AVP Greg Wright, AVP, COLOTRUST Admin. Karen Brylle, Manager Miriam Cleary, Manager Bruce Ely, Manager David Lee, Manager James Berger, Regional Director Richard Choyke, Regional Director Gay EichhofF, Regional Director Richard Garay, Regional Director Deirdre Jordan, Regional Director Danny King, Regional Director Jo Ann Klatskin, Regional Director Linda Livingston, Regional Director Edward Rajsteter, Regional Director Bryan Todd, Regional Director Nancy Weiss, Regional Director Gene Havel, Senior Associate Susie Lockwood, Senior Associate Carrie Taylor, Senior Associate Emily Ferguson, Associate Samira Mattin, Associate Matthew Starr, Associate Lisa Spano, Senior Administrator Judy Stone, Administrator Matthew Duren, Intem Marc Morris, Managing Director Richard Walz, Director John Ariola, CPA, VP Michael O'Brien, VP Christopher Staab, VP John Antonazzo, AVP Anna Bulzomi ,AVP Cynthia Caione, AVP Teresa Hearty, AVP Barry Howsden,AVP Sonya Linder-Silidjian, AVP Stephen Scanlan, AVP Rohit Sood, AVP Thomas Stabile, AVP James Walker, AVP Angelique Allen, Senior Accountant Nils Demme, Senior Accountant David Craparo, Senior Accountant John Lucas, Senior Accountant Laura Mok, Senior Accountant James Nickle, Senior Accountant Pamela Vieira, Senior Accountant Evan Yarian, Senior Accountant Elaine Constantine, Senior Analyst Kimberlee Lisella, Senior Analyst Mainuddin Hoque, Senior Analyst JP Kupper, Senior Analyst Christine Dolan, Senior Associate Michael Lee, Senior Associate Brian Kelly, Senior Associate Mike Murphy, Senior Associate Christopher Pryzmylski, Senior Associate Kevin Dolan, Associate Christine Calvao, Senior Accountant Deisy Tamayo, Accountant Aparna Basu, Analyst Todd Ragusa, Analyst Rosemarie Collorafi, Senior Administrator Christy Luckenbach, Senior Administrator Janet Johnson, Senior Administrator Krista Koenig, AdminisVator Ursula Solimine. Ass'stant Ruth M. Whaley, Chief Risk Officer, David Huntley, Director Jenn'der Hendrix, AVP 15 MBIA Risk Managers ... Andrea Randolph, Chief Technology Officer, MBIA Michael DeNigris, Director JamesYang, VP 40 MBIA IT Programmers Mava Asset Management Group SECTOR ALLOCATION ~ ~. MBS/CMBS 38% 40% ABS/CMO 6% 1% Corporates 29% 22% Agencies 15% 12% Cash 3% • l1 11 . 0% Treasuries 15% 25% MBS/CMBS 36% 40% ABS/CMO 6% 1 Corporates 29% 22% Agencies 14% 12% as 0% . • 11. ° Treasuries 16% 25% MBS/CMBS 35% 39% ABS/CMO 6% 1 Corporates 29% 23% Agencies 14% 12% Cash p% ~ 11• 0% Treasuries 12% 25% MBS/CMBS 33% 40% ABS/CMO 4% 1 Corporates 33% 23% Agencies 18% 11 Cash 0% ~ 11 0% Treasuries 12% 25% MBS 34% 35% ABS 0% 1% Corporates 38% 24% Agencies 16% 11 CMBS 0% 4% Cash Treasuries 0% ~ ~ 11 13% 0% 25% MBS 33% 34% ABS 0% 1% Corporates 37% 26% Agencies 17% 11 CMBS 0% 3% Cash 0% 0% • ! 11 Treasuries 17% 26% MBS 33% 35% ABS 4% 1% Corporates 31 % 24% Agencies 12% 11 CMBS 1 % 3% Cash Treasuries ! 2% 11 9% 0% 25% MBS 33% 35% ABS 9% 2% Corporates 37% 24% Agencies 9% 11 CMBS 1% 3% Cash Treasuries ! 2% 11• 8% 0% 25% MBS 30% 35% ABS 9% 1% Corporates 40% 25% Agencies 9% 11 CMBS 1% 3% Cash Treasuries • ! 3% 11 • 6% 0% 24% MBS 31 % 36% ABS 10% 1% Corporates 41 % 25% Agencies 10% 11 CMBS ! 2% 11 3% Treasuries • 5% 24% MBS 33% 36% ABS 14% 4% Corporates 40% 25% Agencies 8% 11 Cash Treasuries ! 0% 11• 4% 0% 22% MBS 30% 35% ABS 12% 4% Corporates 45% 27% Agencies 9% 12% Cash 0% 0%