Sincerely,
Janice Mueller
State Auditor
__________________
State of Wisconsin
Investment Board
Madison
May 15, 1999
To the Honorable, the Legislature:
Section
25.17(14r) of the Statutes requires that the State of Wisconsin Investment Board (SWIB) submit a report to the Joint Committee on Audit, Joint Committee on Finance and the Chief Clerks of each House summarizing any change in the Board's investment policies, upon adoption of the change.
On April 8, 1999 the Board approved modifications to the Investment Policy Guidelines for the Global Fixed Income and International Equity portfolios of the Wisconsin Retirement System (WRS) Trust Funds. Attached are revised investment guidelines which replace, in their entirety, the previous guidelines for the Global Fixed Income portfolio. Also attached are the modified guidelines for the International Equities portfolio. Additions to the previous International Equities guidelines are shaded and deletions are the stricken material.
A211
Global Fixed Income Guideline Changes
SWIB currently has five portfolios with mandates designed to access developed non-U.S. fixed income markets: one internal Global Opportunistic Fixed Income portfolio and four externally managed International Fixed Income Portfolios. Although all five portfolios had identical mandates at the inception of the international fixed income program, the internal and external managers investment guidelines had been modified over the years, resulting in substantially different mandates.
Prior to the guideline changes adopted at the April Board meeting, the internally managed Global portfolio was primarily a U.S. Treasury portfolio which had been given the authority to invest in non-U.S. government debt markets on a opportunistic basis. Its benchmark was a U.S. Treasury benchmark, reflecting its primary mandate. In contrast, the externally managed International portfolios were 100% non-U.S. in nature, with non-U.S. hedged benchmarks. Comparability and the potential for interaction among internal and external managers regarding portfolio strategies was diminished under this structure.
European bond markets have been undergoing a period of change. Historically, European corporations have had close relations with banks and almost exclusively went to them to borrow money. Today, European companies are increasingly entering the bond market as a source of funds. This creates a new opportunity for international fixed income managers to make attractive investments. In order to keep pace with the growing opportunities in these markets, the external pubic fixed income portfolios were given the authority to invest in non-U.S. corporate debt in 1998.
Recent strategic planning by SWIB staff and trustees recognized the globalization of financial markets. We expect this trend to intensify. We recognize that it is therefore important to enhance and expand our expertise to follow cross-border events if we are to meet our fiduciary responsibility. We have identified the need to redirect portfolio management philosophies across asset classes to a more global focus in the future.
In order to correct inefficiencies and to enact a global strategy which is more commonly accepted in the investment industry, a uniform global mandate was established for the internal Global and external International Fixed Income portfolios. Fully global developed markets, meaning U.S. and non-U.S., are now accessed at the managers' discretion. Accordingly, global benchmarks, including U.S. and non-U.S. fixed income assets, have been adopted. All portfolios have been given the authority to hold non-U.S. investment-grade corporate debt instruments, as well as a small allocation to emerging market debt.
In addition to placing an emphasis on global markets, the investment guidelines were modified to clarify the portfolio's allowable currency hedging activity. Industry-standard unhedged international benchmarks were chosen to reflect the global mandate. The use of currency hedging will now be optional and permissible only through traditional forward and exchange-traded instruments. The modified guidelines have the intent to permit the management of currency exposure and to benefit from a potential appreciation of foreign currencies against the U.S. dollar, should that occur.
While each portfolio is expected to shift its investments to a more global focus, with a mix of U.S. and non-U.S. securities, it is anticipated that the aggregate exposure to non-U.S. instruments will not change substantially with these guideline modifications.
International Equities Guideline Changes
The International Equities guidelines were modified to include the same language regarding allowable currency hedging activity as adopted for the Global Fixed Income portfolio. The language does not materially modify the previous currency hedging activity for the portfolio. The purpose of the change is to apply consistent hedging policies across asset classes.
Please contact me if you have any questions about this report.
Sincerely,
Patricia Lipton
Executive Director
__________________
Representative Foti moved that the Assembly stand adjourned until 10:00 A.M. on Tuesday, June 1.
The question was: Shall the Assembly stand adjourned?
Motion carried.
The Assembly stood adjourned.
1:01 P.M.
