Executive Summary Performance & Implementation Review Fixed Income Market Update 7... · 2018. 4....
Transcript of Executive Summary Performance & Implementation Review Fixed Income Market Update 7... · 2018. 4....
I. Executive Summary II. Performance & Implementation Review III. Fixed Income Market Update IV. Appendix: Manager Scorecards
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Section I
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IPS Stated Objective for Core Fixed Income “Diversify the risk of the overall investment portfolio with a secondary goal of capital preservation”
The performance objective is to exceed the Barclays US Aggregate Bond Index net of fees over rolling five-year periods.
IPS Stated Objective for Non-Core Fixed Income “Diversify the risk of the overall investment program and provide both income and capital appreciation”
The performance objective is to exceed the returns of a blended benchmark comprised of the Barclays US Corporate High Yield Index 50%, the JPM GBI-EM Global Diversified Index (USD Unhedged) 25%, and JPM CEMBI Broad Diversified Index 25%, net of fees over rolling five-year periods.
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Why do we conduct annual reviews? Per the TMRS IPS, comprehensive reviews are to be conducted and documented at least annually. The goal is to formally review managers’ performance, current investment strategy or style relative to that which was communicated, and other issues related to the managers’ organization, personnel, or investment philosophy. The annual review process is part of the IPS manager retention framework. The annual review & ongoing monitoring processes may include but are not limited to:
SEC Form ADV reviews SSAE16 and other operational audit reviews Compliance Certifications Detailed Performance Analyses Manager Meetings Quarterly Monitoring Manager Annual Meetings Limited Partnership Advisory Committees Strategic Portfolio Reviews Meetings with comparable managers Market Research Attending Conferences
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The Annual Review process holds TMRS accountable for
being self-critical of its portfolio management
process in order to preempt manager specific, strategic, or other potential problems.
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• Board approved 2 Emerging Market Debt Manager Recommendations for $480 million May 2015
• Board approved 4 Direct Lending Manager Recommendations for $950 million
December 2015
• Board approved 3 Opportunistic Credit Manager Recommendations (5 strategies) for $700 million June 2016
• Board approved 2 High Yield Manager Recommendations for $600 million
September 2016
• Board approved 3 Opportunistic Credit & 1 Direct Lending Manager Recommendations for $700 million
December 2016
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• Core fixed income continues to fund diversification of the TMRS portfolio into non-core fixed income and other asset classes.
• Board approved 11managers in 2016 that will largely complete the non-core fixed income allocation.
• Staff will continuously evaluate existing managers to optimize allocations within the non-core portfolio.
19.2%
8.3%
72.5%
TMRS Portfolio
Core Fixed Income
Non-Core Fixed Income
Other
10.0%
20.0%
70.0%
TMRS Target Portfolio
Core Fixed Income
Non-Core Fixed Income
Other
*TMRS Portfolio as of 12/31/16
*
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2016 Allocation Activity: Marathon SPS - $150mm Marathon ECO - $100mm Marathon CLO - $50mm Beach Point - $200mm PIMCO COF II - $200mm Columbia - $300mm Neuberger Berman - $300mm Adams Street – $200mm Bain - $100mm GoldenTree - $200mm Waterfall - $200mm TOTAL - $2 Billion
Non-Core Fixed Income Allocation
Bank Loan/CLO (BL/CLO) Direct Lending (DL)
Emerging Markets Debt (EMD) High Yield (HY) Opp. Credit RMBS/CMBS
Guggenheim Adams Street Alliance Bernstein Columbia Bain Ellington
Highland Golub Bluebay Neuberger Berman Beach Point Voya
H.I.G. Whitehorse GoldenTree
TCW Marathon SPS
White Oak Marathon ECO
Marathon CLO
PIMCO COF II Waterfall
The highlighted managers were recommended and approved in 2016. *Partially funded
**Approved, funding pending
8%
8%3%
4%
4%
6%
6%
5%5%6%
6%
1%2%
2%3%
4%
4%
4%
4%
8%
8%
HighlandGuggenheimH.I.G. Whitehorse*White Oak*Adams Street**Golub*TCW*Alliance Bernstein**Bluebay**Columbia**Neuberger Berman**Marathon CLO*Marathon ECO*Bain**Marathon SPS*PIMCO COF II*GoldenTree**Waterfall**Beach PointEllingtonVoya
Section II
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Core Fixed Income
MKT VAL % of Plan 1 Mo. QTR YTD 1 Yr. 3 Yrs. 5 Yrs. 7 Yrs. 10 Yrs. ITD Incept Date
TMRS - TOTAL CORE FIXED INCOME 4,809,721,532.25 19.16 0.17 -2.86 2.89 2.89 3.08 2.4 3.74 4.23 7.82 1/1/1989 TMRS - Total Fixed Income Index (Daily) 0.14 -2.98 2.65 2.65 3.03 2.23 3.63 4.05 7.27 1/1/1989 EXCESS 0.03 0.11 0.25 0.25 0.05 0.16 0.12 0.18 0.55 TMRS - BLACKROCK CORE FIXED INCOME 3,088,424,493.18 12.3 0.21 -2.79 2.94 2.94 3.19 2.43 3.74 3.64 10/1/2009 TMRS-Custom Core Fixed Income Index (Dai 0.14 -2.98 2.65 2.65 3.03 2.23 3.63 3.53 10/1/2009 EXCESS 0.06 0.18 0.29 0.29 0.16 0.19 0.12 0.11 TMRS PIMCO CORE PLUS FIXED INC 1,721,297,039.05 6.86 0.11 -2.98 2.83 2.83 2.75 2.37 3.65 2/1/2010 Barclays Aggregate (Daily) 0.14 -2.98 2.65 2.65 3.03 2.23 3.44 2/1/2010 EXCESS -0.03 -0.01 0.19 0.19 -0.28 0.14 0.21
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Non-Core Fixed Income
MKT VAL % of Plan 1 Mo. QTR YTD 1 Yr. 3 Yrs. 5 Yrs. 7 Yrs. 10 Yrs. ITD Incept Date
TOTAL NON-CORE FIXED INCOME 2,092,565,799.99 8.34 1.09 2.19 7.62 7.62 3.81 10/1/2014 TOT NON-CORE FIXED INCOME INDEX 1.59 -0.99 13.56 13.56 2.18 10/1/2014 EXCESS -0.49 3.18 -5.94 -5.94 1.64 BANDERA II - GUGGENHEIM 407,591,448.77 1.62 0.85 1.76 8.33 8.33 4.25 10/1/2014 CS Leveraged Loan Index 1.15 2.25 9.88 9.88 3.92 10/1/2014 EXCESS -0.29 -0.49 -1.55 -1.55 0.32 BANDERA I - HIGHLAND 407,970,649.26 1.63 1.98 3.73 12.57 12.57 4.52 10/1/2014 CS Leveraged Loan Index 1.15 2.25 9.88 9.88 3.92 10/1/2014 EXCESS 0.83 1.48 2.69 2.69 0.59 VOYA NON CORE FIXED INCOME 401,097,579.03 1.6 0.51 1.65 4.75 4.75 3.61 1/1/2015 Non Agency RMBS/CMBS Strategy Index 1.46 0.23 13.41 13.41 4.78 1/1/2015 EXCESS -0.95 1.43 -8.66 -8.66 -1.18 ELLINGTON NON CORE FIXED INC 399,825,599.06 1.59 0.58 1.54 5.42 5.42 3.47 1/1/2015 Non Agency RMBS/CMBS Strategy Index 1.46 0.23 13.41 13.41 4.78 1/1/2015 EXCESS -0.88 1.31 -7.99 -7.99 -1.32 GOLUB CAPITAL PEARLS DLP LP 51,765,132.73 0.21 0.28 1.91 4.53 7/1/2016 WHITE OAK SUMMIT FUND, L.P 90,210,750.57 0.36 1.81 1.88 3.54 5/1/2016 TCW Asset Management LLC 9,900,000.01 0.04 12/1/2016 H.I.G. WHITEHORSE CAPITAL, LLC 9,912,500.01 0.04 12/1/2016 MARATHON SPS 66,851,822.25 0.27 -0.25 3.06 4.01 8/1/2016 MARATHON ECO 11,070,389.37 0.04 -0.27 -0.24 -0.24 10/1/2016 MARATHON CLO 4,621,579.21 0.02 0 -0.02 11/1/2016 PIMCO COF II 25,657,149.72 0.1 6.9 4.31 4.31 10/1/2016 BEACH POINT 206,091,200.00 0.82 1.7 2.56 2.56 10/1/2016
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Core Weighting vs. Target
19.2%
10.0%
9.2%
0.0%
5.0%
10.0%
15.0%
20.0%
25.0%
Actual Target Difference
Core Fixed Income continues to fund non-core fixed income and other asset classes.
Mandate Market Value % of Total Fund
CORE FIXED INCOME
BlackRock $3,088,424,493 12.30%
PIMCO $1,721,297,039 6.86%
TOTAL $4,809,721,532 19.16%
3.1%
3.2%
2.0%
4.0%
7.6%
Non-Core Fixed Income Dec-15(including unfunded allocations)
BL/CLO
RMBS/CMBS
EMD*
DL*
Unallocated
3.1%
3.2%
13.6%
Non-Core Fixed Income Dec-15
BL/CLO
RMBS/CMBS
Unfunded/Unallocated
13 * Committed, funding pending
• Non-core fixed income investments represented approximately 6% of TMRS portfolio as of December 2015.
2015 Key Allocations: • May: EMD Manager recommendation approved for $480 mill. (2% approx.) • June: New Asset Target Allocation approved increasing non-core to 20%. Core
fixed income reduced to 10% • Dec: Direct Lending Manager recommendation approved for $950 mill. (4%
approx.)
3.1%
3.2%
2.0%
4.0%
7.6%
Non-Core Fixed Income Dec-15(including unfunded allocations)
BL/CLO
RMBS/CMBS
EMD*
DL*
Unallocated
3.2%
4.6%
1.9%2.4%
4.8%
3.2%
Non-Core Fixed Income Dec-16(including unfunded allocations)
BL/CLO
DL**
EMD*
HY*
Opp.Credit**RMBS/CMBS
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*Committed, funding pending ** Partially funded
2016 Key Allocations: • June: Opportunistic Credit Manager recommendation approved for $700 mill.
(3% approx.) • September: High Yield Manager recommendation approved for $600 mill. (2%
approx.) • December: Opportunistic Credit & Direct Lending Manager recommendation
approved for $700 mill. (3% approx.)
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In addition to expected return and volatility, investment staff is constantly evaluating additional factors such as: • Liquidity • Fund structure • Strategy
Capital Preservation Income Capital Appreciation
Core
RMBS/CMBS
BL/CLO
HY DL
EMD
Opportunistic Credit
Expected Volatility
Expe
cted
Ret
urn
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*Partially funded **Committed, funding pending
Non-Core Fixed Portfolio
Capital Preservation Income Capital Appreciation
RMBS/CMBS (16%) • Ellington • Voya
BL/CLO (16%) • Guggenheim • Highland
Direct Lending (23%) • Adams Street** • Golub* • H.I.G. Whitehorse* • TCW* • White Oak*
HY (12%) • Columbia** • Neuberger Berman**
Opportunistic Credit (23%) • Bain** • BeachPoint • GoldenTree** • Marathon SPS* • Marathon ECO* • Marathon CLO* • PIMCO COF II* • Waterfall**
EMD (10%) • Alliance Bernstein** • Bluebay**
Total non-core fixed income portfolio allocation will reach approximately $5 billion upon funding.
8%
8%3%
4%
4%
6%
6%
5%5%6%
6%
1%2%
2%3%
4%
4%
4%
4%
8%
8%
HighlandGuggenheimH.I.G. Whitehorse*White Oak*Adams Street**Golub*TCW*Alliance Bernstein**Bluebay**Columbia**Neuberger Berman**Marathon CLO*Marathon ECO*Bain**Marathon SPS*PIMCO COF II*GoldenTree**Waterfall**Beach PointEllingtonVoya
Section III
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18 Source: Bloomberg
Treasury yields increased from record lows as investors reassessed their inflationary outlook.
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2
3
4
5
6
%
U.S. Treasury Yields
10yr 30yr
Maturity 7/8/2016 8/30/2016 2/28/2017
10yr 1.36 1.57 2.39
30yr 2.10 2.23 3.00
19 Source: Bianco Research
Treasury yields are near record lows as a result of global central bank policies. Long term interest rates remain near historic lows.
20 Source: Bianco Research
The stock of negative-yielding sovereign debt tumbled by more than $2.5 trillion since the summer of 2016.
Update on Negative Interest Rates
21 Source: Bianco Research
Inflation reached 2.1% by the end of 2016.
22 Source: Bianco Research
Wage growth could be a major driver of higher inflation expectations.
23 Source: Bianco Research
Recent U.S. Dollar strength could have a substantial effect on the domestic economy.
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Summary
• Interest rates have moved higher as investors have adjusted their inflation expectations.
• Investors continue to diversify into other asset classes to mitigate rising interest rate risk and capture attractive yields.
• The Fed raised rates in December and suggested they could increase short term interest rates three times in 2017.
• Effective fiscal policy could have a significant impact on the future level of interest rates.
Section IV
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Excellent In Good Standing Fair (working with manager)
Unsatisfactory (remedial action being taken)
Comprehensive Review
Assessment Area Grade Update & Comments
Organization No recent material organizational or structural changes. No additional disclosures made since last review.
People No changes
Philosophy/Strategy/Process No changes
Portfolio(s) No changes
Performance YTD 2.94%; outperformed versus portfolio benchmark for 2016
Compliance No issues
Guideline Changes No changes
Risk Management No issues
Operations No issues
Client Service Client service and portfolio management teams are very accessible and responsive
Other N/A
Performance as of 12/31/16.
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Excellent In Good Standing Fair (working with manager)
Unsatisfactory (remedial action being taken)
Comprehensive Review
Assessment Area Grade Update & Comments
Organization PIMCO has transitioned effectively after the CEO departure. PIMCO has maintained a strong and experienced management team and performance has been in line with expectations. TMRS staff removed PIMCO from our watch list in September, 2016.
People No personnel changes regarding TMRS portfolio.
Philosophy/Strategy/Process PIMCO has continued to add key advisors to its Board of Experts.
Portfolio(s) No changes
Performance YTD: 2.83%; outperformed versus portfolio benchmark for 2016
Compliance No issues
Guideline Changes No changes
Risk Management No issues
Operations No issues
Client Service Client service is extremely responsive and proactive.
Other N/A
Performance as of 12/31/16.
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Excellent In Good Standing Fair (working with manager)
Unsatisfactory (remedial action being taken)
Comprehensive Review
Assessment Area Grade Update & Comments Organization No material changes since last review.
People No departures related to TMRS. Strong portfolio management team.
Philosophy/Strategy/Process Strategy focuses on security selection and scenario analysis. Firm utilizes proprietary models to uncover value in the securitized credit market.
Portfolio(s) No changes
Performance YTD: 5.42%; underperformance versus benchmark, mainly due to benchmark mismatch.
Compliance No issues
Guideline Changes In discussions to expand mandate and benchmark.
Risk Management No issues
Operations No issues
Client Service No issues
Other N/A
Performance as of 12/31/16.
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Excellent In Good Standing Fair (working with manager)
Unsatisfactory (remedial action being taken)
Comprehensive Review
Assessment Area Grade Update & Comments
Organization
On August 31, 2016 Voya announced that its CEO was stepping down. The CEO will be replaced by current CIO, who at the same time will be replaced by current Head of Public Fixed Income. The transition shows staff that Voya was prepared for this kind of event. Staff believes there is no immediate impact to TMRS portfolio. Staff will continue to monitor the situation.
People No changes
Philosophy/Strategy/Process Micro-level collateral analysis. Macro themes expressed through asset allocation.
Portfolio(s) No changes
Performance YTD: 4.75%; underperformance versus benchmark, mainly due to benchmark mismatch.
Compliance No changes
Guideline Changes In discussions to expand mandate and benchmark
Risk Management No issues
Operations No issues
Client Service Client service and portfolio management teams are very accessible and responsive.
Other N/A
Performance as of 12/31/16.
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Excellent In Good Standing Fair (working with manager)
Unsatisfactory (remedial action being taken)
Comprehensive Review
Assessment Area Grade Update & Comments
Organization No additional disclosures made since last review. Guggenheim has undertaken some organizational restructuring. Staff believes there are no material changes regarding TMRS portfolio.
People No material changes regarding TMRS portfolio.
Philosophy/Strategy/Process Strategy relies on fundamental analysis and proactive relative value security selection.
Portfolio(s) No changes
Performance YTD:8.33%; performance lagged due to under weight to energy sector. ITD still outperformed vs. benchmark.
Compliance Restriction on non-rated securities miscoded on compliance program. Error corrected.
Guideline Changes No changes
Risk Management No issues
Operations No changes
Client Service New team in place. Global restructuring of client service area.
Other N/A
Performance as of 12/31/16.
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Excellent In Good Standing Fair (working with manager)
Unsatisfactory (remedial action being taken)
Comprehensive Review
Assessment Area Grade Update & Comments
Organization Independent. 100% employee-owned. In 2015, formed “Highland Alternative Investors” a liquid alternatives platform.
People CLO Portfolio Manager was terminated and replaced.
Philosophy/Strategy/Process Strategy includes fundamental analysis, proactive due diligence and exploiting price inefficiencies.
Portfolio(s) No changes
Performance YTD: 12.57%; outperformance versus benchmark. CLO and energy exposure contributed to strong 2016 performance.
Compliance No issues
Guideline Changes No changes
Risk Management No issues
Operations No changes
Client Service No issues
Other N/A
Performance as of 12/31/16.
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Excellent In Good Standing Fair (working with manager)
Unsatisfactory (remedial action being taken)
Comprehensive Review
Assessment Area Grade Update & Comments Organization No changes
People No changes
Philosophy/Strategy/Process No changes
Portfolio(s) No changes
Performance Recent investment. No issues to report.
Compliance No issues
Guideline Changes No changes
Risk Management No issues
Operations No issues
Client Service No issues
Other N/A
Performance as of 12/31/16.
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Excellent In Good Standing Fair (working with manager)
Unsatisfactory (remedial action being taken)
Comprehensive Review
Assessment Area Grade Update & Comments Organization No changes
People No changes
Philosophy/Strategy/Process No changes
Portfolio(s) No changes
Performance Recent investment. No issues to report.
Compliance No issues
Guideline Changes No changes
Risk Management No issues
Operations No issues
Client Service No issues
Other N/A
Performance as of 12/31/16.
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Excellent In Good Standing Fair (working with manager)
Unsatisfactory (remedial action being taken)
Comprehensive Review
Assessment Area Grade Update & Comments Organization No changes
People No changes
Philosophy/Strategy/Process No changes
Portfolio(s) No changes
Performance Recent investment. No issues to report.
Compliance No issues
Guideline Changes No changes
Risk Management No issues
Operations No issues
Client Service No issues
Other N/A
Performance as of 12/31/16.
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Excellent In Good Standing Fair (working with manager)
Unsatisfactory (remedial action being taken)
Comprehensive Review
Assessment Area Grade Update & Comments Organization No changes
People No changes
Philosophy/Strategy/Process No changes
Portfolio(s) No changes
Performance Recent investment. No issues to report.
Compliance No issues
Guideline Changes No changes
Risk Management No issues
Operations No issues
Client Service No issues
Other N/A
Performance as of 12/31/16.
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Excellent In Good Standing Fair (working with manager)
Unsatisfactory (remedial action being taken)
Comprehensive Review
Assessment Area Grade Update & Comments Organization No changes
People No changes
Philosophy/Strategy/Process No changes
Portfolio(s) No changes
Performance Recent investment. No issues to report.
Compliance No issues
Guideline Changes No changes
Risk Management No issues
Operations No issues
Client Service No issues
Other N/A
Performance as of 12/31/16.
37
Excellent In Good Standing Fair (working with manager)
Unsatisfactory (remedial action being taken)
Comprehensive Review
Assessment Area Grade Update & Comments Organization No changes
People No changes
Philosophy/Strategy/Process No changes
Portfolio(s) No changes
Performance Recent investment. No issues to report.
Compliance No issues
Guideline Changes No changes
Risk Management No issues
Operations No issues
Client Service No issues
Other N/A
Performance as of 12/31/16.
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Excellent In Good Standing Fair (working with manager)
Unsatisfactory (remedial action being taken)
Comprehensive Review
Assessment Area Grade Update & Comments Organization No changes
People No changes
Philosophy/Strategy/Process No changes
Portfolio(s) No changes
Performance Recent investment. No issues to report.
Compliance No issues
Guideline Changes No changes
Risk Management No issues
Operations No issues
Client Service No issues
Other N/A
Performance as of 12/31/16.
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Excellent In Good Standing Fair (working with manager)
Unsatisfactory (remedial action being taken)
Comprehensive Review
Assessment Area Grade Update & Comments Organization No changes
People No changes
Philosophy/Strategy/Process No changes
Portfolio(s) No changes
Performance Recent investment. No issues to report.
Compliance No issues
Guideline Changes No changes
Risk Management No issues
Operations No issues
Client Service No issues
Other N/A
Performance as of 12/31/16.
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Excellent In Good Standing Fair (working with manager)
Unsatisfactory (remedial action being taken)
Comprehensive Review
Assessment Area Grade Update & Comments Organization No changes
People No changes
Philosophy/Strategy/Process No changes
Portfolio(s) No changes
Performance Recent investment. No issues to report.
Compliance No issues
Guideline Changes No changes
Risk Management No issues
Operations No issues
Client Service No issues
Other N/A
Performance as of 12/31/16.
DISCLOSURES
TMRS periodically discloses public information that is not excepted from disclosure under Section 552.0225(b) of the Texas Public Information Act. Information provided by a
manager, a Managing General Partner (GP), any of its Associates or other data provider to TMRS or a TMRS service provider, and contained in these materials (i) may have been
independently produced or modified by TMRS or the TMRS service provider; (ii) has not been reviewed or approved by the manager, Managing GP or any of its Associates; and (iii)
may not reflect the historical performance or asset value reflected in the manager’s, Managing GP’s or any of its Associates’ records and, therefore, should not be used for
comparative purposes.
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