The meeting was called to order at



Delaware College Investment Plan

Delaware Higher Education Commission Conference Room

Board of Trustees Meeting

May 10, 2011

Trustees Attending: Others Present:

José Echeverri, Chair Peter Mahoney, Fidelity Investments

Santosh Viswanathan Maureen Laffey, DHEC Director

Glenn Barlow Elio Battista, Deputy Attorney General

Dan Scholl (via conference call) (via conference call)

David Gregor for Tom Cook Joe Cullen, Fidelity Investments

José Echeverri called the meeting to order at 10:02 a.m.

Minutes from the board meeting held on October 21, 2010 were reviewed and unanimously approved.

Jose’ Echeverri introduced and welcomed Matt Sparks, Executive Director of the Delaware Sports Commission (DSC).

Matt Sparks presented the DSC sponsorship proposal, and explained that the DSC is charged with attracting and promoting sporting events to the State of Delaware for the purpose of economic and social benefit. Their focus is on the social impact that brings out of town visitors into our state to promote economic impact to hotel visitation, retail shops and restaurants. The social impact they look at comes in three ways; the first is to provide opportunities for in-state teens and organizations to not have to travel to participate in tournaments. Bringing events to the state allows for increased competition and raised participation, a real benefit to the young organizations and athletes. The second is to provide positive reinforcement and proper techniques through coaching and player development. Finally, there are programs that are implemented and supported that have a direct correlation of the ideals and focus on education.

Mr. Echeverri asked Mr. Sparks to comment on the importance of a varied demographics of the age group going to college. Mr. Sparks responded that they have various fields and sports activities throughout the state. Getting the message out to their participants about investing in college is something they need to emphasize sooner than later.

Mr. Echeverri questioned how they would administer the scholarship part of the sponsorship. Mr. Sparks noted that they have close relations with the sports organizations across the state and would not be a problem to administer. Ms. Laffey noted that it was her understanding that if there is not a DCIP account already open for a scholarship winner, that an account could be opened without a deposit, and later receive a deposit into that account. Mr. Mahoney responded that he was fairly certain a “dummy” account could be set up. Mr. Echeverri asked about the criteria for the scholarship. Mr. Sparks replied that he would work with Ms. Laffey to develop the criteria as well as a name for the scholarship.

Mr. Viswanathan asked where the main source of their income comes from right now. Mr. Sparks responded that the Delaware Sports Commission is a nonprofit organization, and they currently work closely with the tourism office, which is located with the Delaware Economic Development Office. The hope is that they will secure partnerships to be self-sustainable. Mr. Sparks noted that they are in the process of revamping their website to be more attractive, comprehensive, and useful in developing partnerships in the future. Ms. Laffey stated that, for the record, DSC is requesting $10,000 for the sponsorship.

The next proposal was presented from Delaware State University ((DSU). Introductions were done with the individuals presenting the DSU proposal; Candy Young, Derrick Chadham, and Matthew Millett. Mr. Echeverri, thanked the individuals for attending the meeting. He then noted that he is a trustee at DSU, and consulted with Mr. Battista (Deputy Attorney General) as to whether he should recuse himself from voting on the proposal. Mr. Battista stated that Mr. Echeverri could remain in the meeting, but will need to recuse himself from discussion and voting.

Mr. Millett thanked the board for inviting them to the meeting and acknowledged the past relationship with the DCIP board in sponsoring football games. He noted that the focus of this year’s proposal has changed to be more hands-on with interaction with children. He noted that they do an all day summer sports camp which is the main focus event (a brochure was handed out in reference to the day camp). It is a six week all sports camp in the summer. The camp is not only sports, but also offer educational enrichment activities. Ms. Young explained that she is one of the camp coaches and brings all the instructors together to give them direction on activities such as focusing on weight reduction. The kids begin to develop a sense of confidence, self-awareness, and what they were capable of doing. They’ve added an educational component to our camp. For an hour and ten minutes every day, they take them into the library and different people within the institution spend time working with them with reading and writing activities. There is a lot of exposure for the university as well as DCIP.

Ms. Young stated that last year was the first year of the camp and they had 55 students each week. Mr. Millet also noted that they will be offering camp scholarships through contests on their website. Ms. Young replied that they hope to have about 150 students each week, ages ranging from 7 to 13. Through word of mouth and advertising the DCIP logo, they hope to get the word out to potential campers. DCIP will be the most exclusive sponsor of the camp. DSU is requesting $15,000.00 for the sponsorship. That money will be used to offset camp supplies, provide the t-shirts for the children who attend the camp, the field trips, and the lunches that they provide. There were 5000 flyers distributed to the schools. The targeted schools were Capital School District, Caesar Rodney School District, Forest School District, as well as Smyrna School District. Mr. Millet noted that they would be interested in a multiyear agreement of sponsorship by DCIP for the summer camp.

Lucas Kraut, University of Delaware (UD) sports marketing representative, presented a proposal from UD. He thanked the board for their time. He briefly reviewed last year’s proposal and stated that he would like to keep the activities the same as they were. He referred the the handout identifying activities included in the proposal. Ms. Laffey asked for an update of how many kids are in the Blue Hens Club? The response was 137 in year one and they are looking to double that number in the upcoming year. Mr. Lucas stated that they are requesting $12,000.00 for the sponsorship.

Ms. Laffey gave an update of the Blue Rocks sponsorship of the Kids School Day game scheduled for May 25, 2011.

Mrs. Laffey asked if a board vote on the proposals was in order and to take a vote for each one? Mr. Echeverri stated yes, and that he will recues himself from the Delaware State University vote. Mr. Echeverri asked about the Division of Libraries request for their summer reading program partnership. Ms. Laffey responded they expressed interest again this year and she met with them about their proposal. They developed a couple posters that she had asked them to update, but they have not yet responded. They would like to include a “tear-off” sheet where people can put their name, telephone number, and address which would then go into a big pile, then they would pull out the names and addresses of, I believe, five winners. Each of them would receive a $500.00 deposit into a “dummy” or a current DCIP plan. From that, our name would be out there, we would have the names and addresses of the people in case we wanted to do a follow-up with them. We could start a little database of some of the people whose children participate in this reading program and that was for, I believe $5,000.00. I can get the information to you when I receive the information back from them. Last year the proposal was tentatively approved, however, I never received a formal proposal.

Mr. Echeverri noted that what is unique with all three presentations given is that the statewide demographics were met. Mr. Echeverri asked for a motion to approve the Delaware Sports Commission sponsorship. Mr. Barlow made a motion to approve and Mr. Viswanathan seconded the motion. The vote was unanimous to approve the DSC sponsorship.

Mr. Echeverri asked Mr. Viswanathan to ask for a motion to approve the DSU sponsorship. Mr. Viswanathan motioned to approve, Mr. Barlow seconded. Mr. Echeverri did not vote on the sponsorship. The vote was unanimous to approve the DSU sponsorship.

Mr. Echeverri asked for a motion to approve sponsorship proposal from the University of Delaware. Mr. Gregor made a motion to approve and Mr. Barlow seconded the motion. The vote was unanimous to approve the UD sponsorship.

Mr. Mahoney introduced Joe Cullen who is a new representative for Fidelity and will lead the review of the DCIP Investment Plan. Mr. Cullen was asked to tell a bit about himself and to describe his role in the company. Mr. Cullen stated he is working as part of the investment team with Andrew Dierdorf and Chris Sharpe.

Mr. Cullen began on page 2, market overview. He noted that after one year all of the returns have been positive, it was a good year for investments. On page 3, of the five asset classes, 3 asset classes have outperformed. The emerging market underperformed the benchmark. The total bond portfolio performed well during this period. In the short term, the asset numbers are low but with a solid relative return. Mr. Mahoney asked why we keep disciplined equity if it’s not meeting the benchmark. Mr. Cullen responded that this takes more of a quantitative approach, very diversified. Things really got back to normal towards the end of 2010 and the discipline equity portfolio has outperformed year to date. He said they are continuing to speak with underlying portfolio managers and sticking to their processes.

On page 4, Aged Based Actively Managed Portfolio vs. Benchmarks – top right hand side of page, first 2030, there are no bars shown because they don’t have the one year track record yet. For the 2027 portfolios down to the college portfolio, initially the portfolios show strong absolute returns. The 2027 portfolio and the 2024 portfolio are slightly below their benchmarks. The remaining portfolios are slightly ahead of their benchmarks and down to the college portfolio, 7% vs. 5.4%. That’s a pretty strong performance over a one year period.

Mr. Viswanathan asked about page 4, the life return, the actively managed portfolio continues to trail the benchmark. Is that going to change? Mr. Cullen replied that yes, in 2008 there was a huge impact on some of these life numbers, as we keep looking at this and moving forward, it is having a significant impact. A few important things to speak of is the most important drive of these portfolios is asset allocation. The life return for all the numbers is positive. That’s where the asset allocation comes into account, from the absolute return of the portfolio. The relative return is a bit behind these benchmarks we’ll compare the active portfolios to the index portfolios, we’ll see that the actual portfolios have done better than the index. Mr. Mahoney added that the good thing about this is that the customer chooses which way they want to go or they can go 50/50.

Continuing onto page 5, Mr. Cullen compared the index portfolio vs. their benchmarks. As expected, over these time periods, all cases are slightly behind because they were matching the indexes and then taking out the fees. This illustrates things are working as expected.

On page 6, Mr. Cullen noted that the actively managed funds are doing better than the index portfolio. One thing to highlight is the biggest difference between the two portfolios is that the index strategy does not use the high yield asset class. Where the active portfolios use the 5 asset classes, including high yield, the index does not. The reason for that is the index approach is more of an approach based on tracking error to a benchmark as it represents that asset class. The biggest difference is the high yield asset class is not used with the index strategy.

Mr. Cullen noted that on page 17, Risk & Risk Management is a key part of these portfolios. This page is a layer of risk management that is taking place and this shows that within U.S. Equities, which is a larger class of portfolios, how we look at and monitor one of the risks which are different sector exposures. This page is comparing the sector exposures in the portfolio to the sector exposures within the U.S. total stock market which is the benchmark of the asset class. It is not perfectly aligned, but relatively neutral.

Mr. Echeverri asked how concerned are were with the European issue, the debt issue? Risk parameters? Mr. Cullen responded if something big happened over there, these portfolios wouldn’t take a big hit, as they are very structured and diversified. They believe it wouldn’t impact all these asset classes. Mr. Viswanathan asked what is seen as happening, market erosion, going in negative direction and does a defensive role need to be taken? Mr. Cullen stated that, in terms of defensiveness, they’re not doing anything significant at the total portfolio level, in terms of being very tactical. The underlying portfolio managers, in cases, become more defensive.

Peter Mahoney discussed the Business Results. As Jose’ mentioned in the beginning of the meeting, as of the end of April, the $500,000,000.00 mark was crossed. As of the end of April the total was $509,000,000.00. The numbers at the end of March were what were available at the time. That milestone was very significant.

Page 2 – year to date, it should read year over year in the right hand column. At the end of March there were 27,000 accounts which is up over 5% from the March period. Gross sales were up significantly, about 14%, year over year. Net sales were down significantly.

Page 5 is an update on 2 big initiatives in 2010. We’re still in the low interest rate environment. There was an e-mail that was sent out to approximately 300 households that had either recently purchased the money market portfolio or had continued to hold onto it and contribute to it. It was to make them aware of options are consider, and to call Fidelity to ensure they are positioned the way they want to be.

Mr. Mahoney reviewed the Bank Deposit Portfolio, the FDIC backed account. This option was first available in September, 2010. There are 23 accounts with just under $300,000.00 in assets. Mr. Echeverri asked if there is a yield on these. Mr. Mahoney responded he believed it’s somewhere in the neighborhood of 10 basis points.

Mr. Mahoney reviewed Marketing Plan. He noted that he and Ms. Laffey have discussed the proposed plan for this year and are opened to suggestions/changes from anyone.

Page 2 shows an overview of what is being done differently from what we’ve done in the past. The key message is there’s not a lot to do differently because we feel as if the marketing strategy works, and the metrics that are available indicate that it does work. That said, there are pieces that are not working as well as they should and areas where we could make better choices. The biggest change that will have the most impact is the creative messaging. Mr. Mahoney stated they will remove “” and add “” and “pandora”.

Mr. Mahoney noted that they’re trying to acquire new customers. They have an existing base of customers that they want to build a deeper relationship with so that they continue to invest more frequently, invest in the automatic investment program, and use the 529 American Express Rewards Card. We have enhanced the “service communications” within the past couple of years. This is the money market (mentioned earlier). We encourage customers to keep with the college portfolio which has equity exposure, at the same time, recognizing that not everybody has the same risk tolerance.

Mr. Mahoney stated the last 3 pages have to do with managing Fidelity relationships. This is not new, but the communication to customers who have other Fidelity accounts but not a DCIP account, explain how important it is to have a DCIP account also. Mr. Mahoney reviewed the customer relationship efforts on pages 4 and 5.

Mr. Mahoney noted that on page 6, the ad can be seen in the creative picture that is being used. Newborn to age 5 is the greatest age range at the moment. The message is really resonating with that group. He states Delaware Today magazine has not been a good fit, and that we will stay with Delaware Moms blog and articles. The News Journal is a good supplemental advertising tool, continue to do well with (we’ll maintain our presence), and the same thing with Yahoo parenting sites. We are adding “,” (wholesaler for web presence).

Page 9 shows information on the first Fidelity-sponsored Grandparents Week at the Delaware Children’s Museum. The success for this was hard to measure, but we need to keep pushing on to see if there’s a good way to measure success. Mr. Echeverri would like to know if we can get numbers from the Children’s Museum? Mr. Mahoney responded they did share some numbers on Saturday, they had a little over 400 grandparents that attended for free. Mrs. Laffey stated that Saturday was the big “give-away” day. We need to see if we can take this exposure and extend it more than just one week, perhaps extend it though out the year, that’s more of a constant exposure. In exchange for that we’ll probably have to take something that isn’t as high traffic, instead of a Saturday, we’ll probably have to take a day during the week. Mrs. Laffey stated that the board could check to see what would be a good day of the week, if they have slow Mondays. Mr. Echeverri stated that maybe this could be discussed at the next annual meeting with the Children’s Museum.

At this time, 11:50 a.m., Elio Battista ended his telephone participation.

Mr. Mahoney stated the last aspect of the presentation is the Open Architecture option, and Joe Cullen will speak about it.

On page 2, Mr. Cullen stated that there are two broad topics to cover; what is Open Architecture and what is Fidelity’s approach.

On page 3, it defines Open Architecture as a platform that provides access to a broader universe of investment. All portfolios discussed earlier are all invested in Fidelity and managed funds. This expands that and looks at other funds that are managed by managers outside of Fidelity. On client choice provides an option of what investors are looking for with more diversification across different firms. With that comes the trade off of additional perplexity because we’re thinking of this as not replacing the current option, but as an additional stand alone option. More choice is good, but, could get a bit more confusing for some people, given that additional choice.

The access and expert selection allows for a broader universe in investment managers and, philosophically, that’s very appealing to a lot of people, especially as you go away from true traditional asset core classes. With that and working with outside managers comes increased costs. The last benefit listed mitigates the single firm risk, again that goes back to the diversification issue. On the right hand side, the performance has not been significantly different for those people who have implemented the Open Architecture process. There are mixed reviews as to whether it does better than the proprietary structure.

On page 4, Mr. Cullen reviewed the industry’s current approach. It’s used open architecture in aged based portfolios, static portfolios, and individual portfolios. In most cases, there’s a small amount of numbers for outside managers for the strategies that have an open architecture platform. There is limited turnover in these funds, as one would expect. The last highlight is that a lot of people now that have an open architecture platform tend to use passive investment manager in a series of mandates that’s another architecture option.

Page 5 - thinking about success and keys to success, this is more broad not just open architecture, the success factors for college savings start with the contributions. You can’t do anything if people aren’t contributing. Second, from an investment stand point, the biggest driver is the asset allocation and that needs to be appropriate, in terms of what the goals are and the risk and the time. This is highlighted on the right hand side showing how the asset allocation and how that has historically had an impact on the variability of concerns and much more significant than security selection. The customer experience, 50% of new accounts contribute to the automatic investment program and many are using the age based static portfolios as an option.

Page 6 - How is the open architecture being designed? The structure is to allow the investor to select the portfolio. We’ll have the options we have now which are using proprietary Fidelity only funds, but also one that includes open architecture from which participants can select one or the other. The investments strategy is the same, the age based, multi asset class that we’re going to implement the open architecture, the same 5 asset classes, no change. Strategic advisors and current portfolio managers are Andrew Dierdorf and Christopher Sharpe.

Page 7 - Andrew Dierdorf, Christopher Sharpe, and Joe Cullen all work within Fidelity’s asset allocation division. That division is broken into two halves, one that is a global asset allocation running the type of portfolios, and the other half is more for the individuals, more on managed accounts.

Mr. Cullen reviewed pages 8 – 11 with the board. On page 12, he noted that the team that is in place is very extensive. There are more than 25 research analysts, associates with advanced degrees. All different segments of the U.S. Equity, National Equity, some are not included in these portfolios.

On page 13, Mr. Cullen spoke of the conceptual sample portfolios. Page 14 covered a little bit more about expenses. There is differential between the fund expenses in green, and the program fees in blue. The expenses are higher within the open architecture. Page 15 summarizes the different portfolios. Again, this is to offer the participants a choice.

Page 16 summarizes the costs and benefits. As this platform was structured, they are simply trying to match the best in class.

Mr. Mahoney commented that he believes what Fidelity is trying to share with the board is that this product enhancement will be another level to the platform. It is a big investment on Fidelity’s part. What thay’re asking the DCIP, in exchange for the Open Architecture option, is to extend their contract with the DCIP for an additional 5 years.

Mr. Mahoney noted that when he spoke to Mr. Echeverri, he brought up a good point. There’s real value to participating in an RFP to see what the market will bare. He thought there was fair amount of truth to that, but what he wanted to share with everyone is the fact that they have gone through RFP’s with some of their other state partners, and in every single case, whatever Fidelity has provided to them, they’ve rolled out to the DCIP.

Mr. Mahoney noted that his general point was that DCIP has already benefitted from the RFP process without actually having to go through it. Mr. Echeverri asked when the current contract began. Mr. Mahoney states he believes the contract has been in place for 11 years.

Ms. Laffey stated the initial contract was signed in 1998. Mr. Echeverri asked if there was any RFP, and Ms. Laffey stated she does not know because she was not involved at that time. Mr. Echeverri stated he would like to know if there has been one since that time. That would bring the contract end date to 2010, however. Ms. Laffey stated she will review the paperwork for an up to date contract. Mr. Mahoney stated he reviewed the contract and says it states this is a 10 year contract with a 5 year renewal, which would then bring the contract to the year 2013. Ms. Laffey said she believes the contract was initiated and followed through to the extension year by the State of Delaware Treasurer’s Office. At this time, Mr. Battista (Attorney General) has rejoined the DCIP board meeting. Mr. Battista states the contract may have been signed before 2007. Ms. Laffey says she will need to review the management agreement and see what she can find out as far as an original contract date. My concern, and we will need to include Mr. Battista in a quick executive session, is I don’t know, quite honestly, the legalities of the contract. Give us time to review all of that and then I think we can have a better discussion as to where we’re at. We need to be concerned of procurement issues and RFPs and certain dollar amounts and everything that we do with the state. I do believe your efforts of the Fidelity presentation and its contents. I’ve felt that you’ve always listened to us, in my time here. He asked if any other board member has any questions. The response from the board was that there were no questions.

At this time, Mr. Mahoney put forward a small review and an implementation target date of this fall; specifically October 1, 2011. We’re moving towards the best in class definition. He says they are testing operational issues, moving with external funds within the 529 platform. Again, from an investment stand point, they’ve done research, listened to people, heard that this is something that you (DCIP) want to incorporate and so in doing this research we’ve had similar discussions with our other clients as to make them aware of when we think we’re going to be ready for this October date and trying to move people along and work with them with whatever process they need to decide, does that work for them. Mr. Barlow asks if a lot of the other states have been asking for about this also. Mr. Mahoney’s response was, exactly. Our ultimate goal is to achieve better investment results. Mr. Barlow asks Mr. Mahoney if he thinks this new plan will appeal to the more sophisticated investor. This will not require any more effort from the individuals stand point. We’re looking to appeal to all. Most people that are asking for it at this point are probably the more sophisticated. Mr. Gregor asked how open is the Open Agriculture, can any of the 1200 funds be chosen? Mr. Cullen responded, no, a team of managers will pick the fund. The team builds the portfolios within the age based strategy. It won’t be in the single portfolios that people are selecting. Mr. Barlow asks if one can move between the funds. The individual participating makes that decision, responded Mr. Cullen and Mr. Mahoney said they can make a change once a year. Ms. Laffey asks if there is a fee for participants to participate in the Open Architecture. Mr. Cullen states there are additional costs. Mr. Viswanathan asks for the earliest date DCIP can receive the list of outside managers?

Mr. Viswanathan asks if DCIP can get a list of outside managers. Mr. Cullen said Fidelity can share the list, however, the list might change by October 1, 2011 and that if the list is shared, it must be kept confidential. A significant turnover is not expected, however, changes can be made.

The fit of the portfolios are things that might change the list of managers. Mr. Mahoney states Fidelity was hoping to have the contract in place by mid August.

Mr. Echeverri thanked the Fidelity members for the presentation and stated DCIP will now have a 5 minute executive session. The DCIP went into executive session at 12:30 p.m.

The meeting was adjourned at 1:00 pm.

Respectfully submitted,

Karin Gotcher

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