[PPT] - December 16, 2014 Police & Fire Retirement Plan Board Police PowerPoint Presentation

SLIDE 1

Police & Fire Department Retirement Plan Special Board Meeting

December 16, 2014

SLIDE 2

Police & Fire Retirement Plan Board Police & Fire Retirement Plan IC Investment Program NEPC Albourne

Global Equity Global Fixed Income Private Equity Inflation Linked Assets Absolute Return

Mgr Mgr Mgr Mgr Mgr Mgr Mgr Mgr Mgr Mgr Mgr Mgr Mgr Mgr Mgr Mgr Mgr Mgr Mgr Mgr Mgr Mgr Mgr Mgr Mgr Mgr Mgr Mgr Mgr Mgr Mgr

2

SLIDE 3

 The Plan will be managed as an ongoing concern

with a long-term investment time horizon, consistent with the demographic profile of the Plan’s members and beneficiaries.

 The primary objective of the investment portfolio is

to satisfy the Plan’s obligations to pay benefits to members of the Plan and their beneficiaries.

Police & Fire Investment Policy

3

SLIDE 4

 The investment portfolio also seeks to achieve a

risk-adjusted long-term rate of return that exceeds the return of a composite benchmark of the respective long-term target asset mix weighting of the major asset classes.

 The Plan will take into consideration the actuarial

investment return assumption, which is developed by the Plan’s Actuary, with the goal of choosing an assumed rate that the Plan can be expected to achieve with a probability greater than 50%.

Police & Fire Investment Policy

4

SLIDE 5

 Investments shall be diversified with the intent to

minimize the risk of large investment losses. Consequently, the total portfolio will be constructed and maintained to provide prudent diversification with regard to the concentration of holdings in individual issues, issuers, or industries. Furthermore, assets will be assigned to a variety of investment managers that employ a range of investment management strategies

5

Police & Fire Investment Policy

SLIDE 6

6

SLIDE 7

7

SLIDE 8

 Asset Allocation  Asset Class Structuring  Manager Selection & Monitoring  Risk Management  Portfolio Positioning and Strategy

8

SLIDE 9

Pension Investment Strategies

(In a Low Return World)

December 16, 2014 Allan Martin, Partner Dan LeBeau, Consultant

City of San Jose Police and Fire Department Retirement Plan

SLIDE 10

All investors face the same fundamental challenge

– Capital + Investment Earnings must equal total obligations in the end – For pensions, this is the classic equation:

If investment return is lower than expected, adjustments are required

to balance the equation

– Contributions must be higher; – Benefits + Expenses must be lower; or – More risk must be taken in an effort to earn the expected return

Adjusting investment return and risk is the most fluid of these three

levers

– Staying unchanged and accepting lower returns puts more pressure on contributions and payouts – How does one increase risk efficiently while staying within an appropriate risk tolerance?

Facing the Challenge of Lower Returns

C + I = B + E

10

SLIDE 11

A Survey of Portfolio Approaches

11

SLIDE 12

Each plan sponsor’s asset allocation is unique, based on funded status, maturity
f plan, payout structures, etc.
For simplicity, we can think of a few broad frameworks for investing

– Most plan sponsors can be easily identified as fitting into one of the approaches below or some blend two approaches – An additional framework not considered here is a bond-centric liability-driven investing (LDI) approach

Heavily utilized by Corporate Defined Benefit plans, where benefits are known (not subject to inflation;

funded status already reflects low discount rate)

60/40

– Heavily invested in public equities and core fixed income securities – U.S.-centric, very liquid – Little or no alternatives exposure (typically real estate)

Risk Parity

– Balance risk across different asset classes – May need to apply leverage at portfolio level to increase returns – No alternatives, limited access to alpha – Global and liquid

Endowment

– Heavily focused on alternatives – hedge funds, private markets (private equity, real estate, real assets) – Using alpha and illiquidity to drive returns as much as or more than beta exposure – Less U.S.-centric, less liquid

De-risked Public Plan

– Diversified globally – Looks more like Endowment model than 60/40 or Risk Parity – Capturing some illiquidity premium – Participating in economic growth but substituting significant credit exposure for equity – While not Risk Parity, attempting to capture some element of risk balancing

Asset Allocation Frameworks

12

SLIDE 13

60/40 Risk Parity Endowment De-risked Public Plan Total Equity

60% 25% 30% 28%

Total Fixed Income

35% 72% 30% 33%

Total Alternatives

0% 0% 30% 32%

Total Real Assets

5% 47% 10% 5%

Cash/Leverage Financing

0%

44%

0% 2%

Expected Return (5-7 Yr)

5.9% 5.2% 6.5% 7.9%

Expected Volatility (5-7 Yr)

11.9% 10.0% 11.6% 13.8%

Sharpe Ratio

0.37 0.37 0.43 0.47 Comparison of Asset Allocations

Note: Total Alternatives includes Private Equity, Real Estate and Hedge Funds. Total Real Assets includes Commodities, TIPS and private real assets investments such as infrastructure, farmland, energy, timber, etc.

13

SLIDE 14

Comparison of Asset Allocations

60/40 Risk Parity* Endowment

* - Represents proportional allocation of levered exposures

De-risked Public Plan

14

SLIDE 15

Comparison of Risk Allocations

De De-ri risk sked Public Plan

15

SLIDE 16

Traditional approaches like 60/40 have worked historically, but prospects

for forward-looking returns are muted, especially following significant equity bull markets

With low yields, return expectations for all asset classes, and

subsequently, all portfolios constructed from asset classes, are lower

All of these approaches can earn positive returns for investors over the

long-term

Variations occur for many reasons

– Concentration versus diversification/balance – Liquidity – Risk tolerance/volatility levels – Portfolio efficiency – Implementation (active vs. passive, tilts relative to market exposure within asset classes) – Luck

Outcomes for Various Investment Approaches

16

SLIDE 17

Setting Asset Allocation

17

SLIDE 18

S&P 500 has gained almost

54% cumulatively over the last two years (as of 12/31/2013)

– Historically, this has led to subdued performance looking forward

Strength of corporate profits

has supported equity rally

– Corporate profits have historically shown mean reversion

Supported in the short-term by

low financing costs to corporations

With accommodative monetary

policy, U.S. stock market could continue to grind higher

– Further upside (likely driven by continued valuation expansion) seems unsustainable given how far markets have run

How Much Further Can U.S. Equities Run?

(Eq. Risk Premium is over cash) Source: Bloomberg, NEPC Source: Bloomberg as of 6/30/2013

We Are Here

18

SLIDE 19

Sources of Return

– Valuation – Earnings growth

Adjusted for changes in

margin

– Dividend yield – Inflation

Return Source Starting Value Expected Forecast Values Return Contribution Real Earnings Growth 2.5% 2.5%

Profit Margin Adjustment
1.0%

1.5% Dividend Yield 2.0% 2.0% 2.0% Inflation 3.0% 3.0% 3.0% Valuation & Other* 16.3 16

0.25%

Total Expected Return 6.25%

Equity Risk Premium over 10 year

Treasury is volatile

– Long-term average of 2.9% – Stock and bond forecasts imply an Equity Risk Premium of 4.25% – While high relative to the long-term average, almost 40% of observations exceed this level

ver the last 50 years
Downward adjustment reflects higher

but still low interest rates supportive of an elevated equity risk premium

2014 NEPC Assumption Development – U.S. Large Cap Equity

Source: Ibbotson as of 11/30/2013

*Valuation & Other incorporates adjustment for P-E ratios as well as other factors such as rounding, geometric compounding, etc. 19

SLIDE 20

Historically, there is a high correlation between the YTM of the Barclays

Aggregate Index and the benchmark’s 6-year forward return Forward Looking Returns – Barclays Capital U.S. Aggregate Bond Index

0% 2% 4% 6% 8% 10% 12% 14% 16% 18% 20% 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 Starting Yield 6 Year Forward Return

Source: Barclays Live, as of 12/31/2013 20

SLIDE 21

Discipline and discretion are

required despite markets moving higher

Return expectations are even

more compressed following strong rally

– Low yields limit potential return – Diversification, active management and risk management can be used to navigate challenging environment rather than simply stretching for returns through increased risk

How to achieve 7.125% when

60/40 earns 4%

– Diversification – Tactical Allocation – Be Opportunistic – Manager selection in areas where manager outperformance is a variable

NEPC 2014 Focused Actions for Public Funds

Source: Shiller Data, Bloomberg, NEPC

Nov 30, 2013: 4.0% expected for next 10 years

21

SLIDE 22

(0.60) (0.40) (0.20)

0.20

0.40 0.60 0.80 1.00 1.20 1.40 1.60 Bonds Commodities Equities Equal Thirds

Range of Historical 10 year Sharpe Ratios

Diversification Wins In The Long Run

Source: Bloomberg, NEPC

Max Min LT Avg.

Historically strong performance

for one asset class does not signal the ruin of diversification

– In fact, periods following these runs are often when diversification is most rewarded

Discipline of diversification

requires a long-term focus to withstand concentrated results

– Both good (U.S. Equities in 2013)… – And bad (2008)

Over the long term, diversified

portfolios will likely produce better risk-adjusted returns than concentrated ones

Concentrated portfolios will

correct after long bull runs

Source: Morningstar as of 10/31/2013 22

SLIDE 23

Asset allocation is the primary determinate of total fund returns
Be forward–looking

– Be Realistic about future returns – Look for opportunities to be dynamic

Portfolio construction tools available when assessing strategic allocations

– Mean-variance optimization – Risk Budgeting – Scenario Analysis – Liquidity Analysis – Factor Analysis – Active Risk Budgeting

Each of these approaches offers insight into the risk and return characteristics of

current and potential allocations

– Each approach also has limitations

Building a mosaic through the useful insights of each perspective produces a more

robust and resilient long-term strategy

Recognizing pros/cons of each approach creates a framework for regular scrutiny

– Can lead to further evolution and additional perspectives – Each model we utilize was built to address gaps of existing tools

How to Choose an Appropriate Asset Allocation

23

SLIDE 24

Efficient Frontier Comparison Efficient Frontier Comparison

2014 2013

S t a n d a r d D e v ia t io n ( R is k ) E x p e c t e d R e t u r n 0 . 7 2 7 . 9 2 . 0 4 . 0 6 . 0 8 . 0 1 0 . 0 1 2 . 0 1 4 . 0 1 6 . 0 1 8 . 0 2 0 . 0 2 2 . 0 2 4 . 0 2 6 . 0 0 . 4 1 3 . 0 1 . 0 2 . 0 3 . 0 4 . 0 5 . 0 6 . 0 7 . 0 8 . 0 9 . 0 1 0 . 0 1 1 . 0 1 2 . 0 C a s h T r e a s u r ie s C r e d it M B S T IP S H ig h - Y ie ld B o n d s G lo b a l B o n d s G lo b a l B o n d s - H e d g e d E M D - E x t e r n a l E M D - L o c a l L a r g e C a p E q u it ie s S m a ll/ M id C a p E q u it ie s In t 'l E q u it ie s In t 'l E q u it ie s - H e d g e d E m e r g in g In t 'l E q u it ie s P r iv a t e E q u it y P r iv a t e D e b t P r iv a t e R e a l A s s e t s R e a l E s t a t e C o m m o d it ie s H e d g e F u n d s

24

SLIDE 25

Potential Asset Mixes for Consideration - SAMPLE

Recommended 70/30 5% Volatility 10% Volatility Cash

1% 1% 0% 0%

Large Cap Equities

18% 40% 0% 20%

Small/Mid Cap Equities

2% 5% 0% 5%

Int'l Equities (Unhedged)

5% 15% 0% 20%

Emerging Int'l Equities

10% 10% 0% 5%

Total Equity

35% 70% 0% 50%

Core Bonds

6% 19% 0% 50%

Global Bonds (Hedged)

0% 0% 100% 0%

Opportunistic/Private Debt

20% 10% 0% 0%

EMD

2% 0% 0% 0%

Total Fixed Income

28% 29% 100% 50%

Private Equity

11% 0% 0% 0%

Private Real Assets

8% 0% 0% 0%

Real Estate

7% 0% 0% 0%

Hedge Funds

0% 0% 0% 0%

Total Alternatives

26% 0% 0% 0%

Global Asset Allocation

5% 0% 0% 0%

Risk Parity

5% 0% 0% 0%

Total Other

10% 0% 0% 0%

Expected Return (5-7 Year)

7.8% 6.7% 1.4% 5.3%

Expected Cost (bps)

0.87% 0.29% 0.09% 0.16%

Expected Cost ($$)

$95,700,000 $31,900,000 $9,900,000 $17,600,000

Standard Dev of Asset Return

14.5% 13.9% 5.0% 9.9%

Sharpe Ratio

0.43 0.37

0.02

0.38

Sortino Ratio

0.65 0.57 0.31 0.67

Expected Return (30-Year)

8.6% 7.9% 3.1% 6.8%

Sharpe Ratio

0.33 0.30

0.12

0.31

Probability of 1-Year Return < 0%

29.7% 31.6% 39.1% 29.7%

Probability of 5-Year Return < 0%

11.7% 14.2% 26.8% 11.6%

Probability of 1-Year Return > 7.75%

50.0% 46.9% 10.1% 40.2%

Probability of 5-Year Return > 7.75%

50.0% 43.2% 0.2% 28.9% 25

SLIDE 26

2.0

0.0 2.0 4.0 6.0 8.0 10.0 12.0 14.0 16.0 10% Volatility 5% Volatility 70/30 Recommended Cash Treas Credit MBS TIPS HY Munis Bank Loans Glob Bonds EMD LDI Lg Cap Sm/Mid Cap Int'l Emerg PE PD PRA RE HF HF - L/S HF - Credit HF - Macro Commod MLP

Active Risk Budgeting

Total Vol % Public Equity Contribution 14.5% 45% 13.9% 88% 5.0% 0% 9.9% 85%

26

SLIDE 27

Impact of 2014 Capital Market Assumptions on Long-Term Policy Benchmark – The Challenge

5-7 Year 30 Year 2013 2014 2013 2014 Expected Return 7.2% 6.8% 7.8% 7.9% Expected Volatility 12.0% 12.2% 12.0% 12.2% Sharpe Ratio 0.53 0.43 0.40 0.34

Assumed Rate: 7.125%

Note: Long-Term Policy Benchmark approved by the Board in August 2012.

Global Equity 29.0% Private Equity 8.0% Core Fixed Income 5.0% Global Core Fixed Income 5.0% High Yield Fixed Income 5.0% Emerging Market Debt 5.0% Private Debt 10.0% Real Estate 7.0% Commodities 7.0% Private Real Assets 3.0% Absolute Return 10.0% Global Asset Allocation 5.0% Cash 1.0%

Long-Term Policy Benchmark

27

SLIDE 28

Potential Asset Mixes for Consideration – San Jose P&F Assumed Rate: 7.125%

Note: Current Target approved by the Board in June 2014.

Current Target NEPC/Staff Recommendation Cash

1% 1%

Global Equity

29% 31%

Private Equity

8% 8%

Total Equity

37% 39%

Global Core Bonds

5% 6%

High-Yield Bonds

5% 5%

Private Debt

10% 11%

Emering Market Debt

5% 5%

Total Fixed Income

25% 27%

Real Estate

7% 7%

Commodities

7% 7%

Inflation-Linked Assets

3% 3%

Total Alternatives

17% 17%

Global Asset Allocation

10% 10%

Hedge Funds

10% 6%

Total Absolute Return

20% 16%

Expected Return (5-7 Year)

6.9% 6.9%

Standard Dev of Asset Return

12.6% 12.5%

Sharpe Ratio

0.43 0.43

Sortino Ratio

0.68 0.69

Expected Return (30-Year)

8.0% 8.0%

Standard Dev of Asset Return

0.34 0.34

Probability of 1-Year Return < 0%

29% 29%

Probability of 5-Year Return < 0%

11% 11%

Probability of 1-Year Return > 7.125%

49% 49%

Probability of 5-Year Return > 7.125%

48% 48%

28

SLIDE 29

Results

29

SLIDE 30

Performance Comparison as of 6/30/2014

Client A Client B Client C Client D Client E Client F Client G Client H $11 Billion State Fund Client I Client J Client K Client L Client M Client N Client O $8 Billion CA County Client P

Note: San Jose P&F is Client O in the table

30

SLIDE 31

Performance Comparison as of 6/30/2014

31

SLIDE 32

Performance Comparison as of 9/30/2014

Note: San Jose P&F is Fund 15 in the table

32

SLIDE 33

Be forward-looking

– Be realistic about lower return prospects – Look for opportunities to be dynamic

Maintain vigilance and risk-awareness

– Define risk broadly – Risk balance – Diversification, discipline and rebalancing – Assess tail risks

Take smart risks

– Contrarian opportunities

Emerging markets
Europe

Successful Investing Traits to Navigate a Low Return Environment

33

SLIDE 34

SLIDE 35

1% 31% 8% 27% 17% 16%

Cash Global Equity Private Equity Fixed Income Inflation-Linked Assets Absolute Return

35

SLIDE 36

Sub-Asset et Class / Manage ger & Investm tment Market Value ($ million ions) % o

f Asset Class

% o

f Plan

an Assets Global Equity Northern Trust – Russell 1000 – Passive $250.5 25% 8% Northern Trust – MSCI World ex US – Passive 227.2 23% 7% Russell Investments – MSCI Emerging Markets - Passive 34.8 4% 1% Global Equity Overlay - Passive 43.8 4% 1% Artisan Partners Global Value – MSCI ACWI IMI - Active 93.1 10% 3% Artisan Partners Global Opportunities – MSCI ACWI IMI -Active 94.2 10% 3% Oberweis – MSCI World ex US Small Cap Growth - Active 59.5 6% 2% Vontobel – MSCI Emerging Markets - Active 66.2 7% 2% RBC – Russell 2000 – Active 40.4 4% 1% Aberdeen – MSCI Frontier Markets - Active 21.8 2% 0.5% Equity Long/Short Amici 10.0 1% 0.5% Horizon 11.3 1% 0.5% Marshall Wace 10.3 1% 0.5% Sandler Plus 10.7 1% 0.5% Senator Investment Group LP 12.0 1% 0.5% Total Global al Equit ity $985.8 100% 100% 31% 31% 36

SLIDE 37

Exposure Positioning vs. MSCI ACWI IMI

using target exposures

MSCI ACWI I IMI Index Weight Plan Target t Weight Differe rence MSCI USA 43.6% 34.0%

9.6%

MSCI USA SMALL CAP 7.0% 4.0%

3.0%

MSCI WORLD EX US LARGE CAP 33.7% 38.5% 4.8% MSCI WORLD EX US SMALL CAP 4.9% 6.5% 1.6% MSCI EM IMI 10.7% 17.0% 6.3% 37

SLIDE 38

Case Study: Emerging Markets Exposure: Vontobel: $66 million Aberdeen: $22 million Passive: $35 million + overlay Recommendation: replace passive exposure with new active manager Considerations: active vs. passive new or existing managers compatibility of new manager with current lineup

38

SLIDE 39

Sub-Asset et Class / Manage ger & Investm tment Market Value ($ million ions) % o

f Asset Class

% o

f Plan

an Assets* Private Equity HarbourVest Partners [2005 - Fund VII] $ 11.3

4% 0%

Portfolio Advisors [2005 - PAPEF III] 13.4

5% 0%

Pantheon Ventures [2005 – Fund VI] 28.8

11% 1%

HarbourVest Partners [2006 - Fund VIII] 20.7

8% 1%

Siguler Guff [2008 - DOF III] 17.9

7% 1%

TCW/Crescent [2008 – Mezzanine V] 7.1

3% 0%

TPG [2012 – TOP II] 13.3

5% 0%

Crescent [2013 – Mezzanine VI] 10.2

4% 0%

Warburg Pincus [2013 – Growth Equity XI] 11.1

4% 0%

57 Stars [2014 – Emerging Markets FoF] 7.8

3% 0%

TPG [2014 – TOP III] 0.9

0% 0%

CCMP [2014 – Growth Equity/Buyout CCMP III] 5.2

2% 0%

Industry Ventures [2014 – Venture/Secondaries IVPH III] 2.4

1% 0%

Total Active Private Equity $ 150.0

55%

4% Northern Trust [Interim Exposure - Russell 3000 Index] 122.4

45%

4% Total Private vate Equity ity $ 272.5 100% 100% 8% 8%

*may not total due to rounding

39

SLIDE 40

Fiscal Year 2014-15 Strategic Plan

Commit $100MM
$40-60MM to Secondaries
$40-60MM to Mid-Market Buyout

Fiscal Year 2015-16 Strategic Plan

Commit $100MM based on updated review of the opportunity set

40

SLIDE 41

Case Study: y: Industry Ventures Partnership Holding III, VC Fund of Funds $15 million commitment (September 2014)

Strategic Rationale
Strategy: focus on small venture capital funds with the inclusion
f mid-stage companies acquired through early secondary

purchases and direct investments in order to shorten the J-curve and accelerate liquidity.

Target Asset Type:
40%-50% in primaries
40%-50% in early secondaries
0%-20% in direct or special situations

41

SLIDE 42

Sub-Asset et Class / Manage ger & Investm tment Market Value ($ million ions) % o

f Asset Class

% o

f Plan

an Assets Global Core Franklin Templeton Global Multisector Plus Trust $ 71.0 10% 2% Colchester Global Bond Fund 111.7 15% 3% Claren Road Credit Master Fund 30.0 4% 1% Global Fixed Income Overlay - Passive

18.5
3%
1%

High Yield Symphony Asset Management Long-Short Credit $ 78.4 11% 2% Beach Point Capital Total Return Fund II 79.8 11% 2% Emerging Market Debt BlueBay Emerging Market Select Bond Fund $ 115.8 16% 4% Wellington Iguazu 53.6 7% 2% Opportunistic Credit GSO / Blackstone GSO SJ Partners LP $ 20.0 3% 1% Medley MOF III 48.7 7% 2% White Oak 43.3 6% 1% Marathon European Credit Opportunities I 17.1 2% 1% Capula European Special Situations Fund 46.7 6% 1% Park Square Capital Credit Opportunities II 14.7 2% 0% Davidson Kempner Institutional Partners LP 22.9 3% 1% Total Fixed d Incom

me

$ 753.4 100% 100% 22% 22% 42

SLIDE 43

Diversifying within sub-asset classes: High Yield Beach Point Middle market event-driven high yield Symphony Trading

riented

long-short high yield

Opportunistic distressed Shorts mitigate downside

Macro: Better yields than investment grade Favorable place in credit cycle

Mitigate interest rate risk
Sensitive to index valuations
Complementary styles

Case Study: y:

43

SLIDE 44

Sub-Asset et Class / Manage ger & Investm tment Market Value ($ million ions) % o

f Asset Class

% o

f Plan

an Assets* Commodities Credit Suisse $ 217.6 40% 7% Inflation-Linked Wellington Management $ 89.8 17% 3% Real Estate American Realty Advisors [Separate Accounts] $ 21.9 4% 1% American Realty Advisors [2010 - Core Fund] 125.3 23% 4% TA Realty Associates [2013 – Value Add Fund X] 8.8 2% 0% Brookfield Asset Mgmt. [2013 – BSREP Opportunistic Fund] 8.2 2% 0% Blackstone [2013 – Real Estate Debt Fund II] 5.7 1% 0% Orion [2014 – Value Add Euro RE Fund IV] 1.2 0% Tristan Capital Partners [2014 – Opportunistic EPISO 3] 1.3 0% Och-Ziff Capital Mgmt. [2014 – Opportunistic Fund III] 0.0 0% Total Active Real Estate $ 72.5 32% 5% Russell Investments [RE Proxy 50% ACWI/50% Barclays Global Agg.] 60.6 11% 2% Total Inflatio lation-Link Linked d Assets $ 540.4 100% 100% 17% 17%

*may not total due to rounding

44

SLIDE 45

Real Estate Strategic Plan

FY 2014-15 Commit - $30MM
$10MM each to Opportunistic, Value Add, & REIT
FY 2015-16 Commit - $25MM
$10MM each to Opportunistic & Value Add
$5MM to REIT
Potentially redeem $15MM from Core

45

SLIDE 46

Case Study: y: Och-Ziff Real Estate Fund III, Opportunistic Fund $20 million commitment (July 2014)

Strategic Rationale
Strategy: seek value-based, situationally-opportunistic real estate

investments that are expected to yield superior returns.

Target Markets: primarily US & secondarily Europe
Non-core and niche focused strategies
Debt and equity investments
Property Types:
Cell towers, golf, gaming, healthcare, lodging, office,

retail, senior housing, parking, etc.

46

SLIDE 47

Sub-Asset et Class / Manage ger & Investm tment Market Value ($ million ions) % o

f Asset Class

% o

f Plan

an Assets Global Tactical Asset Allocation (GTAA) GMO Benchmark Free Allocation $ 128.0 23% 4% PIMCO All Asset All Authority 100.1 18% 3% Standard Life Global Absolute Return 108.8 19% 3% Hedge Fund Arrowgrass Master Fund $ 22.5 4% 1% BlueTrend Fund Limited 9.1 2% 0% Brevan Howard Multi-Strategy Fund 20.8 4% 1% DE Shaw Composite Fund 25.4 4% 1% Hudson Bay International Fund 21.1 4% 1% Kepos Alpha Fund 5.2 1% 0% Pine River Fund 22.9 4% 1% Russell Investments (proxy) 101.2 18% 3% Total Absolu lute Return $ 565.1 100% 100% 17% 17% 47

SLIDE 48

Historica ical context

A 15% allocation to Absolute Return was established in August 2012
10% allocation to hedge funds, and
5% allocation to GTAA
Albourne was retained as the hedge fund consultant
In 2012 the first hedge fund strategies were added to the program
The program was diversified across a broad spectrum of hedge

fund strategies

In August 2014, the hedge fund program was “decomposed.” Equity

and credit related strategies were moved to their respective asset

classes. As a result of this reclassification, the target hedge fund

allocation declined from 10% to 6%.

Following the decomposition the objectives of the hedge fund

program were modified; volatility increased and beta decreased

The target program will be composed of relative value and macro

strategies, ~25% and ~75% respectively.

48

SLIDE 49

Retur turns ns exhi hibit bit lower r levels ls of c correlat atio ion n to t traditi tional nal asset classes

Gl

Global Tactic tical al As Asset et Al Allocat ation ion

GMO Benchmark Free Allocation
Equity biased strategy
PIMCO All Asset All Authority
Fixed income bias; strategy seeks an inflationary bias
Standard Life Global Absolute Return
Flexible mandate, global macro strategy
Hedge

ge Fund nds: Relati ative ve Value ue

Arrowgrass
DE Shaw
Hudson Bay
Pine River
Hedge

ge Fund nds: Macro

Blue Trend
Brevan Howard
Kepos

49

SLIDE 50

Case Study: y: DE Shaw Composite Fund, multi-strategy relative value hedge fund

Strategic rationale
Generates returns by identifying mispricing between securities
Relative value, low net exposure, supports uncorrelated returns
Limited expected drawdown in negative markets; will also lag in

strong up markets

Multi-strategy approach provides diversification across a number
f relative value opportunities
Quantitatively oriented strategy
Large, institutional, and well resourced organization

50

SLIDE 51

2014 2014-20 2015 5 Work rk Pla lan

51

SLIDE 52

 Operational

tional Projec jects ts

Issue RFP for Risk Management System
Issue RFP for Investment Consultants Prior to June 30, 2015
Issue RFP for Investment Counsel Prior to June 30, 2014
Begin Search for Securities Litigation Firms

 Investm

stment nt Projec jects ts

Due Diligence for $100 million of Private Equity Commitments
Due Diligence for Value Add Real Estate Manager
Due Diligence for Private Infrastructure Managers
Continue Implementation of Global Equity Restructuring and

Analysis

Continue Evaluating and Implementing Hedge Fund

Decomposition

Perform Analysis of Fixed Income Portfolio

52