PERFORMANCE REVIEW AS OF DECEMBER 31, LACERA Investments
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1 PERFORMANCE REVIEW AS OF DECEMBER 31, 214
2 Table of Contents EXECUTIVE SUMMARY Total Fund Performance...1 Equity Market Review...2 Equity Manager Review...4 Fixed Income Market Review...7 Fixed Income Manager Review...8 Commodities Market Review Commodities Manager Review TOTAL FUND Annualized and Annual Returns (Gross of Fees) Annualized and Annual Returns (Net of Fees) Fiscal Year Returns Total Fund Attribution vs. Benchmark Risk-Adjusted Return ASSET ALLOCATION Total Fund Actual vs. Target... 2 U.S. Equity Managers Non-U.S. Equity Managers Fixed Income Managers & Programs Commodities Managers ANNUALIZED TOTAL RETURNS U.S. Equity Managers Non-U.S. Equity Managers Fixed Income Managers & Programs... 3 Commodities Managers U.S. EQUITY Risk-Adjusted Return Large Cap: INTECH Investment Management LLC Relational Investors, LLC Twin Capital Management, Inc Small/Mid Cap: Cramer Rosenthal McGlynn LLC Eagle Asset Management, Inc Frontier Capital Management Company, LLC Westwood Management Corporation... 4 Emerging Manager Program: FIS Group, Inc Northern Trust Investments, Inc NON-U.S. EQUITY Risk-Adjusted Return Non U.S.: Acadian Asset Management, LLC Capital Guardian Trust Company Putnam Investments Pacific Basin: GAM International Management Ltd Europe: BlackRock Institutional Trust Co. - Europe Alpha Tilts Emerging Markets: Acadian Asset Management, LLC AQR Capital Management, LLC Capital Guardian Trust Company... 51
3 Genesis Investment Management, LLP Lazard Asset Management, LLC FIXED INCOME Risk-Adjusted Return Core: BlackRock Financial Management, Inc Dodge & Cox Pugh Capital Management, Inc Wells Capital Management Core Plus: Dolan McEniry Capital Management, LLC GW Capital, Inc LM Capital Group, LLC Loomis, Sayles & Company, LP Pacific Investment Management Company Western Asset Management Company High Yield: Oaktree Capital Management, L.P PENN Capital Management Company, Inc Opportunistic: Beach Point Capital Brigade Capital Management Crescent Capital Group LP Principal Global Investors, LLC... 7 Sankaty Advisors, LLC Western Asset Management Company STIF: J.P. Morgan Chase Asset Management COMMODITIES Risk-Adjusted Return Credit Suisse Asst Management, LLC Neuberger Berman Alternative Fund/Gresham Pacific Investment Management Company PERFORMANCE BANDS U.S. Equity: Large Cap Small/Mid Cap Non-U.S. Equity: Non-U.S Pacific Basin & Europe Emerging Markets Fixed Income: Core Core Plus High Yield Opportunistic STIF Commodities APPENDIX Estimated Total Fees to be Paid: Equities... 9 Fixed Income Commodities Allocation Ranges: Strategic vs. Actual Glossary
4 EXECUTIVE SUMMARY for the quarter ended December 31, 214 TOTAL FUND PERFORMANCE In the fourth quarter of 214, LACERA s Total Fund increased 1.2% but trailed its policy benchmark return of 1.5% by 3 basis points (bps). Non-U.S. Equity was the only asset class that outperformed its benchmark. In contrast, U.S. Equity, Fixed Income, Real Estate, Private Equity, Commodities, and Hedge Funds underperformed their respective benchmarks. Cash matched its benchmark, as both were essentially flat. LACERA s U.S. equity composite return was 5.1%, 1 bps below its benchmark index return. Manager performance was mixed, as a slight majority of active managers (5 of 9) underperformed their benchmarks, leading to the slightly negative relative performance. LACERA s Non-U.S. equity composite returned -1.5%, 4 bps better than its benchmark return. Seven of ten active managers generated positive excess returns: All three global ex-u.s. developed markets managers outperformed, as did three of five active emerging markets managers, and the European region specialist. LACERA's Fixed Income Composite return of.8% trailed its benchmark by 5 bps for the quarter. This underperformance is attributable to negative relative results generated by most of LACERA's core, core plus, and high yield fixed income managers, as well as the allocation to opportunistic mandates. LACERA s Private Equity portfolio rose 2.%, but trailed the 3.3% return of the benchmark by 13 bps. LACERA s Real Estate portfolio returned 1.6%, compared to its benchmark return of 3.1%, resulting in underperformance of 15 bps. Both of these asset classes are lagged by one quarter. LACERA s Hedge Fund portfolio declined.7%, trailing its benchmark return of 1.2% by 19 bps. The Hedge Fund return is lagged by one month. As a reminder, short term results for the three aforementioned asset classes are not very meaningful. Qtr FYTD 1 Yr 3 Yrs 5 Yrs 1 Yrs U.S. Equity RUSSELL 3 (DAILY) Non-U.S. Eq 5% Dev Mkt Hdg'd CUSTOM MSCI ACWI IMI N 5%H Fixed Income FI CUSTOM INDEX Barclays US Universal Real Estate* REAL ESTATE TARGET Private Equity* PRIVATE EQUITY TARGET Commodities Bloomberg Commodity Index Total Return Hedge Funds** HEDGE FUND CUSTOM INDEX Cash Citigroup 6 M Treasury Bill Index Total Fund (Gross of Fees) TOTAL FUND POLICY BENCHMARK LACERA's Commodities composite declined 12.2%, lagging the index return of -12.1% by 1 bps. Two of the three managers within the composite surpassed the benchmark for the quarter. Total Fund (Net of Fees) All asset class returns shown are Gross of Fees. Yearly returns are annualized. See Glossary for all benchmark definitions. * Portfolio and benchmark are one quarter in arrears. Preliminary returns. ** Portfolio and benchmark are one month in arrears. 1
5 EXECUTIVE SUMMARY for the quarter ended December 31, 214 EQUITY MARKET REVIEW U.S. INDEX Global equities began the fourth quarter on a volatile note, as concerns about global growth and the imminent end of the U.S. Federal Reserve s asset purchase program weighed on investors. However, the tide turned in mid-october as improved economic data in the U.S., the ongoing decline in oil prices, and the continuation of accommodative monetary policy by global central banks contributed to a rebound. Russell 3 Russell After posting a flat return in the 3rd quarter, U.S. equities recovered in the 4th quarter, advancing more than 5%. As a result, the Dow Jones Industrial Average and the S&P 5 Index reached all times highs during the quarter, and the Nasdaq Composite Index finished just shy of its "dot com" peak. Investors were encouraged by a number of positive economic and corporate developments. Third quarter U.S. GDP growth was revised up to 5.% the strongest in a decade. In addition, the employment report released in December highlighted an improving job market with more jobs added than had been predicted by economists. Russell 2 Russell 1 S&P LACERA s U.S. equity benchmark, the Russell 3 Index, returned 5.2%. Small capitalization (cap) stocks outperformed large caps, with the small cap Russell 2 Index up 9.7% versus a 4.9% gain in the large cap Russell 1. Style results were mixed as large cap value stocks outperformed their growth counterparts, but small cap growth stocks beat small cap value. Russell 2 Value Russell 1 Value Russell 2 Growth 1.1 Russell 1 Growth
6 EXECUTIVE SUMMARY for the quarter ended December 31, 214 EQUITY MARKET REVIEW NON-U.S. INDEX European markets declined for the second consecutive quarter, driven by weak inflation data and slowing economic growth. Eurozone GDP was stagnant in the 3rd quarter, expanding only.2%. November's inflation report showed that year-over-year inflation was.3%, significantly below the European Central Bank s (ECB) target of just under 2.%. The weak data prompted speculation that the ECB would expand its asset purchase program to include government bonds in the first quarter of 215. The Pacific Basin region rose for the quarter in local terms; however, given Asian currency weakness versus the U.S. dollar (USD), results were less impressive in USD terms. Emerging markets declined for the second consecutive quarter as plunging commodity prices, the economic crisis in Russia, and depreciating currencies versus the USD held back the region. Non-U.S. equity markets, as represented by the MSCI ACWI ex-u.s. IMI (unhedged), returned -3.9%. All regions declined as follows: Canada -5.8%, Emerging Markets -4.7%, Europe -4.%, and the Pacific region -2.3%. Non-U.S. Eq Cust Hdg'd Index* MSCI ACWI X U.S. IMI (Net)* MSCI Europe IMI (Net) MSCI EAFE + Canada (Net) MSCI Emerging Markets IMI (Net) MSCI Pacific IMI (Net) The U.S. dollar (USD) rose versus all major currencies. The USD strengthened 9.2% versus the Japanese Yen, 4.2% versus the Euro, 3.9% versus the British Pound and 3.8% versus the Canadian Dollar. For the quarter, LACERA's passive 5% developed markets currency hedge into USD returned 2.6%. MSCI EM Small Cap Index (Net) MSCI EAFE + Canada Small Cap (Net) MSCI Canada IMI (Net) * See Glossary 3
7 EXECUTIVE SUMMARY for the quarter ended December 31, 214 Large Cap EQUITY MAGER REVIEW LARGE CAP LACERA's active U.S. Large Cap managers posted mixed results during the quarter as market volatility increased due to an accelerating drop in oil prices and investors reassessing the impact on the economy. The emerging manager fund-of-funds underperformed. U.S. Equity Composite FIS Funds Mgmt INTECH, one of LACERA's two quantitative managers, outperformed its index by 16 bps due to stock selection within the information technology, industrials, health care, and consumer staples sectors. Twin, the other quantitative manager, outpaced its benchmark by 2 bps through stock selection in the consumer discretionary sector. Relational, LACERA s large cap activist manager, underperformed by 47 bps due to its positions in industrial companies which were negatively impacted by the oil price decline. Northern Trust Russell FIS, one of LACERA's emerging manager fund-of-funds advisors, underperformed its index by 3 bps. Northern Trust, the other fund-offunds advisor, underperformed by 5 bps. The sub-managers in each mandate struggled with stock selection in the energy sector. INTECH Twin Capital Enhanced Two large cap managers had observations* that fell outside their calculated performance bands for the quarter: Intech (one observation above) and FIS (two observations below). S&P 5 Index 4.9 Relational Investors.2 Relational Custom Index See Glossary for all Custom Index definitions. * Each quarterly observation is based on trailing one year excess returns. 4
8 EXECUTIVE SUMMARY for the quarter ended December 31, 214 Small/Mid Cap EQUITY MAGER REVIEW (...cont.) LACERA's small/mid cap managers also posted mixed results, but underperformed as a group. Cramer Rosenthal McGlynn SMALL / MID CAP 2.8 Eagle outperformed by 2 bps as a result of positive stock selection in the industrials, financials, and materials sectors. Eagle Asset Management 8.8 Frontier outpaced its benchmark by 18 bps as a result of stock selection in the information technology and industrials sectors. Westwood trailed its benchmark by 25 bps driven by stock selection in the industrials and energy sectors. Frontier Capital 8.6 CRM underperformed by 4 bps due to stock selection within the financials, industrials, health care, and information technology sectors. Westwood Management 4.3 No small/mid cap managers had observations* that fell outside their calculated performance bands for the quarter. Russell 25 Index * Each quarterly observation is based on trailing one year excess returns. 5
9 EXECUTIVE SUMMARY for the quarter ended December 31, 214 Non-U.S. EQUITY MAGER REVIEW (...cont.) LACERA's active non-u.s. equity managers posted strong results for the quarter, as seven of ten managers outperformed their respective benchmarks. Non-U.S. Eq 5% Dev Mkt Hedged Non-U.S. Eq Custom Hedged Idx Non-U.S Among the developed markets managers, Acadian outperformed its benchmark by 13 bps due to stock selection in Canada and Australia and in the materials and consumer staples sectors. Capital Guardian s EAFE+Canada strategy surpassed its index by 21 bps, driven by stock selection in France and the United Kingdom. Stock selection in the financials sector also contributed to the results. Putnam s small cap portfolio outpaced its benchmark by 4 bps via stock selection in Canada and within the industrials sector. Acadian Asset Mgmt. Capital Guardian MSCI EAFE + Canada (Net) Putnam MSCI World X-U.S. Small Cap Idx BlackRock Europe Tilts exceeded its benchmark by 12 bps as a result of stock selection in Italy, Germany, and France, as well as in the financials sector. GAM lagged its index by 2 bps primarily due to stock selection in Australia and an underweight to consumer discretionary stocks. In emerging markets, Acadian s strategy outperformed its benchmark by 19 bps due to stock selection in South Korea and Brazil, and also within financials. AQR s 17 bps of excess return was largely driven by an overweight allocation to China. Lazard s closed-end fund strategy delivered 44 bps of excess return mainly due to an overweight to and selection among its Asian funds. Capital Guardian underperformed its index by 6 bps due to an underweight allocation to South Africa and Taiwan, and negative stock selection in the information technology sector. Genesis trailed its benchmark by 2 bps, as an underweight to China and stock selection in the financials sector drove results. One non-u.s. equity manager had observations* that fell outside its calculated performance bands for the quarter: Capital Guardian EM (two observations below). BTC Europe Alpha Tilts MSCI Europe (Net) GAM International Mgmt. MSCI Pacific Basin (Net) Acadian Emrg. Markets AQR Emerging Markets Lazard Emrg. Markets MSCI EMF (Net) Capital Guardian Emerging Mkts Genesis Investment Mgmt. MSCI EMF IMI Custom Index See Glossary for all Custom Index definitions. * Each quarterly observation is based on trailing one year excess returns. 6
10 EXECUTIVE SUMMARY for the quarter ended December 31, 214 FIXED INCOME MARKET REVIEW U.S. Treasury Yield Curve By generating a 1.3% return for the quarter, the U.S. fixed income market ended calendar year 214 with a respectable return of 5.6% (as measured by the Barclays U.S. Universal Index). The fourth quarter was highly volatile due to concerns surrounding plummeting commodity prices, the Ebola outbreak, and weak global economic data (particularly from Europe and China). In addition, Russia s economy was severely affected by tumbling oil prices and economic sanctions, resulting in a continued devaluation of their currency. By year end, the Russian ruble had depreciated almost 5% versus the U.S. dollar. These events, coupled with lower inflation expectations (resulting primarily from lower gasoline prices), led investors to seek a safe haven in U.S. Treasuries, especially those with long-dated maturities. Furthering the rally in Treasuries was the Fed s statement that it would be "patient in beginning to normalize monetary policy" and that any rate hike would be based on the U.S. economy's progress toward the Fed's dual mandate of "maximum" employment and a 2% inflation target. The U.S. Treasury yield curve continued to flatten during the quarter as maturities 5-year and longer decreased between 1 and 45 bps points, while 3-year and shorter maturities increased by as much as 12 bps. The 3-year Treasury bond yield decreased the most (down 45 bps) ending the quarter at 2.75%, while the 1-year Treasury bond yield dropped 32 bps to 2.17%. The greatest increase in yield was exhibited by the 1-Year Treasury Bill which jumped to.22%, up 12 bps from the prior quarter-end. These changes in yield levels produced an overall return of 1.9% for the Treasury Index with the Long-Term component outpacing the intermediate portion of the index by a whopping 76 bps (8.6% vs 1.%). Treasury Inflation Protected Securities (TIPS) continued to be among the worst performing sectors with a flat return of % due to lower inflation expectations. Given investor s flight to quality, all spread sectors underperformed Treasuries during the quarter. Emerging markets was the worst performing sector, trailing Treasuries by 28 bps with a -.9% return, while high yield Ba/B-rated corporate bonds underperformed by 22 bps (-.3% return). Asset-backed, commercial mortgage-backed, and residential mortgage-backed securities lagged Treasuries by 13 bps, 5bps, and 1 bps, respectively. Investment grade corporate bonds, because of their longer duration characteristics, trailed Treasuries by only 1 bps, with a 1.8% return. Total Returns BC U.S. Universal BC Aggregate BC Asset-Backed BC CMBS BC Treasury BC TIPS BC Mortgage-Backed BC Investment Grade Corp BC High Yield Ba/B -.3 JP Morgan Emrg Mkts
11 EXECUTIVE SUMMARY for the quarter ended December 31, 214 Core FIXED INCOME MAGER REVIEW LACERA s core managers generated mixed results against the Barclays Aggregate Index for the quarter. Wells Capital outpaced the Aggregate Index by 1 bps because of solid security selection in MBS 1 combined with an overweight allocation to ABS 1 and CMBS 1 sectors. Pugh Capital, one of LACERA s emerging managers, performed in-line with the Index for the quarter. Pugh s outperformance from an overweight allocation to ABS and CMBS was offset by the negative impact of an overweight to corporate bonds. Fixed Income Composite Fixed Income Custom Index BlackRock Core BlackRock's active portfolio lagged the benchmark by 2 bps for the quarter. The portfolio s shorter-than-benchmark duration and allocation to Treasury Inflation Protected Securities (TIPS) detracted from returns for the quarter as both interest rates and inflation expectations fell. Dodge & Cox underperformed the most among core managers last quarter, trailing the Index by 6 bps (though their three-year performance is still best among core managers). The strategy s defensive duration positioning, overweight allocation to corporate bonds, security selection within corporates and Agency MBS were negative contributors to performance. For the quarter, none of the core managers had observations* that fell outside their calculated performance bands. Dodge & Cox 1.2 Pugh Capital 1.8 Wells Capital 1.9 Barclays Aggregate ABS = asset-backed securities CMBS = commercial mortgage-backed securities MBS = mortgage-backed securities * Each quarterly observation is based on trailing one year excess returns. 8
12 EXECUTIVE SUMMARY for the quarter ended December 31, 214 Core Plus FIXED INCOME MAGER REVIEW (...cont.) Core Plus With the exception of one manager, LACERA s core plus managers trailed their respective benchmarks. LM Capital was the best performing core plus manager for the quarter, adding 3 bps over their custom benchmark. Good security selection within U.S. Treasury and high yield securities proved beneficial, due to their higher quality and longer duration characteristics. Loomis Sayles PIMCO Western Asset Dolan McEniry, one of LACERA s emerging managers, and PIMCO each lagged their respective benchmarks by 2 bps for the quarter. Dolan s zero exposure to MBS, a component of their custom benchmark, was the primary reason for underperformance. PIMCO s allocation to TIPS and underweight to the long-end of the yield curve detracted from performance as longer maturity yields declined. Barclays Aggregate Dolan McEniry Western Asset underperformed by 5 bps for the quarter. Western's allocation to EMD 1 was the largest negative contributor, along with modest exposures to TIPS and high yield. GW Capital, another emerging manager, lagged its benchmark by 6 bps. The primary contributor to GW's underperformance was security selection (two securities in particular), caused by weakness in energy markets. Dolan McEniry Custom Index GW Capital.4.9 Loomis Sayles was the biggest laggard among core plus managers (though they're still the top performer for the year). Loomis underperformed by 11 bps for the quarter. The strategy s out-of-benchmark exposure to high yield and international bonds, combined with an underweight to U.S. Treasury securities detracted from performance. GW Custom Index LM Capital The following managers had observations* that fell outside their calculated performance bands for the quarter: LM Capital (four observations below), PIMCO (two observations below) and GW Capital (one observation below). LM Capital Custom Index See Glossary for all Custom Index definitions. 1 EMD = Emerging Market Debt * Each quarterly observation is based on trailing one year excess returns. 9
13 EXECUTIVE SUMMARY for the quarter ended December 31, 214 FIXED INCOME MAGER REVIEW (...cont.) High Yield & Opportunistic HIGH YIELD / OPPORTUNISTIC LACERA s high yield managers underperformed for the quarter. Oaktree trailed the Barclays High Yield Ba/B Index by 2 bps because of security selection within industrials and gaming. Oaktree Capital -.5 PENN lagged the Index by 13 bps for the quarter. The portfolio s exposure to energy related securities, combined with an overweight allocation to single B-rated securities detracted, as lower quality bonds underperformed. Issue selection within chemicals, and an underweight allocation to noncyclical industries like healthcare and food also negatively impacted performance. PENN Capital Barclays HIgh Yield Ba/B LACERA s non-traditional fixed income investments include portfolios comprised of securities such as non-agency MBS 1, bank loans, high yield corporate bonds, private debt, and distressed securities. Performance varied among LACERA s opportunistic fixed income managers for the quarter. Beach Point**.4 Beach Point was the best performing opportunistic manager for the quarter. The firm outpaced its benchmark by 11 bps, benefitting from the strategy s security selection in the food/supermarket and cable/media sectors. Principal underperformed its custom index by 2 bps for the quarter. The firm s short duration positioning, combined with security selection in high yield and bank loans, negatively impacted the portfolio. Western Asset trailed its benchmark by 3 bps. Western s portfolio was negatively impacted by an allocation to high yield and EMD along with an underweight allocation to Non-Agency mortgages. Sankaty underperformed by 18 bps for the quarter. Sanktay s mixture of bonds and loans within the energy sector were the primary culprits to their underperformance, along with security selection within the insurance sector. Brigade underperformed by 2 bps for the quarter. The strategy s exposure to high yield bonds within the energy and gaming sectors was a drag on performance. The portfolio s distressed and bank debt positions also negatively impacted performance. Crescent trailed its benchmark by 28 bps. This was the result of an overweight to and security selection within energy. Lastly, Tennenbaum Capital (Tennenbaum), a recently hired opportunistic manager, was given its first funding in early October ($37 million). As of December 3, 214, Tennenbaum s portfolio was valued at $37.4 million. For the quarter, both high yield managers (Oaktree and PENN) were outside their calculated performance bands for the quarter. Each had two observations* below. None of the opportunistic managers had observations* that fell outside their calculated performance bands for the quarter. Crescent Capital Sankaty Advisors Opportunistic Custom Index Brigade Capital Brigade Custom Index Principal Opp. BC U.S. Universal Spread 1-1 Yr. Western Opportunistic Western Opportunistic Custom Index See Glossary for all Custom Index definitions. 1 MBS = mortgage-backed securities * Each quarterly observation is based on trailing one year excess returns. ** Represents the combined performance of two portfolios, one of which is reported one month in arrears.
14 EXECUTIVE SUMMARY for the quarter ended December 31, 214 COMMODITIES MARKET REVIEW The Bloomberg Commodity Index fell 12.1% for the quarter as the majority of constituents that make up Index continued to decline. Of the 22 commodities in the Index, only five registered a positive return. For all of 214, the Bloomberg Commodity Index lost 17.%. Energy was the biggest story within commodities for the quarter as both Brent Crude and WTI Crude Oil continued to experience sharp declines due to excess inventories. Brent and WTI dropped by roughly 4% in the quarter as U.S. shale output, combined with the refusal of OPEC (Organization of the Petroleum Exporting Countries) to cut production, kept inventories high - at the same time global demand for oil weakened. Ancillary commodities within the sector declined with oil: Natural Gas returned -32.5%, Unleaded Gas was off by 38.6%, and Diesel dropped by 3.2%. As a result, energy was the worst performing sector for the quarter and year, returning -36.6% and %, respectively. Notably, the sector no longer has the distinction of being the largest sector within the Index - energy is now second to Agriculture. Agriculture, the largest sector in the Index, was the only sector to post a positive return for the quarter, up 5.6%. Agriculture was driven higher in the quarter due to robust returns (gains from 1-22%) within four of the nine commodities in the sector as unseasonably dry weather in Brazil, Russia, and Australia decreased supply expectations. However, the sector decreased by 9.2% for the year because of high crop yields. Industrial Metals, the third largest component in the Index, declined 6.2% for the quarter and 6.9% for the year. For both time periods, the sector s performance was driven lower by economic data out of China and Europe that pointed to a continued weakening of demand for the metals. Bloomberg Commodity Index Total Returns Industrials Precious Metals Agriculture 5.6 Energy Livestock -5.3 Bloomberg Commodity Index Total Return Bloomberg Commodity Index Sector Weights Livestock was down 5.3% for the quarter but was the only sector with positive calendar year performance, with a return of 11.6%. Livestock's strong year-to-date return is attributable to sustained demand for live cattle, coupled with flat supply. For the year, live cattle returned an impressive 22.1%. Lean hogs declined 13.9% for the quarter and 4.4% for the year, as supply continued to increase, outpacing demand. Precious Metal returns fell 3.9% for the quarter and 6.7% for the year. Silver led the index lower in both time periods, falling by 8.8% and 2.4%, respectively. Silver s decline for the quarter was driven by the FED s announcement of an end to quantitative easing (QE). The end of QE prompted the U.S. Dollar to trade higher, causing precious metal prices to decline as their attractiveness as safe haven currencies waned. For the year, silver traded lower off of weak industrial demand. 11
15 EXECUTIVE SUMMARY for the quarter ended December 31, 214 COMMODITIES MAGER REVIEW Commodities LACERA's commodities composite underperformed the benchmark, the Bloomberg Commodity Index by 1 bps for the quarter, with a return of -12.2% versus the index return of -12.1%. Two of the three portfolio managers outpaced the benchmark. For the whole of 214, all three managers surpassed the Index, prompting the composite to outperform by 8 bps for the year. Commodities Composite PIMCO outpaced the benchmark by 4 bps for the quarter. Most of the quarter's excess return was attributable to PIMCO's active commodity strategies within energy trades. Specifically, calendar trades that favored longer dated WTI, Brent crude, and natural gas futures added 7 bps of alpha to the portfolio. However, the fixed income collateral underlying the commodities detracted 3 bps for the quarter. An overweight to TIPS detracted as inflation expectations declined. At year end, the account was up 17 bps versus the Index. Credit Suisse Credit Suisse, the most conservative of the three managers, outperformed the Index by 2 bps in the fourth quarter and 3 bps for the year. Credit Suisse manages the underlying fixed income collateral in liquid, short duration U.S. Treasury and agency debt, which added a few bps to the portfolio for the quarter. Therefore, outperformance for the account was attributable to active commodities strategies. Spread positioning within natural gas was the largest contributor to performance. Gresham/Neuberger Berman lagged the index by 9 bps for the quarter. The portfolio's overweight positioning to Brent Crude detracted as oil was down over 4%. Additionally, an underweight to Corn, which gained 2% in the quarter, weighed on performance. Neuberger's conservatively managed cash collateral account was flat for the quarter. Despite the negative fourth quarter return, the manager has outpaced the benchmark by 4 bps for the year. For the quarter, no managers had observations* that fell outside their calculated performance bands. Neuberger / Gresham -13. PIMCO Bloomberg Commodity Index Total Return * Each quarterly observation is based on trailing one year excess returns. 12
16 TOTAL FUND ANNUALIZED & ANNUAL RETURNS for the quarter ended December 31, 214 Gross of Fees Qtr End 1 Year 3 Years 5 Years 7 Years 1 Years Dec Dec Dec Dec U.S. Equity RUSSELL 3 (DAILY) Non-U.S. Eq 5% Dev Mkt Hdg CUSTOM MSCI ACWI IMI N 5%H Fixed Income FI CUSTOM INDEX Barclays US Universal Real Estate* REAL ESTATE TARGET Private Equity* PRIVATE EQUITY TARGET Commodities Bloomberg Commodity Index Total Return Hedge Funds** HEDGE FUND CUSTOM INDEX Cash Citigroup 6 M Treasury Bill Index Total Fund (Gross of Fees) TOTAL FUND POLICY BENCHMARK See Glossary for all benchmark definitions. * Portfolio and benchmark are one quarter in arrears. Preliminary returns. ** Portfolio and benchmark are one month in arrears. Performance included in Total Fund beginning 1/31/11.
17 TOTAL FUND ANNUALIZED & ANNUAL RETURNS for the quarter ended December 31, 214 Net of Fees Qtr End 1Year 3 Years 5 Years 7 Years 1 Years Dec Dec Dec Dec U.S. Equity RUSSELL 3 (DAILY) Non-U.S. Eq 5% Dev Mkt Hdg CUSTOM MSCI ACWI IMI N 5%H Fixed Income FI CUSTOM INDEX Barclays US Universal Real Estate* REAL ESTATE TARGET Private Equity* PRIVATE EQUITY TARGET Commodities Bloomberg Commodity Index Total Return Hedge Funds** HEDGE FUND CUSTOM INDEX Cash Citigroup 6 M Treasury Bill Index Total Fund (Net of Fees) TOTAL FUND POLICY BENCHMARK See Glossary for all benchmark definitions. * Portfolio and benchmark are one quarter in arrears. Preliminary returns. ** Portfolio and benchmark are one month in arrears. Performance included in Total Fund beginning 1/31/11.
18 TOTAL FUND FISCAL YEAR RETURNS FYTD Jun 3 21 Jun Jun Jun Jun U.S. Equity RUSSELL 3 (DAILY) Non-U.S. Eq 5% Dev Mkt Hdg CUSTOM MSCI ACWI IMI N 5%H Fixed Income FI CUSTOM INDEX Barclays US Universal Real Estate* REAL ESTATE TARGET Private Equity* PRIVATE EQUITY TARGET Commodities Bloomberg Commodity Index Total Return Hedge Funds** HEDGE FUND CUSTOM INDEX Cash Citigroup 6 M Treasury Bill Index Total Fund (Gross of Fees) TOTAL FUND POLICY BENCHMARK Total Fund (Net of Fees) See Glossary for all benchmark definitions. * Portfolio and benchmark are one quarter in arrears. Preliminary returns. ** Portfolio and benchmark are one month in arrears. Performance included in Total Fund beginning 1/31/11.
19 TOTAL FUND ATTRIBUTION TOTAL FUND vs. BENCHMARK for the one-year ended December 31, Value Added Effects Allocation.5 TOTAL FUND - 2 DOMESTIC EQ PLUS CE INT'L EQUITY W/CCY OVERLAY COMMODITIES COMPOSITE TOTAL HEDGE FUNDS FIXED INCOME CASH PRIVATE EQUITY MIRROR REAL ESTATE MIRROR -.5 Allocation Total - 1 Yr Selection - 1 Yr Total - 1 Yr Fund Weight Target Weight Relative Fund Return Benchmark Return Return Difference Allocation Effect* Selection Effect** BM Impact TOTAL FUND CASH COMMODITIES COMPOSITE TOTAL HEDGE FUNDS PRIVATE EQUITY MIRROR REAL ESTATE MIRROR FIXED INCOME INT'L EQUITY W/CCY OVERLAY DOMESTIC EQ PLUS CE Mgmt Effect Total Value Add * Allocation decision reflects the asset class over or underweight (versus the policy weight) multiplied by the difference between the asset class benchmark and Fund Policy benchmark return. ** Selection decision reflects the Fund's asset class return minus the asset class benchmark return, multiplied by the asset class weight. 16
20 TOTAL FUND RISK-ADJUSTED RETURN for the quarter ended December 31, Year Risk vs Return Annualized Return Rate of Return 1 Years Total Standard Deviation(Qtr) 1 Years TOTAL FUND TOTAL FUND POLICY BENCHMARK th Percentile th Percentile th Percentile th Percentile th Percentile Number of Observations Risk (Standard Deviation) TOTAL FUND TOTAL FUND POLICY BENCHMARK Rate of Return 1 Years Standard Deviation(Qtr) 1 Years Tracking Error 1 Years Public Funds (DB) > $1 Billion TOTAL FUND TOTAL FUND POLICY BENCHMARK
21 ASSET ALLOCATION TOTAL FUND for the quarter ended December 31, 214 Cash 2.9% Fixed Income 22.8% Non-U.S. Equity 24.6% Hedge Funds 1.2% Real Estate 11.% U.S. Equity 26.7% Private Equity 8.7% Commodities 2.2% 18
22 ASSET ALLOCATION TOTAL FUND for the quarter ended December 31, Weight Fixed Income Hedge Funds Real Estate Private Equity Commodities U.S. Equity Non-U.S. Equity Cash 2 1 Dec-5 Dec-6 Dec-7 Dec-8 Dec-9 Dec-1 Dec-11 Dec-12 Dec-13 Dec-14 Time 19
23 ASSET ALLOCATION ACTUAL vs. TARGET for the quarter ended December 31, 214 Actual vs Target Weights Weight (%) U.S. Equities Non-U.S. Equities Private Equity* Fixed Income Real Estate* Commodities Hedge Funds** Cash Actual Target Ending Market Value Actual Target Relative Min Max Total Equity 24,249,731, U.S. Equities 12,61,143, Non-U.S. Equities 11,639,587, Fixed Income 1,752,315, Real Estate* 5,29,811, Private Equity* 4,91,365, Commodities 1,25,289, Hedge Funds** 546,634, Cash 1,347,24, Total Fund 47,222,171, * Portfolio and benchmark are one quarter in arrears. Preliminary returns. ** Portfolio and benchmark are one month in arrears. 2
24 ASSET ALLOCATION U.S. EQUITY MAGERS for the quarter ended December 31, 214 PASSIVE December 31, 214 Assets ($ millions) % of Composite BTC Russell 1 Index 9, BTC Russell 2 Index BTC S&P 5 Index PASSIVE September 3, 214 Assets ($ millions) % of Composite BTC Russell 1 Index 8, BTC Russell 2 Index BTC S&P 5 Index LOW RISK INTECH Twin Capital LOW RISK INTECH Twin Capital MODERATE / HIGH RISK Cramer Rosenthal McGlynn Eagle Asset Mgmt FIS Group Frontier Capital Mgmt Northern Trust Relational Investors Westwood Mgmt. Corp MODERATE / HIGH RISK Cramer Rosenthal McGlynn Eagle Asset Mgmt FIS Group Frontier Capital Mgmt Northern Trust Relational Investors 8.7 Westwood Mgmt. Corp TOTAL U.S. EQUITY 12, TOTAL U.S. EQUITY 12,
25 ASSET ALLOCATION NON-U.S. EQUITY MAGERS (cont's...) for the quarter ended December 31, 214 PASSIVE December 31, 214 Assets ($ millions) % of Composite BTC Canada Index IMI BTC EAFE Index IMI 5, BTC Emerging Markets Index BTC Europe Index BTC Emerging Markets Small Cap Index NON-US DEVELOPED Acadian Asset Mgmt Capital Guardian Putnam Investments REGIOL DEVELOPED BTC Europe Alpha Tilts GAM International Mgmt EMERGING MARKETS Acadian Emrg. Markets AQR Emerging Markets Capital Guardian Emerging Genesis Investment Mgmt Lazard PASSIVE September 3, 214 Assets ($ millions) % of Composite BTC Canada Index IMI BTC EAFE Index IMI 5, BTC Emerging Markets Index BTC Europe Index BTC Emerging Markets Small Cap Index NON-US DEVELOPED Acadian Asset Mgmt Capital Guardian Putnam Investments REGIOL DEVELOPED BTC Europe Alpha Tilts GAM International Mgmt EMERGING MARKETS Acadian Emrg. Markets AQR Emerging Markets Capital Guardian Emerging Genesis Investment Mgmt Lazard TOTAL NON-U.S. EQUITY (Unhedged) 11, TOTAL NON-U.S. EQUITY (Unhedged) 11,
26 ASSET ALLOCATION NON-U.S. EQUITY MAGERS (...cont'd) for the quarter ended December 31, 214 PASSIVE HEDGE December 31, 214 Assets ($ millions) Currency Hedge Gain/Loss TOTAL NON-U.S. EQUITY (Hedged) 11,639.6 PASSIVE HEDGE September 3, 214 Assets ($ millions) Currency Hedge Gain/Loss TOTAL NON-U.S. EQUITY (Hedged) 12,
27 ASSET ALLOCATION FIXED INCOME MAGERS & PROGRAMS (cont's...) for the quarter ended December 31, 214 CORE December 31, 214 Assets ($ millions) % of Composite BTC Aggregate Index BTC Intermediate Credit Index BlackRock Dodge & Cox 1, Pugh Capital Mgmt Wells Capital Mgmt. 1, TOTAL CORE 4, CORE September 3, 214 Assets ($ millions) % of Composite BTC Aggregate Index BTC Intermediate Credit Index BlackRock Dodge & Cox 1, Pugh Capital Mgmt Wells Capital Mgmt. 1, TOTAL CORE 4, CORE PLUS Dolan McEniry Capital Mgmt GW Capital LM Capital Group Loomis, Sayles & Co PIMCO Western Asset Mgmt. 1, TOTAL CORE PLUS 3, CORE PLUS Dolan McEniry Capital Mgmt GW Capital LM Capital Group Loomis, Sayles & Co PIMCO Western Asset Mgmt TOTAL CORE PLUS 3, Policy Ranges Core: 25% - 45% Core Plus: 25% - 45% High Yield: - 1% Opportunistic: 15% - 35% 24
28 ASSET ALLOCATION FIXED INCOME MAGERS & PROGRAMS (...cont'd) for the quarter ended December 31, 214 HIGH YIELD December 31, 214 Assets ($ millions) % of Composite Oaktree Capital Mgmt PENN Capital Mgmt TOTAL HIGH YIELD HIGH YIELD September 3, 214 Assets ($ millions) % of Composite Oaktree Capital Mgmt PENN Capital Mgmt TOTAL HIGH YIELD OPPORTUNISTIC Beach Point Capital* Brigade Capital Mgmt Crescent Capital Principal Opportunistic Sankaty Advisors Tennenbaum Capital** Western Opportunistic TOTAL OPPORTUNISTIC 1, MORTGAGE PROGRAM Member Home Loan Program (MHLP) TOTAL FIXED INCOME*** 1, OPPORTUNISTIC Beach Point Capital* Brigade Capital Mgmt Crescent Capital Principal Opportunistic Sankaty Advisors Western Opportunistic TOTAL OPPORTUNISTIC 1, MORTGAGE PROGRAM Member Home Loan Program (MHLP) TOTAL FIXED INCOME*** 1, Policy Ranges Core: 25% - 45% Core Plus: 25% - 45% High Yield: - 1% Opportunistic: 15% - 35% * Represents the combined assets of two portfolios, one of which is reported one month in arrears. ** One month in arrears. *** Does not include cash. 25
29 ASSET ALLOCATION COMMODITIES MAGERS for the quarter ended December 31, 214 December 31, 214 Assets ($ millions) % of Composite Credit Suisse Neuberger Berman/Gresham PIMCO September 3, 214 Assets ($ millions) % of Composite Credit Suisse Neuberger Berman/Gresham PIMCO TOTAL COMMODITIES 1, TOTAL COMMODITIES 1,
30 ANNUALIZED TOTAL RETURNS U.S. EQUITY MAGERS for the quarter ended December 31, 214 LARGE CAP Gross of Fees Mkt Value ($Mil) Qtr 1 Yr 3 Yrs 5 Yrs BTC S&P 5 Index INTECH Twin Capital S&P Relational Investors* Relational Custom Index BTC Russell 1 9, Russell SMALL / MID CAP Cramer Rosenthal McGlynn Eagle Asset Management Frontier Capital Management Westwood Management Russell BTC - Russell Russell EMERGING MAGER PROGRAM FIS Group Northern Trust Russell LARGE CAP Net of Fees Mkt Value ($Mil) Qtr 1 Yr 3 Yrs 5 Yrs BTC S&P 5 Index INTECH Twin Capital S&P Relational Investors* Relational Custom Index BTC- Russell 1 9, Russell SMALL / MID CAP Cramer Rosenthal McGlynn Eagle Asset Management Frontier Capital Management Westwood Management Russell BTC - Russell Russell EMERGING MAGER PROGRAM FIS Group Northern Trust Russell See Glossary for all Custom index definitions. * Time-weighted returns are shown for the Relational portfolio rather than IRR. 27
31 ANNUALIZED TOTAL RETURNS NON-U.S. EQUITY MAGERS (cont's...) for the quarter ended December 31, 214 NON U.S. Gross of Fees Mkt Value ($Mil) Qtr 1 Yr 3 Yrs 5 Yrs Acadian Asset Management Capital Guardian MSCI EAFE + CADA Net (Daily) Putnam International Small Cap MSCI World EX US Small Cap (Net) BTC EAFE IMI* 5, MSCI EAFE IMI Custom Index BTC Canada IMI* MSCI Canada Custom IMI (Net) NON U.S. Net of Fees Mkt Value ($Mil) Qtr 1 Yr 3 Yrs 5 Yrs Acadian Asset Management Capital Guardian MSCI EAFE + Canada Net (Daily) Putnam International Small Cap MSCI World Ex US Small Cap (Net) BTC EAFE IMI* 5, MSCI EAFE IMI Custom Index BTC Canada IMI* MSCI Canada Custom IMI (Net) PACIFIC BASIN GAM Pacific Basin MSCI Pacific (Net) PACIFIC BASIN GAM Pacific Basin MSCI Pacific (Net) See Glossary for all Custom index definitions. * BTC EAFE & Canada Funds; 8/31/8 - Present: BTC EAFE & Canada IMI Funds. 28
32 ANNUALIZED TOTAL RETURNS NON-U.S. EQUITY MAGERS (...cont'd) for the quarter ended December 31, 214 EUROPE Gross of Fees Mkt Value ($Mil) Qtr 1 Yr 3 Yrs 5 Yrs BTC Euro Tilts BTC Europe Index MSCI Europe (Net) EUROPE Net of Fees Mkt Value ($Mil) Qtr 1 Yr 3 Yrs 5 Yrs BTC Euro Tilts BTC Europe Index MSCI Europe (Net) EMERGING MARKETS Acadian Emerging Markets AQR Emerging Markets Lazard Emerging Markets BTC - Emerging Markets MSCI EM Standard (Net) BTC Emerging Markets Small Cap MSCI EM Small Cap - Net Return Capital Guardian Emerging* Genesis MSCI EM IMI Custom Index EMERGING MARKETS Acadian Emerging Markets AQR Emerging Markets Lazard Emerging Markets BTC - Emerging Markets MSCI EM Standard (Net) BTC Emerging Markets Small Cap MSCI EM Small Cap - Net Return Capital Guardian Emerging* Genesis MSCI EM IMI Custom Index PASSIVE HEDGE BTC Passive Currency Hedge % FX Hedge Index PASSIVE HEDGE BTC Passive Currency Hedging % FX Hedge Index See Glossary for all Custom index definitions. * Returns reflect fees (they are taken directly from the commingled fund). 29
33 ANNUALIZED TOTAL RETURNS FIXED INCOME MAGERS & PROGRAMS (cont's...) for the quarter ended December 31, 214 CORE Gross of Fees Mkt Value ($Mil) Qtr 1 Yr 3 Yrs 5 Yrs BTC Aggregate Index BlackRock Dodge & Cox 1, Pugh Capital Mgmt Wells Capital Mgmt. 1, Barclays Aggregate Bond Index BTC Intermediate Credit Index Barclays Credit Intermediate Index CORE Net of Fees Mkt Value ($Mil) Qtr 1 Yr 3 Yrs 5 Yrs BTC Aggregate Index BlackRock Dodge & Cox 1, Pugh Capital Mgmt Wells Capital Mgmt. 1, Barclays Aggregate Bond Index BTC Intermediate Credit Index Barclays Credit Intermediate Index CORE PLUS Loomis, Sayles & Co PIMCO Western Asset Mgmt. 1, Barclays Aggregate Bond Index Dolan McEniry Capital Mgmt Dolan McEniry Custom Index GW Capital GW Custom Index LM Capital Group LM Custom Index CORE PLUS Loomis, Sayles & Co PIMCO Western Asset Mgmt. 1, Barclays Aggregate Bond Index Dolan McEniry Capital Mgmt Dolan McEniry Custom Index GW Capital GW Custom Index LM Capital Group LM Custom Index See Glossary for all Custom index definitions. 3
34 ANNUALIZED TOTAL RETURNS FIXED INCOME MAGERS & PROGRAMS (...cont'd) for the quarter ended December 31, 214 HIGH YIELD Gross of Fees Mkt Value ($Mil) Qtr 1 Yr 3 Yrs 5 Yrs Oaktree Capital Mgmt PENN Capital Mgmt Barclays BA/B U.S. High Yield Index HIGH YIELD Net of Fees Mkt Value ($Mil) Qtr 1 Yr 3 Yrs 5 Yrs Oaktree Capital Mgmt PENN Capital Mgmt Barclays BA/B U.S. High Yield OPPORTUNISTIC Beach Point Capital* Crescent Capital Group Sankaty Advisors Opportunistic Custom Index Brigade Capital Mgmt Brigade Custom Index Principal Opportunistic Barclays U.S. Universal Spread 1-1 Yr Western Opportunistic Western Opportunistic Custom Index OPPORTUNISTIC Beach Point Capital* Crescent Capital Group Sankaty Advisors Opportunistic Custom Index Brigade Capital Mgmt Brigade Custom Index Principal Opportunistic Barclays U.S. Universal Spread 1-1 Yr Western Opportunistic Western Opportunistic Custom Index MORTGAGE PROGRAM Member Home Loan Program (MHLP) MORTGAGE PROGRAM Member Home Loan Program (MHLP) See Glossary for all Custom index definitions. * Represents the combined assets & performance of two portfolios, one of which is reported one month in arrears.
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