ORANGE COUNTY EMPLOYEES RETIREMENT SYSTEM BOARD OF RETIREMENT 2223 E. WELLINGTON AVENUE, SUITE 100 SANTA ANA, CALIFORNIA

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1 Attendance was as follows: ORANGE COUNTY EMPLOYEES RETIREMENT SYSTEM BOARD OF RETIREMENT 2223 E. WELLINGTON AVENUE, SUITE 100 SANTA ANA, CALIFORNIA INVESTMENT COMMITTEE MEETING MINUTES Present: Absent: Also Present: David Ball, Chair; Chris Prevatt, Vice Chair; Frank E. Eley, Chuck Packard, Thomas Flanigan, Eric Gilbert, Roger Hilton, Thomas Beckett and Shari Freidenrich Wayne Lindholm Steve Delaney, Chief Executive Officer; Girard Miller, CFA, Chief Investment Officer; Shanta Chary, Director of Investment Operations; David Beeson, Investment Officer; Adam Cheng, Investment Officer; Stina Walander-Sarkin, Investment Analyst; David Lantzer, Deputy Chief Counsel; Anthony Beltran, Visual Technician; and Julius Cuaresma, Recording Secretary Scott Krouse, RVK Don Stracke, CFA, NEPC, LLC The Chair called the meeting to order at 9:01 a.m. and read the opening statement into the record. Mr. Beckett led the Pledge of Allegiance. CONSENT AGENDA All matters on the Consent Agenda to be approved by one action unless a Committee Member or a member of the public requests separate action on a specific item. Mr. Flanigan pulled item C-2 and C-3. A motion was made by Mr. Packard and seconded by Mr. Hilton to approve the Consent Agenda. The motion carried unanimously. C-1 COMMITTEE MEETING: Approval of Meetings and Minutes Investment Committee Meeting March 30, 2016 Manager Monitoring Subcommittee Meeting April 5, 2016 Recommendation: Authorize meeting and approve minutes.

2 C-2 QUIET PERIOD INVESTMENT RELATED SEARCHES Recommendation: Receive and file. C-3 INVESTMENT MANAGER FEE STRUCTURE UPDATES Recommendation: Receive and file. C-4 ECONOMIC DASHBOARDS & HOUSE VIEWS Recommendation: Receive and file. * * * * * * * END OF CONSENT AGENDA * * * * * * * INDIVIDUAL ITEMS AGENDA I-1 INDIVIDUAL ACTION ON ANY ITEM TRAILED FROM THE CONSENT AGENDA Mr. Flanigan pulled item C-2 due to his concern in hiring more investment managers. He asked for OCERS current investment related searches. Mr. Miller responded that there are three current searches: (1) General Investment Consultant RFP; (2) Global Custodian RFP; and (3) one contract yet to be finalized from the International Direct Lending RFP. Mr. Flanigan pulled item C-3 due to his ongoing concerns with investment manager fees. A motion was made by Mr. Hilton and seconded by Mr. Packard to receive and file items C-2 and C-3. The motion carried unanimously. I-2 CIO COMMENTS Mr. Miller introduced the agenda, including the upcoming May Manager Monitoring Subcommittee meeting and the General Investment Consultant RFP. Mr. Miller described the current and prospective economic and investment landscape. Ms. Freidenrich arrived at 9:20 a.m. Mr. Miller discussed the risk-return profile of a prototypical safe-haven portfolio. Since 2012, stocks have rallied over 60-70%, while such a safe-haven portfolio returned approximately 0%. 2

3 OCERS portfolio is intentionally risk-averse and equity-lite, which explains OCERS relative underperformance. Mr. Miller explained the relative and absolute underperformance of a number of OCERS asset classes and strategies. Mr. Gilbert arrived at 9:46 a.m. Mr. Miller described alternative sources of returns for OCERS in this low-return environment, particularly strategies that should provide returns higher than OCERS actuarial rate, with similar risks to other asset classes and strategies already in the portfolio. The Committee recessed at 10:02 a.m. The Committee reconvened at 10:12 a.m. I-4 INVESTMENT GOVERNANCE Mr. Miller discussed recommended revisions to the Investment Committee and CIO charters. Mr. Ball clarified that the amended Investment Committee charter stipulates a three-year review cycle of investment managers (versus two years), with the ability to meet on an ad-hoc basis. Mr. Eley expressed his concerns regarding the migration from the multi-finalist presentation format as it places the ultimate responsibility onto the CIO. He opined that the responsibility must fall on the Committee. He also asked for Mr. Miller s thoughts on this transfer of responsibilities. Mr. Miller noted that these revisions do provide asymmetric risk to the CIO, i.e. no upside and unlimited downside. He commented that there should be performance accountability for the CIO, consultants and the Committee. Mr. Prevatt supported the revisions for both charters and stated that the Committee s job is to set policy and not select managers. A motion was made by Mr. Packard and seconded by Mr. Beckett to approve the recommended revisions to the Investment Committee and Chief Investment Officer charters. Ms. Freidenrich expressed her general support of the revisions. She also recommended language in the Investment Committee charter that specified dollar-based meeting frequency thresholds, i.e., larger investments require more frequent meetings. Mr. Ball observed that the Committee s general consensus is that the number of managers will be reduced, thus logically increasing the allocation size. He understands the inherent angst with a large $500 million investment but stated that OCERS decision-making process is not a function of allocation size. 3

4 Mr. Miller described that his original governance memo did include dollar-based meeting frequency thresholds, but through prior Investment Committee discussions, this requirement was removed. He explained that the recommended revisions would have no impact on OCERS fee policy. He also reported that the CIO charter stipulates a linear model whereby the CIO is held accountable to the CEO. Ms. Freidenrich requested specific language in the Investment Committee charter that mandated Committee education sessions prior to hiring a manager. Ms. Freidenrich and Mr. Ball requested that the Investment Committee charter also include language that required both staff and the consultant to make manager recommendations. Mr. Hilton requested a separate vote on each charter revision; he expressed agreement with the Investment Committee charter revisions and disagreement with the CIO charter revisions. He also expressed his preference to meet with the two best investment manager candidates. Mr. Beckett stated his preference to only meet with one investment manager candidate. Mr. Ball responded that meeting with the two or four best candidates frequently translates into a split investment allocation across those two or four managers, thus increasing the number of managers in the portfolio. A substitute motion was made by Mr. Prevatt, seconded by Mr. Ball to approve the recommended revisions to the Investment Committee charter. The motion carried unanimously. A substitute motion was made by Mr. Hilton, seconded by Mr. Flanigan to amend the CIO charter, to include the language of bringing in at least two finalists for Committee consideration and a definite recommendation from the CIO and the consultant. The motion carried 7-1 with Mr. Beckett voting no. AYES NAYS ABSTAIN/ABSENT Mr. Hilton Mr. Beckett Mr. Lindholm Mr. Flanigan Ms. Freidenrich Mr. Prevatt Mr. Eley Mr. Ball Mr. Packard I-5 RVK 4 th QUARTER REAL ESTATE PERFORMANCE REPORT Presentation by Scott Krouse Mr. Krouse presented the 4 th quarter 2015 update on OCERS real estate portfolio as well as an update for the entire Mr. Hilton requested that the performance summary include returns net of fees. 4

5 Mr. Krouse reported that commercial real estate valuations declined for the second consecutive month in February 2016, after a six-year streak of uninterrupted price appreciation. Therefore, RVK commented that OCERS should expect the portfolio to have tempered returns relative to recent history. Mr. Krouse discussed RVK s recommended action steps for OCERS in light of this economic environment. Ms. Freidenrich commented on the strong performance in the core real estate portion of the portfolio, and questioned why OCERS would be migrating to a 50/50 core/non-core split. A motion was made by Mr. Packard and seconded by Mr. Flanigan to receive and file I-5. The motion carried unanimously. The Committee recessed for lunch at 11:49 a.m. The Committee reconvened at 12:32 p.m. I-6 PERFORMANCE EVALUATION EDUCATION BENCHMARKS FOR PRIVATE EQUITY Presentation by Don Stracke, CFA Mr. Stracke presented performance attribution, evaluation issues and methodologies for private equity. Mr. Stracke stated that NEPC recommends the continued use of Cambridge as the benchmark for private equity. A motion was made by Mr. Packard and seconded by Mr. Hilton to approve the recommended changes to the benchmarks for asset classes and the Investment Policy. The motion carried unanimously. I-7 PROXY POLICY REVIEW Mr. Miller discussed OCERS Proxy Policy as it is scheduled. There are no substantive changes to the Policy as the Policy remains current. The only changes remove the specific references to ISS and State Street, with general, boilerplate language, i.e., Proxy Voting Service Provider and Custodian. A motion was made by Mr. Packard and seconded by Mr. Hilton to approve the amendments to OCERS Proxy Policy. The motion carried unanimously. I-8 RFP - OPERATIONAL DUE DILIGENCE SERVICE PROVIDER Mr. Miller described the operational due diligence service provider RFP and explained the rationale for this search. OCERS portfolio currently has nearly 50% in alternative assets; in some instances, the typical operational due diligence work performed by consultants may not be 5

6 sufficient for alternative managers. It is not expected that all alternative managers will require additional operational due diligence; rather, this due diligence will be on an as-needed basis and is intended to complement the work performed by retained investment consultants. Mr. Miller stated that staff s preference is to retain a bench of operational due diligence providers to eliminate availability and capability issues that may arise with securing only one provider. Ms. Freidenrich opined on the prudence in utilizing at least one external source (pension, consultant, etc.) to help review the operational due diligence responses. A motion was made by Mr. Prevatt and seconded by Mr. Hilton to approve the RFP and search process for operational due diligence service providers. The motion carried unanimously. I-9 CONSULTANT COMMENTS Mr. Stracke had no further comments. I-3 PORTFOLIO ACTIVITY REPORT Mr. Miller presented the total fund overview, the preliminary performance, and asset allocation for March He presented the index performance as of April 22, Mr. Miller also discussed the employer pre-payment program. Mr. Flanigan and Mr. Delaney discussed Segal s 2014 and 2015 actuarial figures and estimates. A motion was made by Mr. Packard and seconded by Mr. Flanigan to receive and file I-3. The motion carried unanimously. I-10 CIO COMMENTS Mr. Miller discussed opportunistic and alternative income investment strategies and the present global macroeconomic backdrop, including the emerging markets, the United States, and Japan. Mr. Miller presented an update on OCERS energy capital commitments and deployments, and an update on the General Consultant RFP search. He disclosed the two finalists. Mr. Miller reported that staff is collecting data on investment managers compliance with the CFA Code of Ethics. Mr. Eley observed the difficulty in timing markets and the value in adhering to a long-term investment perspective in regards to the absolute return allocation. * * * * *END OF INDIVIDUAL ITEMS AGENDA * * * * * 6

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