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

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1 ORANGE COUNTY EMPLOYEES RETIREMENT SYSTEM BOARD OF RETIREMENT 2223 E. WELLINGTON AVENUE, SUITE 100 SANTA ANA, CALIFORNIA INVESTMENT MANAGER MONITORING SUBCOMMITTEE MEETING 9:00 a.m. MINUTES The Vice Chair called the meeting to order at 9:07 a.m. and read the opening statement into the record. Attendance was as follows: Present: Also present: Chris Prevatt, Chair; Frank Eley, Vice Chair; Roger Hilton, and David Ball Steve Delaney, Chief Executive Officer; Girard Miller, CFA, Chief Investment Officer; David Beeson, Investment Officer; Adam Cheng, Investment Officer; Stina Walander- Sarkin, Investment Analyst; Anthony Beltran, Visual Technician; and, Julius Cuaresma, Recording Secretary A. CIO COMMENTS Mr. Prevatt arrived at 9:09 a.m. Mr. Miller gave an overview of the day s agenda and future meetings. B. INDIVIDUAL MANAGER PRESENTATIONS Mr. Beeson briefly introduced City of London. CITY OF LONDON INVESTMENT MANAGEMENT COMPANY Presentation by Todd Fawaz, Barry Olliff, and Oliver Marschner The key highlights of the presentation were: Firm update: City of London manages approximately $3.7 billion, primarily for institutional investors. The emerging market (EM) closed-end strategy represents 82% of assets under management (AUM). The balance in AUM is across the following closed-end funds: (1) developed markets; (2) frontier EM; and (3) and global tactical asset allocation. Employees own approximately 22.5% of the firm. City of London trades on the London Stock Exchange under the ticker CLIG. The firm has not had any significant departures over the last two years.

2 Market Overview: Global growth, particularly in China, has stifled EM equity in City of London has relatively outperformed yet their portfolio s weighted discount has increased from % to -15.2%. In 2015, country allocation and currency movements have contributed positively to performance. Underweight positions to South Africa rand and Brazil real dampened losses as those currencies depreciated during the year. Discount movements contributed to the underperformance of the portfolio; specifically, China A-Shares have widened significantly, detracting meaningfully from performance. Outlook for 2016: Despite the challenging EM backdrop and sluggish global growth, investors have rebalanced back into EM as valuations seem compelling and therefore City of London asset flows fortunately have been stable. Though EM appears underpriced, EM is clearly out of favor. Portfolio strategy: Rather than directly trading in underlying individual stocks, City of London trades in closed-end funds that own stocks. The manager generates alpha by exploiting closedend funds intraday and intraweek volatility. This volatility enables the manager to buy closed end funds perceived to be trading at a discount to net asset value (NAV). Historically, approximately 2/3 of the manager s performance is derived from this discount (bottom-up analysis of closed-end fund managers), with the balance from country allocations (utilizing proprietary top-down, macro EM country rankings). The fund seeks out closed-end funds with good board members who distinctly provide good governance who ideally undertake corporate actions (i.e., tender offerings, IPOs, rights offerings, buybacks, distributions) that narrow the discount to NAV. The fund is not looking at underlying stocks. The portfolio will hold between closed-end funds, each of which hold an average 60 securities, providing a total look-through exposure to 3,500 to 4,500 stocks. Performance: Given the investing climate specifically in EM, City of London s performance on an absolute basis is less than ideal. Relatively speaking, the manager has favorably compared to the MSCI Emerging Markets Index: for the last 12 months, as of September 30, 2015, while the MSCI EM slipped 19.3%, City of London declined 17.9%. Since inception, on an annualized basis, the benchmark has lost 10.8%, while the manager has only lost -7.5%. This results in a ranking of 31st percentile in NEPC s EM equity universe. Mr. Miller: After visiting the manager s office, the manager s technical edge is in their minute to minute estimate, real time proprietary valuation of NAV versus the price the rest of the world sees at the end of the trading day. The manager arbitrages intraday volatility. Mr. Ball: How does currency risk play a factor in the portfolio? Mr. Oliff: Currency risk is considered deeply, as trading an international stock carries individual stock risk and currency risk. So trading in international closed-end funds naturally includes those risks. Mr. Miller expects that should there be an upward move in EM, the discount in NAV will consequently shrink. This could eventually call for a Committee discussion on rebalancing OCERS EM investments, particularly with respect to City of London, if and when we finally see improvement in EM. Other EM managers will benefit from this beta index move; but City of London will arguably benefit twice from such a market move, from the beta index rally as well as their alpha generated from the discount compression. 2

3 Mr. Oliff agreed and prefers that investors take their profits in such scenarios due to the increasingly limited opportunity set. Mr. Eley pointed observed that it is the same structural story of asymmetric risk: in 2008, EM sold off initially and far worse than the U.S. post the 2008 collapse, EM rallied, but so did the U.S. More recently, it is the same story as 2008: EM sells off initially and far worse than the U.S. Mr. Hilton left at 10:02 a.m. The Committee recessed at 10:05 a.m. The Committee reconvened at 10:19 a.m. AEW Presentation by Jonathan Martin, Pamela Herbst, Candida Hoeberichts, and Maureen Joyce Mr. Beeson introduced AEW. OCERS is a seed investor in their fund and consequently is charged reduced fees with a blended rate of 57 bps since the original investment. Mr. Beeson stated RVK s concerns with AEW: (1) style drift from core to non-core and; (2) valuations based upon cap rate compression and not on net operating income (NOI) growth. The key highlights of the presentation were: Firm update: AEW is an independent, wholly owned subsidiary of Natixis Global Asset Management. Across the globe, AEW currently has $48.9 billion in assets under management dedicated to three real estate investment disciplines: direct equity investment (core and valueadd property investments and funds), the AEW Partners series of opportunistic private equity partnerships, and listed real estate securities. AEW has 278 professionals in 10 offices around the world. AEW Core Property Trust (CPT) has a current gross property value of $7.7 billion. OCERS committed $100 million to CPT in the 4 th quarter of 2008 and an additional $37 million in the first quarter of OCERS current investment in the fund is $237 million, which is net of approximately $47 million in dividends paid. The firm has not had any significant departures over the last two years. Market Overview: Due to high core real estate valuations, the portfolio presently has a 3%, $170 million, non-core, build to core allocation; this includes mezzanine debt. Prospectively, such loans are not as attractive as they recently were, and consequently, this is gradually being paid off. Thus far, these investments have generated an 11% Internal Rate of Return (IRR). The mezzanine debt is by definition, riskier, but also potentially has more upside the manager uses this allocation to stay competitive as their peers have drifted away to more non-core real estate investments to amplify returns in this single digit environment. Outlook for 2016: The manager has successfully implemented the investment strategy of investing primarily in Tier-1 assets in Tier-1 markets, while simultaneously targeting opportunities in sub Tier-1 major markets expected to benefit from the rebounding U.S. economy. Further, and to a lesser degree, the manager continues to use their non-core capacity to selectively pursue limited development of core assets in situations where it is difficult to buy and where they can develop at a significant return premium to current stabilized cap rates. 3

4 Portfolio Strategy: The manager invests in high quality properties in high class markets. Their macro-economic (i.e. local employment rates), top down lens seeks to find industry trends and themes. This is coupled with bottom up analysis and underwriting that focuses on, but not limited to, the asset s physical condition and tenant creditworthiness. Generally speaking, their investment process filters down to an overall emphasis on highly liquid, high income, bi-coastal locations. Performance: Since inception, CPT s return has exceeded the benchmark by 90bps (CPT s inception in 2009 exploited the real estate opportunities in the core space, post the 2008 recession); in all other time periods, however, performance has lagged. CPT s performance has also lagged other OCERS core managers over all time periods. AEW has disclosed that in one of the real estate private equity funds (OCERS is not an investor), they are currently in litigation with a joint-venture partner. This is a contract dispute. Mr. Prevatt opened up the forum to the public. AFL CIO Secretary Treasurer, Local 11: AEW is the real estate advisor for the Westin Long Beach. Workers at this specific property have demanded a fair organizing process to decide on unionization. There is boycott at this hotel, due to a class action lawsuit alleging that this hotel location has violated state wage and hour laws. Ms. Herbst stated that AEW is an investment fiduciary advisor to a public fund in a separate account that includes this Westin Long Beach property under labor disputes. AEW respects the employees right to unionize, but through the secret ballot process of the National Labor Board. Mr. Eley emphasized, as a fiduciary, that governance has come a long way and the goal is to do the right thing; however, the conundrum of socially responsible investing versus investing in the best risk-adjusted asset still remains. The Domini Index (index of companies that meet certain social and environment al standards) significantly underperforms the S&P 500 Index. OCERS is responsible for paying those benefits, but, by definition, due to the limited opportunity set of socially responsible investments, this structurally limits the return potential of OCERS portfolio. Mr. Ball commented that the manager s investments are inherently good the portfolio s assets are hard to find and valuable with attractive cash flows. That in mind, prospectively, opportunistic real estate is where OCERS should focus their time and money. Currently, there is no need to keep reinvesting the dividends. Mr. Eley opined his preference is to not be in opportunistic real estate again. Mr. Prevatt asked if the manager is in fact exhibiting style drift by exceeding their investment parameters with regards to core versus non-core. Mr. Miller stated that the manager is operating within their parameters. Mr. Ball emphasized this drift is effectively a higher quality drift than their peers non-core drift. Mr. Miller explained that regardless of whether or not the investment property is labeled core or not, the end product is a high quality product. This style drift may not actually be a bad thing; many of the managers peers are undertaking similar investments in order to augment returns. 4

5 Mr. Miller commented that in 2016 there will be a full Committee discussion on real estate, core, non-core, value-add, and opportunistic strategies as the Committee is evidently divided over this investment allocation. The Committee recessed at 11:30 a.m. The Committee reconvened at 11:39 a.m. BRIGADE CAPITAL MANAGEMENT Presentation by Robert Brady and Donald Morgan III, CFA Mr. Beeson introduced Brigade, where OCERS has two investments: (1) $168 million in Brigade Leveraged Capital Structures (LCS) Fund (multi-strategy credit hedge fund) and; (2) a May 2015 commitment of $100 million to Brigade Energy Opportunities Fund. This presentation s focus is on LCS, which has struggled of late. In particular, the manager s long book has erased strong portfolio gains generated earlier in the year. The concern is the lack of the short book s downside protection during the recent sell-off. The firm has not had any significant departures over the last two years. In fact, the manager has focused time on boosting their investment team, particularly with regards to traders around the globe. Mr. Miller reported that over time, part of this account could become a funding source for OCERS direct lending allocation in our Diversified Credit portfolio. That said, this is probably not the best time to redeem from Brigade, which would lock in losses and prevent OCERS from capitalizing on the inherent value in the long book. The key highlights of the presentation were: Firm update: Brigade was founded in 2006 by Donald Morgan III (Managing Partner and Lead PM) and Patrick Kelly (President and COO) and registered with the SEC in Brigade is majority owned by 17 of its senior staff with Donald Morgan III owning 40%. Asset Management Finance LLC has a passive, minority ownership in Brigade that does not affect the operations or management of Brigade s business. Assets under management in various credit strategies are approximately $16.0 billion. Brigade currently manages $2.9 billion within LCS. Brigade employs 111 people: there are 50 investment professionals, including 8 traders, across the globe in New York, London, and Tokyo offices. The manager believes its firm size and depth of investment professionals across the globe translates into an investment edge relative to peers. Market Overview: Brigade s performance struggles have largely occurred over the last four months as the high yield market declined precipitously. After beginning 2015 with a positive 6.1% return through May, the manager lost 10.7% from June 2015 through September 2015, resulting in a year-to-date return of -5.3% versus -0.2% for the index. The following sub-strategies were the main detractors: Structured credit (-220 bps), long/short credit (-320 bps), and distressed trades (-200 bps). Outlook for 2016: Brigade remains constructive on sectors within high yield. Brigade believes that the broader investment opportunity set in leveraged finance is the most interesting it has been since the financial crisis. During the recent September volatility, the manager re-underwrote each 5

6 position: (1) added to high conviction names and (2) formulated a shopping list of long and short candidates where should they move materially up or down, the manager already knows what to do. Brigade also reduced their gross equity exposure and initiated new short positions in companies that held up well in the last few months. Portfolio Strategy: LCS portfolio is a function of appropriate relative value trades through the credit cycle. When the cycle is at its widening / bear market stage, the manager ramps up the short book while also increasing long exposure in distressed situations. As that cycle of spreads start shift to a tightening / bull market regime, the manager increases long exposure, (with some emphasis on the leveraged equities) and reduces short exposure. The manager trades across the entire capital structure domestically and globally; given the manager s depth and strength of experience, the portfolio will include the following securities: long/short high yield, distressed debt, capital structure arbitrage, and long/short leveraged equities. The manager will seek to provide liquidity to the market when the fund is compensated to do so. Performance: While the manager s objective is to generate 8-12% net returns over a credit cycle with low volatility, Brigade has trailed the HFRI Relative Value Index over the last 12 months and since inception. As of September 30, 2015, the fund absolutely and relatively underperformed, losing -7.7% over the prior 12 months versus the index s decline of -1.2%. Since inception, while the index has generated an absolute return of 3.4%, Brigade is essentially flat at - 0.2%. Though shorts contributed +280 bps and exhibited significant returns on invested capital (ROIC), there were just not enough shorts on in the book to compensate for long losses. Mr. Miller: Why is there no performance hurdle? Mr. Morgan: Rather than offering a hurdle, Brigade provides quarterly liquidity. Mr. Eley: What are your thoughts on a vehicle with a lock-up and a hurdle? OCERS appreciates the hedge funds undoubtedly fear that clients redeem en masse. Further, at the time when LCS would like to add to its leveraged positions, is exactly the time you cannot due to redeeming clients. Mr. Morgan: We are trying to be proactive, and will therefore think about this option, i.e., longer lockup, lower fees, and hurdle rates. Mr. Miller: OCERS is willing to play a seed capital role in this type of investment vehicle. (Post-script: Brigade has engaged in fee discussions with the CIO along those lines.) A motion was made by Mr. Eley, seconded by Mr. Ball to receive and file the manager presentations. The motion carried unanimously. C. CIO COMMENTS The CIO had no further comments. PUBLIC COMMENTS: None COMMITTEE MEMBER COMMENTS: None 6

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