To: Investment Committee From: Daniel L. Allen and Gabriel Ayoroa Date: April 18, 2013 Re: NCM Capital Management Annual Review and Recommendation

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1 State Universities Retirement System of Illinois Serving Illinois Community Colleges and Universities 1901 Fox Drive Champaign, IL (217) (217) (FAX) Investment Department To: Investment Committee From: Daniel L. Allen and Gabriel Ayoroa Date: April 18, 2013 Re: NCM Capital Management Annual Review and Recommendation Overview and Recommendation In March 2005, NCM Capital Management (NCM) was hired as a mid cap growth manager in the Manager Diversity Program (MDP). NCM was initially funded with $12.5 million. In February 2008, NCM received additional funding of $25 million. NCM was allocated an additional $15 million in October 2011 as a result of the U.S. equity structure study. As of December 31, 2012, NCM managed $68 million for SURS, which represents approximately 13.6% of the U.S. Equity component of the MDP and 5.2% of the Manager Diversity Program. NCM was most recently placed on the Watch List in September 2012 due to organizational concerns regarding a high level of personnel turnover in the firm s investment team and a pronounced decline in the firm s assets under management. NCM has continued to qualify for Watch List status since that time. SURS staff performed an on-site due diligence meeting with NCM in Durham, North Carolina on March 26, 2013, to address organizational and performance concerns. SURS staff and Callan Associates have lost confidence in the NCM organization. Jointly, Staff and Callan recommend that NCM be terminated as a domestic equity manager for the following reasons: 1) High level of investment personnel turnover 2) Considerable decrease in AUM 3) Change in investment process 4) Poor investment performance relative to the benchmark, the Russell Midcap Growth, and peer group of mid cap growth equity managers Organization NCM Capital Management registered with the SEC in August of Currently, Maceo K. Sloan, CFA, Chairman, Chief Executive Officer and Chief Investment Officer, owns 65% of the firm. The remaining 35% is owned by the employees at the firm, who qualify, with at least one full year of employment, for participation in the employee ownership program. Currently, 68% of all qualified employees participate in this program. There have been no changes in ownership or management at NCM Capital in the past year. Staffing NCM currently employs nine investment professionals and twenty-one total staff. Maceo K. Sloan continues to serve as portfolio manager for the SURS account. Maceo plans to transfer his portfolio management duties to Lorenzo Newsome, Co-CIO by the end of the year. Lorenzo

2 Newsome has a fixed income background and does not have a proven track record managing mid cap growth equity portfolios. Moreover, NCM has experienced a high rate of personnel turnover. Below is a table showing personnel turnover since Year Name of Employee Responsibilities Turnover 2007 Shayne John Equity Portfolio Manager Departure 2008 Hunter Brackett Equity Research Analyst Hire 2008 Rick Jones Equity Research Analyst Hire 2008 Michael Custer Deputy CIO Hire 2008 James Peterson Equity Portfolio Manager Departure 2010 Hudson Boyer Equity Research Analyst Hire 2010 Benjamin Kadlec Equity Research Analyst Hire 2010 Ron Elmer Director of Equity Research Departure 2010 Patrick Lyons Equity Research Analyst Departure 2011 Benjamin Kadlec Director of Research Promotion 2011 Hudson Boyer Equity Research Analyst Departure 2011 Hunter Brackett Equity Research Analyst Departure 2012 Lorenzo Newsome, Jr Portfolio Manager Co CIO Hire 2012 Shontelle McGuire Equity Research Analyst Hire 2012 Michael Custer Deputy CIO Departure 2012 Zack Schroeder Equity Research Analyst Departure 2013 Benjamin Kadlec Director of Research Departure Clients/Assets NCM s assets under management continued to decline significantly over the past year. As of December 31, 2012, NCM managed approximately $943 million. As of December 31 Assets in Mid Cap Growth ($ in millions) Assets Under Management ($ in millions) , , , , , Over the past year, NCM lost six mid cap growth and six broad growth accounts while gaining no new accounts. The total loss in assets was $213 million.

3 Investment Process Changes In 2010, the investment process was changed to accommodate a technical analysis newsletter by DiBiaso and Edgington. This change in the investment process was introduced to address sector allocation deficiencies experienced at NCM after Portfolio Manager Shane John left the firm in The newsletter was subsequently replaced by macroeconomic and technical reports by Market Trend Investors in Investment Performance The NCM portfolio underperformed the Russell Midcap Growth Index by 685 basis points in The primary driver of NCM s underperformance during 2012 was poor stock selection in information technology, industrials and materials. In calendar years 2011 and 2010 NCM s underperformance was also due to poor stock selection. The NCM portfolio lagged the benchmark across most time periods ending December 31, 2012, as shown in the below performance table: As of December 31 Calendar Year Performance Russell Midcap Growth Relative Performance NCM Capital Trailing Period Performance 1 1 Year Year Year Since Inception The performance charts following the review are from the December 31, 2012 Callan performance book. The first chart compares NCM s performance and peer ranking in the mid cap growth equity universe over various time periods. For the year ending December 31, 2012, NCM ranked in the 86 th percentile for the one-year and in the 86 th percentile for the prior five years. The second chart displays the NCM portfolio s quarterly relative return and cumulative five year return versus the benchmark. 1 Periods longer than one year are annualized 2 Inception is March 31 st, 2005

4 The third chart compares risk statistics calculated for the portfolio versus a peer group of other mid cap growth equity managers. The chart confirms that the absolute risk of the NCM portfolio, as measured by standard deviation, is higher than 84% of other managers in the mid cap growth equity peer group. The last chart compares risk adjusted performance of the NCM portfolio relative to the peer group of other mid cap growth equity managers. The chart confirms that once adjusted for risk, NCM ranked at the bottom quartile and in the 84 th percentile, as measured by a negative 0.52 information ratio, which measures the portfolio manager s ability to generate excess returns relative to the benchmark while maintaining consistency of returns. Consultant Comments NCM Capital Management (NCM) has experienced significant personnel turnover and inconsistent performance relative to benchmarks. In September 2012, Michael Custer, former Deputy CIO and Zack Schroeder, former Equity Research Analyst, were terminated. The firm continued to experience professional turnover more recently, as Benjamin Kadlec, former Director of Research, also left the firm. In addition, Lorenzo Newsome, Jr. and Shontelle McGuire (co-cio and Equity Research Analyst, respectively), joined the firm during Sector research responsibilities have been reassigned as a result of these changes. Given NCM s reliance on sector leaders for specific segments of the portfolio, Callan believes these changes are of concern. Another area of concern is that Mr. Newsome s recent practical experience is primarily focused in high yield fixed income management. We believe he will need time to make a full, effective transition into equity management given his responsibilities as co-cio of the firm and his role as sector leader for technology, consumer staples, and industrials. NCM s inconsistent implementation of risk controls within technology is also of concern. Their internal guidelines permit up to 15% exposure in out of benchmark positions; however, positions in this segment have reached close to 30% - we do not see evidence of effective risk control systems in place to contain unintended sector bets. The portfolio s underperformance has been mainly attributable to security selection and an overweight position in technology. Mr. Newsome has been deeply involved with the mid cap growth strategy, making significant adjustments within the technology segment of the portfolio to reduce its out of benchmark holdings. NCM indicated they intend to keep their technology exposure within acceptable parameters going forward. However, given the high level of professional turnover the firm has experienced, and the loose risk controls inherent in the investment process, we do not have confidence the firm is well positioned to provide consistent performance relative to benchmarks and on a risk-adjusted basis going forward. Recommendation SURS staff and Callan Associates recommend that NCM Capital Management be terminated as a domestic equity manager.

5 Performance vs CAI Mid Cap Growth Style (Gross) 25% 20% 15% (39) (56) 10% (86) (82) 5% 0% (37) (10) (43) (86) (5%) Last Quarter Last Year Last 3 Years Last 5 Years 10th Percentile th Percentile Median th Percentile (0.73) th Percentile (1.79) (0.33) NCM Capital (0.12) Russell MidCap Growth Idx Cumulative and Quarterly Relative Return vs Russell MidCap Growth Idx 10% Relative Returns 0% (10%) (20%) NCM Capital CAI Mid Cap Growth Style

6 35% 30% 25% 20% 15% 10% 5% 0% (26) (25) (29) (39) Standard Downside Residual Tracking Dev iation Risk Risk Error 10th Percentile th Percentile Median th Percentile th Percentile NCM Capital (0.2) (0.4) (0.6) (0.8) (86) (87) (84) Information Sharpe Excess Return Ratio Ratio Ratio 10th Percentile th Percentile Median (0.06) 0.09 (0.09) 75th Percentile (0.36) 0.01 (0.41) 90th Percentile (0.56) (0.03) (0.57) NCM Capital (0.52) (0.02) (0.51)