Investment Performance Review Quarter Ended December 31, 2011

Transcription

1 Investment Performance Review Quarter Ended December 31, 2011 I. EXECUTIVE SUMMARY Market challenged by highly volatile risk on/risk off environment during was dominated by investors shifting perceptions of the pace of the current global economic recovery. Markets moved higher through mid-year, only to give back gains by late summer as Euro-zone and U.S. debt uncertainties introduced deepening concerns of a protracted slowdown. Investors fled risk assets in the ensuing bear market, which lasted into September. As central bankers became more unified in their support for monetary/quantitative easing, signs of growth stabilization began to emerge by the end of the fourth quarter, particularly reflected in U.S. economic growth indicators. As a result, the S&P 500 and Dow saw double digit gains of 11.8% and 12.8%, respectively for the quarter. U.S. Equity markets circled back to levels similar to those at the start of the year posting modest gains of 1.0% for Russell 3000 and 2.1% for S&P. U.S. equities stood out among global markets for the year, eking out modest gains, whereas most international markets ended the year with double digit losses with the MSCI World ex. U.S. Index off -12.2%. (See Attachment IA for market performance.) Plan portfolio generated positive excess return (Alpha) in the quarter and calendar year Total fund assets of $68.6 billion were flat in a year when non-u.s. Equity markets fell by double- digits. The performance improved in the fourth quarter as all plans posted solid performance in the fourth quarter. (See Attachment IIA and IIB for portfolio performance.) The total UC Entity gained 0.62% for the calendar year, 113 bps ahead of policy. For the quarter, the UC Entity added 4.18%, 16 bps ahead of policy. Both the UCRP (Retirement) and GEP (Endowment) had strong relative performance for the year. UCRP ended the year with a flat return, exceeding the benchmark by 90 bps, while GEP declined -0.76% and exceeded the policy by 239 bps. For the quarter, the UCRP (Retirement) portfolio performed in line with the benchmark, increasing 4.96% and GEP rose 3.89 ahead of policy by 43 bps. Strong security selection, particularly in Absolute Returns, was the key driver of relative gains for the full calendar year and quarter in both funds. Asset allocation detracted modestly, as we remained underweight core fixed income and TIPs in a year when Treasuries rallied strongly. (See Attachments IIC and IID for attribution.) The fixed income portfolios had strong absolute performance In the wake of deflationary fears, our Total Core Fixed Income and TIPs delivered strong total returns for the calendar year. The UCRP Core Fixed Income gained 7.3% but lagged the benchmark by -57 bps while TIPs surged 13.76%, 20 bps ahead of policy. Our portfolio s modest tilt towards credit over government bonds reduced our relative return as the general flight to safety rewarded treasuries. For the quarter, the UCRP Core Fixed Income modestly outperformed the benchmark gaining 1.20%, 8 bps ahead of policy, while GEP Core Fixed Income gained 1.05%, -7 bps behind the benchmark. Riskier fixed income assets outperformed U.S. Treasuries in the December quarter, 1

2 as better U.S. economic data, an insatiable appetite for yield, and a strong supply-demand backdrop overcame ongoing concerns about the European debt crisis. Fundamentals began to emerge in the fourth quarter, benefitting active public equity In recent years stocks have been trading less on their individual business performance and more on economic news. That created a challenging headwind for active managers in 2010 and 2011; however, late in 2011 that pattern began to show signs of breaking down, with stocks increasingly trading on their business performance rather than economic data. As a result, the active U.S. and Developed Market equity portfolios outperformed in the fourth quarter of The composite U.S. Equity Portfolio across both UCRP and GEP gained 12.02% for the quarter, inching ahead of the benchmark return of 12.00%. The Active U.S. Equity portfolio gained 12.22%, slightly outpacing the benchmark by 0.22%. In 2011, the Active portion of the U.S. Equity portfolio returned 0.24%, lagging the policy benchmark, which returned 0.58%, by -0.34% for the year. The Non-U.S. Developed Equity Portfolio across all plans rose 3.55% during the quarter while the benchmark returned 3.51%. Active managers returned 3.75%, outperforming the index by 0.24%. In 2011 the active portion of the Non-U.S. Developed Markets portfolio returned %, outperforming the policy benchmark, which declined %, by 0.40% for the year. Alternatives helped the portfolio achieve strong CYTD returns while quarterly results lagged high beta assets Given the heightened level of uncertainty in market direction in 2011, the plans investments in alternatives helped diversify our equity beta risk within the traditional long only asset classes. For the QTD, as risk assets rallied, alternative returns generally lagged the overall plan return. However, Absolute Returns drove relative returns higher, as manager selection outpaced the hedge fund policy returns. For the quarter, Private Equity declined -2.66% in UCRP and -2.68% in GEP. Private Equity s valuations are lagged a quarter and reflect reduced public market valuations over the September quarter, when risk assets fell sharply. For the full calendar year, the overweight in private equity helped relative and absolute returns, given the Private Equity gains of 12.51% for UCRP and 11.22% for GEP in a year when risk assets fell. Absolute Returns quarterly gains were strong, with a 1.38% gain relative to the benchmark loss of -1.36%. Active returns for the year were good, -2.60% relative to the policy return of %. The Cross-Asset Class ( CAC ) strategies combining UCRP and GEP gained 4.82% for the quarter, well in line with the plan policy return of 4.78%. CAC has been in place since April 1, The strategy gained 6.11% FYTD while the policy benchmark declined -5.63%. The strong alpha was primarily driven by a core strategy allocating equivalent risk capital across diversified macro scenarios. The Private Real Estate Portfolio continued its steady recovery. The UCRP gained 1.35% and GEP added 0.97% in the quarter. The Real Estate portfolio fell short of the benchmark by -1.96% in UCRP and -2.34% in GEP. Public Real Estate portfolio returns were more robust, and rose 7.6% for both plans during the quarter, outperforming the policy benchmark return of

3 II. MARKET OVERVIEW PUBLIC EQUITY MARKET OVERVIEW U.S. Equity Markets snapped back from a chilling decline of -15.5% in the third quarter to rally 12.1% in the final quarter of For all of 2011 U.S. stocks edged up a scant 1.0%, based on the Russell 3000 index. For all of 2011, Utilities surged 19.0%, outperforming the broader market by 18.0%. Consumer Staples also significantly outperformed, gaining 13.9%. Financials and Materials were the worst performing sectors for the year, falling -13.9% and -9.3%, respectively. In 4Q2011, better than expected economic news on many fronts, including unemployment ebbing lower, an increase in housing sales, decent economic growth, and a decline in recessionary fears that were prominent in the prior quarter, all contributed to the strong advance in U.S. equity markets. Value style investing outperformed Growth for the quarter. The Russell 3000 Value Index surged 13.3% during the quarter, while the Russell 3000 Growth Index gained 10.9%. For all of 2011, however, Growth edged Value, 2.2% to -0.1%. Small cap stocks outpaced large stocks in 4Q2011. The Russell 2000 Index of smaller companies surged 15.5% during the quarter, while the Russell 1000 Index of larger stocks gained 11.8%. Non-U.S. Developed Markets experienced much smaller gains than U.S. markets, advancing just 3.5% for the quarter. For all of 2011, international stocks sank -12.2%. Weaker economic growth in Europe and Japan, high debt levels of European banks, and worries over sovereign debt and the euro, contributed to international stocks significantly lagging U.S. equities both for the quarter and in In their local markets international stocks gained just 3.0% for the quarter. Mild strength in foreign currencies added 0.4% to total return for the quarter. For all of 2011, in their local stock markets international equities sank -12.0%, while currencies trimmed another -0.2% for a total return of -12.2%. Country returns varied by extraordinary amounts during the quarter, primarily driven by fears of default or hopes for the resolution of local debt insolvency. Greece sank -25.1% and Portugal fell -7.1%. On the other hand, Ireland soared 26.4%, and Denmark and Norway gained 11.7% and 11.1%, respectively. Sector returns varied considerably for the quarter. Energy surged 14.3%, outperforming the index by 10.9%. On the other hand, Utilities declined -4.5%, lagging the benchmark by 7.9%. Financials underperformed for the quarter, edging up just 0.2%, and considerably underperformed for the year, declining -19.6%, an underperformance of 7.4%. Emerging Markets gained 4.4% during the quarter, slightly outpacing Non-U.S. Developed Markets but substantially trailing the U.S. market. For all of 2011, emerging markets declined -18.4%, slightly worse than Non-U.S. Developed Markets, and much worse than U.S. markets. For the year 19 out of 21 emerging market countries declined. The exceptions were Indonesia, which gained 6.0%, and Malaysia, which inched up 0.1%. The countries with the largest declines were Egypt and India, which sank -46.9% and -37.2%, respectively. Among other notable emerging market countries, Brazil underperformed with a loss of -24.9%. Peru, Malaysia, and Thailand were the best performing countries during the quarter, rising between 11.5% and 12.5% each. Brazil and China outperformed the index, gaining 8.8% and 8.1% for the 3

4 quarter. But several countries experienced double digit declines in the fourth quarter. Turkey and India were the worst performing countries, declining -15.7% and -14.2%, respectively. Sector returns exhibited little dispersion for the quarter. But for the year, sector variances were large. Consumer Staples significantly outperformed by 19.8%, as the sector bucked the overall downward trend by inching up 0.7%. Telecom, another defensive sector, lost just -4.5%, which equals an outperformance of 14.6%. Materials and Industrials, two highly cyclical sectors, fell the most, declining -29.3% and -27.0%, respectively. Currency returns were mostly quite small during the quarter, with one exception: India s currency fell -7.2% due to tightening fears. For the year, however, many currencies contributed large losses to their country s total return. Brazil s currency fell -8.3%, India s fell -11.7%, Mexico s declined -11.4%, South Africa s fell -18.2%, and Turkey s currency sank -14.4%. FIXED INCOME MARKET OVERVIEW Core Fixed Income Fixed Income markets had a positive bias in the quarter, as the Barclay s Aggregate Index rose 1.1%. Corporate bonds and CMBS were the best performers for the month. Longer maturity bonds outpaced shorter, boosted by the Fed s stance and Operation Twist. For the calendar year, the Barclays Aggregate gained 7.8% with the Barclays Long Government Index soaring 29.2%. TIPS Within the government sector: after reaching a new low yield of 1.8%, U.S. Treasuries traded in a narrow range around 2%. Price returns were basically flat in the quarter. The Fed reiterated plans to maintain low rates at least through the end of The Credit Sector rally continued on both an absolute and relative basis in Q4, as investors favored U.S. corporate bonds over Treasuries and European sovereigns. The Barclay s Collateralized Index was up 1.0% in the quarter, with CMBS putting in a strong performance of 3.1%. For the quarter, mortgage backed securities in the Barclay s Collateralized Index returned 0.88% modestly above treasuries. However, the government s announcement to refinance borrowers undermined performance of non-agency (not backed by Fannie or Freddie) securities. TIPS outperformed nominal Treasuries of similar maturity in Q4 as continued expansionary monetary policy caused investors to price inflation expectations higher. Breakeven inflation rose about 20 bps across the yield curve as real yields on TIPS fell more than on comparable maturity Treasuries. Real yields remain negative, with10 Year TIPS ending the quarter at -0.11%. For the year, the TIPs index rallied 13.6%. Emerging Markets Debt External Emerging Markets Debt performed second only to High Yield, with a strong return of 4.7% for the JPM EMBIG Diversified Index. Local fixed income indexes were slightly up, with the J.P. Morgan GBI-EM index gaining 0.5% for the quarter, but down -1.8% for the year. Emerging market currencies declined versus the dollar. In Q4 lagging currencies included the Hungarian Forint, Indian Rupee and Czech Koruna while the Brazilian Real and the Korean Won showed relative strength. 4

5 In external debt, Latin America with a Q4 return of 7.04% was the strongest region led by Argentina, Venezuela and Columbia, while Asia returned 4.97%. Both regions were seen as somewhat safe havens versus the European index members. The weakest performers were Egypt (-10.41%) on rising political tensions, and Hungary (-3.98%) over doubts about ongoing IMF funding. The High Yield Market The High Yield benchmark, Merrill Lynch Cash Pay returned 6.2% over the last three months. High Yield returns in the fourth quarter were similar across ratings categories. High Yield mutual funds had net inflows of $11 billion for the quarter representing a 5% increase in assets under management as the high yield asset class remained the beneficiary of investors searching for yield. $68 billion in new issuance in Q4 was easily absorbed. For the year, ML Cash pay gained 4.5%. Throughout the quarter 14 companies defaulted, most of which occurred in November, and for the year only 27 companies defaulted for a total of $21.2 billion. This brought the twelve-month default rate to 1.8% for high yield bonds and 0.4% for leveraged loans, well below long-term averages. The financial sector continues to be one of the most dynamic sectors in the market with Insurance (+10.45%), Banks & Thrifts (+9.72%), and Diversified Financials (+6.31%) all exhibiting strength during the quarter. 5

6 III. UC PLAN PERFORMANCE (Attachment II) UC Entity ended the quarter with $68.6 billion in assets. The Treasurer s Office achieved solid total performance at the aggregate level. For the quarter ended December, the entity gained 4.18%, 16 bps above the policy return of 4.02%. During calendar year 2011, the entity gained 0.62% ahead of the policy by 1.13%. Across all plans, we have accomplished the objective of maintaining a disciplined and proactive approach to our asset allocation process in conjunction with our liquidity funding needs, particularly within the Retirement plan. This has been particularly beneficial in light of the relatively choppy market environment over the past year. (See Attribution table in Attachments IIC-IID.) UCRP had an ending market value of $39.7 billion. The Retirement Plan performed in line with the benchmark, 4.96% compared to the Policy Benchmark return of 4.98%. The UCRP 2011 return of 0% was 0.90% ahead of policy. Manager Selection contributed positively over the quarter, predominantly coming from Absolute Returns. Fixed Income and Non-U.S. Equity also contributed positively. Following a strong third quarter, hedge funds generated their strongest performance of the year in the fourth quarter amid a rally across a broad range of asset classes. Core Fixed income performed well across all sectors. Credit performed best, as investors looked to extend yield through spread products. Strong security selection was offset by the portfolio s asset allocation this quarter; however, this was mostly due to the lagged effect of private equity valuations. The plan was modestly overweight in private equity, which reflects the equity declines within the third quarter. GEP had an ending market value of $6.3 billion. The Endowment Plan returned 3.89% compared to the Policy Benchmark return of 3.46% for the quarter. Over the year, the GEP returned -0.76%, which was 239 bps ahead of policy. As in UCRP, the endowment benefitted from strong manager selection especially in Absolute Returns, which carries a greater allocation weight in GEP. Given the 23% average weight of the Absolute sector in the Endowment plan, the strong outperformance in asset selection contributed 64 bps to overall returns. STIP ended the fiscal year with $7.3 billion. The STIP returned 0.64%, exceeding its benchmark by 0.60%. CYTD, STIP returned 2.39%, well ahead of the policy by 2.06%. Returns benefitted from effective yield curve positioning. STIP was also able to take advantage of attractive spreads on high quality corporate securities purchased in early 2009 as credit markets began to rally. Securities Lending income continues to add incremental yield to the portfolio. TRIP had an ending market value of $3.6 billion. The TRIP returned 4.8%, 0.19% ahead of policy benchmark returns. During 2011, TRIP gained 4.08%, ahead of policy by 0.28%. Over the fiscal year period, TRIP accomplished the Regents objective of delivering more yield and return to the University s operating portfolio with less risk. The fund s core fixed income asset selection was the primary driver of the gain, adding 37 bps, while overall asset allocation modestly detracted due to a slight underweight in equity and overweight to fixed income. At year end TRIP is 55% exposed to core fixed income and 45% in equities, REITs, and high yield. 6

7 IV. ASSET CLASS PERFORMANCE Equity Portfolio Asset Class Performance (Attachment III) U.S. Equity Portfolio composite comprised of UCRP and GEP, gained 12.02% for the quarter, inching ahead of the benchmark return of 12.00%. The Active U.S. Equity portfolio gained 12.22%, slightly outpacing the benchmark by 0.22%. In 2011 the Active portion of the U.S. Equity portfolio returned 0.24%, lagging the policy benchmark, which returned 0.58%, by -0.34% for the year. The active portfolio has a slight growth tilt, which mildly hurt returns in the quarter as value investing outpaced growth style investing, 13.3% to 10.9%. For the year, though, the growth tilt helped, as growth edged value, 2.2% to -0.1%. The active U.S. equity portfolio was overweight technology by 2%, which mildly hurt returns during the quarter as technology lagged the broader market by 3.2%. For the year, the technology tilt had no virtually impact as technology lagged the market by 0.4%. The active U.S. equity portfolio was underweight giant or mega cap stocks (companies in the Russell Top 200) by 3.4%. The tilt mildly helped returns in the quarter, as giant-sized companies lagged the overall market by 11.6% to 12.0%.. Non-U.S. Developed Equity Portfolio composite rose 3.55% during the quarter while the benchmark returned 3.51%. Active managers returned 3.75%, outperforming the index by 0.24%. In 2011 the active portion of the Non-U.S. Developed Markets portfolio returned %, outperforming the policy benchmark, which declined %, by 0.40% for the year. Emerging Markets Portfolio composite returned 4.26% during the quarter, which lagged the benchmark by -16 bps. In 2011 the Emerging Markets portfolio sank %, outperforming the benchmark, which lost %, by 0.73%. An underweight to China of 3.4% helped returns mildly during the quarter, as China lagged the index by 1.9%. For the year, the underweight had no effect, as China performed exactly the same as the index, losing -18.4%. Fixed Income Portfolio Asset Class Performance (Attachment IV) Core Fixed Income The actively managed Core Fixed Income portfolios had a positive quarter, with UCRP returning 1.20% and outperforming the Barclays Aggregate benchmark return by 0.08%, GEP underperforming by -0.07%, 403b Core outperforming by 0.17%, and TRIP Core returning 2.19% versus its custom benchmark return of 1.56%. Portfolio outperformance was aided by sector allocation, i.e. an underweight in the Government sector and an overweight in the Credit sector. The Government sub-index had a return of 0.84%, while the Credit sub-index returned 1.70%. The Government portfolio underperformed modestly in UCRP and GEP, was flat in TRIP, and outperformed by a small amount in 403bCore. The Collateralized sector contributed to outperformance of 0.43% in TRIP. 7

8 High Yield Portfolio UCRP High Yield returned 6.81%% in Q4 and GEP returned 7.0%, beating the benchmark return of 6.17% by 0.64% and 0.83%. UCRP and GEP returns include both internally and externally managed portfolios. TRIP High Yield (100% internally managed) returned 7.09%, outperforming its benchmark by 1.20%. Emerging Market Debt Portfolio UCRP EM Debt returned 3.96%, in line with the benchmark return of 3.95%. GEP s EM Debt gained 4.24%, ahead of the benchmark by 0.29%. The fund is currently comprised primarily of an internally managed fund and an external local currency debt fund. The internally-managed EM portfolio had a strong return of 4.85%, outperforming the benchmark by 20 bps in the quarter. The externally managed Local Currency EM fund underperformed slightly, returning 0.70% versus 1.11% for Q4. The local currency EM market regained its equilibrium after a horrendous Q3 which saw losses in the sector of over 10%. STIP The STIP income return fund had strong performances in Q4, FYTD and CY 2011 relative to their common benchmark, 2yr U.S. Treasury income return. For these time periods, STIP had returns of 0.64%, 1.23% and 2.39%, generating outperformance of 0.60%, 1.13% and 2.04% respectively. As has been the case for some time, the ability of STIP to invest in corporate securities is the primary factor in its outperformance versus the Savings Fund. With low yields for the forseeable future, STIP outperformance will gradually erode as older investments mature and are rolled into lower, current rates. Alternative Investments Asset Class Performance Alternative Investments primarily with the Absolute Return categories, added value through the year offering much needed diversification in a market environment plagued with macro uncertainty. Over the quarter, the diversified alternatives modestly lagged the overall plan portfolio return, as higher risk assets were rewarded. Private Equity returned -2.66% in UCRP and -2.68% in GEP in the quarter and 12.51% and 11.22% respectively in the calendar year. Private Equity s valuations are lagged a quarter and reflect reduced public market valuations over the September quarter, which was challenging for risk assets. (See Attachment V.) The buyout portfolio s bias toward high quality managers with significant differentiation and operational value-add coupled with an underweight to mega funds continued to be an integral driver of returns during the quarter. The buyout portfolio valuation decline was less severe than the public market comparables due to continued strong operating performance of the underlying companies in the portfolio. Fiscal year to date, venture capital s performance is the result of strong performance in the third quarter driven by the lagged effect of the second quarter s very strong M&A and IPO markets combined with robust investment activity supporting significant valuation increases. Capital calls increased in the quarter, indicating strong deal activity. Distributions were also strong although effectively flat with the prior quarter. The UC prudently managed the pacing of new commitments in 2011, committing $246 million in the quarter ended December 31, and $737 million 8

9 for the 2011 calendar year. This is a significant increase from 2009 and 2010 levels and reflects the high quality of managers the UC saw in the market during the year. The Absolute Return (AR) Diversified Portfolio gained 1.38% relative to the weighted HFRX index which declined -1.36% for the quarter and lost -2.60% in the calendar year, but significantly exceeded the benchmark by 8.93% in both UCRP and GEP during the year. (See Attachment VI.) The primary contributors to the UC AR portfolio in the fourth quarter were Equity Hedge and Event Driven strategies. Long-biased and directional equity-based strategies were the best positioned to capitalize on the substantial rally in risky assets in the fourth quarter, Global Macro strategies also contributed positively to quarterly performance, particularly after the October market rally subsided. Systematic strategies benefited from rules-based algorithms which continued to operate effectively in a market environment characterized by escalating anxiety and indecisiveness. Emerging Markets strategies in the portfolio also performed well during the quarter. Higher dispersion in individual equities in Asian markets relative to the U.S. and Europe provided an enhanced opportunity set in which to capitalize on mispricings in both the long and short sides of the portfolio. The Cross-Asset Class ( CAC ) strategies gained 4.82% for the quarter across both UCRP and GEP, well in line with the plan policy benchmark return of 4.78%. (See Attachment VII.) The CAC strategy is currently driven by a core manager who allocates equivalent risk capital by balancing four key macroeconomic scenarios determined by inflation and growth outlooks. This manager currently represents 2/3 of the portfolio. Over the quarter, each of the four modeled portfolios positioned for high and low growth and inflationary outlooks added positive alpha to the portfolio, given the historically low rate environment. Risk equities were stronger this quarter while bonds still retained their luster. Real Assets returned 0.45% in UCRP and 0.18% in GEP during the quarter ended December 31 for relative returns of -0.05% and 0.48% respectively. The calendar year return was 0.33% for UCRP and -2.51% for GEP. (See Attachment VIII.) For the calendar year, positive performance came from the Energy and Infrastructure portfolios, which were up 7.0% and 1.9% respectively. Negative performance came from the Commodities and Timberland portfolios, which generated respective returns of -4.5% and -2.6%. During the quarter, underperformance was completely attributed to the commodity portfolio which is 18% of the portfolio and lagged the S&P Reduced Energy Index by -1.4%. The commodity portfolio is the only segment of the Real Assets portfolio actively benchmarked against an index since the other assets are illiquid. The Energy segment is 18% of the Real Assets portfolio and positively contributed to performance this quarter with a gain of 2.4%. The Private Real Estate Portfolio continued its steady recovery. The UCRP gained 1.35% and GEP added 0.97%. The Real Estate portfolio fell short of the benchmark by -1.96% in UCRP and -2.34% in GEP. During the calendar year, Private Real Estate had strong total returns but lagged the benchmark. The UCRP gained 17.98%, lagging the benchmark by -0.69%, and GEP soared 19.54%, but fell behind the policy return by -1.25%. (See Attachment IX) Over the quarter, a slower-growth outlook resulted in a reduced performance expectation for higher beta opportunistic holdings. For our global closed end funds, the impact of Euro exposure detracted from performance. In addition, portfolio holdings with exposure to public market valuations (faster to value) subtracted 15 basis points in conjunction with equity market volatility during the period ended 9

10 September 30th. Finally, operating losses related to certain holdings represented the remainder of the drag on performance. The separate account composite, a lagged as well due to underperformance in both income and appreciation. Value-added and opportunistic separate account assets are a smaller, position within the plans, and it is expected that meanwhile they are in transformation, income will not be a primary component of their return attribution. In general, returns for Private Real Estate continued to trend positive, but to a more moderate degree. There remains a more positive outlook than a year ago, but valuations gains moderated in the face of European uncertainty and its potential global impact. The Public Real Estate portfolio returned 7.61% during the quarter and -1.81% for 2011, outperforming the benchmark by 0.87% and 4.98% respectively for UCRP. The portfolio returned 7.63% during the quarter and -2.23% in 2011 for GEP, for an excess return of 0.89% and 4.56%, respectively. (See Attachment IX.) Stock selection was positive in all regions during the quarter, though negative in the industrial and retails sectors. Strong picks in US hotels, office and residential companies aided relative performance there. Regional allocation was neutral, with a beneficial over-allocation to Latin America and Singapore offset by an underweight to Canada and the U.S. In summary, this quarter s gains, which accelerated at year end, partially offset declines from the severe selloff in the late summer through September. Investors in the December quarter were heartened by signs that the European crisis would be averted by central bank and ECB support through monetary easing. Despite heightened levels of market uncertainty, the Treasurer s Office managed to maintain solid performance across all plans over the quarter. In light of the continued uncertainty in today s market environment, the Treasurer s Office believes that maintaining appropriate levels of liquidity and evaluating a balanced risk approach are critical factors in the placement of assets in our plans. 10

11 Attachment IA Market Indices Performance Report Period Ended December 31, 2011 Market Indices Performance Report Period Ended 12/31/2011 US Equity Quarter Returns Jul 1 Dec 31 FTYD Jan 1 Dec 31 CTYD S&P Russell Dow Jones Industrial Average Non US Equity MSCI World ex US MSCI Emerging Markets US Fixed Income Barclays Capital Aggregate Barclays Capital TIPS B of A ML High Yield US Corporate Non US Fixed Income JP Morgan Emerging Market Global Diversified Real Estate NAREIT all share Price Index Cash Equivalents 91 Day Treasury Bill Consumer Price Index

12 Attachment IB Global Equity Market Returns Period Ended December 31, 2011 Global Equity Market Returns Through 12/31/11 110% 100% 90% 80% 70% 60% 50% 40% 30% 6/29/2007 8/29/ /29/ /29/2007 2/29/2008 4/30/2008 6/30/2008 8/31/ /31/ /31/2008 2/28/2009 4/30/2009 6/30/2009 8/31/ /31/ /31/2009 2/28/2010 4/30/2010 6/30/2010 8/31/ /31/ /31/2010 2/28/2011 4/30/2011 6/30/2011 8/31/ /31/2011 WORLD EUROPE PACIFIC UK JAPAN US 150% Emerging Mkt. Equity Market Returns through 12/31/11 125% 100% 75% 50% 25% 6/29/2007 8/29/ /29/ /29/2007 2/29/2008 4/30/2008 6/30/2008 8/31/ /31/ /31/2008 2/28/2009 4/30/2009 6/30/2009 8/31/ /31/ /31/2009 2/28/2010 4/30/2010 6/30/2010 8/31/ /31/ /31/2010 2/28/2011 4/30/2011 6/30/2011 8/31/ /31/2011 EMG MKT EM-ASIA EM-EUME EM-LA ACWI ACWI ex US

13 Attachment IC Risk Trends Period Ended December 31, Implied Volatility - Weekly Apr-07 Jul-07 Oct-07 Jan-08 Apr-08 Jul-08 Oct-08 Jan-09 Apr-09 Jul-09 Oct-09 Jan-10 Apr-10 Jul-10 Oct-10 Jan-11 Apr-11 Jul-11 VIX Index 8 Lehman Bros Monthly Option Adjusted Spreads (OAS) Jun-06 Jun-07 Jun-08 Jun-09 Jun-10 Jun-11 Agg Credit AAA AA A Baa

14 Attachment IIA UC Plan Performance Period Ended December 31, 2011 Monthly Investment Performance Report Period Ended 12/31/2011 UC Entity Return Market Value ($M) Recent Quarter FYTD Calendar YTD UCRP $ 39, % -5.10% 0.00% Policy Benchmark 4.98% -5.50% -0.90% Variance to Benchmark -0.02% 0.40% 0.90% GEP $ 6, % -5.25% -0.76% Policy Benchmark 3.46% -6.43% -3.15% Variance to Benchmark 0.43% 1.18% 2.39% STIP $ 7, % 1.23% 2.39% Policy Benchmark 0.04% 0.10% 0.33% Variance to Benchmark 0.60% 1.13% 2.06% TRIP $ 3, % 0.57% 4.08% Policy Benchmark 4.64% 0.09% 3.80% Variance to Benchmark 0.19% 0.48% 0.28% Total Assets 1 $ 68, % -3.62% 0.62% Entity Benchmark 4.02% -4.19% -0.51% Variance to Benchmark 0.16% 0.57% 1.13% 1) Includes 403(b), 457(b) & DC Plans core investments

15 Attachment IIB UCRP and GEP Asset Class Performance Period Ended December 31, 2011 Total Return Excess Return Market Value Quarter FYTD CYTD Quarter FYTD CYTD ($000) UCRP $39, % 5.10% 0.00% 0.02% +0.40% +0.90% EQUITIES U.S. Equity $10, % 5.05% 0.81% +0.05% +0.27% +0.23% Non U.S. Equity Developed $8, % 16.12% 12.04% +0.12% +0.37% +0.58% Non U.S. Equity Emerg. Mkt $1, % 18.23% 17.69% 0.16% +0.90% +0.73% Global Equity $ % 11.99% 7.80% 0.02% +0.00% +0.09% FIXED INCOME SECURITIES Core Fixed Income $4, % 4.37% 7.27% +0.08% 0.61% 0.57% High Yield Bond $1, % 0.09% 4.84% +0.64% +0.28% +0.34% Emerging Market Debt $ % 0.20% 4.99% +0.01% +0.14% +0.17% TIPS $2, % 7.37% 13.76% +0.15% +0.05% +0.20% ALTERNATIVE ASSETS Private Equity $3, % 1.46% 12.51% N/A N/A N/A Absolute Return Diversified $2, % 4.24% 2.60% +2.74% +4.63% +8.93% Absolute Return Cross Asset Class $ % 6.06% 13.91% 0.17% % % Real Assets $ % 1.96% 0.33% 0.05% 0.75% +0.28% Public Real Estate $ % 8.34% 1.81% +0.87% +3.83% +4.98% Private Real Estate $1, % 6.24% 17.98% 1.96% 1.60% 0.69% Total Return Excess Return Market Value Quarter FYTD CYTD Quarter FYTD CYTD ($000) GEP $6, % 5.25% 0.76% +0.43% +1.18% +2.39% EQUITIES U.S. Equity $1, % 5.32% 0.57% 0.16% +0.00% 0.01% Non U.S. Equity Developed $1, % 16.02% 11.91% +0.09% +0.47% +0.71% Non U.S. Equity Emerg. Mkt $ % 17.85% 17.47% 0.04% +1.28% +0.95% Global Equity $ % 11.99% 7.80% 0.02% +0.00% +0.09% FIXED INCOME SECURITIES Core Fixed Income $ % 4.07% 6.57% 0.07% 0.91% 1.27% High Yield Bond $ % 0.36% 5.22% +0.83% +0.73% +0.72% Emerging Market Debt $ % 0.93% 5.62% +0.29% +0.87% +0.80% TIPS $ % 7.42% 13.88% +0.08% +0.10% +0.32% ALTERNATIVE ASSETS Private Equity $ % 1.28% 11.22% N/A N/A N/A Absolute Return Diversified $1, % 4.24% 2.60% +2.74% +4.63% +8.93% Absolute Return Cross Asset Class $ % 6.43% 13.87% +1.41% % % Real Assets $ % 3.44% 2.51% 0.48% 2.14% 2.19% Public Real Estate $ % 8.74% 2.23% +0.89% +3.43% +4.56% Private Real Estate $ % 6.46% 19.54% 2.34% 1.38% 1.25%

16 Attachment IIC UCRP Quarterly Attribution UCRP Asset Class Performance Attribution Period Ended December 31, 2011 Asset Allocation % Within Asset Class Return % Total EQUITY US Equity (0.01) 0.01 (0.00) Non US Equity (0.02) Emerging Market Equity (0.02) (0.02) (0.04) Global Equity (0.01) (0.00) (0.01) FIXED INCOME Core Fixed Income High Yield Debt Emg Mkt Debt (0.00) 0.00 (0.00) TIPS ALTERNATIVES Private Equity (0.11) 0.00 (0.11) Abs Return Diversified (0.01) Abs Return CAC (0.00) (0.00) (0.01) Real Assets 0.00 (0.00) 0.00 Real Estate (0.01) (0.06) (0.07) Other (0.01) 0.00 (0.01) TOTAL (0.16) 0.14 (0.02) UCRP 1 Year Attribution Asset Allocation % Within Asset Class Return % Total EQUITY US Equity Non US Equity Emerging Market Equity (0.02) Global Equity (0.00) 0.00 (0.00) FIXED INCOME Core Fixed Income (0.15) (0.06) (0.22) High Yield Debt Emg Mkt Debt (0.01) 0.00 (0.00) TIPS (0.11) 0.01 (0.09) ALTERNATIVES Private Equity Abs Return Diversified Abs Return CAC Real Assets (0.00) (0.00) (0.01) Real Estate Other TOTAL

17 Attachment IID GEP Quarterly Attribution GEP Asset Class Performance Attribution Period Ended December 31, 2011 Total Contribution % Within Asset Class Return % Asset Allocation % EQUITY US Equity (0.00) (0.03) (0.03) Non US Equity (0.01) Emerging Market Equity (0.02) (0.02) (0.03) Global Equity (0.01) (0.00) (0.01) FIXED INCOME Core Fixed Income 0.04 (0.00) 0.04 High Yield Debt Emg Mkt Debt (0.00) TIPS (0.01) 0.00 (0.01) ALTERNATIVES Private Equity (0.09) 0.00 (0.09) Abs Return Diversified Abs Return CAC Real Assets (0.01) (0.00) (0.01) Real Estate (0.02) (0.13) (0.14) Other TOTAL (0.10) GEP 1 Year Attribution Total Contribution % Within Asset Class Return % Asset Allocation % EQUITY US Equity 0.01 (0.00) 0.00 Non US Equity (0.00) Emerging Market Equity (0.03) Global Equity (0.01) 0.00 (0.00) FIXED INCOME Core Fixed Income (0.12) (0.09) (0.21) High Yield Debt Emg Mkt Debt (0.01) TIPS (0.11) 0.01 (0.10) ALTERNATIVES Private Equity Abs Return Diversified (0.01) Abs Return CAC Real Assets (0.00) (0.03) (0.03) Real Estate 0.06 (0.05) 0.01 Other TOTAL (0.04)

18 Attachment III PUBLIC EQUITY Period Ended December 31, 2011 Public Equity Returns Quarter Total Return FYTD CYTD Quarter Excess Return FYTD CYTD US Equity - UCRP US Equity - GEP Non-US Developed Equity - UCRP Non-US Developed Equity GEP Emg. Mkt. Equity - UCRP Emg. Mkt. Equity - GEP HIGHLIGHTS OF THE PUBLIC EQUITY ASSET CLASS After a two year period in which stocks traded more on economic news and less on their individual business performance, the recent trend toward trading on business results should continue for awhile. Hence, we are tilting the equity portfolios more toward managers that should particularly well in such an environment. Emerging market valuations shrank by nearly 40% in 2011, as their stock prices fell by nearly 20% while earnings increased by about the same percentage. Valuations are now the lowest in more than ten years. Due to low valuations and strong economic growth, we are currently taking steps to increase our allocation to emerging markets. The Emerging Markets portfolio has a tilt away from the large multi-national emerging market companies that rely more on exports, due to weak economic growth in Europe and Japan. The portfolio has a positive tilt toward local demand as well as emerging market countries that trade with each other. Hence, the portfolio is tilted Consumer Staples and Consumer Discretionary, due to rapid wage growth, low unemployment, and rising living standards in many emerging countries. Staff thinks the above mentioned tilts are factors that are likely to persist for awhile, and is currently taking steps to increase these tilts.

19 Attachment III, continued PUBLIC EQUITY PORTFOLIO REVIEW U.S. Equity Portfolio gained 12.02% for the quarter, inching ahead of the benchmark return of 12.00%. The Active U.S. Equity portfolio gained 12.22%, slightly outpacing the benchmark by 0.22%. In 2011 the Active portion of the U.S. Equity portfolio returned 0.24%, lagging the policy benchmark, which returned 0.58%, by -0.34% for the year. The active portfolio has a slight growth tilt, which mildly hurt returns in the quarter as value investing outpaced growth style investing, 13.3% to 10.9%. For the year, though, the growth tilt helped a bit, as growth edged value, 2.2% to -0.1%. The active U.S. equity portfolio was overweight technology by 2%, which mildly hurt returns during the quarter as technology lagged the broader market by 3.2%. For the year, the technology tilt had no virtually impact as technology lagged the market by 0.4%. The active U.S. equity portfolio was underweight giant or mega cap stocks (companies in the Russell Top 200) by 3.4%. The tilt mildly helped returns in the quarter, as giant-sized companies lagged the overall market by 11.6% to 12.0%.. Non-U.S. Developed Equity Portfolio rose 3.55% during the quarter while the benchmark returned 3.51%. Active managers returned 3.75%, outperforming the index by 0.24%. In 2011 the active portion of the Non-U.S. Developed Markets portfolio returned %, outperforming the policy benchmark, which declined %, by 0.40% for the year. An underweight to financials of -4.9% helped during the quarter as the sector underperformed the broader index by -7.7%. Active managers have had an underweight to financials of around -5% for several years, due to European banks high debt levels, lower capital reserves, and high exposure to sovereign debt of countries in poor financial position. An overweight to technology of 3.6% and to consumer discretionary of 3.5% both hurt returns during the quarter as both sectors declined -1.1%, lagging the broader market by - 4.5%. The tilts also hurt for the full year, as technology lost -20.2%, lagging the index by 7.6%, and consumer discretionary declined -14.9%, which was 2.3% more than the index. An underweight to Canada and Australia of 3.7% and 3.5%, respectively detracted slightly from returns for the quarter as Canada edged the benchmark by 1.1% and Australia outperformed by 3.1%. However, for the year the tilt mildly helped returns as both Canada and Australia lagged the index by -1.8% and -2.2% respectively in An overweight to Emerging Markets of 8.9% mildly helped returns during the quarter as emerging countries edged the Non-U.S. developed markets index by 1.0%. However, for the year the overweight hurt returns as emerging countries underperformed the Non-U.S. Developed Markets index by 5.8% in Emerging Markets Portfolio returned 4.26% during the quarter, which lagged the benchmark by -16 bps. In 2011 the Emerging Markets portfolio sank %, outperforming the benchmark, which lost %, by 0.73%. An underweight to China of 3.4% helped returns mildly during the quarter, as China lagged the index by 1.9%. For the year, the underweight had no effect, as China performed exactly the same as the index, losing -18.4%.

20 Attachment III, continued An overweight of 1.4% to Thailand boosted returns for the quarter as Thailand outperformed the index by 7.1%. The overweight also helped for the year as Thailand declined just -2.7%, outperforming the benchmark by 15.7%. An overweight of 1.2% to Turkey hurt returns in the fourth quarter as Turkey lost -15.7%, lagging the index by 20.1%. The overweight also hurt for the year as Turkey sank -35.4%, underperforming the benchmark by 17.0%. Sector positioning added to returns, both for the quarter and in An underweight to Materials of 2.2% helped returns during the quarter as Materials lagged by 3.5%. The underweight to Materials was quite helpful for the full year as Materials lost -27.0%, underperforming the index by 8.6%. An overweight to Consumer Staples of 1.9% was quite helpful both during the quarter and in For the quarter, Consumer Staples gained 9.7%, outpacing the benchmark by 5.3%. For the year, Consumer Staples inched up 0.7%, outperforming the index by 19.1%. LOOKING FORWARD Emerging market valuations have come down significantly, with a price-earnings ratio of 10.7, down sharply from 14.6 a year ago, due to the decline in emerging market stocks over the past year while earnings growth continued to be strong. Staff thinks the combination of low valuations, strong economic growth, low consumer and government debt, and high savings rates, make emerging markets an attractive long-term investment. Hence, we are currently taking steps to increase our exposure to emerging markets. With the significant underperformance of emerging markets in 2011, we are edging closer to hiring one manager that focuses exclusively on Brazil and another that focuses solely on China. The potential exists for larger excess returns among country specific managers, more so than globally diversified emerging market managers. Country specific managers may be better at identifying emerging companies, secular trends, political, legislative, and social developments, inflection points and turning points better than globally diversified managers. The correlation between stocks has been at ultra high levels the past few years, as stocks have moved in tandem based on economic news related to Europe, banks, economic growth, government debt, and unemployment. Stated differently, in recent years stocks have been trading less on their individual business performance and more on economic news. We are seeing an increase in the potential for excess returns from active managers, and we are also beginning to see a breakdown of high correlations between stocks. Hence, we are tilting the active portion of the equity portfolios more toward managers that should benefit from a greater emphasis among investors on the business performance of individual companies.

21 Attachment IV FIXED INCOME Period Ended December 31, 2011 Fixed Income Returns Quarter Return FYTD CYTD Quarter Excess FYTD CYTD UCRP Core FI GEP Core FI High Yield Debt (UCRP GEP Composite) Emg. Mkt. Debt (UCRP GEP Composite) STIP TRIP-Core FI FIXED INCOME HIGHLIGHTS Riskier fixed income assets outperformed U.S. Treasuries in the December quarter, as better U.S. economic data, an insatiable appetite for yield, and a strong supply-demand backdrop overcame ongoing concerns about the European debt crisis. Overall exposure to High Yield was increased in the quarter, which paid off well. Additions to higher quality existing portfolio names, favored in this environment, and new purchases of select improving lower quality issues contributed to both strong absolute and relative performance. Emerging debt markets also had strong returns, benefitting from better economic, fiscal, and borrowing needs comparisons to the troubled Western European countries. Long-standing underweights to the riskier European and other unsettled countries in the EM portfolios, such as Hungary and Egypt, and overweights to Latin America led to modest outperformance. In the Government portfolio, a bias towards higher yields and a steepening yield curve was maintained, as current yields near their historic lows are artificially depressed by two things: ongoing flight-to-quality buying vs Europeans and Fed purchases under Operation Twist, which were more concentrated in longer maturities. U.S. Treasuries basically earned their coupons in the quarter. TIPS continued to benefit from strong investor demand for protection against a future rise in inflation, as the Fed has indicated it will tolerate a level above its central tendency for some time. TIPS returned 2.7% in the quarter, of which only 22bps was due to CPI. For the calendar year, TIPS returned a whopping 13.6%, outperforming most asset classes. CMBS, DUS and CMO sector spreads all narrowed for the quarter given strong demand for both duration and convexity. Uncertainty in the government refinancing program hurt non-agency prices. TRIP increased by $335 million in market value as further inflows from STIP were invested. The allocation to investment grade credit increased to $1.6 billion exceeding the UCRP allocation. TRIP Core Credit is now the largest core credit portfolio under management.

22 Attachment IV, continued FIXED INCOME PORTFOLIO REVIEW Fixed Income Asset Class Performance Fixed Income Core Portfolio The actively managed Core Fixed Income portfolios had a positive quarter, with UCRP returning 1.20% and outperforming the Barclays Aggregate benchmark return by 0.08%, GEP underperforming by -0.07%, 403b Core outperforming by 0.17%, and TRIP Core returning 2.19% versus its custom benchmark return of 1.56%. Portfolio outperformance was aided by sector allocation, i.e. an underweight in the Government sector and an overweight in the Credit sector. The Government sub-index had a return of 0.84%, while the Credit sub-index returned 1.70%. Results were also aided by outperformance of approximately 0.7% in each of the core Credit portfolios. The Government portfolio underperformed modestly in UCRP and GEP, was flat in TRIP, and outperformed by a small amount in 403bCore. The Collateralized sector contributed to outperformance of 0.43% in TRIP. Government Portfolio All Core Government portfolios closely tracked their benchmark which returned 0.84% for the quarter. Recognizing the unattractive nominal and real yields currently on offer, all core portfolios remain underweight versus their policy allocation. Active risk in the Government sector consists of a moderate duration short and an overweighting of the 10 sector versus the index. A so-called bear steepener in which rates rise led by the 30 year sector, is the optimal scenario for outperformance given this configuration. Credit Portfolio All Core Credit bond portfolios outperformed in Q4 by roughly 72 bps. Although financials as a whole underperformed, security selection within financials boosted performance as hybrid and Trust Preferred bonds outperformed as banks are calling many of these issues at prices higher than market levels. Lower quality and crossover names outperformed the highest quality in the quarter, due in part to ongoing pressure in higher-rated European sovereign and supranational issues, which we do not own. Collateralized Portfolio The UCRP Collateral Sector returned 0.63% versus the benchmark return of 1.01% in Q4 while GEP returned 0.31% for the same period. Non-agency holdings were marked lower as prices weakened. TRIP Collateral returned 1.44%, an outperformance of 0.43%, benefitting from both a longer duration and a higher allocation to CMBS. 403b returns of 0.85%, underperformed the index by -0.16% once again due to weaker non-agency prices.