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 COMMITTEE MEETING Attendance was as follows: MINUTES Present: Absent: Also Present: David Ball, Chair; Chris Prevatt, Vice Chair; Eric Gilbert, Thomas Flanigan, Roger Hilton, Wayne Lindholm, Thomas Beckett, and Shari Freidenrich Charles Packard Steve Delaney, Chief Executive Officer; Girard Miller, CFA, Chief Investment Officer; Shanta Chary, Director of Investment Operations; David Beeson, Investment Officer; Adam Cheng, CFA, Investment Officer; Stina Walander-Sarkin, Investment Analyst; David Lantzer, Deputy Chief Counsel; Anthony Beltran, Visual Technician; and Julius Cuaresma, Recording Secretary Meketa Investment Group: Stephen McCourt, CFA; Laura Wirick, CFA Pension Consulting Alliance: John Linder, CFA RVK: Scott Krouse; Ryan Robinette The Chair called the meeting to order at 9:00 a.m. and read the opening statement into the record. Mr. Lindholm 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. A motion was made by Mr. Lindholm and seconded by Mr. Beckett to approve the Consent Agenda. The motion carried unanimously. C-1 COMMITTEE MEETING: Approval of Meetings and Minutes Investment Committee Meeting August 24, 2016 Manager Monitoring Subcommittee Meeting September 8, 2016 Recommendation: Authorize meetings and approve minutes.

2 C-2 QUIET PERIOD INVESTMENT RELATED SEARCHES Recommendation: Receive and file. C-3 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 I-2 CIO COMMENTS Presentation by Girard Miller, CFA Mr. Miller briefly introduced the agenda and discussed items and topics for the upcoming Investment Manager Monitoring Subcommittee and Investment Committee meetings in October. Mr. Hilton arrived at 9:02 a.m. Ms. Freidenrich arrived at 9:03 a.m. Mr. Miller also provided an update on OCERS current and prospective RFP searches. I-3 PORTFOLIO ACTIVITY REPORT Presentation by Girard Miller, CFA Mr. Miller presented the total fund overview, the preliminary performance, and asset allocation for August He also presented index returns as of September 23, A motion was made by Mr. Hilton and seconded by Mr. Beckett to receive and file item I-3. The motion carried unanimously. I-4 ALTERNATIVE INCOME RFP - REAL ESTATE DEBT FINALIST KAYNE ANDERSON CAPITAL ADVISORS Presentation by Al Rabil, Andrew Smith & Kevin Welsh F:\Committee\Minutes\Investment Committee\

3 Mr. Miller introduced the Kayne Anderson Real Estate Debt (KARED) strategy. He discussed the costs and benefits, pros and cons, of KARED, and how it conforms to the rationale and requirements detailed in the RFP. He reported that Kayne Anderson presented an educational session on this real estate debt investment strategy at the May 2016 Investment Committee meeting. He stated that Trustees expressed interest in the general investment thesis at that meeting. Ms. Freidenrich inquired about KARED s Freddie Mac exposure. She also expressed concerns about the KARED investment team s lack of experience in a down market (i.e., the 2008 financial crisis), given its inception of Mr. Ball responded that KARED s exposure is different from Freddie Mac and its 2008 nonperforming loans that were pooled and subject to the credit-worthiness of individual borrowers. Mr. Flanigan expressed concerns about the agency debt. Mr. Rabil responded and explained the underlying credit of the pool versus the agency. Mr. McCourt discussed various risks with regards to KARED, including pricing risk. Mr. Miller described similarities and differences of KARED to private equity and closed-end funds and explained that the risks of the strategy are higher than traditional bonds but appear reasonable in light of expected returns at or above the actuarial rate. A motion was made by Mr. Prevatt and seconded by Mr. Hilton to provisionally approve a commitment of $125 million to the forthcoming Kayne Anderson KARED real estate debt fund subject to further and final due diligence and contract negotiations. The motion carried 7-1 with Mr. Flanigan voting no. The Committee recessed at 10:07 a.m. The Committee reconvened at 10:19 a.m. I-5 STATE STREET - SECURITIES LENDING Presentation by John Muir Mr. Miller introduced State Street and provided background regarding OCERS securities lending program with State Street. Mr. Ball asked for guidance on the topic of securities lending. Mr. Miller responded that the primary issues are the potential risks versus rewards of the securities lending program. Mr. Muir, as State Street s relationship manager for OCERS, provided background on State Street s 18-year securities lending relationship with OCERS. He presented a performance and risk update on OCERS securities lending portfolio. Mr. Flanigan asked about indemnification and the legal process should a borrower default. Mr. Muir responded and described State Street s legal process and its guarantees to investors. Ms. Freidenrich expressed concerns regarding some borrowers credit ratings and collateral pools whose maturity dates extended out past F:\Committee\Minutes\Investment Committee\

4 Mr. Muir responded and described their credit rating classification system. He also described the difference between final maturity dates and expected maturity dates. Ms. Freidenrich asked if other clients have made any changes, and if that has led to possible recommendations for improvements to OCERS securities lending program. Mr. Muir responded that there has been a significant focus on flexibility in the collateral pool i.e. staying below limits and well within portfolio constraints. He stated that portfolios are managed more conservatively, particularly with expectations of a rising-rate environment. He also reported that some clients have moved to a separate collateral fund versus commingled, which enables access to the portfolio manager and allows for a tailored portfolio of lendable securities. Ms. Freidenrich asked for the positives and negatives of a separate versus commingled fund. Mr. Miller responded that a separate fund at OCERS securities lending portfolio size would not be cost effective and would be difficult to diversify, as a separate fund. Mr. Flanigan expressed market-level concerns with securities lending. Mr. McCourt described the credit risks associated with the collateral pool and discussed the historical and expected returns from the securities lending program. Mr. Hilton asked if there could be fewer available securities to lend given a possible change in OCERS asset allocation. Mr. Miller responded that the asset allocation process will determine the amount of available securities to lend. A motion was made by Mr. Prevatt and seconded by Mr. Lindholm to continue the securities lending program with State Street. The motion carried 7-1 with Mr. Flanigan voting no. I-6 RVK - 2 ND QUARTER 2016 REAL ESTATE PERFORMANCE REPORT Presentation by Scott Krouse & Ryan Robinette Mr. Krouse presented an update on OCERS real estate portfolio for the second quarter of He provided current and prospective market commentary and discussed RVK s capital allocation recommendations. He reported OCERS real estate portfolio overweight/underweight sector exposures. He also presented an update on OCERS projected investment pacing schedule. Mr. Ball expressed agreement with RVK s recommendations on market direction and sentiment. Mr. Weintrobski, Mission Viejo, addressed the Committee and RVK about a recent market participant s $500 million Asia real estate allocation and an update on AEW. Mr. Krouse briefly responded that he does not have much information on this allocation. He also provided an update on AEW s portfolio. Mr. Ball requested that RVK obtain and report further geographical information on AEW s portfolios. A motion was made by Mr. Prevatt and seconded by Mr. Gilbert to receive and file I-6. The motion carried unanimously. F:\Committee\Minutes\Investment Committee\

5 I-7 MEKETA INVESTMENT GROUP ASSET ALLOCATION REVIEW Presentation by Girard Miller, CFA, Stephen McCourt, CFA, & Laura Wirick, CFA Mr. McCourt and Ms. Wirick continued Meketa Investment Group s (Meketa) multi-month asset allocation discussion and review process for OCERS. Mr. Ball asked for target model asset allocations from Meketa and staff, suggesting that the Committee would respond better to a modeled asset allocation, rather than an abstract one. Messrs. Ball, Beckett, and Lindholm asked made suggestions for data presentations to show: (1) proposed target asset allocations (including risk mitigating strategies and opportunistic strategies) and (2) their pro-forma performance results during various market scenarios, particularly downside protection in negative markets and upside capture in positive markets. Mr. Miller responded that PCA could provide a brief presentation on the behavior of crisis risk offset during several market regimes, and staff is working with actuaries at Segal actuaries, to first show the impact of various market scenarios. Alternative portfolio models will follow that step in the deliberative process. Ms. Freidenrich and Mr. Beckett asked for a simpler and consolidated table on OCERS current and pro-forma asset allocations. Mr. Beckett made suggestions for data formats. Mr. McCourt agreed and stated that Meketa would work with staff and PCA in producing a consolidated asset allocation table. Mr. Gilbert suggested that Meketa, PCA, and staff should collaborate to formulate a unified asset allocation. Mr. Flanigan expressed his concerns on fees paid to investment managers. Ms. Freidenrich left at 11:38 a.m. Mr. Ball stated that after the new asset allocation is approved, the Committee and Meketa should discuss fees and then portfolio diversification versus concentration. He stated that he is in agreement with Mr. Flanigan regarding fees, but he does not mind paying higher fees commensurate with higher returns. He also noted his preference for increased manager concentration. Mr. Hilton opined that there should be a discussion on capitalizing on other potential investment strategies since OCERS is cash-flow positive. Ms. Wirick and Mr. McCourt presented an updated memo on Investment Beliefs. She stated that these beliefs have been modified to reflect discussions at the recent September Annual Strategic Planning offsite meeting and the September 15 Investment Committee meeting. Mr. Ball requested that Meketa modify the language in the fees section in the proposed Investment Beliefs. F:\Committee\Minutes\Investment Committee\

6 After discussion, a motion was made by Mr. Prevatt and seconded by Mr. Hilton to adopt Investment Beliefs, subject to Meketa s modification to the fees section. The motion carried unanimously. The Committee and Meketa tabled Meketa s presentation on Treasury Inflation-Protected Securities (TIPS) to a later Investment Committee Meeting. Mr. Ball left at 11:57 a.m. The Committee recessed for lunch at 11:57 a.m. The Committee reconvened at 12:54 p.m. I-9 PRIVATE EQUITY RFP Presentation by Girard Miller, CFA Mr. Miller provided the format and the rationale for the potential private equity RFP procurement process and presented possible alternative motions. He noted that the incumbent managers will be invited to participate along with qualifying discretionary private equity advisors. He reported that the RFP is expected to be released in the next days. Mr. Hilton asked if the intention of this RFP is to add or cut OCERS private equity allocation. Mr. Miller responded that this RFP is a search for new private equity market opportunities, particularly with respect to fee structures. He expressed agreement with Meketa s recommendation that OCERS could increase the private equity allocation, but also expressed caution that the private equity market may be overheating with stretched valuations. The size of allocations will be decided after proposals are received and reviewed. Mr. Ball returned at 1:05 p.m. A motion was made by Mr. Hilton and seconded by Mr. Gilbert to authorize the CIO to issue an RFP for private equity discretionary management as outlined in the staff memorandum, following review and comments from the general consultant. The motion carried unanimously. I-8 REAL ESTATE CONSULTANT RFP Presentation by Girard Miller, CFA Mr. Miller presented the historical background for the real estate consultant RFP as part of the 2016 work plan, and described the overall procurement process. Mr. Ball stated his preference to table this RFP due to his belief that OCERS could be better served if OCERS wait until Meketa, PCA, and staff finalize OCERS asset allocation. He opined that this RFP could be different after the finalization of the asset allocation. F:\Committee\Minutes\Investment Committee\

7 A motion was made by Mr. Prevatt and seconded by Mr. Flanigan to authorize issuance of staff s RFP for a real estate consultant in accordance with the 2016 service provider work plan. The motion was amended. Mr. Ball asked for the proposed timeframe for a real estate educational session. Mr. Miller responded that this session is planned for December s Investment Committee meeting. After discussion, a substitute motion was made by Mr. Prevatt and seconded by Mr. Flanigan to refer the real estate consultant RFP back to staff, pending completion of OCERS broader asset allocation studies and a discussion first of portfolio structure and real estate alternatives that could have impact on the consultant selection process. RVK will continue to serve OCERS under a contract extension into early The motion carried unanimously. I-7 MEKETA INVESTMENT GROUP ASSET ALLOCATION REVIEW Presentation by Girard Miller, CFA, Stephen McCourt, CFA, & Laura Wirick, CFA The Committee continued their prior discussion on item I-7. Mr. Miller provided background for the Investment and Economic Scenarios presentation. Mr. Hilton asked why the presentation seems to only include negative scenarios. Mr. McCourt responded that the analysis prioritized negative market scenarios, specifically, lefttail market moves since they tend to occur almost instantaneously or over shorter-term periods, whereas positive markets tend to occur over longer-term periods. He stated that presentations, at next month s Investment Committee Meeting, will provide positive market scenarios and thus present a balance of possible market scenarios. The Committee concluded that no formal actions were to be taken on asset allocation, as the discussions and the deliberation process are both expected to continue through December. I-10 CONSULTANT COMMENTS Both Meketa and PCA had no further comments. I-11 CIO COMMENTS Mr. Miller provided an update on the hedge fund program and the transition plan for absolute return strategies that will be presented at a future meeting. Mr. Miller discussed investment governance as it relates to an amendment to OCERS Investment Policy Statement that will be presented next month. He also provided an update on staff s work on benchmarks and the work needed to calculate fees, alpha, and beta based on investable indices. F:\Committee\Minutes\Investment Committee\

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