From~Sangeeta Bhatia, Retirement Plan Manager

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1 CITY OF LOS ANGELES DEPARTMENT OF WATER AND POWER INTRADEPARTMENTAL CORRESPONDENCE Date: November 1, 2011 To: Retirement Board Members From~Sangeeta Bhatia, Retirement Plan Manager Subject: Board Agenda Item No.8: Report on Investment Staff Due Diligence Site Visit to Wells Capital Management (November 9, 2011, Regular Retirement Board Meeting) Investment Officer Carlo Manjikian met with representatives from the Wells Capital Management (Wells Cap) Fixed-Income Core (Core) team on September 28, 2011, in Walnut Creek, California, and the Wells Cap Fixed-Income High-Yield (HY) team on September 29, 2011, in San Francisco, California, to review and discuss the organization and the investment portfolios they manage for the Plan. The Board hired Wells Cap to manage a Core and a HY mandate for the Retirement Fund (RF) in July 2004 and November 2004, respectively. The RF's Core and HY mandates received an initial funding of $929.7 million, and $103.0 million, respectively. As of September 30, 2011, the market values for the RF's Core and HY portfolios were $1,068.3 million and $110.7 million, respectively. The Board also hired Wells Cap to manage a commingled Core mandate for the Death and Disability funds for the Plan. Additionally, the Board hired the firm to manage a Core and HY mandate for the Retiree Health Benefits Fund (RHBF) in January 2007 and September 2009, respectively. The RHBF Core and HY mandates received an initial funding of $248.2 million and $32.8 million, respectively. As of September 30, 2011, the market value for the RHBF's Core and HY was $207.8 million and $40.5 million, respectively. Mr. Manjikian interviewed the personnel directly responsible for managing the Plan's assets, and he observed and confirmed the capabilities of the management team and the resources available to Wells Cap to manage the Plan's Core and HY portfolios. He met with Senior Relationship Managers Sandra Willen and Stephen Scharre, Director of Business Risk Management Mai Sharif Shiver, Operations Managers Siobhan Connolly Foy and Mary Jo Abbott, and Senior Portfolio Manager and Co-Head of the Wells Cap Core investment team Troy Ludgood. On the Wells Cap HY team, Mr. Manjikian met with the Senior Portfolio Managers Niklas Nordenfelt and Phil Susser as well as Sean Lynch, the Head of Research. Areas of discljssion included company overview, key functional areas, operations, risk controls, performance, disaster recovery, and business continuity. 8.1

2 Company Overview Wells Cap is a wholly owned subsidiary of Wells Fargo Bank, N.A., which is wholly owned by Wells Fargo & Company (Wells Fargo). Wells Cap was formed in 1996 from existing investment management teams that have been in place since the early 1980s. In 2003, Wells Cap and Wells Fargo Bank acquired the Core investment products of Montgomery Asset Management, LLC, who currently perform the investment functions for the Plan's Core mandate. Also in 2003, the Sutter High Yield team, who perform the investment functions for the Plan's HY mandate, was transitioned under Wells Cap from the parent company Wells Fargo. As of June 30, 2011, the total firm assets under management were $355 billion. Key Functional Areas Mr. Manjikian and the Wells Cap Core investment team members, including Senior Portfolio Manager and Co-Head of Wells Core portfolio Troy Ludgood, discussed the team's investment process in its core fixed-income strategy. Mr. Manjikian observed that Wells Cap Core continues to adhere to its strategy of adding value primarily through bottom-up security selection from the universe of high quality bonds that offer the opportunity for consistent out-performance, according to the Core investment team. The Senior Portfolio Managers (PMs) Tom O'Connor and Troy Ludgood are responsible for capital allocation decisions, security selection, and risk management. The investment team is responsible for covering specific subsectors as the Commercial Mortgage-Backed Securities (CMBS), Asset-Backed Securities (ABS), agency mortgage markets, etc., and they identify bonds with relative value through fundamental research and experience acquired by trading these types of securities. The team also recommends purchases and sales to the portfolio managers and their peers. Even though a trader's primary responsibility is to execute trades, they are also responsible for informing the analysts and PMs of opportunities they identify in the market. Mr. Manjikian and the Wells Cap HY investment team members, including Senior Portfolfo Managers Niklas Nordenfelt and Phil Susser, as well as the Head of Research Sean Lynch, discussed Wells HY's investment process in its high yield fixed-income strategy. Mr. Manjikian observed that Wells HY continues to adhere to its strategy of focusing on identifying attractive credits (including leveraged loans and bonds) across the capital structure. The portfolio construction is based on a bottom-up security selection process and uses intensive credit analysis to find securities with the best relative value. All investments are made from an approved issuers list, which contains only approved investments that have already been subjected to the rigors of the firm's investment process. The credit quality is once again reviewed by both the analysts and the PMs prior to the purchase of any securities. The Wells HY investment team makes all investment decisions for the RF's portfolio in compliance with the Plan's Investment Policy. Mr. lvianjikian observed a demonstration of the trading process by a Wells HY trader who created a phantom trade that violated one of the Plan's Investment Policy guidelines. 8.2

3 Operations Mr. Manjikian verified that Wells Cap Core's office, which is comprised of the portfolio managers, research analysts, and traders, is located in Walnut Creek, California. Mr. Manjikian confirmed that the Wells Cap Core team utilizes RiskSum, a proprietary risk management system designed to assist with the set-up, execution, and compliance (with the Plan's Investment Policy) of trades. The RiskSum system also assists the investment team in efficiently monitoring risk metrics such as duration, yield clirve, convexity, and sector exposures. Prior to execution, the trade is input into RiskSum for pre-trade compliance and, if the trade is compliant with all the risk metrics and policy constraints, it is executed through Bloomberg or via phone. During Mr. Manjikian's tour of Wells Cap Core's office in Walnut Creek, he was shown the trading process from start to finish by observing two phantom trades, one flagged as a Rule 144A policy violation (without registration rights) and another as a valid trade. Mr. Manjikian verified that Wells HY's office, which is comprised of the portfolio managers, research analysts, and traders, is located in San Francisco, California. Mr. Manjikian confirmed that the Wells HY team utilizes a trade blotter, which dynamically updates and allocates trades for each account, to assist in the trading process. The Wells HY traders primarily rely on broker quotes as a portfolio valuation source along with Interactive Data Corporation (IDC) and Bloomberg. He toured the Wells HY office in San Francisco and met with individuals from the trading desk to observe the trading process from start to finish. Risk Controls Mr. Manjikian verified that Wells Cap Core implements risk controls during every step of the investment process to assist in maximizing and preserving returns, given the risk objective of the portfolio. The investment team employs both proprietary and commercially available risk management tools. Some of the proprietary tools include RiskSum, Total Return Option-adjusted Spread Model, and RoVeR. The primary system Wells Cap Core utilizes is RiskSum, a proprietary system which contains a pre-screened database of quality securities that assists in the portfolio management process by allocating trade orders fairly across all clients, as well as ensuring compliance before a trade is executed. RiskSum also enables the team to monitor several risk characteristics including duration, convexity, sector risk, yield curve risk, sector levels, liquidity, and position sizes versus the benchmark. The investment team uses these risk control tools along with their experience and judgment to manage the fixed income portfolios. The Total Return Option-adjusted Spread Model is a tool used by the mortgage group to assist in calculating the duration of mortgage related securities. It also assists the team by stress testing the duration and price of mortgage related securities should a significant change take place in interest rates. RoVeR is a database that contains historical data of the spreads between various corporate bonds within the same 8.3

4 industry. This tool assists the credit team in indentifying relative value opportunities within the corporate bonds. Mr. Manjikian verified that Wells Cap HY implements risk management controls which focus on avoiding default and price risk through its disciplined and rigorous credit research process. They monitor the risk of individual bonds and diversification across ratings, industries, and maturities. They also monitor secondary risks which include sector, liquidity, and event risk among others, which are addressed during Wells HY's credit screening, research, and analysis process. Wells HY takes a disciplined approach throughout the investment process toward anticipating, monitoring, and mitigating risks across the portfolio. Risk in the Plan's portfolios is monitored on a regular basis by the Wells HY team, which includes the CIO and the Chief Fixed Income Officer. Performance Mr. Manjikian discussed the performance of the RF and RHBF portfolios with Wells Cap Core and Wells Cap HY. The performance issues discussed of the Wells Core portfolios is consistent with the performance numbers reported by the Plan's custodian, BNY Mellon, and has outperformed its benchmark, the Barclay's Capital U.S. Aggregate Index, net of fees over multiple time periods ending July 31,2011. The performance issues discussed for the RF's and RHBF's HY portfolio are consistent with the performance numbers reported by BNY Mellon. The Wells HY portfolios have consistently underperformed their benchmark net of fees over multiple time periods ending July 31,2011. At the Regular Retirement Board meeting held on July 27, 2011, the Board approved the RFP process to possibly replace Wells HY; however, Wells HY was allowed to participate. Disaster Recovery and Business Continuity Mr. Manjikian and representatives of Wells Cap's management discussed the firm's disaster recovery plans. Wells Cap has corporate policies and procedures in place which strive to provide assurance and confidence that the disaster planning and testing techniques enabling them to respond to an unexpected disruption of their information systems and production facilities are fully capable of a timely recovery of critical processing in the event of a disaster. Wells Cap maintains Business Continuity Plans (BCP) designed to deal with a major disruption of its facilities and/or systems. Wells Cap's BCPs are developed in collaboration with Wells Fargo Bank's Business Continuity Office and also Wells Cap's Business Continuity Officer who is responsible for overseeing, implementing and testing the plans. Wells Cap utilizes multiple sites to provide real time redundancy of the primary systems it controls as well as geographically dispersed backup sites. In case of disruption due to disaster, accident, civil disturbance or sabotage, Wells Cap anticipates that business will continue with minimal disruption, most of which can be immediately brought back online via 8.4

5 phone/fax/ and the Internet from almost any location. Mr. Manjikian confirmed that for critical applications, real time replication is written on the back-up servers and tested annually, and less critical data are backed up on tape daily. Summary and Findings Mr. Manjikian and Wells Cap management staff covered a comprehensive agenda. Mr. Manjikian also observed work in various areas of the firm and discussed the back office operations while speaking with multiple key personnel. From Mr. Manjikian's prospective, the overall Wells Cap team presented effectively and covered key philosophy and management issues associated with the Plan's portfolio. Mr. Manjikian observed no areas of concern during his visit. SB:JW:SV:CM 8.5

CITY OF LOS ANGELES DEPARTMENT OF WATER AND POWER INTRADEPARTMENTAL CORRESPONDENCE

Date: September 17, 2015 CITY OF LOS ANGELES DEPARTMENT OF WATER AND POWER INTRADEPARTMENTAL CORRESPONDENCE To: From: Subject: Retirement Board Members Linda P. Le, Retirement Plan Manager J V Board Agenda