CITY OF LOS ANGELES DEPARTMENT OF WATER AND POWER INTERDEPARTMENTAL CORRESPONDENCE

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1 CITY OF LOS ANGELES DEPARTMENT OF WATER AND POWER INTERDEPARTMENTAL CORRESPONDENCE.~"".,,~.. r-'1 \,,,.. ' Date: February 6, 2013 c::>...,,, ~. To: Retirement Board Members.~. From:L!Jsangeeta Bhatia, Retire~ent Plan Manager.~. t.j Subject: Board Agenda Item No. 10: Discussion of the European Investors, Inc., Global Real Estate Investment Trust Securities Mandate; and Possible Action (February 13, 2013, Regular Board Meeting) Recommendation That the Retirement Board invest $5 million of Retiree Health Benefit Fund (RHBF) assets into European Investors, Inc. (Ell), Global Property Fund. Summary At the regular Retirement Board meeting held on September 19, 2012, the Retirement Board interviewed six finalists in the global Real Estate Investment Trust (REIT) securities investment manager search. The Retirement Board selected Ell and Dimensional Fund Advisors to manage a $50 million global REIT securities mandate with $20 million from the Retirement Fund (RF) and $5 million from the Retiree Health Benefits Fund each (ratified on October 10, 2012, via Resolution No ). During contract negotiations, Ell informed Staff that it would be unable to accept RHBF assets alongside RF assets into its institutional commingled fund called the Ell World Fund due to tax classification reasons. The RF is classified by the Internal Revenue Service according to Section 401 (a) of the Internal Revenue Code (IRC), and the World Fund is designed to accept these types of assets. The RHBF is classified according to IRC Section 115(1), and Ell will only accept these funds into its mutual fund called the Global Property Fund. The World Fund was the investment vehicle that the Retirement Board originally considered during the manager selection process. The Plan normally commingles RF and RHBF assets and simply establishes separate accounting and reporting procedures. The two global REIT vehicles in question, Ell's World Fund and Ell's Global Property Fund, are similar from investment strategy and guidelines perspective. The primary differences relate to liquidity, fees, and allocation to cash. The Global Property Fund offers daily liquidity, whereas the World Fund offers monthly liquidity. Ell must also charge all Global Property Fund investors the same fees (per U.S. securities regulations governing mutual funds) of 1.0%. These fees compare to the negotiated rate of 0.65% for the World Fund. The 1.0% fee would only apply to the $5 million in RHBF assets and would result in total blended fees of 0.72% for the entire mandate. 10.1

2 Finally, Ell's World Fund operates with an average cash allocation that can be :~~:: materially different than the Global Property Fund. These three factors combine to create modest performance disparity between the two vehicles over time. Courtland analyzed both investment vehicles and determined they are suitable for the Plan despite the minor structural differences and modest performance disparity. Therefore, Courtland recommends, and Staff concurs, that the Retirement Board invest $20 million of RF assets into Ells' World Fund and invest $5 million of RHBF assets into CD Ell's Global Property Fund. t... ) The following documents are attached: Resolution No Resolution No (approved ) Memo from Courtland I..! ~.~ for Jeremy Wolfson Chief Investment Officer SB:JW:SV:DB 10.2

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4 ~" "l COURTLAND PARTNERS, LTD. INSTITUTIONAL REAL ASSET ADVISOR..c;'~... lr.'::::' PUBUC SQUARE WILSHIRE BOULEVARD SUITE 2530 SUITE 830 C,'') CLEVELAND, OH Los ANGELES, CA TELEPHONE: (216) TELEPHONE: (310) FAX: (216) FAX: (310) MEMORANDUM TO: FROM: Los Angeles Department of Water and Power Employees' Retirement Plan ("WPERP") Courtland Partners, Ltd. ("Courtland") DATE: February 13, 2013 RE: Comparison between European Investors Incorporated World Fund and Global Property Fund This memorandum is intended to summarize the performance and return characteristic differences between European Investors Incorporated ("Ell") World Fund (the "Commingled Fund") and the Global Property Fund (the "Mutual Fund"). Ell has indicated that these two platforms are virtually identical with the exception of: 1) fees (non-negotiable 1% for the Mutual Fund), and 2) amount of cash on hand (higher for the Mutual Fund). The follo\ving bullets summarize reasons for the slight differences in performance: ~ Cash level due to flows - Client directed cash flows can impact the level of cash level in a portfolio for a number of days. Cash levels may be affected by activities such as raising cash for an upcoming redemption, or investing new capital. For example, high cash balances in an up market will cause a portfolio/fund to lag a similar portfolio with a lower cash balance. Examples such as these may impact the return of the Composite. ~ Net-of-fee return calculation - The Mutual Fund's net return reflects a 1.0% annual fee and is accrued daily, while the Commingled Fund's returns reflect gross numbers which does not account for fees. ~ Fair value pricing - The Mutual Fund incorporates fair value pricing while the Commingled Fund do not. Other than the reasons stated above, Courtland has evaluated the Commingled Fund and the Mutual Fund and believes that the composition of the two portfolios is virtually identical from an asset allocation and security selection standpoint. For comparison purposes, the following table summarizes the minor differences in performance between the Commingled Fund and the Mutual Fund since Commingled Fund's inception in the second half of

5 Ell Memorandum Page 20f2 Commingled Fund Mutual Fund ElI World Fund ElI Global Property EPRAINAREIT World Fund (net) w. (net) Fund (net offees) DewlopedIndex Global Property Fund 4Q % % % 1.28% lq % % " % 2Q % 39.58% 35.91% -1.04% 3Q % 22.39% 25.08% 0.28% 4Q % 5.17% 4.40% 0.14% lqlo 3.31% 2.90% 3.97% 0.41% 2QIO -7.25% -7.62% -7.89% 0.37% 3QIO 19.52% 18.48% 18.44% 1.03% 4QIO 4.75% 4.46% 6.15% 0.29% lqll 3.54% 3.12% 3.04% 0.42% 2Qll 4.92% 4.41% 2.94% 0.51% 3Qll % % % -0.10% 4Qll 5.96% 5.48% 7.36% 0.48% lq % 14.38% 12.90% 0.75% 2Q % 0.91% 2.12% -0.19% 3Q % 4.26% 5.51% 0.95% 4Q % 7.50% 5.77% -0.35% As of4q2012 SOHrce: EII, Comtland Please note that the 75bpsjee was Hsed to calmlate EII World FHnd net ojjeeperformance. '''''1'..:;. '''1. 0'.':~,.. ITI r " "l ~".,' e,.) '" Finally, the below table profiles the difference in perfonnance statistics for the Commingled Fund vs. the Mutual Fund over 1 and 3-Year annualized time periods. Courtland believes that the return of the Mutual Fund is statistically very similar to that of the Commingled Fund, with the fee differential being the primary driver of divergence. Annualized Difference in Portfolio Characteristics Commingled Fund vs. Mutual Fund (as of 4Q20I2) I-Year 3-Year Return 0.41% 0.41% Standard Deviation 0.37% 0.80% Tracking Error -0.07% -0.37% Information Ratio Sharpe Ratio -4.16% 1.09% SOHrce: EII, COHrtland Please note that the 75bpsjee was Hsed to calmlate EII World FHnd net ofjeeperformance. In summary, Courtland believes that the Mutual Fund allocation for the Retirees' Healthcare Portfolio is for all purposes representative of the Commingled Fund platfonn approved by the Board ofwperp. As such, Courtland recommends that WPERP move forward with Ell and allocate to global REITs while utilizing the Commingled Fund for the pension assets and the Mutual Fund for the Retirees' Healthcare Portfolio. If you have any questions or would like to discuss further, please let us know at your convenience. Thank you. 10.5