ORANGE COUNTY EMPLOYEES RETIREMENT SYSTEM BOARD OF RETIREMENT 2223 E. WELLINGTON AVENUE, SUITE 100 SANTA ANA, CALIFORNIA

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1 Attendance was as follows: ORANGE COUNTY EMPLOYEES RETIREMENT SYSTEM BOARD OF RETIREMENT 2223 E. WELLINGTON AVENUE, SUITE 100 SANTA ANA, CALIFORNIA INVESTMENT COMMITTEE MEETING MINUTES Present: Absent: Also Present: David Ball, Chair; Chris Prevatt, Vice Chair; Frank E. Eley, Chuck Packard, Thomas Flanigan, Roger Hilton, Wayne Lindholm, Thomas Beckett and Shari Freidenrich Eric Gilbert Steve Delaney, Chief Executive Officer; Girard Miller, CFA, Chief Investment Officer; Shanta Chary, Director of Investment Operations; David Beeson, Investment Officer; Adam Cheng, Investment Officer; Stina Walander-Sarkin, Investment Analyst; David Lantzer, Deputy Chief Counsel; Javier Lara, IT Operations Supervisor; and Julius Cuaresma, Recording Secretary Thomas A. Hickey, III, Esq., Foley & Lardner, LLP Matt Mullarkey, CFA, Aksia, LLC Allan Martin, NEPC Don Stracke, CFA, NEPC The Chair called the meeting to order at 9:00 a.m. and read the opening statement into the record. Mr. Hilton led the Pledge of Allegiance. INDIVIDUAL ITEMS AGENDA E-1 CLOSED SESSION CONFERENCE WITH LABOR NEGOTIATORS UNREPRESENTED EMPLOYEES (GOVERNMENT CODE SECTION ) Agency Designated Representative: Steve Delaney, CEO Unrepresented Employee: Chief Investment Officer Adjourn pursuant to Government Code Section The Committee recessed into closed session at 9:01 a.m. Ms. Freidenrich arrived at 9:04 a.m. The Committee reconvened from closed session at 10:31 a.m.

2 The Committee recessed at 10:31 a.m. The Committee reconvened at 10:37 a.m. The Committee recessed into closed session at 10:37 a.m. Ms. Freidenrich left at 10:40 a.m. The Committee reconvened from closed session at 11:26 a.m. The Committee recessed for lunch at 11:29 a.m. Mr. Packard left at 11:29 a.m. Ms. Freidenrich returned at 12:25 p.m. The Committee reconvened at 12:25 p.m. The Committee recessed into closed session at 12:25 p.m. The Committee reconvened from closed session at 1:04 p.m. I-5 AKSIA, LLC HEDGE FUND PORTFOLIO PERFORMANCE UPDATE Presentation by Matt Mullarkey, CFA Mr. Mullarkey presented a performance update on OCERS hedge fund portfolio as of the end of February Mr. Mullarkey reported that various capital markets are behaving differently in reaction to global central bank policy actions. He described more defensive-oriented hedge fund strategies are performing better, but the returns are still low. OCERS portfolio has experienced a drawdown since June 2015: during this period, Mr. Mullarkey explained that hedge funds have either had a challenging time in averting the choppy markets or in capitalizing on the volatility and generating strong returns or absolute returns. Mr. Mullarkey indicated that Aksia recommends OCERS to actively manage their liquid absolute return portfolio. OCERS portfolio beta is within the stated target range, but portfolio correlations have been higher than stated targets. Aksia recommends reducing beta and portfolio correlations. Mr. Mullarkey also discussed liquid alternatives as a cheap alternative way for exposure to simple hedge fund strategies. Mr. Flanigan questioned if OCERS should have an allocation to hedge funds due to the compressed return environment. Mr. Martin responded that NEPC will be reviewing OCERS asset allocation. He described that if OCERS portfolio has sufficient diversifying strategies elsewhere in the portfolio, there probably is less or no need for a hedge fund allocation. Mr. Martin stated that 2

3 OCERS 7% current allocation is near the high end, but he does not recommend that OCERS should presently exit from their hedge fund program. Mr. Hilton asked what is the minimum hedge fund allocation that is significant enough for OCERS portfolio. Mr. Martin replied that below a 5% allocation is immaterial and does not make capital allocation sense. Mr. Steven Weintrobski, Mission Viejo, addressed the Investment Committee. A motion was made by Mr. Flanigan and seconded by Mr. Hilton to receive and file I-5. The motion carried unanimously. E-1 CLOSED SESSION CONFERENCE WITH LABOR NEGOTIATORS UNREPRESENTED EMPLOYEES (GOVERNMENT CODE SECTION ) Agency Designated Representative: Steve Delaney, CEO Unrepresented Employee: Chief Investment Officer Adjourn pursuant to Government Code Section The Committee recessed into closed session at 1:33 p.m. The Committee reconvened from closed session at 1:37 p.m. The Committee took no reportable action. I -10 COMPENSATION OF PUBLIC EMPLOYEE -- CHIEF INVESTMENT OFFICER Presentation by Steve Delaney, CEO The Committee took no reportable action. I-7 FOLEY & LARDNER INVESTMENT COUNSEL DISCUSSION Presentation by Thomas A. Hickey, III, Esq. Mr. Hickey presented the legal case of Einhorn vs. Goldentree et al. Mr. Hickey explained the ramifications of this case and described how it could impact OCERS. He suggested amendments to current OCERS governance policies. Mr. Ball asked whether or not current side letter agreements indemnify OCERS against such litigation. Mr. Hickey responded current side letter agreements only indemnify OCERS from lawsuits against actions undertaken by the investment manager. Mr. Hickey reported that more institutional investors are requesting observer seats rather than advisory board seats. He discussed governance policies for OCERS with regards to communications with investment managers. Mr. Hickey discussed transparency of fees and expenses. 3

4 Ms. Freidenrich asked how far the liability of limited partners could extend. Mr. Hickey responded that any communication between limited partners and investment managers could be perceived as influential or exertion of control. He is working internally, along with OCERS staff and staffs across the country, to put procedures in place so as to limit this liability. Mr. Ball requested that Mr. Hickey return to an upcoming Investment Committee Meeting with suggestions for updated governance and insurance policies. Other members agreed that Mr. Hickey should provide suggestions that amend the present governance policy. A motion was made by Mr. Eley and seconded by Mr. Flanigan to receive and file. The motion carried unanimously. 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. Eley and seconded by Mr. Lindholm to approve the Consent Agenda. The motion carried unanimously. C-1 COMMITTEE MEETING: Approval of Meetings and Minutes Investment Committee Meeting February 24, 2016 Manager Monitoring Subcommittee Meeting March 3, 2016 Recommendation: Authorize meeting and approve minutes. C-2 QUIET PERIOD INVESTMENT RELATED SEARCHES Recommendation: Receive and file. C-3 INVESTMENT MANAGER FEE STRUCTURE UPDATES Recommendation: Receive and file. C-4 ECONOMIC DASHBOARDS & HOUSEVIEWS Recommendation: Receive and file. 4

5 INDIVIDUAL ITEMS AGENDA I-1 INDIVIDUAL ACTION ON ANY ITEM TRAILED FROM THE CONSENT AGENDA Ms. Freidenrich complimented staff and the Manager Monitoring Subcommittee for reducing manager fees. I-6 PERFORMANCE EVALUATION EDUCATION BENCHMARKS FOR ALTERNATIVE ASSETS Presentation by Allan Martin and Don Stracke, CFA Mr. Martin explained the proper applications of time-weighted and dollar-weighted returns, i.e. internal rate of return (IRR) as performance results that can be significantly different due to timing of invested cash flows. Mr. Ball asked what strategies use dollar-weighted returns. Mr. Martin responded that private market assets where investors commit capital, such as real estate and private equity, are best suited for IRR, as well as total value paid-in capital (TVPI) and distributions paid in capital (DPI). Mr. Ball stated it is helpful to avoid confusing time-weighted or dollar-weighted returns versus a third-party appraisal or valuation of an asset. Mr. Miller described the data on OCERS blue performance sheets as intrinsically noisy. He explained that staff will unlikely never be able to standardize each unique investment performance result. Mr. Martin proposed changes to some of OCERS aspirational benchmarks, rather than abandoning the entire use of them. He also suggested re-characterizing higher beta hedge funds as not absolute return. This re-characterization enables both proper benchmarking and analysis of whether or not the hedge funds are truly meeting original investment objectives. Mr. Eley said he sees the value in viewing the absolute return allocation through a longer-term perspective versus at any one single time-period. Mr. Martin explained his rationale for absolute return allocations in portfolios that lack investments that (1) diversify and (2) provide downside protection. Mr. Stracke presented the option of retaining some current benchmarks (i.e. aspirational benchmarks such as Libor +500 bps for hedge funds) as secondary references to supplement the additional use of primary benchmarks (i.e. HFRI Fund of Funds composite index for hedge funds). Mr. Ball noted that each asset class has its own relevant benchmark and that separately, each underlying investment within each asset class also can have its own relevant benchmark. 5

6 A motion was made by Mr. Lindholm and seconded by Mr. Flanigan to approve the recommended changes to the benchmarks for asset classes and the Investment Policy. The motion carried unanimously. I-8 CONSULTANT COMMENTS Mr. Martin discussed the current month-to-month volatility in the private debt markets. Mr. Martin reported that according to the most recent Greenwich survey, NEPC is the largest advisor to public funds. He outlined themes and issues NEPC s clients are all facing. Of particular concern is that market participants have benefitted from a multi-year period of positive returns and are entering into a period of known depressed returns. Mr. Martin noted the renewed focus on asset allocation, particularly with respect to downside protection. Mr. Martin explained how seemingly every asset allocator focuses on downside protection only after the market declines. NEPC is doing a white paper on what their clients are buying and/or selling to protect against risk-off scenarios. Mr. Lindholm asked about the best performing public pensions in 2015 and what assets they invested in. He also expressed his ongoing concerns about global debt, especially in Japan. Mr. Martin reported that the median return in their client universe was flat in 2015 with the top fund generating approximately 3%. I-3 PORTFOLIO ACTIVITY REPORT Presentation by Girard Miller, CFA Mr. Miller presented the total fund overview, the preliminary performance, and asset allocation for February He also presented the index performance as of March 28, Mr. Miller explained that OCERS performance reporting (blue) sheets may not hold much weight during shorter-time periods: February s risk-off, negative returns were quickly reversed by March s risk-on, positive returns. The month-to-month data is less important than the themes and trends that the performance sheets reveal; presently, they provide a lens into what the next recession may look like, and therefore, what OCERS ought to focus on, regarding downside risks and correlations. This lens also reveals that diversified credit, like any other asset class, is not riskfree. Mr. Miller explained the asset allocation inefficiencies of the employer pre-payment program, specifically with respect to cash inflows that need to be invested, only to be redeemed in the short-term. 6

7 Mr. Miller reported on OCERS recent international REIT redemptions and the GMO redemptions to trim exposure in these positions. For the meantime, these assets will reside the cash overlay, absent a superior alternative. A motion was made by Mr. Lindholm and seconded by Mr. Eley to receive and file I-3. The motion carried unanimously. I-2 CIO COMMENTS The Committee provided direction to move the item to the April 27th Investment Committee meeting. I-4 INVESTMENT GOVERNANCE Presentation by Girard Miller, CFA The Committee provided direction to move the item to the April 27 th Investment Committee meeting. I-9 CIO COMMENTS The Committee provided direction to move the item to the April 27 th Investment Committee meeting. * * * * *END OF INDIVIDUAL ITEMS AGENDA * * * * * PUBLIC COMMENTS: At this time members of the public may address the Committee of Retirement regarding any items within the subject matter jurisdiction of the Committee, provided that no action may be taken on non-agendized items unless authorized by law. None COMMITTEE MEMBER COMMENTS None STAFF COMMENTS None COUNSEL COMMENTS None 7

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