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 MANAGER MONITORING SUBCOMMITTEE MEETING 9:00 a.m. MINUTES The Chair called the meeting to order at 9:07 a.m. and read the opening statement into the record. Attendance was as follows: Present: Also present: Roger Hilton, Chair; Frank Eley, Chris Prevatt, and Shari Freidenrich Steve Delaney, Chief Executive Officer; Girard Miller, CFA, Chief Investment Officer; Shanta Chary, Director of Investment Operations; David Beeson, Investment Officer; Anthony Beltran, Visual Technician; and Stina Walander-Sarkin, Recording Secretary A. CIO COMMENTS Mr. Miller stated that the Investment Committee Charter now incorporates the Manager Monitoring Subcommittee meeting s authority to make formal recommendations up to the full Investment Committee. Mr. Prevatt arrived at 9:09 a.m. B. INDIVIDUAL MANAGER PRESENTATIONS Mr. Beeson briefly commented on the two presenting event-driven hedge fund managers; Archer Capital and Beach Point Capital. ARCHER CAPITAL MANAGEMENT Presentation by Josh Lobel Mr. Beeson introduced Archer Capital and stated that they currently manage $56.4 million on behalf of OCERS in their main flagship hedge fund. He stated that Archer seeks to find middle market companies that have dislocations and they can invest up and down the capital structure. Mr. Beeson stated that Archer currently represents 7.2% of OCERS hedge fund portfolio and has outperformed the return objective over the last 12 months. The key highlights of the presentation were: Firm update: Archer Capital has $1.3 billion in institutional assets under management, including $1 billion in the flagship fund. Archer s managing partners have over 15 years of experience investing together through economic cycles. There has been no turnover in the investment team in over 5 years. Marko Kangrga was promoted from the back office up to the investment team as an analyst. Archer had its first Securities and Exchange Commission (SEC) audit last year and did not receive any comments.

2 Market Overview: Recent volatility has created good investment opportunities largely in event-driven equities. There have been scarce opportunities in credit due to tight spreads and the availability of credit. Archer believes it has been a bad time to be a provider of leverage, but a good time to be the consumer of leverage through event equities of good companies with efficient capital structures or accretive opportunities. The high yield and leveraged loan markets remain firm despite recent disruption. Outlook for 2014/2015: Currently, Archer is seeing compelling opportunities in event equities, including building products, paper and packaging, dislocated telecom, transportation, home furnishing, and chemicals. Archer believes that greater volatility will likely persist and a barbell portfolio construction and risk management are therefore crucial. Portfolio Strategy: Archer s mission is to provide partners with world class funds focused on middle market opportunities in both debt and equity special situations. Archer seeks middle market companies with an enterprise value of $1 to $6 billion that are experiencing some sort of financial distress. Archer believes the business cycle changes the nature of the opportunity set and not the availability of investment opportunities, and they find investment opportunities in every part of the cycle as dislocations create a deep population of securities. Archer utilizes a systematic 3-step investment process: research, portfolio construction, and risk management. Archer s investment process focuses on risk mitigation and they manage risk at three distinct levels: position level, thematic (sector), and market (duration, equity beta, and macro correlation). In constructing a portfolio, Archer ranks each potential and current investment in terms of risk and reward. Also, each investment in the portfolio is monitored and tracked daily. Performance: OCERS investment has an 18% cumulative net return and a 4.4% return year-to-date as of September 30, The net equity and bonds/bank debt exposures are 31.6% and 25.0% respectively since OCERS inception in January Mr. Hilton: What is the capacity for the strategy and are you at full capacity? Mr. Lobel: The capacity is $1.5-$2 billion and there is still room. In the current economic environment, we are finding opportunities to put money to work. Mr. Eley: Would you look at a company like Blackberry for example as they are declining? Mr. Lobel: No, Archer does not in general invest in mainstream companies where there are big winner/losers and strong competition. Mr. Eley: Would you focus on macro events, such as Ebola? Mr. Lobel: Archer will manage in terms of macro events to a certain extent, but focuses more on corporate events. Archer reduced the exposure to airlines due to the potential impact of an Ebola outbreak. Archer is not a macro firm, but will take macro events in to account. Mr. Miller: What is the ownership structure of the firm? Mr. Lobel: Archer is owned by Eric Edidin and Joshua Lobel. Archer is considering instituting a partnership concept next year as the firm is maturing. A motion was made by Mr. Prevatt, seconded by Ms. Freidenrich to receive and file Archer Capital s presentation. The motion carried unanimously. 2

3 The Committee recessed at 10:19 a.m. The Committee reconvened at 10:33 a.m. BEACH POINT CAPITAL MANAGEMENT Presentation by Scott Klein & John Quintanar Mr. Beeson briefly introduced Beach Point Capital and stated that they currently manage $53.1 million on behalf of OCERS in their Total Return Fund II. He also stated that they focus specifically on credit opportunities and tend to follow more complex and underfollowed middle market companies. Mr. Beeson stated that Beach Point wants a typical investment to have a margin of safety, some type of mispricing within the market, and they also seek a catalyst that will help unlock the fundamental value they believe is there. Mr. Beeson stated that Beach Point currently represents 6.8% of OCERS hedge fund portfolio and has outperformed the return objective over the last 12 months. The key highlights of the presentation were: Firm update: Beach Point has $8.0 billion in assets under management as of September 30, 2014, including $6.3 billion managed in opportunistic credit. Beach Point has 75 employees of which 28 are investment professionals and the founding partners have strong legal expertise. Beach Point has had zero turnover at the portfolio management, director, and co-cio levels. Beach Point has offices in Los Angeles, London, and New York. Market Overview: Since 2008, the regulatory and structural changes of the banking sector have led to fundamental market changes as large banks have had to reduce their balance sheet risk. As a result, it has created funding gaps for middle market debt and opportunities for direct loan managers in both U.S. and Europe. Outlook for 2014/2015: Beach Point remains constructive on the environment for credit as corporate fundamentals are generally strong, defaults remain below historical average, monetary policy continues to be accommodative, and banks have reduced their balance sheet risk. Beach Point believes the recent volatility has created mispriced opportunities offering attractive value. Going forward, Beach Point is looking to capitalize on underfollowed, off-the-run securities, small and middle market borrowers unable to access traditional markets, special situations and distressed debt opportunities in Europe, and potential future distressed opportunities that arise from aggressive loan insurance. Portfolio Strategy: Beach Point focuses on complex or underfollowed middle market companies where the market is less efficient and they believe mid-market off-the-run securities create opportunities for outsized yields. 58% of Beach Point s invested capital is not in any index and a majority of the invested capital is in senior secured debt. Beach Point has a disciplined, flexible, research-intensive, and riskcontrolled 4-step investment process: idea generation, credit analysis, investment selection, and portfolio construction. Beach Point dedicates substantial resources to ensure strict and consistent risk management and their primary goal is to generate strong returns with less risk. Beach Point emphasizes investing with a margin of safety and to protect capital through portfolio diversification, hedging and top-down risk management. Beach Point strategically allocates capital through the different economic cycles and the fund is structured to have the flexibility to capitalize on changing credit markets and can move up and down the capital structure and across sectors for new opportunities. 3

4 Performance: As of September 30, 2014, OCERS investment had a 3.0% year-to-date return and a 16.2% cumulative net return since the inception in January Beach Point has a reduced exposure to interest rate risk, and the portfolio duration is less than 3 years. Mr. Beeson: Please discuss the recent volatility in middle market names. Mr. Klein: The recent volatility was focused on Europe and if the slowdown in Europe would spill over to the U.S. Overall, Beach Point s fundamentals have not changed. The major selling recently has been in large, exchange traded fund securities, and middle market names have not seen much volatility in October. Mr. Hilton: What is the capacity of this fund? Mr. Klein: Beach Point recognizes that there is limited capacity in the space, but in the current market, the capacity of this strategy is $10 billion. Mr. Miller: Please discuss your position in Anadarko? Mr. Klein: Anadarko is one of the biggest winners for the year. Beach Point has sold out of the majority of the holding in Anadarko and realized the gains. Mr. Steven Weintrobski, Mission Viejo, addressed the Investment Manager Monitoring Subcommittee. A motion was made by Mr. Prevatt, seconded by Mr. Eley to receive and file Beach Point s presentation. The motion carried unanimously. C. CIO COMMENTS Mr. Miller had no further comments. PUBLIC COMMENTS: COMMITTEE MEMBER COMMENTS: CHIEF EXECUTIVE OFFICER/STAFF COMMENTS: COUNSEL COMMENTS: ADJOURNMENT: 4

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

ORANGE COUNTY EMPLOYEES RETIREMENT SYSTEM BOARD OF RETIREMENT 2223 E. WELLINGTON AVENUE, SUITE 100 SANTA ANA, CALIFORNIA INVESTMENT MANAGER MONITORING SUBCOMMITTEE MEETING 9:00 a.m. MINUTES The Chair called