PA C I F I C A S S E T M A N A G E M E N T Corporate (Bank) Loan Strategy

Transcription

1

2 PA C I F I C A S S E T M A N A G E M E N T Corporate (Bank) Loan Strategy Presented to: Los Angeles Water and Power Employees Retirement Plan June 10 th, 2015 FOR INSTITUTIONAL INVESTOR USE ONLY

3 Section 1 Section 2 Section 3 Section 4 Section 5 Pacific Asset Management Investment Philosophy & Process Market Overview Portfolio Overview Appendix GIPS Disclosures Investment Professionals Important Disclosures TABLE OF CONTENTS L O S A N G E L E S D E P A R T M E N T O F W A T E R A N D P O W E R

4 Executive Summary PA C I F I C A S S E T M A N A G E M E N T B A N K L O A N S T R AT E G Y Pacific Asset Management was awarded the U.S. Bank Loans mandate for the Plan on December 10 th, Pacific Asset Management has specialized in Bank Loans since our founding, with investment professionals managing loan investments for multiple decades. Our differentiation is a more selective approach with a focus on the larger, rated bank loan issuers. Our investment process has led to strong historical performance and downside risk protection relative to peers, as measured by downside market capture, default rates, standard deviation, and performance during With limited duration risk and low correlation to most asset classes, bank loans provide portfolio diversification, an interest rate hedge, and the ability to increase yields through credit risk. In our view, bank loan investors are paid to wait today for higher rates and inflation down the road. 3

5 Presenter Bios R E P R E S E N T I N G PA C I F I C A S S E T M A N A G E M E N T JP Leasure, Senior Managing Director Executive Committee Member Loan Portfolio Manager and Head of Research JP is a Senior Managing Director for Pacific Asset Management. He serves as the firm s Head of Credit Research and is a Co-Portfolio Manager for the Corporate (Bank) Loan Strategy. In addition, JP is a member of Pacific Asset Management s Executive Investment Committee. JP joined Pacific Life in 1997 and was formerly a senior member of Pacific Life's credit research team, responsible for overseeing approximately $10 billion of Pacific Life's portfolio of investment grade corporate public bonds and portfolio of leveraged loans. JP is a former member of Pacific Life's Workout Committee. Prior to joining Pacific Life, JP was a member of Credit Lyonnais' Leveraged Finance Group. JP has over 18 years of investment and banking experience and holds a bachelor's degree from the University of California, Los Angeles and an MBA from Columbia University. Dominic Nolan, CFA, Senior Managing Director Executive Committee Member Head of Product and Business Development Dominic is a Senior Managing Director for Pacific Asset Management and a member of the firm s Executive Investment Committee. He is head of product and investment strategy design, business development, and account management. Prior to this, he was the director of institutional business at Lombardia Capital Partners. Prior to Lombardia Capital, he was Vice President and Product Manager for LM Capital Group, an institutional global fixed income manager. Prior to LM Capital, Mr. Nolan worked at Fidelity Investments. Dominic has over 16 years of industry and investment experience. He holds a bachelor's degree in business finance from CSU Fullerton and an MBA from the Anderson School of Management at UCLA. He is a CFA Charterholder and a member of the CFA Society of Los Angeles. Joe Reid, Director Client Service and Business Development Joe is a Director for Pacific Asset Management, responsible for business development, client service, and investment related activities within the firm. Prior to joining Pacific Asset Management, Joe was Vice President of Business Development at LM Capital Group, a institutional global fixed income manager where he focused on Business Development for the firm working with corporate and public pension investors. Prior to joining LM Capital Group, Joe s experience included positions in business development and legal with ING Investment Management, PIMCO, and Merrill Lynch & Co. Mr. Reid is a graduate of Arizona State University where he received a B.A. in Business and Ethics. 4

6 P A C I F IC ASSET MANAGEMENT Section 1

7 Pacific Asset Management I N T R O D U C T I O N Pacific Asset Management is a registered investment advisor specializing in institutional fixed income management. Our investment team focuses on credit investments, managing bank loans, high yield and investment grade bonds. Pacific Asset Management is a subsidiary of Pacific Life Insurance Company N E W P O R T B E A C H, C A Pacific Asset Management operates out of Pacific Life headquarters in Newport Beach, CA. Pacific Life has approximately $130 billion in company assets as of December 31, Our investment team possesses an average of 16 years of investment experience with members that have worked together for over 14 years. There have been no departures of senior professionals since the inception of Pacific Asset Management We operate as a boutique investment management firm utilizing a team approach, offering our clients customized, nimble solutions supported by the scale and infrastructure of our parent, Pacific Life Insurance Company (Pacific Life) Pacific Asset Management exemplifies the integrity and trust of Pacific Life, which has a heritage of launching successful investment firms, including Pacific Investment Management Company (PIMCO)*, and Montauk Triguard* * PIMCO and Montauk Triguard are no longer affiliated with Pacific Life 6

8 Assets Under Management I N V E S T M E N T S T R AT E G I E S Solely focused on credit strategies The Corporate Loan strategy is the largest and longest tenured within the firm. Our investment team works as a single, integrated team looking through the capital structure and across the credit quality spectrum. We believe our focus on corporate debt provides a unique perspective on relative value. Our firm and portfolio size allows us to effectively enter and efficiently exit positions as needed. Strategy Pacific Asset Management Asset breakdown as of March 31, 2015 AUM ($m) Bank Loan Strategies* 1,833 High Yield Bond Strategy 1,150 Investment Grade Strategies** 899 Core Plus Bond Strategy 624 Strategic Credit Strategy 161 Short Duration Strategy 134 Limited Duration High Income Strategy 38 Total Assets Under Management 4,839 Representative Bank Loan Clients: Large California County (Public) Large East Coast Police and Fire Pension Fund (Public) Texas Fire and Police Pension Fund (Public) Several large religious entities (Endowment / Foundation / Corporation) Midwest Union Retirement Funds (Taft- Hartley) Large Insurance Account (Insurance) Large Corporate Account (Corporate) Sub-advised Mutual Fund (Sub-Advisory) * Contains two bank loan composites **Contains investment grade bond strategy, intermediate credit strategy, intermediate gov/credit strategy 7

9 Pacific Asset Management O R G A N I Z AT I O N Pacific Asset Management Founded in 2007 Wholly owned by Pacific Life Insurance Company Sole business is fixed income portfolio management focused on corporate credit Supported by the infrastructure (operations, legal, compliance, technology) of Pacific Life Pacific Asset Management s Executive Investment Committee oversees business and investment management Bob Boyd Managing Director (17/MBA) Jason Rosiak Senior Managing Director Head of Portfolio Management (22/MBA) JP Leasure Senior Managing Director Head of Research (18/MBA) Michael Long Managing Director (31/MBA) Dominic Nolan, CFA Senior Managing Director Head of Business Development (16/MBA) Rex Olson, CFA Senior Managing Director Head of Business Management (28/MBA) Michael Marzouk, CFA Managing Director (18/MBA) Brian Robertson, CFA Managing Director (12/BA) David Weismiller, CFA Managing Director (18/MBA) Michael Lonia Senior Director (11/MBA) Michael Spitler, CFA Senior Director (12/BS) Joe Reid Director (12/BA) Shalini Viswanathan, CFA Senior Analyst (7/MBA) Matthew Cecil Senior Associate (9/MBA) John Brueggemann Analyst (2/BS) Information in parentheses indicates number of years experience/highest academic degree obtained 8

10 Pacific Asset Management C L I E N T S E R V I C E T E A M RELATIONSHIP MANAGER N E W P O R T B E A C H, C A Joseph Reid Director Direct Line: (949) Fax: (949) Joseph.Reid@pacificlife.com CLIENT SERVICES TEAM Dominic Nolan, CFA Senior Managing Director Direct Line: (949) Dominic.nolan@pacificlife.com Michael Spitler, CFA Senior Director Direct Line: (949) Michael.Spitler@pacificlife.com 700 Newport Center Drive Newport Beach, CA Mathew Cecil Senior Associate Direct Line: (949) Fax:(949) Matthew.Cecil@PacificLife.com 9

11 I N V ESTMENT P H ILOSOPHY & PROCESS Section 2

12 Investment Objectives, Strategy, Process B A N K L O A N S T R AT E G Y Investment Objective The investment objective seeks to outperform the Barclays Capital U.S. Bank Loans Index by investing primarily in bank loan instruments of non-investment grade companies. Investment Strategy Pacific Asset Management will seek to outperform the benchmark through a selective approach focused on the larger issuers within the bank loan universe. Pacific Asset Management believes a focus on the larger issuers provides a margin of safety and downside risk protection relative to the smaller issuers within the bank loan universe. Pacific Asset Management believes this focus on seeking to minimize loss while providing the upside of the asset class is a key differentiator in our process. Pacific Asset Management seeks to construct a selective portfolio, generally consisting of bank loan issuers. Investment Process Pacific Asset Management screens the approximate 1,200 companies in the bank loan universe generally filtering out those companies with less than $100m in EBITDA and an issue size of less than $300m. Following the initial screening process, we evaluate securities through a process based on fundamental credit analysis. Following an assessment of the issuer fundamentals, an evaluation of the loan structure takes place. The decision to act on an investment comes in two parts; the first being the individual issuer review and the second being the portfolio construction and relative value. Pacific Asset Management seeks a high conviction in potential issuers, defined as those that meet the requirements involved in the screening process combined with a high degree of comfort, understanding, and a margin of safety in the business, credit fundamentals, financials, management team, industry dynamics, sponsorship, and downside risk. 11

13 Investment Philosophy O U R I N V E S T M E N T P H I L O S O P H Y I S A N C H O R E D B Y F U N D A M E N T A L A N A L Y S I S Fundamental Analysis Fundamental credit analysis is the cornerstone of our investment process Selective Construction Building portfolios utilizing selective construction allows us to articulate our views on a security Top Down Market Assessment We incorporate a Top Down assessment to complement our bottom-up analysis Team Approach A robust process, where all members of the investment team review, challenge and share investment ideas Capital Preservation We focus on companies that we believe will meet their debt obligations, thus mitigating downside risk and preserving investor capital 12

14 Investment Process PA C I F I C A S S E T M A N A G E M E N T Our Investment Process Overview Market Assessment We assess the economic climate to identify potential headwinds and tailwinds. This assessment is used as a framework to determine portfolio risk positioning. Sector Allocation We identify potential economic impacts on various sectors and consider secular trends in the industries. These considerations drive our sector allocation. Screen Fundamental Analysis Investment Decision We utilize a team approach with close communication between Portfolio Management and Research to promote idea generation. The bottom-up approach comes into play during our security selection. We perform fundamental credit analysis on each company and a relative value analysis on each security. Our team draws on the group s experience which provides a blend of investment insight and perspective. We strive for consensus and thoroughly vet each investment we make. Monitor We consistently monitor the portfolio and utilize performance attribution analysis as a quantitative check on the results of our decision making process. 13

15 Loan Selection Process PA C I F I C A S S E T M A N A G E M E N T Our Selection Process B A N K L O A N U N I V E R S E ( 1, I S S U E R S ) Screen Fundamental Analysis Investment Decision Loan Facilities greater than $300mm 80% of index market value Less than 500 issuers EBITDA greater than $100mm Credit Analysis Leverage Free Cash flow Competitive Position Industry Dynamics Management Loan Structure Guarantor Group Collateral Financial Covenants Capital Structure Enterprise Value 1 st Lien Coverage Junior Bonds Equity Loan Economics Price Coupon Yield Relative Value Catalyst Fundamentals Amend/Extend Potential Capital Markets Take-out Portfolio Loans 14

16 Risk Management D I S C I P L I N E D A P P R O A C H Our Approach Preserving investor capital in downside scenarios is a core philosophy of our management We manage diversified portfolios, monitoring issuer weights, industry weights, and credit quality in accordance with portfolio guidelines Our portfolios typically hold larger issuers, which improves liquidity in various market environments Portfolio Management works closely with our Research team, actively monitoring credits Pacific Asset Management utilizes a variety of internal and external resources to assist with the investment and reporting process Pacific Asset Management takes a disciplined approach to managing investment risk by focusing on several main factors: Review and Report Internal credit review Cash projections, trade and position analysis Client reporting Identify and Define Macro level analysis; define market and credit risks Partner with client to set guidelines Monitor Strategy performance dispersion Internal compliance checks Performance attribution Manage Portfolio diversification; issuer weights, sector weights, credit quality and liquidity 15

17 LADWP U.S. Bank Loans Guidelines L A D W P U. S. B A N K L O A N S I N V E S T M E N T G U I D E L I N E S * 1. Fixed-rate instruments shall be limited to 20% of the portfolio. 2. Non-benchmark market holdings (excluding cash) shall be limited to 40% of a portfolio. Benchmark market is based on currency denomination and security type (e.g., USD corporate industrial loan, USD corporate utility loan). Security type is based on Barclays Capital s Class 2 sector classifications and instrument (e.g., bond versus loan). 3. No more than 5% of the lesser of cost or market value of the portfolios will be invested in any one issuer. 4. No more than 20% of the lesser of cost or market value of the portfolios will be invested in any one industry. 5. Pacific Asset Management expected to have performed thorough due diligence on each security purchased (which may include, but is not limited to, the analysis of company audited financial statements in the case of corporate holdings, relevant government reports and records, etc.), and such due diligence must be available for each investment in case of a WPERP audit. 6. No securities shall be purchased on margin or sold short other than any initial and maintenance margin required in connection with futures transactions which may be used only for risk management purposes. 7. The portfolios shall not use leverage nor purchase Collateralized Loan Obligations (CLOs). 8. Although a fully invested position is encouraged, cash equivalents are also permissible as a transitional/temporary investment, subject to permanent investment. 9. If the portfolio produces characteristics that exceed the above limitations in these guidelines or the manager guidelines in Section 7.3, Pacific Asset Management is required to report these results to WPERP within a timely manner. 10. Any investments in securities (including, but not limited to, Build America Bonds, Recovery Zone Economic Development Bonds, Tax Credit Bonds, et. al.) issued by the City of Los Angeles and/or any of its affiliates are not permitted and should not be held in the WPERP portfolio. * Guidelines take from Water and Power Employees Retirement Plan Statement of Investment Objectives, Goals and Guidelines - Revised by the Board December 10,

18 MARKET OVERVIEW Section 3

19 Market Update L O A N M A R K E T U P D AT E Market Overview The 1 st Quarter saw a reversal from the 4 th quarter of 2014 with the outperformance of credit risk versus more interest rate sensitive bond sectors. For corporate debt asset classes such as high yield, bank loans, and corporate bonds, this led to strong excess returns versus government bond sectors. The Federal Reserve, while continuing to maintain a tightening bias into the second half of the year, has also been reducing their growth and inflation outlooks. This has led to a modest flattening of the yield curve and reduction in rate volatility as market participants have priced in a slower policy path. Overall market sentiment in the 1 st quarter proved a positive combination of risk appetite, lower rate volatility, and technicals for credit markets. Portfolio Review For the quarter, the focus on large cap issuers and overweight to single B rated loans contributed to performance. The primary detractor from performance was security selection in the energy sector, specifically Harvey Gulf International Marine and Samson Resources, which accounted for nearly all the relative underperformance for the Strategy for the quarter. Both energy issuers saw significant price declines given the ongoing energy related volatility and drop in oil prices. The Strategy had no defaults and no distressed sales for the quarter. Market Outlook and commentary In 2015, corporate health should continue to keep the default rate below average and the drop in energy prices should boost consumer spending, thus keeping the U.S. economic expansion moving forward. The Federal Reserve, while imparting a tightening bias, may be more reluctant to aggressively hike interest rates given global central bank policy and low growth. This, in our view, leads to an overall positive outlook for credit risk assets given the lower rate volatility from the Fed and substantial income and spread advantages versus government debt. Given the positive outlook for credit risk and low default environment (outside of energy), we believe that credit risk is attractive in 2015 versus government debt. 18

20 Barclays US High Yield Loan Index B A N K L O A N R E T U R N S B E L O W C O U P O N I N Barclays US High Yield Loan Index Total Return (%) Source: Barclays, as of December 31,

21 1/1/2010 3/1/2010 5/1/2010 7/1/2010 9/1/ /1/2010 1/1/2011 3/1/2011 5/1/2011 7/1/2011 9/1/ /1/2011 1/1/2012 3/1/2012 5/1/2012 7/1/2012 9/1/ /1/2012 1/1/2013 3/1/2013 5/1/2013 7/1/2013 9/1/ /1/2013 1/1/2014 3/1/2014 5/1/2014 7/1/2014 9/1/ /1/2014 1/1/2015 3/1/2015 Loan Market Summary A S O F M A R C H 3 1, Snapshot Average loan index price at Bank loan technicals are mixed, support from CLO Issuance is being offset by outflows from retail mutual funds Bank loan default rates continue to remain in the 2% range Credit Suisse Leveraged Loan Index Current Yield 9.00% 8.00% 7.00% 6.00% 5.00% Yield (3-Yr Life) 4.00% CS Leveraged Loan Index Summary Rating Effective Yield (3yr) 3-yr DM(bps) Price YTD Return BB B CCC As measured by the Credit Suisse Leveraged Loan Index. 20

22 Relative Value R E L A T I V E V A L U E F A V O R S B A N K L O A N S 2014 was a reversal of 2013, with duration risk outperforming credit risk. We believe relative value favors bank loans in 2015 given the limited duration risk, yield advantages, and corporate health backdrop conducive for credit risk. Index Duration Yield (%) Price ($) 2013 Return (%) 2014 Return (%) 2015 Return YTD (%) Barclays Corporate Barclays Agency MBS Barclays Aggregate Barclays Treasury Barclays Int Corporate Barclays High Yield CS Leveraged Loan Index Barclays US High Yield Loan Index Source: Barclays, Credit Suisse, as of March 31, Yields based on YTM for various indices. 21

23 2015 Outlook B A N K L O A N M A R K E T O U T L O O K Bank loans saw below coupon returns in 2014, with the Credit Suisse Leverage Loan Index returning 2.07%, its lowest return since The 1 st Quarter of 2015 saw a sharp reversal in performance with strong returns driven by improvement in risk sentiment and technicals. Corporate health may continue to keep the default rate below average (excluding energy), the U.S. economy is improving, and the drop in energy prices should boost consumer spending. We believe this points to a favorable environment for credit risk. We believe the selloff in the energy sector has led many bank loan issuers to now trade below expected recoveries given the seniority in the capital structure and strong asset coverage. We expect oil price volatility to continue as the capital markets attempt to figure out the future price of oil. We believe that the role of bank loans in a portfolio is to diversify traditional fixed income, reduce portfolio durations, and improve yields through credit risk. Given the outperformance of duration versus credit risk over the past year and absolute low yield levels of traditional fixed income, bank loans are an attractive asset class for portfolio diversification. 22

24 P ORTFOLIO OVERVIEW Section 4

25 Corporate (Bank) Loan Strategy I N V E S T M E N T O B J E C T I V E The investment objective for the LADWP Bank Loan segment is to outperform the Barclays Capital U.S. High-Yield Loan Index by investing primarily in bank loan instruments of non-investment grade companies. Investment Approach Selective Strategy seeks to add value through credit selection, with portfolio holdings typically ranging from names. Large Issuers This strategy will typically invest in bank loan facilities of larger companies, typically with an EBITDA of greater than $100 million. Liquid Due to our active management approach, we prefer names with daily liquidity. This allows for more fluid entry and exit of positions as needed. Lower Volatility Through Low Defaults Since inception, our strategy has had 2 issuer defaults versus 196 for the Bank Loan issuer universe. Internal Guidelines Portfolio Composition Bank Loans Minimum 80% Minimum Average Portfolio Credit Quality B Diversification Sector constraints such as 3x the Index weighting or 15% whichever is greater Maximum 5% account value per issuer in portfolio Opportunistic Secured Corporate Bonds Unsecured Corporate Bonds 24

26 Performance C O R P O R A T E ( B A N K ) L O A N S T R A T E G Y C O M P O S I T E R E T U R N S Annualized Ending 1Q15 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year Inception Corporate (Bank) Loan Strategy (Gross) Corporate (Bank) Loan Strategy (Net) Barclays U.S. High-Yield Loan Index Calendar Year Performance 1Q Corporate (Bank) Loan Strategy (Gross) Corporate (Bank) Loan Strategy (Net) Barclays U.S. High-Yield Loan Index Inception of the Strategy was January 1, 2007 Past performance is no guarantee, prediction or indication of future results. 25

27 Performance C O R P O R A T E ( B A N K ) L O A N S T R A T E G Y C O M P O S I T E R E T U R N S Strategy (Gross) Strategy (Net) Index* Annualized Ending 1Q15 1Q Strategy (Gross) Strategy (Net) Index* Calendar Year Performance 0 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year Inception** * Barclays Capital U.S. High-Yield Loan Index ** Inception of the Strategy was January 1, 2007 Past performance is no guarantee, prediction or indication of future results. 26

28 Portfolio Characteristics Portfolio Positioning as of March 31, 2015 Portfolio duration is above benchmark through a tactical allocation to High Yield bonds Average price is higher than benchmark due to overweight to High Yield bonds and higher weighting to newer vintage/new issue Bank Loans, which typically have higher dollar prices. Newer issue Bank Loans have been attractive due to lower leverage multiples, higher covenants, and Libor floors. Credit quality remains focused on B rated credits Metals/Minerals Media Retail Manufacturing Service IT Transportation Housing Utility Aerospace Chemicals Healthcare Energy Financial Food and Drug Food/Tobacco Forest Prod. Gaming/Leisure Characteristics Strategy Index* Duration Average Credit Quality B+ BB-/B+ Effective Yield (%) 5.52% 5.30% Average Maturity (years) Number of Issues 132 1,043 Weighted Average Price $98.31 $97.13 Weighted Average Coupon (%) 4.97% 4.80% Credit Quality Strategy (%) Index (%)* BBB BB B CCC & Below Not Rated Asset Allocation Strategy (%) Index (%)* Cash Bank Loans - First Lien Second Lien Third lien / Unsecured High Yield Bonds - Secured Unsecured *Barclays Capital U.S. High-Yield Loans Index as of 03/31/

29 Issuer Weighted Default Rate (%) Strategy Default Experience P R O C E S S D R I V E N T O M I N I M I Z E D E F A U L T S Corporate (Bank) Loan Strategy vs. Industry Our investment process has led to a very low default rate relative to peers. Since inception, the Strategy average default rate is 0.56% versus the Moody s bank loan issuer default rate of 3.57%. The Strategy has only had two defaults and three distressed sales since inception. Both defaults occurred in 2009 with Charter Communications and Idearc defaulting Corporate (Bank) Loan Strategy Default Rate Moody's Loan Issuer Default Rate Since Inception the Strategy has had only two defaults, both occurring in The Strategy has had three distressed sales since inception Strategy Default Rate Par Value ($) Strategy Distressed Sales Rate (%) Strategy Issuer Weighted Default Rate (%) Strategy Number of Issuer Defaults Moody s Number of Issuer Defaults Moody s Issuer Weighted Default Rate (%) Source: Moody s. Data as of March 31, 2015 Pacific Asset Management defines distressed sales as a greater than 20 point loss from cost 28

30 Portfolio Characteristics Portfolio Positioning as of March 31, 2015 Description % of Portfolio Index* Burger King/Tim Hortons Term B Loan Univar Inc Term Loan B Biomet Dollar Term B2 Loan Hd Supply Gates Global Initial Dollar Term Loan Sprouts Farmers Mkt Initial Tl Freescale Semiconductor Clubcorp Club Operations New Term Ln Rite Aid Level 3 Financing Top 10 Sectors (%) % of Portfolio Index* Retailers Supermarkets Auto P&C Restaurants Health Care Const. Machinery Transportation Services Chemicals Pharmaceuticals *Barclays U.S. High-Yield Loans Index as of 03/31/

31 Portfolio Characteristics Portfolio Characteristics as of March 31, 2015 Characteristics Strategy Index* Annualized Relative Returns 1.05 N/A Alpha 1.94 N/A Beta Sharpe Ratio Standard Deviation (Since Inception)* Tracking Error 2.89 N/A R-squared Correlation Information Ratio 0.36 N/A Jensen's Alpha Treynor Ratio VaR 95% Returns Trailing Sharpe Product Benchmark Excess Std Dev Alpha Beta Trk Error Info Ratio Periods Ratio 1 Year Year Year Year Year Year Year Year Since Inception* *Barclays Capital U.S. High-Yield Loans Index **Inception January 1,

32 Returns Analysis Rankings H I S T O R I C A L R E S U LT S R E L AT I V E T O P E E R G R O U P The Strategy has outperformed 81% of its peer group since inception* Historical Results The Strategy s standard deviation has been less than 84% of the peer group since inception* The Strategy s philosophy of managing downside risk has led to a downside market capture that outperforms 81% of the peer group since inception* * Inception: January 1, 2007 Source: Evestment Alliance Floating Bank Loan Category as of March 31, 2015 (*Performance returns are on a gross basis. Please see the disclosures regarding gross performance in the Appendix) 31

33 Peer Group Risk/Return R I S K - R E W A R D A N A L Y S I S Historical Risk-Return The Strategy has outperformed its benchmark with lower volatility The Strategy s standard deviation has been less than 84% of the peer group since inception* *Inception January 1, 2007 Evestment Alliance Floating Rate Loan Category as of March 31, 2015 (*Performance returns are on a gross basis. Please see the disclosures regarding gross performance in the Appendix) 32

34 A P P ENDIX Section 5

35 Fee Schedule L O S A N G L E S W AT E R & P O W E R E M P L O Y E E S R E T I R E M E N T P L A N Fee Schedule 1. The Board shall pay Pacific Asset Management an annual flat fee of 32 basis points calculated as follows: The basis would be the aggregated average market value of the total managed assets in the Account as valued by the Custodian and reconciled by Pacific Asset Management hereunder as of the last business day of each calendar month. 2. Pacific Asset Management warrants that the annual fee set forth above will not result in payment by the Board of fees exceeding those that would be payable for management of assets equal in value to the Accounts by any of Pacific Asset Management's other clients for whom it provides the same or similar services. In the event that Pacific Asset Management enters into a future agreement with another client to provide the same or similar services that would produce a lower fee for investing assets equal in value to the Accounts, said lower fee shall automatically apply to this Contract and shall supersede the annual fee set forth above. 3. Pacific Asset Management shall bill 1/4th of the fees above every quarter and in arrears. 4. For the initial quarter of service hereunder, the fee will be prorated beginning with the first day that funds are made available for investment. In the event of termination, expiration, and/or resignation of this Contract, the fee shall be prorated to the date of such termination, expiration, and/or resignation. 5. The annual fees shall be the sole compensation paid to Pacific Asset Management by the Board for the services provided and expenses incurred by Pacific Asset Management hereunder. No additional amounts shall be due Pacific Asset Management for overhead, out-of-pocket or other expenses incurred in connection with this agreement. 34

36 Investment Professionals B I O G R A P H I E S JP Leasure, Senior Managing Director JP is a Senior Managing Director for Pacific Asset Management. He serves as the firm s Head of Credit Research and is the Co-Portfolio Manager for the Corporate (Bank) Loan Strategy. In addition, JP is a member of Pacific Asset Management s Executive Investment Committee. JP joined Pacific Life in 1997 and was formerly a senior member of Pacific Life's credit research team, responsible for overseeing approximately $10 billion of Pacific Life's portfolio of investment grade corporate public bonds and portfolio of leveraged loans. JP is a former member of Pacific Life's Workout Committee. Prior to joining Pacific Life, JP was a member of Credit Lyonnais' Leveraged Finance Group. JP has over 18 years of investment and banking experience and holds a bachelor's degree from the University of California, Los Angeles and an MBA from Columbia University. Dominic Nolan, CFA, Senior Managing Director Dominic is a Senior Managing Director for Pacific Asset Management and a member of the firm s Executive Investment Committee. He is head of product and investment strategy design, business development, and account management. Prior to this, he was the director of institutional business at Lombardia Capital Partners. Prior to Lombardia Capital, he was Vice President and Product Manager for LM Capital Group, an institutional global fixed income manager. Prior to LM Capital, Mr. Nolan worked at Fidelity Investments. Dominic has over 16 years of industry and investment experience. He holds a bachelor's degree in business finance from CSU Fullerton and an MBA from the Anderson School of Management at UCLA. He is a CFA Charterholder and a member of the CFA Society of Los Angeles. Rex Olson, CFA, Senior Managing Director Rex is Co-Head and Senior Managing Director for Pacific Asset Management. He is Head of Business Management for Pacific Asset Management, and is a member of its Executive Investment Committee. Rex joined Pacific Life in As Pacific Life's former head of credit research, Rex was responsible for overseeing approximately $17 billion in investment grade bonds, private placements, high-yield bonds and leveraged loans. Prior to that, Rex held portfolio management and analyst positions at GE Capital and Transamerica. Rex has over 28 years of investment and banking experience and holds a Bachelor of Science degree and an MBA from the University of Southern California. He is a CFA Charterholder. Jason Rosiak, Senior Managing Director Jason is Co-Head and Senior Managing Director for Pacific Asset Management. He oversees Pacific Asset Management's portfolio management activities. Jason is a member of Pacific Asset Management's Executive Investment Committee. Previously, Jason held senior positions at UBS Investment Bank, from 2006 to 2007, and Pacific Investment Management Company (PIMCO) from 1996 to While at PIMCO, Jason was a Senior Vice President and served as a Portfolio Manager and Head of High-Yield Trading. Jason is an investment professional with over 22 years experience in corporate and asset backed securities on both the buy and sell-side. Jason holds a bachelor's degree in economics from the University of California, Los Angeles and an MBA from the University of Southern California. 35

37 Investment Professionals B I O G R A P H I E S Bob Boyd, Managing Director Bob is a Managing Director for Pacific Asset Management. He serves as Co-Portfolio Manager for the High Yield Bond Strategy in addition to covering the Gaming, Aerospace and other cyclical sectors. He joined Pacific Asset Management in Previously, Bob was with Pacific Investment Management (PIMCO) for 14 years, where he was a Vice President, Bank Loan Portfolio Manager and Credit Analyst. Bob has over 17 years of investment experience, focused on leveraged finance, credit analysis, and structured products. He holds a bachelor's degree from California State University, Long Beach and an MBA from the University of Southern California. Michael Long, Managing Director Michael is a Managing Director for Pacific Asset Management. He serves as the Co-Portfolio Manager for the High Yield Bond Strategy in addition to responsibilities covering Emerging Markets and the Energy sectors. Michael joined Pacific Life in 1994 as an Investment Analyst. He was promoted to Portfolio Manager in Michael has over 31 years of experience in the financial and securities industry, including past investment analyst positions at Franklin Resources, Bradford and Marzec, and Great Northern Annuity. Michael holds a bachelor's degree in Economics from the University of California, Davis and an MBA from Pepperdine University. Michael Marzouk, CFA, Managing Director Michael is a Managing Director for Pacific Asset Management and serves as the Co-Portfolio Manager for the Corporate (Bank) Loan, Short Duration, and Limited Duration High Income Strategy. In addition, Michael covers the Telecommunications and Cable sectors. Prior to joining Pacific Asset Management in 2007, Michael worked in the investment banking field most recently as Vice President in the Leveraged Finance Group at the Royal Bank of Scotland. Prior to the Royal Bank of Scotland, he worked at UBS Investment Bank, Prudential Financial and Deutsche Bank. During his tenure in investment banking, Michael s experience included leveraged buy-outs and mergers and acquisitions advisory work. Michael has over 18 years of investment experience. He received his B.A. summa cum laude in Business-Economics from UCLA and his M.B.A. from the Anderson School of Management at UCLA. Michael is a CFA Charterholder and member of the CFA Society of Los Angeles. Brian Robertson, CFA, Managing Director Brian is a Managing Director for Pacific Asset Management. Brian is the Co-Portfolio Manager on the Cash Management Strategy, Strategic Credit, High Yield Bond, and Limited Duration High Income Strategy. Brian also has responsibilities in the Forest Products and Metals & Mining sectors. Prior to joining Pacific Asset Management, Brian was a former member of Pacific Life Insurance Company's credit research team, with responsibility for fixed income analysis and leveraged loan credit analysis. Brian joined Pacific Life in 2000 and holds a bachelor's degree from the University of Michigan. Brian is a CFA Charterholder and member of the CFA Society of Orange County. 36

38 Investment Professionals B I O G R A P H I E S David Weismiller, CFA, Managing Director David is a Managing Director for Pacific Asset Management. David is the Co-Portfolio Manager on the Core Plus, Investment Grade, and Short Duration Bond Strategies. In addition, David has credit research responsibilities in the Chemicals and Utilities sectors. As a former member of Pacific Life's credit research team, he was responsible for fixed income and leveraged loan credit analysis. David joined Pacific Life in June 2002, and was previously with Comerica Bank, where he was a Commercial Banking Officer responsible for investing in a portfolio of leveraged loans. He has over 18 years of investment and banking experience and holds a bachelor's degree from the University of California, Santa Barbara and an MBA from the University of California, Irvine. David is a CFA Charterholder and member of the CFA Society of Los Angeles. Michael Lonia, Senior Director Michael is a Senior Director and Head of Trading for Pacific Asset Management, responsible for trading and co-portfolio Management of the Cash Management Strategies. Prior to joining Pacific Asset Management, Michael was a member of Pacific Life's Operations Compliance team where he was responsible for trade reconciliation, processing various derivative products and corporate actions. Prior to joining Pacific Life in 2005, Michael performed portfolio modeling at American Express. Michael holds a bachelor's degree in both finance and operations management from the University of Delaware and his MBA at the University of California, Irvine. Shalini Viswanathan, CFA, Senior Analyst Shalini is an Analyst for Pacific Asset Management, responsible for covering various sectors including Healthcare, Pharma and Technology. Prior to joining Pacific Asset Management, Shalini spent four years as a High Yield Credit Analyst for First Western Capital Management. Prior to First Western Capital Management, she worked as a Senior Credit Analyst in the middle market commercial lending group of Comerica Bank. Shalini holds a bachelor s degree in Commerce from Madras University Stella Maris College and an MBA from the Anderson School of Management at University of California, Los Angeles. She is a CFA Charter holder and a member of the CFA Society of Los Angeles. John Brueggemann, Analyst John Brueggemann is an Analyst at Pacific Asset Management, responsible for covering the Retail and Restaurants sectors. Previously, John was an Investment Analyst at Wells Fargo Securities in their Alternative Investment Management group, where they invest the bank s capital in leveraged loans and high yield bonds. John holds a BS in Business Finance from the University of Arizona. 37

39 Investment Professionals B I O G R A P H I E S Michael Spitler, CFA, Senior Director Michael is a Director for Pacific Asset Management, responsible for business development activities within the firm. Prior to joining Pacific Asset Management, Michael spent seven years as a fixed income product and account manager for the Macquarie Funds Group in Los Angeles. As a product and account manager, Michael was responsible for institutional business development, product management and client servicing across bank loan, corporate credit, and absolute return strategies. Michael holds a BS in Business from Sacramento State University and completed part of his undergraduate coursework at the London School of Economics and the University of Pittsburgh's foreign study program. He is a CFA Charterholder and member of the CFA Society of Los Angeles. Joe Reid, Director Joe is a Director for Pacific Asset Management, responsible for business development and investment related activities within the firm. Prior to joining Pacific Asset Management, Joe was Vice President of Business Development at LM Capital Group, a institutional global fixed income manager where he focused on Business Development for the firm working with corporate and public pension investors. Prior to joining LM Capital Group, Joe s experience included positions in business development and legal with ING Investment Management, PIMCO, and Merrill Lynch & Co. Mr. Reid is a graduate of Arizona State University where he received a B.A. in Business and Ethics. Matthew Cecil, Senior Associate Matthew is a Senior Associate for Pacific Asset Management, responsible for business development and investment related activities within the firm. Prior to joining Pacific Asset Management, Matt spent several years at PIMCO where he serviced institutional clients and led a team that ensured compliance for segregated assets in all of the firm s 40-Act and ETF accounts. Prior to PIMCO, Matt built a financial advisory practice with Wells Fargo and was a senior team member of a practice within American Express. Mr. Cecil has over nine years of industry experience and has received a BA from Biola University and an MBA from the Paul Merage School of Business at the University of California, Irvine. 38

40 GIPS Strategy Strategy CS Leveraged Composite Size % of Total Firm Assets # of Portfolios Dispersion (Gross) (Net) Loan Index ($mm) Firm Assets ($mm) 1Q N/A 1, , N/A 1, , <5 N/A 1, , <5 N/A , <5 N/A , <5 N/A , <5 N/A , <5 N/A , <5 N/A COMPLIANCE STATEMENT. Pacific Asset Management claims compliance with the Global Investment Performance Standards (GIPS ) and has prepared and presented this report in compliance with the GIPS standards. Pacific Asset Management has been independently verified for the periods of 2007 through Verification assesses whether (i) the Firm has complied with all the composite construction requirements of the GIPS standards on a Firm-wide basis and (ii) the Firm s policies and procedures are designed to calculate and present performance in compliance with the GIPS standards. The Corporate (Bank) Loan Composite has been examined for the periods of 2007 through The verification and performance examination reports are available upon request. FIRM DEFINITION. Pacific Asset Management (the firm ) is a business division of Pacific Life Fund Advisors LLC (PLFA), an SEC registered investment adviser and a wholly owned subsidiary of Pacific Life Insurance Company (Pacific Life). The firm, as defined for compliance with GIPS, includes assets managed by the investment professionals of Pacific Asset Management for Pacific Life and for clients of Pacific Asset Management. COMPOSITE DESCRIPTION. The Corporate (Bank) Loan Composite consists of fixed income portfolios comprised of primarily the bank debt of non investment grade companies managed with a view towards current income. The Corporate (Bank) Loan Composite includes all actual, fully discretionary bank loan portfolios managed by Pacific Asset Management that meet the following criteria: minimum asset level of $5 million and no material client restrictions. For comparison purposes, the Corporate Bank Loan Composite is measured against the Credit Suisse Leveraged Loan Index. BENCHMARK. The Credit Suisse Leveraged Loan Index is an index designed to mirror the investable universe of the U.S. dollar denominated leveraged loan market. Index returns assume reinvestment of all dividends and distributions, if any. The index is unmanaged, has no fees and is not available for investment. Comparisons of returns to a benchmark index may be of limited value for various reasons. For example, indices not presented herein may have performed better (or worse) than the one used in the comparisons. There may be differences in the types of assets contained in such investment vehicles and those in the index. The performance information is not audited and accordingly no assurance is given with respect to its accuracy. 39

41 GIPS CURRENCY. Valuations are computed and performance is reported in U.S. dollars. PERFORMANCE. All calculations are on a total return basis and includes the reinvestment of all income. Actual performance results may differ from composite returns, depending on the size of the account, investment guidelines and/or restrictions, inception date and other factors. Past performance is not indicative of future results. As with any investment vehicle, there is always the potential for gains as well as the possibility of losses. FEES AND FEE SCHEDULE. Gross-of-fee returns are presented before management and custodial fees but after all trading expenses. Net-of-fee returns are presented after management fees and trading expenses. Net performance is calculated using the highest applicable fee as shown in the fee schedule provided. The treatment of withholding tax on dividends, interest income and capital gains, if applicable have not been considered in the performance calculations and are subject to each investors tax situation. The fee schedule, as stated in our ADV Part II, for portfolios in the Corporate Bank Loan Composite is: First $100 million 0.50%, next $100 million 0.40%, excess 0.30%. EX-POST STANDARD DEVIATION. The three-year annualized ex-post standard deviation measures the variability of the composite and the benchmark returns over the preceding 36-month period, if available. The standard deviation of the composite and benchmark as of each year end is as follows: Composite 3-year Standard Deviation (%) Benchmark 3-year Standard Deviation (%) N/A N/A 2007 N/A N/A POLICIES. Valuation, Calculation Methodology, and Presentation and Reporting Policies are available upon request. LIST OF COMPOSITES. A complete list and description of Pacific Asset Management s composites are available upon request. 40

42 Important Disclosures The Information presented herein has been provided by Pacific Asset Management. It has been provided for one-on-one presentation purposes only and is not for distribution. This information is intended for sophisticated investors who will understand and accept its inherent limitations, and will use it only for the purpose of discussing preliminary interest in Pacific Asset Management. This material is not a solicitation of any offer to buy or sell any security, commodity or other financial instrument (or related derivative) or to participate in any trading strategy. Pacific Asset Management, formed on May 30, 2007, is a division of Pacific Life Fund Advisors LLC (PLFA), an SEC registered investment adviser and wholly owned subsidiary of Pacific Life Insurance Company (Pacific Life). Investment professionals at Pacific Asset Management also have investment responsibilities at Pacific Life. The firm, as defined, includes assets managed at Pacific Life by the investment professionals of Pacific Asset Management and assets managed within Pacific Asset Management. There is no guarantee that Pacific Asset Management s investment professionals will manage the portfolios or accounts presented for any period of time or continue to be employed by Pacific Asset Management or continue to hold stated positions. There can be no assurance that Pacific Asset Management will continue to use Pacific Life s Infrastructure. The Credit Suisse Leveraged Loan Index is an index designed to mirror the investable universe of the U.S. dollar denominated leveraged loan market. Index returns assume reinvestment of all dividends and distributions, if any. The indices are unmanaged, have no fees and are not available for investment. Comparisons of returns to a benchmark index may be of limited value for various reasons. For example, indices not presented herein may have performed better (or worse) than the one used in the comparisons. There may be differences in the types of assets contained in such investment vehicles and those in the index. The performance information is not audited and accordingly no assurance is given with respect to its accuracy. 41