Salient Partners L.P. 4265 San Felipe, 8 th Floor Houston, Texas 77027 T + 1 713 993 4675 F + 1 713 993 4098 Memo To: SDCERA Board of Trustees Brian White, CEO, SDCERA From: Lee Partridge, CFA Todd Centurino, CFA Ben Hunt, PhD CC: Scott Whalen, CFA Date: February 19, 2015 Subject: Portfolio Strategist Report Domestic equity markets sold off in January following weaker than expected economic data in the U.S. while European equities posted modest gains for the month following the announcement that the European Central Bank (ECB) would purchase sovereign bonds. Swiss shares suffered when the central bank ended the Franc s peg against the euro which was a surprise to most. The appreciation in the Franc that followed increased market volatility with exporters seeing the brunt of the move. Additionally, there was a renewed concern over the breakup of the Eurozone as a result of the Greek general election which saw the anti-austerity party Syriza sweep into power. U.S Treasuries gained on the uncertainty in the market with the yield on the ten year note hitting a low of 1.64% at the month end. January Return Contribution In January, the SDCERA portfolio returned an estimated (+0.69%) versus its estimated custom benchmark return of (-0.30%). The major contributors to performance over the course of the month were Diversifying Assets and Risk Parity which added +1.02% and +0.40%, respectively. The detractors included Equity (-0.48%), Real Assets (-0.14%), and Cash/Timing effects (-0.10%). Asset Classes Beginning January Weights (%) January Returns (%) Contribution (%) Equity 32.55-1.48-0.48 Credit 5.42 0.58 0.03 Diversifying Assets 21.81 4.67 1.02 Real Assets 19.21-0.72-0.14 Risk Parity 19.20 2.10 0.40 Cash, Timing, and Other 1.82-0.24-0.10 Interaction Effect -0.04 Total Fund 100.00 0.69 For illustrative purposes only. Past performance is not indicative of future results Sources: BNY Mellon Workbench, Integrity Capital, LLC Reporting Trustee Tactical Trading Scorecard On September 18 th the SDCERA Board of Trustees directed Salient to reduce the expected standard deviation of returns from15% to 6% within the risk parity allocation (simultaneously reducing leverage limits from 400% to 100%)*. For the month of January we estimate a total periodic forgone gain of
$69.6 million. This results in an estimated cumulative forgone gain to the trust of $171.4 million since September 18 th. Month RP - V15 Gain/(Loss) RP - Trustee Gain/(Loss) Value Add September (19,169,469) (11,939,750) 7,229,719 October 70,302,152 28,270,593 (42,031,559) November 129,345,696 49,741,506 (79,604,190) December (22,368,937) (9,723,053) 12,645,884 January 111,961,187 42,315,472 (69,645,714) Cumulative 270,070,628 98,664,768 (171,405,860) * Leverage calculated as (total exposure net assets)/net assets Over this same time period, a similar investment of $1.9B in the S&P 500 would have lost $2.9MM, Vanguard s Total Stock Market fund would have lost $10MM, and Barclays Aggregate Bond Index would have gained $86.8MM. For illustrative purposes only. Past performance is not indicative of future results Sources: BNY Mellon Workbench, Integrity Capital, LLC Reporting Peer Comparison For the calendar year 2014, the SDCERA s 9.25% gross return ranks in the top 7% of all public plans with greater than $1 billion in assets within the Wilshire TUCS. This return has been achieved with risk that ranks in the bottom quartile of its peer universe. 2
Portfolio Strategist Report SDCERA Board of Trustees Meeting Lee Partridge, CFA Todd Centurino, CFA Ben Hunt, PhD Thomas Weldin, CAIA February 2015
Disclosures The opinions expressed in these materials represent the personal views of Salient s investment professionals and are based on their broad investment knowledge, experience, research and analysis. However, market conditions, strategic approaches, return projections and other key factors upon which the views presented in these materials are based remain subject to fluctuation and change. Consequently, it must be noted that no one can accurately predict the future of the market with certainty or guarantee future investment performance. This presentation contains "forward-looking statements." Forward-looking statements can be identified by the words "may, "will," "intend," "expect," "estimate," "continue," "plan," "anticipate," "could," "should" and similar terms and the negative of such terms. By their nature, all forward-looking statements involve risks and uncertainties, and actual results could differ materially from those contemplated by the forward-looking statements. Several factors that could materially affect actual results are the performance of the portfolio of securities, the conditions in the U.S. and international financial, natural gas, petroleum and other markets and other factors. Actual results could differ materially from those projected or assumed in our forward-looking statements. This presentation does not constitute an offering of any security, product, service or fund. No investment strategy can guarantee performance results. Past performance is no guarantee of future results. All performance is net of fees and expenses. All investments are subject to investment risks, including loss of principal invested. Salient research has been prepared without regard to the individual financial circumstances and objectives of persons who receive it. Salient recommends that investors independently evaluate particular investments and strategies, and encourage investors to seek the advice of a financial advisor. The appropriateness of a particular investment or strategy will depend on an investor s individual circumstances and objectives. All opinions, projections, and estimates constitute the judgment of the author as of the date of the report and are subject to change without notice. Performance estimates are subject to change and are based on unaudited data. Integrity Capital LLC is under no obligation to update this report. The reader should therefore assume that Integrity Capital LLC will not update any fact, circumstance, or opinion contained in this report. Always refer to the most recent research report prior to making an investment decision. Investment advisory and research services provided by Integrity Capital, LLC, a registered investment advisor. Registration as an investment advisor does not imply a level of skill or training. Salient Partners, L.P. is the parent company of Integrity Capital, LLC. Salient Partners, L.P. and affiliates do not provide tax or legal advice. 2
Flash Reporting Causes for Variances Internally produced tool for intra month position monitoring and performance All numbers are estimates and have not been finalized by BNY Mellon Data is gathered and analyzed from several sources Custodian (BNY Mellon), Bloomberg, Salient middle office, SDCERA Accounting, External managers Reasons for differences between Final and Estimated data Lagged reporting for the private markets Private markets are often subject to revisions Less liquid assets and their benchmarks typically take longer to report Custodial accounting data takes 30 days after a month end to finalize Custodial performance composites take 45 days after a month end to finalize Fees for assets held with the custodian are not estimated Commingled vehicle return estimates are net of fees Impact of cash flows calculation methodology used by BNY Mellon Final audited numbers from external managers typically arrive 10-15 business days after a month end 3
For Internal Use Only Not For Further Distribution San Diego County Employees Retirement Association January 31, 2015 Asset Allocation Actual Drift Over/Under Target Policy Normals MTD Performance Composite $ (MM) % % Target Min Max $ (MM) % Target Min Max SDCERA Benchmark Public Equity 2,235.2 21.2% 19.7% 14.7% 24.7% 157.5 1.5% 20% 15% 25% -1.41% -1.56% U.S. Equity 269.1 2.6% Global Equity 1,486.1 14.1% International Equity 150.5 1.4% Emerging Market Equity 329.4 3.1% Private Equity 1,146.0 10.9% 9.9% 4.9% 14.9% 105.4 1.0% 10% 5% 15% -1.63% -1.39% Total Equity 3,381.2 32.1% 29.6% 19.6% 34.6% 262.9 2.5% 30% 20% 35% -1.48% -1.51% High Yield Credit 463.8 4.4% 5.0% 0.0% 10.0% (67.3) -0.6% 5% 0% 10% 0.66% 0.66% Private Credit 99.4 0.9% 5.0% 0.0% 10.0% (428.3) -4.1% 5% 0% 10% 0.00% 0.00% Total Credit 563.2 5.4% 10.1% 5.1% 15.1% (495.6) -4.7% 10% 5% 15% 0.58% 0.33% US Treasuries 543.5 5.2% 5.2% 0.2% 10.2% (5.6) -0.1% 5% 0% 10% 7.68% 4.06% Emerging Market Debt 491.0 4.7% 5.0% 0.0% 10.0% (38.5) -0.4% 5% 0% 10% 0.63% 0.34% Managed Futures 648.7 6.2% 5.1% 0.1% 10.1% 110.8 1.1% 5% 0% 10% 6.18% 1.94% Hedge Funds and Relative Value 585.6 5.6% 5.0% 0.0% 10.0% 56.2 0.5% 5% 0% 10% 3.70% 0.33% Total Diversifying Assets 2,268.8 21.6% 20.4% 15.4% 40.4% 123.0 1.2% 20% 15% 40% 4.67% 1.67% Public Real Assets 429.1 4.1% 4.4% -0.6% 9.4% (37.4) -0.4% 5% 0% 10% -3.37% -3.90% Private Real Assets 621.7 5.9% 5.4% 0.4% 10.4% 51.9 0.5% 5% 0% 10% 0.00% 0.00% Real Estate 977.4 9.3% 10.0% 5.0% 15.0% (77.9) -0.7% 10% 5% 15% 0.00% 0.00% Total Real Assets 2,028.3 19.3% 19.9% 9.9% 29.9% (63.4) -0.6% 20% 10% 30% -0.72% -0.90% Total Risk Parity 2,059.2 19.6% 20.0% 0.0% 0.0% 0.0-0.5% 20% 17% 23% 2.10% -0.19% Unequitized Cash 220.6 2.1% 0.0% 220.6 2.1% GRAND TOTAL INVESTMENTS 10,521.4 100.0% 100.0% 0.0 0.0% 0.69% -0.30% Performance Trailing Performance MTD QTD FYTD CYTD 1 Yr 3 Yr 5 Yr IC Inc BM Inc SDCERA 0.69 0.69 2.18 0.69 10.35 8.35 9.63 9.42 8.94 Benchmark (0.30) (0.30) (0.43) (0.30) 7.37 7.29 8.89 8.56 8.44 Traditional (0.23) (0.23) (1.19) (0.23) 5.92 8.02 8.35 7.97 7.83 S&P 500 (3.00) (3.00) 2.93 (3.00) 14.22 17.47 15.60 15.03 10.01 Barclays Aggregate 2.10 2.10 4.09 2.10 6.60 3.07 4.56 4.61 6.46 Monthly and Yearly Performance January February March April May June July August September October November December 2010 (1.53) 1.11 3.68 1.47 (5.17) (1.60) 4.49 (0.66) 5.14 2.19 (1.45) 3.71 2011 0.83 2.22 0.71 3.18 (0.56) (0.55) 1.01 (1.69) (4.33) 5.27 (0.80) 0.72 2012 4.02 2.17 (0.31) 0.78 (2.83) 2.11 1.88 1.06 1.62 (0.26) 0.98 1.47 2013 1.91 0.15 1.42 2.01 (1.64) (2.98) 1.65 (1.42) 2.94 2.29 (0.15) 0.45 2014 (0.74) 2.16 1.25 0.83 1.91 1.61 (0.85) 2.34 (1.49) 0.48 1.24 (0.20) 2015 0.69 4
For Internal Use Only Not For Further Distribution $1.70 $1.60 $1.50 $1.40 $1.30 $1.20 $1.10 $1.00 Public Equity Private Equity High Yield Credit Private Credit US Treasuries Emerging Market Debt Managed Futures Hedge Funds and Relative Value Public Real Assets Private Real Assets Real Estate Risk Parity Gross Total Investments Growth of a Dollar 10/01/09 - Present SDCERA Net Benchmark Blended Actuarial Rate Over/Under Target Gross Total In #REF! Risk Parity -0.5% Real Estate -0.7% Private Real A 0.5% Public Real A -0.4% Hedge Funds 0.5% Managed Fut 1.1% Emerging Ma -0.4% US Treasuries -0.1% Private Credi -4.1% High Yield Cr -0.6% Private Equit 1.0% Public Equity 1.5% -5.0% -4.0% -3.0% -2.0% -1.0% 0.0% 1.0% 2.0% San Diego County Employees Retirement Association January 31, 2015 MTD Attribution Asset Classes Allocation Selection Timing & Interaction Total Public Equity (0.01) 0.03 0.02 $1.58 Private Equity (0.01) (0.03) (0.04) $1.55 High Yield Credit 0.00 (0.00) 0.00 $1.50 Private Credit 0.04 0.00 0.04 US Treasuries 0.01 0.19 0.20 Emerging Market Debt 0.00 0.01 0.02 Managed Futures 0.03 0.25 0.27 Hedge Funds and Relative Value 0.02 0.20 0.23 Public Real Assets 0.00 0.02 0.03 Private Real Assets (0.01) 0.00 (0.01) Real Estate 0.01 0.00 0.01 Risk Parity (0.01) 0.44 0.43 Cash, Timing and Other (0.02) 0.00 (0.18) (0.20) Total Fund 0.05 1.12 (0.18) 1.00 Allocation vs Drift Unequitized Cash, 2.1% Public Equity, 21.2% Total Risk Parity, 19.6% Real Estate, 9.3% Private Real Assets, 5.9% Public Real Assets, 4.1% Hedge Funds and Managed Futures, RV, 6.0% 6.2% Private Equity, 10.9% High Yield Credit, 4.4% Private Credit, 0.9% US Treasuries, 5.2% OTC Counter Party Exposure (MM) Counter Party Credit Ratings Notional Gross Exp Collateral Net Exp % of NAV Moody's Fitch Goldman Sachs 846.5 (9.0) (8.7) (0.4) 0.00% Rating Outlook Rating Outlook Deutsche Bank 579.3 (5.4) (5.3) (0.1) 0.00% Barclays (P)A3 NEG N/A STABLE Total 1,425.7 (14.4) (14.0) (0.5) 0.00% BNP Baa2 STABLE A NEG Cash BNY Mellon A1 NEG A+ STABLE PIMCO $ 4,551.0 BOA ML A1 STABLE AA- STABLE BNY Mellon 508.4 Citibank Baa2 STABLE A STABLE Goldman Sachs 214.7 Deutsche Bank A3 NEG A+ NEG Other 34.3 Goldman Sachs Baa1 STABLE A STABLE Total $ 5,308.3 Morgan Stanley Baa2 POS A STABLE EMD, 4.7% 5
For Internal Use Only Not For Further Distribution Disclosures San Diego County Employees Retirement Association January 31, 2015 Performance is preliminary and unaudited. Such estimates are not guaranteed to be accurate and do not guarantee future performance. Allocations are subject to change. January 2015 performance is estimates; all other performance is net of fees. Past performance is no guarantee of future index results. The index does not bear fees and expenses. Integrity Capital Inception is October 2009. Note that an investor cannot invest directly into an index. Prior to June 2010, the Total Fund Benchmark is composed of 23% Russell 3000, 24% MSCI All-Country World ex-u.s. Investable Market Index (IMI), 4% JP Morgan Global EMBI, 3% Citigroup High Yield Cash Pay Index, 10% Real Estate Custom Benchmark, 4% S&P Goldman Sachs Commodity Index (GSCI), 5% U.S. CPI (Inflation) + 5%, 5% Private Equity Custom Benchmark, 17% Barclays Capital Aggregate Bond Index, and 5% Barclays US Inflation Linked Bond Index. Custom Benchmark from July 2010 to June 2014 is 20% MSCI World Net Index, 5% MSCI Emerging Markets Index, 5% ML High Yield Master II, 3.3%Russell 3000 + 3%, 6.7% Russell 3000, 10% JP Morgan GBI--EM Global Diversified (Unhedged), 6.7% HFRI Macro (HFRX), 3.3% Barclays CTA Index, 10% Three-Month Treasury Bills + 2%, 5% Three-Month Treasury Bills, 40% Barclay's 10-year UST Futures Index, 10% NCREIF NPI, 2.98% GSCI,.36% GSCI (Lagged), 3.3% S&P MLP, 1.67% S&P Materials Index, 1.67% S&P/TSX Materials Composite Index, 5% Barclay's Capital US TIPS. From July 1, 2014 to present, the custom benchmark is 20% MSCI All Country World Net Index,5% Russell 3000+3% Annualized (lagged one quarter), 5% Russell 3000, 5% ML High Yield Master II (lagged one quarter) + 2%, 5% ML High Yield Master II, 5% Barclay's US Treasury: 7-10 Year, 5% JP Morgan GBI--EM Global Diversified (Unhedged), 5% Barclays CTA, 5% HFRI Macro, 5% of 1/3 MLP + 1/3 SPGSCI + 1/3 S&P Materials, 5% 3-Month XTreasury Bills + 5% (lagged one quarter), 10% NCREIF ODCE, 20% Risk Parity (15%+ Volatility). 6
Trailing Performance Estimates For the Period Ended January 31, 2015 Trailing Performance 1-Month QTR CYTD 1 Yr 3 Yr 5 Yr IC Inc SDCERA 0.69 0.69 0.69 10.35 8.35 9.64 9.42 Benchmark (0.30) (0.30) (0.30) 7.37 7.29 8.89 8.56 Actuarial Rate 0.62 0.62 0.62 7.75 7.78 7.87 7.88 Traditional (0.23) (0.23) (0.23) 5.92 8.02 8.35 7.97 MSCI World (1.81) (1.81) (1.81) 7.00 12.91 10.73 9.98 S&P 500 (3.00) (3.00) (3.00) 14.22 17.47 15.60 15.03 Barclays Aggregate 2.10 2.10 2.10 6.60 3.07 4.56 4.61 Fiscal Year Performance 2015 FYTD 2014 2013 2012 2011 2010 2009 SDCERA 2.18 13.44 7.73 5.89 20.72 13.08 (24.57) Benchmark (0.43) 13.61 6.98 5.20 21.20 10.76 (18.01) Actuarial Rate 4.45 7.75 7.75 8.00 8.00 8.00 8.25 Traditional (1.19) 14.98 9.66 0.80 19.63 10.93 (19.63) MSCI World (2.96) 24.05 18.58 (4.98) 30.51 10.20 (29.50) S&P 500 2.93 24.61 20.60 5.45 30.69 14.43 (26.21) Barclays Aggregate 4.09 4.37 (0.69) 7.47 3.90 9.50 6.05 Performance is preliminary and unaudited. Such estimates are not guaranteed to be accurate and do not guarantee future performance. Allocations are subject to change. January 2015 are estimates; all other performance is net of fees. Past performance is no guarantee of future index results. The index does not bear fees and expenses. Integrity Capital Inception is October 2009. Note that an investor cannot invest directly into an index. The Traditional is composed of 45% MSCI World Net, 35% Barclays Aggregate, 5% DJ US REIT, 5% HFRIMI, 5% GSCI, 5% MCSI USA levered 30%. 7
Monthly Return Contribution For the Month Ended January 31, 2015 Asset Classes Beginning January Weights (%) January Returns (%) Contribution (%) Equity 32.55-1.48-0.48 Credit 5.42 0.58 0.03 Diversifying Assets 21.81 4.67 1.02 Real Assets 19.21-0.72-0.14 Risk Parity 19.20 2.10 0.40 Cash, Timing, and Other 1.82-0.24-0.10 Interaction Effect -0.04 Total Fund 100.00 0.69 For illustrative purposes only. Past performance is not indicative of future results. Sources: SDCERA Operational Cash Register, BNY Mellon Workbench, Salient Partners Reporting. 8
Growth of a Dollar Integrity Capital Inception through January 31, 2015 $1.70 $1.60 $1.50 $1.58 $1.55 $1.50 $1.40 $1.30 $1.20 $1.10 $1.00 SDCERA Net Benchmark Blended Actuarial Rate Performance is preliminary and unaudited. Such estimates are not guaranteed to be accurate and do not guarantee future performance. Allocations are subject to change. January 2015 are estimates; all other performance is net of fees. Past performance is no guarantee of future index results. The index does not bear fees and expenses. Integrity Capital Inception is October 2009. Note that an investor cannot invest directly into an index. Please see Custom Benchmark Disclosures page for full index constituents. The historical actuarial rate for FY 2014 and 2013: 7.75%, for FY 2012 thru 2010: 8.00%, FY2009: 8.25%. 9
Notable January Activity Redeemed $50MM from Hoisington and added $30MM to SSGA MLPs Hedge Fund Redemptions Received Blue Mountain: $30.4MM Brevan Howard: $41.2MM Silver Point: $1.2MM Lagged Distributions Private Equity: $8.5MM Real Estate: $11.5MM Real Assets: $2.0MM Private Credit: $2.4MM Lagged Capital Calls Private Equity: $18.3MM Real Estate: $1.8MM Real Assets: $1.1MM Private Credit: $5.0MM Source: SDCERA Operational Cash Register. For illustrative purposes only. Lagged Distributions and Capital Calls that will be recorded on a quarter end in the asset class composite but in the cash composite on an unlagged basis. 10
SDCERA Activity Summary January 31, 2015 Market Value* Market Value Market Value* Asset Class 12/31/14 Change* Cash Flows* 01/31/15 Performance* Benchmark* Allianz Global 279,637,163 (1,163,926) - 278,473,237-0.42-3.00 U.S. Equity 279,637,163 (1,163,926) - 278,473,237-0.42-3.00 Developed Market Futures (Salient) 306,166,322 (5,207,443) - 300,958,879-1.70-1.81 Developed Market Swap 1,200,473,246 (21,752,193) - 1,178,721,052-1.81-1.81 Global Equity 1,506,639,568 (26,959,636) - 1,479,679,932-1.79-1.81 EAFE Swap 149,758,180 732,071-150,490,251 0.49 0.49 International Equity 149,758,180 732,071 150,490,251 0.49 0.49 DFA EM Value 146,104,910 (2,713,909) - 143,391,001-1.86 0.60 Genesis 187,811,286 (1,809,584) - 186,001,703-0.96 0.60 Emerging Market Equity 333,916,196 (4,523,492) - 329,392,704-1.35 0.60 Public Equity 2,269,951,106 (31,914,983) - 2,238,036,124-1.41-1.56 Private Equity 547,292,483 - - 547,292,483 0.00 0.00 Russell 3000 Replication Futures (Salient) 590,582,590 (18,639,703) 6,299,393 578,242,280-3.14-2.78 Private Equity 1,137,875,073 (18,639,703) 6,299,393 1,125,534,763-1.63-1.39 Total Equity 3,407,826,179 (50,554,686) 6,299,393 3,363,570,887-1.48-1.51 Blackrock Credit Investors 4,002,296 26,415-4,028,711 0.66 0.66 Hotchkis & Wiley Capital 238,362,328 1,573,191-239,935,520 0.66 0.66 Oaktree HY 238,403,287 1,573,462-239,976,749 0.66 0.66 High Yield Fixed Income/Credit 480,767,911 3,173,068-483,940,980 0.66 0.66 Private Credit 67,634,346 - - 67,634,346 0.00 0.00 Private Credit 67,634,346 - - 67,634,346 0.00 0.00 Total Credit 548,402,257 3,173,068-551,575,326 0.58 0.33 10YR US Treasury Futures (Salient) 347,930,625 11,190,375-359,121,000 3.22 4.06 Hoisington 205,382,332 29,405,809 (50,000,000) 184,788,141 16.30 4.06 US Bonds 553,312,957 40,596,184 (50,000,000) 543,909,141 7.68 4.06 Wellington EMD 487,939,619 3,074,020-491,013,639 0.63 0.34 Emerging Market Debt 487,939,619 3,074,020-491,013,639 0.63 0.34 Campbell 137,395,714 11,884,729-149,280,443 8.65 1.94 Cantab 128,593,329 12,885,052-141,478,381 10.02 1.94 Trend Strategy (Salient) 345,665,548 13,017,405-358,682,952 3.77 1.94 Managed Futures 611,654,591 37,787,185-649,441,776 6.18 1.94 Blue Mountain Capital Credit Alt 103,991,528 427,008 (30,369,516) 74,049,020 0.58 0.33 Brevan Howard, Series B 148,844,577 3,575,386 (41,152,221) 111,267,742 3.32 0.33 DE Shaw - Heliant 116,512,307 6,990,738-123,503,046 6.00 0.33 AQR Delta 266,914,739 9,902,537-276,817,275 3.71 0.33 Hedge Funds and Relative Value 636,263,150 20,895,669 (71,521,736) 585,637,083 3.70 0.33 Total Diversifying Assets 2,289,170,318 102,353,058 (121,521,736) 2,270,001,639 4.67 1.67 GSCI Swap Notional 103,006,854 (6,514,701) - 96,492,153-6.32-7.50 SSGA S&P MLP Index 163,380,837 (5,195,912) 30,000,000 188,184,925-2.91-2.33 SSGA S&P 500 Materials 148,929,250 (2,803,926) - 146,125,324-1.88-1.89 Public Real Assets 415,316,940 (14,514,539) 30,000,000 430,802,401-3.37-3.90 Private Real Assets 616,734,044 - - 616,734,044 0.00 0.00 Real Estate Private 977,420,543 - - 977,420,543 0.00 0.00 Real Estate 977,420,543 - - 977,420,543 0.00 0.00 Total Real Assets 2,009,471,528 (14,514,539) 30,000,000 2,024,956,989-0.72-0.90 Risk Parity (Salient) 2,012,199,351 42,315,472-2,054,514,824 2.10-0.19 Risk Parity 2,012,199,351 42,315,472-2,054,514,824 2.10-0.19 Total Risk Parity 2,012,199,351 42,315,472-2,054,514,824 2.10-0.19 Pimco Cash 4,512,978,239 (10,882,013) 48,910,275 4,551,006,501-0.24 Operational Cash and Other 694,411,651 35,453 37,604,086 732,051,191 0.01 Total Exposure 15,474,459,523 15,547,677,356 Less: Swap Notional (1,453,238,279) 27,534,823 (1,425,703,456) Less: Futures Notional (1,244,679,537) 6,357,378 (1,238,322,159) All figures are estimates and are not verified by BNY Mellon Less: Dynamic Strategies (2,357,864,899) (55,332,877) (2,413,197,776) GRAND TOTAL INVESTMENTS 10,418,676,808 71,925,814 (20,148,658) 10,470,453,964 0.69-0.30 *Estimate 11
Exposure Report - Risk Parity and Trend Sleeves Asset Allocation 01/31/15 Risk Parity Trend Following* Composite $ (MM) % $ (MM) % U.S. Equity 187.4 9.1% 76.7 15.1% Global Equity 0.0 0.0% 0.0 0.0% International Equity 139.1 6.8% 112.6 22.2% Emerging Market Equity 238.8 11.6% 23.5 4.6% Private Equity 0.0 0.0% 0.0 0.0% Total Equity 565.3 27.5% 212.8 41.9% High Yield Credit 337.9 16.4% 0.0 0.0% Private Credit 0.0 0.0% 0.0 0.0% Investment Grade Credit 862.5 41.9% 0.0 0.0% Total Credit 1,200.4 58.3% 0.0 0.0% US Treasuries 521.3 25.3% 119.3 23.5% International Rates 1,076.1 52.3% 567.0 111.8% Emerging Market Debt 35.7 1.7% 0.0 0.0% Managed Futures 0.0 0.0% 0.0 0.0% Hedge Funds and Relative Value 0.0 0.0% 0.0 0.0% Total Diversifying Assets 1,633.1 79.3% 686.3 135.3% Public Real Assets 279.0 13.6% (167.5) -33.0% Private Real Assets 0.0 0.0% 0.0 0.0% Real Estate 0.0 0.0% 0.0 0.0% Total Real Assets 279.0 13.6% (167.5) -33.0% Total Net Market Exposure 3,677.8 178.6% 731.6 144.2% Total Gross Market Exposure 3,731.1 181.2% 1,440.2 283.9% NAV 2,059.2 507.3 *Trend Following includes both Salient Trend and Campbell & Co. For illustrative purposes only. Sources: BNY Mellon Workbench, Integrity Capital Reporting. Allocations are subject to change without notice. 12
Total Fund Asset Class Exposure Asset Allocation 01/31/15 Actual Risk Parity Trend Following Total Exposure Composite $ (MM) % $ (MM) % $ (MM) % $ (MM) % U.S. Equity 269.1 2.6% 187.4 1.8% 76.7 0.7% 533.3 5.1% Global Equity 1,486.1 14.1% 0.0 0.0% 0.0 0.0% 1,486.1 14.1% International Equity 150.5 1.4% 139.1 1.3% 112.6 1.1% 402.2 3.8% Emerging Market Equity 329.4 3.1% 238.8 2.3% 23.5 0.2% 591.6 5.6% Private Equity 1,146.0 10.9% 0.0 0.0% 0.0 0.0% 1,146.0 10.9% Total Equity 3,381.2 32.1% 565.3 5.4% 212.8 2.0% 4,159.3 39.5% High Yield Credit 463.8 4.4% 337.9 3.2% 0.0 0.0% 801.7 7.6% Private Credit 99.4 0.9% 0.0 0.0% 0.0 0.0% 99.4 0.9% Investment Grade Credit 0.0 0.0% 862.5 8.2% 0.0 0.0% 862.5 8.2% Total Credit 563.2 5.4% 1,200.4 11.4% 0.0 0.0% 1,763.6 16.8% US Treasuries 543.5 5.2% 521.3 5.0% 119.3 1.1% 1,184.1 11.3% International Rates 0.0 0.0% 1,076.1 10.2% 567.0 5.4% 1,643.1 15.6% Emerging Market Debt 491.0 4.7% 35.7 0.3% 0.0 0.0% 526.7 5.0% Managed Futures 648.7 6.2% 0.0 0.0% (507.3) -4.8% 141.5 1.3% Hedge Funds and Relative Value 585.6 5.6% 0.0 0.0% 0.0 0.0% 585.6 5.6% Total Diversifying Assets 2,268.8 21.6% 1,633.1 15.5% 179.1 1.7% 4,081.0 38.8% Public Real Assets 429.1 4.1% 279.0 2.7% (167.5) -1.6% 540.6 5.1% Private Real Assets 621.7 5.9% 0.0 0.0% 0.0 0.0% 621.7 5.9% Real Estate 977.4 9.3% 0.0 0.0% 0.0 0.0% 977.4 9.3% Total Real Assets 2,028.3 19.3% 279.0 2.7% (167.5) -1.6% 2,139.8 20.3% Total Risk Parity 2,059.2 19.6% (2,059.2) -19.6% 0.0 0.0% 0.0 0.0% Total Exposure 10,300.8 97.9% 1,618.6 15.4% 224.3 2.1% 12,143.7 115.4% Unequitized Cash 220.6 2.1% Net Investment 10,521.4 100.0% Additional Cash Collateral 2,521.2 24.0% 2,059.2 19.6% 507.3 4.8% 5,087.7 48.4% Cash Reconciliation $ (MM) PIMCO 4,551.0 BNY Mellon 508.4 Goldman Sachs 214.7 Other 34.3 Total Cash 5,308.3 50.5% For illustrative purposes only. Past performance is not indicative of future results. Sources: BNY Mellon Workbench, Integrity Capital Reporting. 13
Trustee Tactical Trading Scorecard Evaluating Trustee decision to reduce volatility and exposure in Risk Parity On September 18 th, the SDCERA Board of Trustees directed Salient to reduce the risk parity expected standard deviation of returns (reducing leverage limits from 400% to 100%)* of the portfolio from 15% to 6% The total forgone gain on the trade is estimated to be $171.4MM as of January 31 st Month RP - V15 Gain/(Loss) RP - Trustee Gain/(Loss) Value Add September (19,169,469) (11,939,750) 7,229,719 October 70,302,152 28,270,593 (42,031,559) November 129,345,696 49,741,506 (79,604,190) December (22,368,937) (9,723,053) 12,645,884 January 111,961,187 42,315,472 (69,645,714) Cumulative 270,070,628 98,664,768 (171,405,860) * Leverage calculated as (total exposure net assets)/net assets Over this same time period, a similar investment of $1.9B in the S&P 500 would have lost $2.9MM, Vanguard s Total Stock Market fund would have lost $10MM, and Barclays Aggregate Bond Index would have gained $86.8MM For illustrative purposes only. September gain/loss is based on Integrity Capital, LLC estimates. October-December gains/losses are based on Audited BNY Mellon Accounting data. January gain/loss is based on preliminary BNY Mellon Accounting data. Sources: BNY Mellon Workbench, Integrity Capital, LLC Reporting. 14
Wilshire TUCS Universe Comparison Peer Analysis as of December 31, 2014 15
San Diego County Employees Ret. Assoc. Performance Comparison Total Returns of Master Trusts - Public : Plans > $1 Billion Cumulative Periods Ending : December 31, 2014 Percentile Rankings 1 Qtr 2 Qtrs 3 Qtrs 1 Year 2 Years 3 Years 4 Years 5 Years 21 Qtrs 7 Years 10 Years 5th 2.88 2.84 6.78 9.47 14.00 13.72 10.72 11.19 11.40 6.50 8.04 25th 1.95 1.42 5.41 7.86 12.24 12.67 9.74 10.47 10.76 5.82 7.24 50th 1.44 0.48 4.53 6.84 11.28 12.02 9.18 10.05 10.30 5.30 6.77 75th 1.10-0.18 3.64 5.75 9.79 11.01 8.40 9.14 9.26 4.70 6.26 95th 0.23-1.53 2.22 4.15 6.16 7.35 6.54 7.29 7.23 3.94 5.54 No. Of Obs 89 89 89 89 89 87 86 84 84 81 77 SDCERA Total Fund 1.68 (37) 1.73 (17) 6.30 (8) 9.25 (7) 8.17 (89) 10.05 (84) 9.15 (51) 9.75 (61) 10.04 (59) 4.45 (83) 6.86 (44) SDCERA wrp 15 2.72 (5) 2.70 (6) 7.31 (1) 10.29 (3) 8.68 (85) 10.40 (80) 9.41 (36) 9.96 (53) 10.24 (52) 4.59 (76) 6.96 (36) SDCERA Custom Bmk 0.30 (94) -0.13 (70) 4.16 (60) 6.91 (47) 6.93 (92) 8.77 (91) 7.92 (80) 8.54 (85) 8.74 (84) 4.55 (77) 6.70 (59) 16 Wilshire Trust Universe Comparison Service (TUCS ) I-4
Disclosures Custom Benchmarks For illustrative purposes only. Past performance is not indicative of future results. Prior to September 2010, the Total Fund Benchmark is composed of 23% Russell 3000, 24% MSCI All-Country World ex-u.s. Investable Market Index (IMI), 4% JP Morgan Global EMBI, 3% Citigroup High Yield Cash Pay Index, 10% Real Estate Custom Benchmark, 4% S&P Goldman Sachs Commodity Index (GSCI), 5% U.S. CPI (Inflation) + 5%, 5% Private Equity Custom Benchmark, 17% Barclays Capital Aggregate Bond Index, and 5% Barclays US Inflation Linked Bond Index. Custom Benchmark from July 2010 to June 2014 is 20% MSCI World Net Index, 5% MSCI Emerging Markets Index, 5% ML High Yield Master II, 3.3% Russell 3000 + 3%, 6.7% Russell 3000, 10% JP Morgan GBI--EM Global Diversified (Unhedged), 6.7% HFRI Macro (HFRX), 3.3% Barclays CTA Index, 10% Three-Month Treasury Bills + 2%, 5% Three-Month Treasury Bills, 40% Barclay's 10-year UST Futures Index, 10% NCREIF NPI, 2.98% GSCI,.36% GSCI (Lagged), 3.3% S&P MLP, 1.67% S&P Materials Index, 1.67% S&P/TSX Materials Composite Index, 5% Barclay's Capital US TIPS. From July 1, 2014 to present, the custom benchmark is 20% MSCI All Country World Net Index,5% Russell 3000+3% Annualized (lagged one quarter), 5% Russell 3000, 5% ML High Yield Master II (laggedone quarter) + 2%, 5% ML High Yield Master II, 5% Barclay's US Treasury: 7-10 Year, 5% JP Morgan GBI--EM Global Diversified (Unhedged), 5% Barclays CTA, 5% HFRI Macro, 5% of 1/3 MLP + 1/3 SPGSCI + 1/3 S&P Materials, 5% 3-Month Treasury Bills + 5% (lagged one quarter), 10% NCREIF ODCE (lagged one quarter), 20% 60/40 MSCI World/Barclays Aggregate levered to 15% volatility for July September 2014 and a 6% volatility from October 2014 to present. The Total Equity benchmark is 2/3 MSCI All Country World Net and 1/3 Private Equity Custom which is Russell 3000 + 3% lagged three months for the private equity portfolio and Russell 3000 live for the replication. The Total Credit Benchmark is the 50% ML High Yield Master II and 50% ML High Yield Master II +2% annualized lagged three months. The Emerging Market Debt benchmark is the JP Morgan GBI EM Global Diversified (unhedged). The US Bonds benchmark is the Barclays 7-10 yr Treasury Futures index. The Managed Futures is the Barclays Global CTA. The Tactical Trading and RV Strategies benchmark is the 30-day T-bills +4% annualized. The Total Diversifying Assets Benchmark is a blended composite of the sub categories. The Real Estate benchmark is the NCREIF ODCE. The Public Real Assets Benchmark is 33% GSCI, 33% S&P MLP index, 33% S&P Materials Index. TheOtherPrivateRealAssetsbenchmarkis3-monthTBills+5%Annualized.TheTotalRealAssetsBenchmarkisablendedcompositeofthe sub categories. The Risk Parity Benchmark is a 60/40 blend of the S&P 500/Barclays Aggregate levered to 15% volatility. The Traditional Portfolio is composed of 45% MSCI World Net, 35% Barclays Aggregate, 5% DJ US REIT, 5% HFRIMI, 5% GSCI, 5% MCSI USA levered 30%. 17
Index Glossary Each Index contained or referenced in the presentation is defined below: Alerian MLP Index: A composite of the 50 most prominent energy MLPs that provides investors with a comprehensive benchmark for this emerging asset class. Barclays 10 Year US Treasury Futures Index: The index seeks to produce returns that track movements in response to an increase or decrease, as applicable, in the yields available to investors purchasing 10-year U.S. Treasury Notes. Barclays Aggregate Bond Index: A U.S. Aggregate index that covers the USD-denominated, investment-grade, fixed-rate, taxable bond market of SEC-registered securities. The index includes government securities, mortgage-backed securities, asset-backed securities and corporate securities all with a maturity of greater than one year. Barclay CTA Index: An unweighted index that measures the composite performance of established programs. For purposes of this index, an established trading program is a trading program that has four years or more documented performance history. Barclays US TIPS Index: Includes all publicly issued, U.S. Treasury inflation-protected securities that have at least one year remaining to maturity, are rated investment grade, and have $250 million or more of outstanding face value. Citi Group High-Yield Cash-Pay Index: Created by removing the bonds in the Deferred-Interest Index from the US High-Yield Market Index. It includes only cash-pay bonds (both registered and Rule 144A) with at least one year to maturity and at least USD 100 million outstanding. (Base Date: December 31, 1988) Consumer Price Index (CPI) : A measure that examines the weighted average of prices of a basket of consumer goods and services, such as transportation, food and medical care. The CPI is calculated by taking price changes for each item in the predetermined basket of goods and averaging them; the goods are weighted according to their importance. Changes in CPI are used to assess price changes associated with the cost of living. Dow Jones US REITS: Represents equity real estate investment trusts (REITs) and real estate operating companies (REOCs) traded in the U.S. The Dow Jones U.S. Select REIT Index is a subset of the Dow Jones Americas Select RESI and includes only REITs and REIT-like securities. HFRI Macro (Total) Index: An equally-weighted performance index of numerous hedge fund managers pursuing Macro strategies, which are predicated on theses about future movements in global macroeconomic variables and how financial instruments might respond to such movements. JPMorgan EMBI Global Diversified: Limits the weights of countries with larger debt stocks by only including a specified portion of these countries' eligible current face amounts of debt outstanding. JPMorgan GBI-EM Global Diversified: An investable benchmark that includes only those countries that are directly accessible by most of the international investor base. The GBI-EM GLOBAL excludes countries with explicit capital controls, but does not factor in regulatory/tax hurdles in assessing eligibility. Specifically, it includes all GBI-EM countries, as well as the Brazil NTN-F, LTN, and the Colombia local TES tasa fijabond. 18
Index Glossary cont d ML High Yield Master II: A U. S. Aggregate index that is comprised of fixed rate, publicly issued, non-investment grade debt. MSCI AC World Index ex US: A free float-adjusted market capitalization weighted index that is designed to measure the equity market performance of developed and emerging markets, excluding the United States. MSCI Daily TR Net: Measures the price performance of markets with the income from constituent dividend payments. The MSCI Daily Total Return (DTR) Methodology reinvests an index constituent s dividends at the close of trading on the day the security is quoted ex-dividend (the ex-date). MSCI Emerging Markets Index: Covers over 2,700 securities in 21 markets that are currently classified as EM countries. The EM equity universe spans large, mid and small cap securities and can be segmented across styles and sectors. MSCI USA Index : Is a broad-based index that tracks stocks in the United States of America. National Council of Real Estate Investment Fiduciaries (NCREIF) Property Index: A market value-weighted index which measures the performance of investment-grade non-agricultural income-producing properties. The index is composed of existing Apartment, Industrial, Office, and Retail properties acquired on behalf of tax-exempt institutions and held in a fiduciary environment. The index includes reinvestment of income. Red Rocks Global Listed Private Equity: Designed to track the performance of private equity firms which are publicly traded on any nationally recognized exchange worldwide. These companies invest in, lend capital to, or provide services to privately held businesses. The Index is comprised of 40 to 75 public companies representing a means of diversified exposure to private equity firms. Russell 2000 Index: A small-cap stock market index of the bottom 2,000 stocks in the Russell 3000 Index. Russell 3000: Measures the performance of the largest 3000 U.S. companies representing approximately 98% of the investable U.S. equity market. Three-Month Treasury Bills: A short-term debt obligation backed by the U.S. government with a maturity of less than one year. S&P 500 Index: An unmanaged, capitalization weighted index comprising publicly traded common stocks issued by companies in various industries. The S&P 500 Index is widely recognized as the leading broad-based measurement of changes in conditions of the U.S. equities market. S&P GSCI Total Return: Recognized as a leading measure of general price movements and inflation in the world economy. The index representing market beta is world-production weighted. It is designed to be investable by including the most liquid commodity futures, and provides diversification with low correlations to other asset classes. S&P Materials: Comprises those companies included in the S&P 500 that are classified as members of the Global Industry Classification Standards materials sector. S&P MLP: Includes both master limited partnerships (MLPs) and publicly traded limited liability companies (LLCs), which have a similar legal structure to MLPs and share the same tax benefits. S&P/TSX Materials: Constituents are selected from a stock pool of S&P/TSX Composite Index stocks, and the relative weight of any single index constituent is capped at 25%. The indices are based upon the Global Industry Classification Standards. 19
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