Agenda Investment Advisory Council (IAC)

Monday, December 4, 2017, 1:00 P.M.*

Hermitage Room, First Floor 1801 Hermitage Blvd., Tallahassee, FL 32308

1:00 – 1:05 P.M. 1. Welcome/Call to Order/Approval Peter Collins, Chair of Minutes (See Attachments 1A – 1B)

(Action Required)

1:05 – 1:15 P.M. 2. Opening Remarks/Reports Ash Williams (See Attachments 2A – 2F) Executive Director & CIO

1:15 – 2:45 P.M. 3. Strategic Investments Asset Class Trent Webster, SIO Review Strategic Investments and (See Attachments 3A – 3C)

Cambridge Associates André Mehta Tod Trabocco Samit Chhabra

The Townsend Group Richard Brown Jack Koch Seth Marcus

Investment Advisory Council – Agenda December 4, 2017 Page 2

2:45 – 4:00 P.M. 4. Asset Class SIO Updates Alison Romano, SIO Global Equity DC Programs Update Tim Taylor, SIO Global Equity (See Attachments 4A – 4E) Katy Wojciechowski, SIO Fixed Income Cherie Jeffries, Director Fixed Income Trading Steve Spook, SIO Real Estate John Bradley, SIO Strategic Investments and Private Equity Daniel Beard, Director of Administration Defined Contribution Programs

4:00 – 4:15 P.M. 5. Major Mandate Performance Aon Hewitt Reviews Steve Cummings (See Attachment 5) Katie Comstock

4:15 – 4:30 P.M. 6. Audience Comments/ Peter Collins, Chair Closing Remarks/ Proposed 2018 Meeting Dates/ Adjourn (See Attachment 6)

*All agenda item times are subject to change.

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APPEARANCES IAC MEMBERS: STATE BOARD OF ADMINISTRATION OF FLORIDA PETER COLLINS GARY WENDT CHUCK COBB BOBBY JONES VINNY OLMSTEAD SEAN McGOULD (by telephone) INVESTMENT ADVISORY COUNCIL MEETING

SBA EMPLOYEES:

ASH WILLIAMS, EXECUTIVE DIRECTOR JOHN BENTON MICHAEL McCAULEY JOHN BRADLEY MONDAY, SEPTEMBER 25, 2017 JOAN HASEMAN 1:10 P.M. - 4:20 P.M. TRENT WEBSTER STEVE SPOOK KATY WOJCIECHOWSKI ALISON ROMANO TIM TAYLOR 1801 HERMITAGE BOULEVARD HERMITAGE ROOM, FIRST FLOOR TALLAHASSEE, FLORIDA CONSULTANTS:

MICHAEL SCHLACHTER - (Mercer) NAYEF PERRY - (Hamilton Lane) GUSTAVO CARDENAS - (Hamilton Lane) ANUP SHARMA - (Hamilton Lane) DAN ROSENBERGER - (Hamilton Lane) DAVID HELGERSON - (Hamilton Lane) (by telephone) KATIE COMSTOCK - (Aon Hewitt) STEVE VOSS - (Aon Hewitt)

REPORTED BY: JO LANGSTON Registered Professional Reporter

ACCURATE STENOTYPE REPORTERS, INC. 2894-A REMINGTON GREEN LANE TALLAHASSEE, FLORIDA 32308 (850)878-2221

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1 INVESTMENT ADVISORY COUNCIL MEETING 1 So with that -- 2 * * * 2 MR. COLLINS: Can I -- let me interrupt you for 3 MR. COLLINS: So we will call the meeting to 3 one second, Ash. We do need to approve the minutes 4 order. According to Trustee Wendt, we are 11 minutes 4 from the June 5th meeting. Everybody should have 5 behind, so we have to make that 11 minutes up. 5 already received the minutes. I know they're in their 6 MR. WENDT: Skip Tabs 4 and 5. 6 packets. If anybody has any comments on the minutes, 7 MR. COLLINS: Skip Tabs 4 and 5? We'll see what 7 now would be the time to make them. If not, I would 8 we can do. I'd like to call the meeting to order of 8 entertain a motion to approve the minutes. 9 the Investment Advisory Council for Monday, 9 MR. JONES: Move to approve. 10 September 25th. I'm going to turn it over to Ash to 10 MR. WENDT: Second. 11 make some opening remarks and give some reports. 11 MR. COLLINS: Moved and seconded. All in favor? 12 MR. WILLIAMS: Thank you, Mr. Chairman. And 12 (Ayes) 13 recognizing Mr. Wendt's good point about our time, I'm 13 MR. COLLINS: All right. Go ahead, Ash. Sorry. 14 going to be very brief. First of all, housekeeping 14 MR. WILLIAMS: Thank you. Not a problem. So a 15 matters. Those of you who are on the phone, please 15 couple of quick things I'm going to touch on. First of 16 identify yourself when you speak, for benefit of the 16 all, calendar year to date performance as of the close 17 court reporter. 17 on Friday, on the defined benefit side, the fund is up 18 Secondly, also for those on the phone, we're using 18 12.59 percent. That's 60 basis points of value added 19 some new meeting software today, which we hope goes 19 and 13 and a half billion dollars change in 20 well. But one side effect of this is that you may 20 of the Florida Retirement System Trust Fund, net of the 21 experience a delay. If you are watching this on the 21 distributions that you-all know we make that average 22 while listening to the phone, you may 22 commonly 600 million or so, normally greater than that, 23 encounter a delay on slide transitions, so it might be 23 monthly. So all good there. 24 helpful for you to have your hard copy book of the 24 On the defined contribution side, a good story as 25 meeting materials just in case that's a problem. 25 well, 9.98 percent gain for the calendar year, 89 basis

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1 points of value add. And current assets there are 10.2 1 speaks pretty well of the job the IAC is doing and that 2 billion. So the defined contribution side has 2 we are doing with your guidance. So we'll take that. 3 continued to grow. Returns are good on both. And I 3 The only other thing I was going to touch on is 4 think the more interesting footnote on returns is if we 4 it's no secret to all of you as Floridians that we've 5 go away from the calendar year to date numbers and go 5 had a few visits from hurricanes of late, which has 6 back to the fiscal year numbers, for the fiscal year 6 provided us an undesired but very effective test of our 7 ended 30 June 2017 -- and, again, these numbers are not 7 disaster recovery and business continuity plans. And 8 final. The audit won't be completed until Q4. So 8 with Irma, which was originally expected to come 9 these are still estimated numbers and may shift a bit 9 literally right through Tallahassee, we made all the 10 as valuations for private market assets are updated in 10 same preparations and reviewed all our plans and 11 the immediate future. 11 corrected the things that troubled us during Hermine a 12 But where we sit now is that the net return we're 12 year ago, and then of course at the last minute, the 13 showing for calendar year -- or fiscal year-end 30 June 13 storm passed about 60 miles east of here and was far 14 is 13.25 percent, which is 36 basis points of value 14 less destructive than we had thought. 15 add. So happy with that. But what I was really 15 But we didn't miss a beat. All our preparations 16 pleased with is our friends at Aon Hewitt did a 16 went well. We were in touch with all our clients in 17 comparison between our performance at the Florida SBA 17 advance, particularly in places like the Florida PRIME, 18 and those of the other nine largest public pension 18 where we have a lot of governmental clients who look to 19 plans in the United States. And if you look at the 19 us for daily liquidity. All of them got liquidity in 20 one, three, five and ten year periods, our performance 20 advance. We didn't have any problems. Various 21 stacks up as follows. 21 transactions, capital calls, et cetera, were dealt with 22 Year one, percentile ranking, one. Year series 22 in advance, and it all went very, very well. 23 three and five, in the 25th percentile, so top 23 So we were pleased with that and don't ever want 24 quartile. And the ten year, the fifth percentile. So 24 to be tested by a direct hit, but I think it's 25 I think a ten year number of fifth percentile net 25 important for any business to be prepared, because if

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1 you're not and you let your clients down, they'll never 1 So we took the damage forecasts from those models, 2 forget it. So all good there. And unless anyone has 2 then had Paragon, who is our contractual administrator 3 any questions, that's it for me. Thank you. 3 for the CAT Fund, overlay that with the exposure 4 MR. COBB: Mr. Chairman, I have a question on the 4 information we have for the primary insurers' coverage 5 CAT Fund. 5 through the Florida Hurricane Catastrophe Fund, so that 6 MR. COLLINS: Yes, sir. 6 we could say, okay, the loss conditions were at this 7 MR. COBB: What's going to probably be the draw on 7 level in this zip code. What is our exposure there? 8 that and what's the impact of that? 8 What's it worth? What's the nature of the 9 MR. WILLIAMS: I don't have a hard number for that 9 construction, and what should our extrapolated expected 10 yet, Ambassador. We will just start seeing claims data 10 damages be? 11 probably this week. What we did to get an initial test 11 Long way of saying I don't think we're going to 12 of how this would look is a two-step exercise, where we 12 have any material challenge to the CAT Fund at all. I 13 first look at the various models that you always see 13 think whatever claims we have we will pay in cash. We 14 quoted on the Weather Channel and CNN, the European 14 will have substantial dollars remaining. Hopefully we 15 model, the American model, et cetera, that look at 15 can get through the remainder of this season without 16 storm path and the intensity of storm exposure along 16 further major events. That of course remains to be 17 that path and the duration of that intensity, because 17 seen. 18 when you're looking at the destructive power of storms, 18 MR. COLLINS: Go ahead. 19 it's a function of not only wind force but how long the 19 MR. WENDT: Two questions. The first one is out 20 wind force is there. 20 of curiosity. The PRIME fund, which is drawn down by 21 If you have a tornado for 30 seconds with 21 the local people, how much did they draw down, all the 22 150-mile-an-hour wind, that is nowhere near as 22 local municipalities, in round numbers? Half? 23 destructive as 150-mile-an-hour wind for two hours, 23 MR. WILLIAMS: I don't know if I've got a hard 24 which is what you saw in the Virgin Islands and Puerto 24 number for that. No, it was nowhere near half. Is 25 Rico, some of the events of the past few weeks. 25 Mike McCauley in the room? Yeah. Mike, what was --

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1 did you hear the question? 1 gave of the cost, not for us, but -- 2 MR. McCAULEY: Yeah. It was a little bit over 2 MR. WILLIAMS: Right. Big dollars. 3 500 million in the three days leading up to. 3 MR. WENDT: Yeah. And it didn't happen, and I'm 4 MR. WENDT: That's all. Good. 4 still amazed by the fact that a hurricane can go up the 5 MR. COLLINS: Your second question? 5 length of the state and get by with basically nothing. 6 MR. WENDT: The second question has to do with 6 MR. COLLINS: There was an interesting article two 7 something I remember from many meetings ago, where you 7 days after the hurricane in the Wall Street Journal, 8 were discussing the CAT Fund and buying reinsurance and 8 and it talked about the building codes in Florida 9 things. And you showed us a chart, which I still have 9 post-Hurricane Andrew and the effect that they're 10 by I can't find, where if a certain size hurricane cut 10 having on hardening the infrastructure of Florida and 11 across the center of the state, the losses would be 11 the citizens of Florida, relative to other areas that 12 $300 billion. Do you remember that chart? 12 may not have done that; say, Houston doesn't have the 13 MR. WILLIAMS: There is a maximum loss event 13 building codes that we certainly have in South Florida 14 graphic. 14 or all of Florida now. 15 MR. WENDT: Yeah. 15 And it talked about how -- I forget the 16 MR. WILLIAMS: That must be it. But for the CAT 16 multiplier. I almost cut it out and sent it to you, 17 Fund, the CAT Fund does not have unlimited liability. 17 Ash. It had a multiplier of what the damage would be 18 The CAT Fund's liability is constrained -- 18 with prior-to-Hurricane-Andrew building codes versus 19 MR. WENDT: I understand. But you were just 19 today on something like that. So maybe even that 20 giving us an estimate of what the cost could be for the 20 forecast has come down from $300 billion. The issue 21 state. 21 really is flooding. The wind -- even though Irma 22 MR. WILLIAMS: And that also takes into 22 really hurt Florida in parts, it really wasn't the 23 consideration loss of infrastructure and any number of 23 wind, it was the flooding. 24 other things that are not liabilities of the CAT Fund. 24 MR. WILLIAMS: Correct. And you have two 25 MR. WENDT: I was looking at the total number you 25 categories of loss we're talking about. And, Gary, you

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1 touched on it. When you're talking in the narrow lens 1 withstand crazy wind forces, and the taller they are, 2 of the CAT Fund, the CAT Fund covers, number one, only 2 the more they have to deal with, but a lot of them are 3 wind. Number two, the industry has -- the primary 3 designed to a 140-mile-an-hour standard. And some of 4 property and casualty insurance industry retains about 4 them, I understand, have lobbies that are designed to 5 $7 billion of loss before the CAT Fund gets hit. So 5 be blow-throughs. So if you have a giant storm surge, 6 you have that. 6 which fortunately we did not have with this storm, but 7 And then there's effectively a co-pay of about 7 a lot of the hotels down in the Caribbean for years 8 10 percent that goes parallel to the CAT Fund's 8 have had lobby designs with glass doors around them, so 9 liabilities. And then the CAT Fund's liabilities are 9 that if you have a big surge that washes over an 10 capped at either a statutory loss level, which is 10 island, it can literally wash right through, push the 11 $17 billion, or the sum of cash on hand and our ability 11 glass out, washes across the tile floor. The water 12 to borrow. And it would be the lower of those two. So 12 goes back. They replace the doors, clean everything 13 two ways to look at this. One is the aggregate losses. 13 up, turn the air-conditioning back on, and you're back 14 Two is covered losses. 14 in business, because the rooms are all above it. So 15 But to Peter's point and also to yours, Gary, 15 there's a lot of technology that goes into these losses 16 about the surprisingly low scale of losses and the 16 as well. 17 value of these building codes, I was particularly 17 MR. COLLINS: Any other questions on Ash's 18 interested in the fact that we've had a lot of 18 presentation? The only thing I would say is relative 19 high-rise development, institutional quality 19 to the performance. I mean, it certainly is a 20 development in Southeast Florida, much of which is 20 testament to the staff here and the staff across from 21 extremely close to water. And even in normal tide 21 us and in the audience, the results, especially in the 22 situations, there's not a whole lot of clearance in 22 one year. It's hard to be better than number one, 23 some cases between, say, Biscayne Bay or things on the 23 right? So -- 24 water in Miami and the buildings. 24 MR. WILLIAMS: We'll take it. 25 Well, a lot of these new buildings are designed to 25 MR. COLLINS: -- well done. We are now going to

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1 go into the update of the Florida Growth Fund. 1 the general partner. We are one of the largest, if not 2 Everybody saw in their packets the presentation or the 2 the largest investor in the private markets, with now 3 slides from Hamilton Lane. We have four members of 3 about 360 billion of capital in AUM. And this last 4 Hamilton Lane with us today. Welcome. And I'm not 4 year alone we invested about 25 billion of capital in 5 sure who is going to start, but I'm sure it's 5 primary commitments. So from an AUM standpoint, about 6 Mr. Perry. 6 four times the size of when we started the Florida 7 MR. PERRY: Yes, sir. Well, thank you. Let me 7 Growth Fund in 2009. 8 just open by saying thank you to the IAC for the 8 And I underscore that fact not to pat ourselves on 9 opportunity to come back and present to you again. I 9 the back for growth sake but to suggest that that is 10 want to also thank the Florida SBA for the tremendous 10 one of big drivers of growth for the Florida Growth 11 partnership that we've had with them. I think the 11 Fund. And so as we continue to put more capital out 12 combination of both that partnership and the platform 12 the door, as we continue to add to the stable of 13 that we invest off of really is the engine for the 13 managers, that translates to both primary and 14 Florida Growth Fund's success. So I want to thank them 14 co-investment opportunities for the Florida Growth 15 for that. 15 Fund. 16 Just a little bit of a roadmap in terms of the 16 The other quick update on the Hamilton Lane fund 17 presentation. We'll talk a little bit about each of 17 is we did have a successful IPO in March of this year. 18 the individual tranches of the Florida Growth Fund. 18 And I would characterize it as a big event but also a 19 We'll talk about portfolio construction, some of the 19 big nonevent. It's been good for -- there have been a 20 liquidity we've been experiencing, and then lastly talk 20 number of firm benefits. There have certainly been a 21 a little bit about some of the ancillary benefits that 21 number of client benefits; namely, having a lot more 22 the program is having on the state. 22 employee engagement and ownership. But I would say 23 Before I do that, though, I just wanted to provide 23 really no change from a day-to-day perspective. We 24 a very quick update on Hamilton Lane as a firm. As you 24 still have the same management team, the same 25 know, we are the manager of the Florida Growth Fund, or 25 investment committee, no big sale of shares by anyone

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1 in the firm, and continuity of decision-making and 1 can see the evolution of the Florida Growth Fund. We 2 strategic direction of the firm. 2 are a $750 million program today. Fund one was 3 So just diving into the Florida Growth Fund, I 3 $500 million in size. And you can see tranche one 4 think all of you are familiar with the program, but 4 started with 250 million in 2009. It evolved to the 5 just a quick refresher. This program was launched in 5 second tranche of 250, which was then split in 2012 6 2009, and really with the aim of generating attractive 6 between 150 of tranche two, and then 100 million was 7 private equity returns and investing primarily in 7 dedicated in 2013 to the credit tranche, and the credit 8 growth and technology companies in the state of 8 tranche being the only active tranche today in Florida 9 Florida. 9 Growth Fund I. 10 And the strategy is really very simple. It's to 10 Florida Growth Fund II was turned on in late 2014, 11 do three simple things. One is to make fund 11 early 2015. That first tranche, 250 million in 12 investments. So looking at general partners across 12 capital. So you can see both of those funds performing 13 strategies that have a strong track record but also 13 at about 60 percent deployment and in lockstep. 14 demonstrate a capacity to invest in the state of 14 In terms of the general team, you can see the 15 Florida. Secondly, to make co-investments. So we look 15 senior leadership team on the top. Dave Helgerson is 16 to make equity co-investments across industries 16 actually on the phone. Unfortunately he could not make 17 alongside a general partner, at the same time, in the 17 it here today. But the team in the light blue is this 18 same security. 18 handsome bunch to my right. These are the guys that -- 19 And then, lastly, credit investments, and this 19 most of us spend all of our time focused on this 20 through our credit tranche. We do this across the 20 program, doing the day-to-day lifting around the 21 , and typically either to general 21 Florida Growth Fund program. 22 partner relationships that we have on the equity side, 22 A lot of the folks that you see on the bottom, we 23 to assist in their transactions, or alongside another 23 really leveraged a lot of the different areas of the 24 lender partner in the private equity space. 24 firm to make this program work. So you can see heads 25 Lastly, if you look at the bottom of the page, you 25 of our co-investment, our secondary fund investment

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1 team. We really rely on those groups both to assist 1 realizations as of 3/31. And as you can see, we're 2 with the underwriting efforts, the portfolio 2 about 55 percent again deployed both on the credit 3 management, as well as a lot of the middle and back 3 tranche as well as tranche one of Florida Growth Fund 4 office work that we do in relation to the program. 4 II. 5 So taking a look at the Florida Growth Fund in 5 And so I think, if we are able to achieve our 6 terms of performance, this is really a bird's eye view 6 pipeline objectives by the end of this year, I would 7 here on page five of the overall program. And as you 7 expect that both of those tranches of capital to be 8 can see, this incapsulates both Florida Growth Fund I, 8 about 70 percent deployed by year-end, at which point, 9 which is the first two tranches, the credit tranche, as 9 probably in the early part of next year, we'd start to 10 well as Florida Growth Fund II. 10 look and talk about potentially turning on tranche two 11 In the top left you can see that both Fund I and 11 of Florida Growth Fund II and the possibility of a 12 Fund II are performing at a 12 percent net IRR. 12 credit fund too as well. 13 Liquidity in the middle there, 270 million of liquidity 13 Florida Growth Fund II in the bottom left-hand 14 as of 3/31. So we're starting to see a lot of 14 corner, having very early success breaking the J-curve 15 liquidity coming out of primarily tranche one of 15 in two quarters. And we'll talk about how we were able 16 Florida Growth Fund I, primarily through co-investment 16 to do that as we get into that portion of the slide. 17 exits. 17 And then lastly just on some of the benefits that 18 In the top right you can see that all of our 13 -- 18 Florida Growth Fund, or the impact that it's having on 19 well, we've had 13 co-investment realizations, 19 the state. You can see that over 80 percent of the 20 generating about a 25 percent gross IRR and a 2.2 MOIC. 20 capital that we've invested has gone directly into the 21 So we've seen a lot of good progress on the realization 21 state. And in terms of the economic impact, again, 22 front. 22 while we are not measured on the economic impact, we're 23 And then as we move into our credit tranche, while 23 measured on returns, we are having an impact on the 24 it's still 60 percent deployed, we're starting to see 24 state. And so over 15,000 jobs having been created as 25 some early realizations in the fund. We've had two 25 a result of Florida Growth Fund dollars being invested

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1 in the state. And that figure is as of last year. 1 2.5x and north of a 25 percent IRR on the equity front. 2 We're currently in the process of the 2016 report, or 2 MR. OLMSTEAD: I have a question, if that's okay. 3 excuse me, the 2017 report, which Gustavo will talk 3 MR. PERRY: Sure. 4 about in a little bit. 4 MR. OLMSTEAD: How are you guys, on the IRR, how 5 But I think the overall headline is I think the 5 are you calculating -- if you could give us just a real 6 program is doing very well. I think the returns are 6 high overview of how you're calculating IRR, especially 7 good, and I think the impact on Florida continues. So 7 on unrealized gains. 8 we thank the SBA. 8 MR. PERRY: From an IRR perspective, we're taking 9 Diving into Florida Growth Fund I, so this fund, 9 sort of a macro view of the overall portfolio. We are 10 tranche one of Florida Growth Fund I was really kicked 10 not calculating IRR on an individual basis. I don't 11 off in 2009, which is why we have it detailed up there. 11 know if you wanted to comment further. 12 But this $500 million fund is performing, Fund I, at a 12 MR. CARDENAS: Yeah. In terms of the unrealized 13 14.7 percent gross IRR and a 1.6 gross MOIC, on a net 13 portion, we do quarterly and annual valuations for each 14 basis, 12 percent and a 1.4 MOIC. We've produced now 14 one of our portfolio companies, whether it's a 15 or we've invested in 54 investments, broken out by 34 15 co-investment or the -- the funds that we invest in, 16 co-investments and 20 fund investments. And, again, 16 they also do their own valuation of their portfolio 17 the liquidity largely coming from tranche one of 17 companies. So while we have about $265 million in 18 Florida Growth Fund I. So we've now had, as of 3/31, 18 distributions back to the SBA, there's also a 19 over 265 million in distributions back to Florida SBA. 19 significant amount of unrealized capital that's valued 20 And then lastly on the realization front, so we 20 quarterly. 21 profile here 13 realizations, at about a 2.2 money on 21 And then the net portion of that is you take away 22 cash. We actually recently had another realization in 22 the management fees as well as the unrealized carry 23 the fund, which generated over a 4x return. So from an 23 portion, which is calculated on a quarterly basis, on 24 equity standpoint, our realizations, kind of on a 24 an aggregate basis as Nayef mentioned. 25 go-forward basis, as of today are closer to about a 25 MR. OLMSTEAD: Is it consistent, the way that you

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1 guys look at your direct investments versus the way the 1 recent funds, they're taking an approach that's closer 2 funds, or you take the fund's IRR and just sort of 2 to mark to market. 3 apply it to your calculation? 3 MR. OLMSTEAD: When we look at that historically, 4 MR. CARDENAS: In terms of the net portion? 4 do you see any exposure of folks over-realizing or 5 MR. OLMSTEAD: Either way. The gross portion. So 5 under -- you get the under-realization the opposite way 6 when you're looking at their IRR or looking at their 6 also, right? The last round two years ago might have 7 unrealized gains, are they marking to market? Are they 7 been great and the world could have changed. 8 marking to the last round, or are they marking -- how 8 So I don't know how proactive you are, because I 9 are they doing it? 9 think half of your investments are through -- you know, 10 MR. CARDENAS: It varies. I'd say two things on 10 are co-funded. So I'm just curious how far you probe 11 that. One is Hamilton Lane is actually taking a very 11 with these and/or VC funds to see whether 12 proactive approach in terms of how folks are valuing 12 they're actually marking correctly or not correctly or 13 their unrealized portfolio. We think that while it 13 trending -- 14 should not be a mark to market on a daily sense in 14 MR. PERRY: As Gustavo mentioned, that's something 15 terms of public markets, we are encouraging folks to 15 that we spend a lot of time -- I think as you see folks 16 reflect the true value of the underlying investments. 16 in the growth and venture stage, they tend to be a 17 It's interesting, when you said the last round. 17 little bit more bearish on valuations. They tend to 18 We do have a significant amount of venture and growth 18 hold more at cost. And so there are certain instances 19 exposure. A lot of our venture relationships are 19 where we are pushing those managers, where it's 20 typically marking whatever they've invested in at the 20 appropriate, to be more aggressive on valuation. But I 21 last round that they invested in. So if a company does 21 would say that's probably one of the areas that we see 22 really well and doesn't need additional capital, even 22 probably the most timidness in terms of valuation. 23 if they've doubled revenue, they might still be marking 23 MR. OLMSTEAD: They're bullish until they're 24 that at cost. I think that for some of our older 24 raising capital. 25 funds, they might still be doing that. For more of our 25 MR. CARDENAS: We're actually in an interesting

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1 situation. Nayef is going to touch on this in the next 1 of 80. So, I mean, this is really a terrific program. 2 couple of slides. We've now seen a lot of the fund 2 Now, my question is, with the 20 fund investments, 3 managers that we backed out at the early part of FGF I 3 can you tell us a little bit about one or two or three 4 coming back to market. We have not backed all of them. 4 of these funds? First of all, I'm surprised there are 5 But part of what we do in that in-depth fund diligence 5 this many funds out there that are 80 percent focused 6 is that we look at every single one of their positions 6 on Florida. I mean, I thought I knew a lot of the 7 and we take the view of, is this kind of marked above 7 private equity and other companies in Florida, but few 8 or below where it is. 8 of them focus so much on Florida. 9 And on the most part, I'd say that folks have been 9 So can you tell us who some of these funds are, 10 more conservative than not. And I haven't seen big 10 who some of these people are and how closely you work 11 valuation misses on the people trying to mark stuff up 11 with them, et cetera? Tell us a little more about that 12 just to raise capital, at least not in our portfolio. 12 relationship, which is so critical to your success. 13 MR. COBB: Mr. Chairman, I have a similar 13 MR. PERRY: Thank you for those comments, 14 question. 14 Ambassador. Just to maybe qualify for a second. So 15 MR. COLLINS: Go ahead, Ambassador. 15 when we talk about 80 percent invested capital in 16 MR. COBB: First of all, just an editorial 16 Florida, I think it's important to separate that number 17 comment. I think this is one of the best programs 17 into two groups. One is on the co-investment front, 18 that, Ash, you and your colleagues have instituted for 18 which Gustavo will talk about in the portfolio 19 the benefit of Florida. And it's unfortunate it's not 19 construction side, assuming it's about over 50 percent 20 better known. As you know, I have given a couple of 20 of the portfolio in aggregate, those investments 21 speeches to talk about this as it relates to our 21 typically are about 100 percent Florida invested. 22 economic development strategy in the state, et cetera. 22 We're only making investments where there is a clear 23 And one of the things this page five doesn't show 23 Florida nexus. 24 is the average salary. And if I recall, it's $86,000. 24 MR. COLLINS: So you're investing in an investment 25 I mean, it's not only 15,000 jobs, but it's an average 25 by a fund that may be doing investments all over, but

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1 you're picking the one that they're doing in Florida. 1 dollar is being invested in Florida companies. That 2 MR. PERRY: Correct. And so those, 100 percent of 2 will range with some folks that do 80 percent of their 3 our capital is invested in Florida. So on the fund 3 investments in Florida and some that might do 4 side, when we look at a fund, for simplicity, if a fund 4 25 percent in Florida. 5 made ten investments, we would look at that fund 5 And with the ones that are doing that lower end of 6 historically in maybe funds one and two, if we were 6 that 20 to 30 percent, we also, as Peter Collins 7 investing in fund three, to have historically made at 7 mentioned, double down on their Florida investments, 8 least two to three investments historically by fund in 8 sometimes on an opportunistic co-investment basis, and 9 the state of Florida. And so that's typically how 9 in a couple of situations we've done Florida sidecars, 10 we're looking at that capital. 10 so that for any Florida deal, they automatically draw 11 Now, that investment, for example, may be a large 11 upon our capital to double down on that transaction. 12 investment. So when you kind of blend the capital or 12 So we've been able to really get that fund side 13 when you blend the numbers together, you get to that 13 number up so that -- I think that if you do the math, 14 80 percent number. So that could be a GP or general 14 50 percent being Florida focus, and 50 percent of 15 partner that is either based in the state of Florida or 15 50 percent, that gets you to about 75. So we're 16 it's a general partner that might be based out of the 16 slightly overperforming to our 75 percent metric. 17 state of Florida that's making an investment -- 17 MR. PERRY: And then just to answer your other 18 MR. COBB: So in answer to my question, on the 20 18 question around name some of the general partners that 19 fund investments, that might only be 10 or 20 percent 19 are actually in this ecosystem, one general partner 20 of our investments is Florida-centric. But when you 20 that is sort of in our back yard, a group by the name 21 add it to the hundred percent with the co-investments, 21 of Palm Beach Capital, for example, that we've invested 22 you get the 80 percent. Is that generally what you're 22 over multiple funds, they are headquartered in the 23 suggesting? 23 state. Their ecosystem, their origination engine is 24 MR. CARDENAS: So on the fund side, I think that 24 really largely Florida-centric. So I would argue 25 we target, over all the funds, that 50 percent of our 25 probably 75 to 80 percent of their deal flow, deals

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1 that they actually make commitments or investments 1 frothiness of the credit markets today. And we've also 2 into, happen to be in the state of Florida. 2 been pretty disciplined about the structures that we've 3 And then there are other managers, for example, in 3 invested in. So we've been conservative on leverage 4 Tampa on more the growth side and venture side, Ballast 4 and very conservative on structure, so making sure that 5 Point Ventures, HealthEdge Partners on the health care 5 all of the investments that we have have good covenant 6 side out of Tampa as well, AE Industrial out of Boca 6 packages, good call protection, et cetera. From a 7 Raton. So there are a number of general partners in 7 liquidity standpoint again -- 8 this ecosystem that we work with. 8 MR. COBB: Excuse me. Another question. So I 9 MR. COBB: Thank you. 9 assume that we take warrants and equity position in 10 MR. PERRY: So just moving on to page seven here 10 every one of our credit deals. 11 on the credit tranche. As I mentioned, when we turned 11 MR. PERRY: Not 100 percent of them. We've taken 12 on Florida Growth Fund, tranche two, we carved 100 12 warrants, I believe, on two of those nine investments, 13 million out of tranche two to create the Florida credit 13 and we've had -- I would say, out of all those nine 14 tranche. And this was formed -- or I should say this 14 investments, we've only had two investments that we 15 tranche went live in late 2013, in Q4 of 2013. This 15 have had no warrants or no equity position in them. 16 fund is, I would argue, performing very well, at an 16 MR. COLLINS: Are you doing deals where you're 17 18.6 percent gross IRR, a 1.2 percent gross MOIC. And 17 doing the equity and you're doing the credit, where 18 on a net basis, a 9.3 percent IRR and a 1.1x MOIC. 18 both funds are investing? 19 Today we've made about nine investments in the 19 MR. PERRY: No. So we're only -- if we make an 20 fund, so we're about 56, 55 percent deployed in that 20 investment out of the credit tranche, we're only making 21 fund. I'd argue that we've also been able to target 21 an investment out of the credit tranche. So by 22 very attractive structures with the investments that 22 example, we had an investment in a company -- we have 23 we've made. So on average across those nine 23 an investment in a company called American Safety 24 investments, we've been generating an 11 and a half 24 Council, which presented at our annual meeting. We 25 percent coupon, which I think is pretty good, given the 25 made a $4 million investment in the mezzanine security

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1 and a $2 million investment in the equity alongside the 1 investment a little bit longer, even if at a smaller 2 general partner but out of the same tranche. And so we 2 level. And it also creates some upside in the return. 3 view -- we will only underwrite the equity -- 3 MR. WEBSTER: Mr. Chairman, if I could say 4 MR. COLLINS: So you're doing what Ambassador Cobb 4 something. That's typical of the mezzanine deals that 5 said, but you're just structuring it a little 5 we're seeing in the broader market. Used to be, five 6 differently than just saying we're doing credit with 6 or ten years ago, you'd have warrants attached to a 7 some warrants. 7 mezz deal. And now a lot of that has gone away, and 8 MR. PERRY: Yes. But in only seven out of -- 8 instead you co-invest alongside the mezzanine tranche 9 well, I should say in seven out of ten investments 9 in the debt structure. So I think what they're doing 10 we've had equity or warrants. Two out of the nine 10 is typical of the market today. 11 investments we've not had any equity -- 11 MR. PERRY: Thanks, Trent. 12 MR. COLLINS: And why would you make an equity 12 MR. COLLINS: Okay. Question? Keep going. 13 investment out of the credit tranche? 13 MR. PERRY: So just lastly on the liquidity front, 14 MR. PERRY: For a few reasons. If it's just a 14 again, we've started to see realizations out of the 15 fundamentally good equity story, I think we would look 15 credit tranche. We've had two full realizations as of 16 to do that and really enhance the return profile of the 16 3/31. And actually, if you fast-forward to today, 17 investment. I would also argue that what happens 17 we've had three full realizations and two partial 18 typically with credit is that, particularly in a very 18 realizations in the fund, so a total of five full and 19 aggressive credit environment or frothy credit market 19 partial realizations and have now produced about 20 that we've been in, where there's a lot of liquidity, 20 $28 million in liquidity to the SBA from this fund. 21 fewer deals, there's this impetus by the market to want 21 And then lastly -- 22 to refinance and really get capital to work. 22 MR. COLLINS: How many full realizations was that? 23 And so I personally view that some of the equity 23 MR. PERRY: Three full realizations. 24 investments that we've made have been good synthetic 24 MR. COLLINS: Tell us one. How much, what you 25 call protection, which allows us to hang onto that 25 did, when you got out.

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1 MR. PERRY: So one example is a company that was 1 smart deal for them. 2 based in the Orlando area called Travel Holdings. And 2 On the positive, that was an instance where we had 3 this is basically a business that provides wholesale 3 some warrants which were penny warrants. They're hard 4 hotel rooms to the online companies that you might go 4 to get, as Trent mentioned, in this environment, but we 5 to to book a holiday with your family. And so we had 5 were able to get it. And so we are still kind of 6 made a $4 million investment alongside a group called 6 working through that, but I would expect, if all goes 7 Comvest Investment Partners out of Palm Beach. And 7 as planned, we will get basically about $1 million of 8 they had structured a $100 million unitranche facility. 8 free money on a $4 million investment that we've 9 We got about an eight and a half percent coupon on that 9 already achieved north of a 17 percent IRR on. So that 10 investment. 10 would bring our IRR up meaningfully from there. 11 It was an investment that did very, very well out 11 MR. COLLINS: Just get about ten more of those, 12 of the gates. In fact, when we were looking at the 12 we'll be good. 13 transaction with Comvest at the onset of the deal, 13 MR. PERRY: We're working on it. So just moving 14 SunTrust out of Atlanta was also bidding on the 14 on to Florida Growth Fund II, so this is a 2015 vintage 15 company. They were only willing to give the company 15 fund we turned on actually in December of 2014. But as 16 $70 million of capital at that time. We were willing 16 you can see, out of the gates the fund has performed 17 to give them 100 on a unitranche structure. They took 17 very, very nicely, 18.6 percent gross IRR and a 1.2x 18 our capital at the eight and a half percent. We had 18 gross MOIC. On a net basis, a 12 percent net IRR and a 19 some call protection in the deal. 19 1.1 MOIC. We've made 15 investments in the fund, seven 20 And within about 12 months -- that was the 20 co-investments, eight fund investments. We've 21 shortest hold deal that we had in the portfolio. But 21 committed, again, about 55 percent of the fund. 22 within about 12 months, the company's EBITDA had grown 22 And we were J-curve positive in two quarters. And 23 so much that Sun came in and said, We'll do the full 23 if you compare that to tranche one of Florida Growth 24 100 million. They were able to come in and refi us out 24 Fund I, that's about three times as fast. And we were 25 and cut their interest cost by about half. So it was a 25 able to do that by proactively seeking a secondary

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1 transaction early on, at the onset of this fund. And 1 And, Ash, maybe you can comment. I don't know from the 2 in addition to that, also making a conscious effort to 2 inception what the expectations were. Like with a lot 3 invest more in buyout transactions, as opposed to what 3 of these folks, I think they have targets. I'm not 4 we had done in fund one, which was a little bit more 4 sure if you-all have targets, but it would be good to 5 venture. And as we had talked about, venture tends to 5 understand what those targets are also. 6 be held closer to cost for a longer period of time. So 6 MR. PERRY: Sure. I would say that probably the 7 that really benefited Florida Growth Fund II. 7 closest benchmark for us, as you look at Florida Growth 8 And then lastly, just on the manager fund, I think 8 Fund I and Florida Growth Fund II, is probably a fund 9 this is a testament to the quality of the ecosystem in 9 of funds benchmark. As you look at the credit tranche, 10 Florida, but we are seeing a lot more managers today 10 I would argue that probably a traditional credit 11 spinning out of other funds that either -- you know, 11 benchmark would be the appropriate benchmark. But I 12 the HIGs and the Sun Capitals of the world that are in 12 think, if you look in aggregate at the fund, I would 13 this ecosystem or other groups that are outside of 13 argue -- and we've got the breakdown, it's probably 14 Florida opening up shop in Florida. And so we've 14 first or second quartile. 15 invested two out of the eight fund investments, so 15 MR. COLLINS: So my question is on the secondaries 16 25 percent have been new managers. So we are not on 16 in a growth fund. We're trying to grow businesses in 17 autopilot on this program. We are continuing to find 17 Florida and employ people, like the ambassador said. 18 new managers to make investments in. 18 And if we're buying secondaries, no doubt it helps with 19 MR. OLMSTEAD: Mr. Chairman, a few questions. 19 the J-curve, you know, makes the IRR look good. 20 MR. COLLINS: Go ahead. 20 Doesn't make the MOIC look good but makes the IRR look 21 MR. OLMSTEAD: How do you guys, when you look at 21 good, which I think that that's how you guys are 22 your IRR and your benchmarks, are you -- there's 22 compensated. 23 nothing in here around how you compare to your class or 23 Just curious of what your thought is or how you 24 how you compare from a benchmark perspective. So maybe 24 think about that when you go to make an investment, 25 you can comment on how you're evaluating your returns. 25 about the impact of a secondary investment versus, you

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1 know, an original investment, if you will. 1 created the Florida Growth Fund was very clear. On its 2 MR. PERRY: That's a very good question. Our 2 first page it said -- it laid out all the wonderful 3 mandate is really to generate returns for the pension, 3 objectives of the fund, to empower employment and help 4 and so it starts and ends with that. I think, you 4 industries flourish, in clean tech, green tech and all 5 know, we've had a multitude of conversations with Ash 5 the other good stuff that we want to see happen in an 6 and with John and other folks in the SBA about how do 6 economy. But it also said, all activities undertaken 7 we think about instances where there could be a jobs 7 consistent with this act shall be done within a 8 story, should we -- how do we navigate that. 8 fiduciary standard of investment activity. 9 And I think -- you know, I'll give you an example. 9 So while the employment is great and we're 10 We passed on a very attractive investment in Tampa in 10 delighted to have it, particularly at double the 11 the glass space that, had we made that investment, 11 average wage in Florida, that's a nice but, without 12 would have probably led to probably somewhere to the 12 being negative, not necessary component. We're in this 13 tune of probably negative 200 jobs, which obviously 13 as fiduciaries to earn an attractive risk-adjusted 14 would have been a bad headline issue for Florida Growth 14 return. And if we are successful in generating jobs, 15 Fund. On the flip side, it would have resulted in a 5x 15 that's wonderful and we're glad to do it, but we want 16 return on our capital in two and a half years. 16 to be careful. 17 And so I think that's always the challenge with 17 I remember well in some of my early experience 18 the program. We ended up not investing for that very 18 with the SBA -- this story will date me, but I remember 19 reason, but I think that is the challenge of the 19 when Eastern Airlines was failing, and the 20 program, is looking -- we are threading the needle by 20 was approached at the last minute for a Hail Mary loan 21 investing in the state of Florida and then focusing on 21 to Eastern Airlines on the basis of job preservation. 22 situations that make sense from an ancillary 22 And there was scant evidence Eastern Airlines was 23 standpoint. 23 viable. And it was declined. You want to be careful 24 MR. COLLINS: Ash. 24 not to be thought of in that way. 25 MR. WILLIAMS: A follow-on to that. The law that 25 MR. CARDENAS: So flipping on to page nine, we

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1 wanted to give you guys some detail around the 1 do is profile what's actually in FGF I and in FGF II by 2 liquidity, which has been a theme of Florida Growth 2 investment type, industry, strategy, as well as that 3 Fund for the last couple of years, and that continues 3 percentage of Florida in each one. As I mentioned, 4 to certainly be the case. Here we've broken out the 4 FGF I is largely invested except for the credit 5 liquidity by tranche. So you can see how much we've 5 tranche. So the only thing you'll see change in this 6 returned relative to each one of the tranches that 6 upper left-hand pie chart is going to be that credit 7 Nayef had been talking about. 7 piece is going to get to about 20 percent of the total. 8 Starting with the top, FGF I, this is the most 8 Otherwise, in terms of industry and strategy, we think 9 mature tranche of all the ones that we're managing. As 9 it's a pretty well-diversified fund, with that bias 10 you can see, we have about $251 million returned to the 10 that the fund was started on in terms of investing in 11 SBA from that tranche, so about the size of the initial 11 technology and growth businesses. 12 tranche that the Florida pension hired us to invest. 12 And here you'll see, this is the part where we 13 Below, you'll see Florida Credit and FGF II, much 13 think we've been doing a very good job targeting 14 more recent vintages. I think that out of Florida 14 Florida opportunities. If you flip to the next page, 15 Credit, you would expect to have these quarterly 15 for FGF II, that number, because it's more slanted 16 interest payments. However, as Nayef mentioned, we've 16 towards co-investments in the ground, that Florida 17 also had a lot of prepayments that have resulted in 17 percentage is very, very high at this point. But 18 additional liquidity to us. But there's still a lot of 18 otherwise you see pretty good diversification in terms 19 equity upside and additional credits in that portfolio. 19 of partnerships versus co-investments, as well as by 20 FGF II, this is a very recent vintage and much 20 industry. 21 more equity oriented, so the distributions that you see 21 The one thing I'll note that is different on this 22 there are actually reflective of the very strong 22 slide is you see the buyout percentage is a lot higher. 23 performance, as well as in part that secondary that 23 I'll say that's for two reasons. One is we've focused 24 Nayef mentioned. 24 more of our growth in venture investment on the fund 25 Now, the next couple of slides what we wanted to 25 side. We think that it's better to have that coming

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1 from a portfolio of venture investments. We have a 1 MR. OLMSTEAD: And when you look at the equity, 2 good stable of managers that can do that. The second 2 just maybe familiarize ourselves with how you're 3 part is, some of those managers have not come back to 3 finding these deals. Is it more co-investing with 4 market during this tranche. We're currently working on 4 current fund managers, or are you finding them from 5 a couple of those opportunities. So you will see that 5 other sources also? 6 VC and growth side tick up in the next couple of 6 MR. CARDENAS: It's a couple of different ways. 7 quarters as well. Moving on to -- 7 I'd say that there's two big parts of the funnel. The 8 MR. OLMSTEAD: I think the last time you guys 8 first one is -- Nayef mentioned the amount of capital 9 presented there was a conversation around how much you 9 that Hamilton Lane manages. Given that we're making 10 do -- fund versus direct investing that you do and that 10 $25 billion of primary fund commitments, most people 11 you were going to try to do more of the co-investing 11 that are raising capital come through Hamilton Lane's 12 than the fund investing, but it seems like you're still 12 doors at some point. 13 split down the middle. Has there been a philosophical 13 So as they're looking to build a relationship or 14 change in strategy, or am I misremembering my notes 14 even further a relationship even if we've already 15 from the last meeting? 15 backed them, we're seeing a lot of co-investment deal 16 MR. CARDENAS: No, you're not misremembering. I 16 flow from those groups. 17 think that this is also reflective of it being earlier 17 The other half is actually everybody here in the 18 on in the cycle. And we know when the funds are in 18 room, from the four of us here from Hamilton Lane that 19 market. That is a much more predictable process. You 19 spend a lot of time in the different markets, and 20 see when they're getting to 60, 70 percent invested, 20 actually that's the part that I was going towards, but 21 you know that in about a year or so that they're going 21 then the SBA has been a great partner to us in terms of 22 to give you a call. On the equity co-investment side, 22 sending us both fund opportunities that they're 23 it is much more reflective of deal flow. And we've 23 reviewing as well as equity co-investments that they 24 also been quite cautious in terms of what we've 24 run across that are in the state of Florida. 25 deployed Florida Growth Fund capital towards. 25 So that's -- Vinny had reviewed the presentation

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1 and saw that I wanted to hit upon how we cover the 1 last year about 80-, 85,000. And we're in the final 2 state. So on page 12 you'll see, even though we're 2 stages of processing the 2017 data, but I can report 3 based in South Florida, we spend a significant amount 3 that that jobs number will continue going up and to the 4 of our time covering all of the major markets, Tampa, 4 right, probably about a thousand new jobs created since 5 Orlando, Jacksonville. In all of these we're meeting 5 we last reported. And the average salary is still 6 with general partners, with intermediaries, with 6 going to be quite high, probably not as high as it was 7 business owners, as well as attending conferences and 7 last year, but in the kind of 77,000 level. Nayef? 8 events, where we can kind of see what's out there in 8 MR. PERRY: I'm happy to take any final questions, 9 terms of the market. 9 but I think that's pretty much the summary on the 10 Something that we've seen that's been very nice 10 program. I think, again, we're pretty pleased with the 11 has been the increase of the private equity ecosystem 11 performance, hope you-all are as well. I think it 12 as a whole here in Florida. There are a number of new 12 really does take this trifecta that we describe, which 13 quality institutional managers that have popped up in 13 is the partnership with the SBA, having a team like us 14 the last five years even since we started the program. 14 on the ground in Florida active in the market, and then 15 As Nayef mentioned, we have backed two new groups out 15 being able to leverage our Hamilton Lane platform to 16 of FGF II. So we're still selectively looking at new 16 really access and manage the opportunities I think has 17 groups. But we think that the Florida Growth Fund and 17 been key to the program's success. 18 the SBA we like to think are a big part in helping grow 18 Liquidity continued to be a big focus of us, 19 that private equity ecosystem in the state. 19 particularly out of tranche one. And then as we get 20 And then lastly, on the jobs front, these are the 20 into tranche two and the credit tranche, so really 21 numbers that we collect for the OPPAGA agency. These 21 focused on fund one and really pushing areas where we 22 are the 2016 numbers, where we had over 15,000 jobs 22 can push to lock in a return for the Florida SBA. And 23 created from companies in which Florida Growth Fund had 23 then, lastly, we're going to continue to try and 24 invested in directly or indirectly through our fund 24 maintain a leadership presence across the state, as 25 investments, at pretty attractive average salaries, 25 well as continue to have impact where we can on the

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1 jobs front as well as on the economy here. 1 chief executive of Hamilton Lane, came to Tallahassee 2 MR. COLLINS: Question, Mr. Wendt? 2 for it. And in this room he made some comments and 3 MR. WENDT: One term that I didn't see up in any 3 said, The capital that we bring to the Florida business 4 of your slides was the largest industry in Florida, 4 market is important, as is the expertise and guidance 5 which is real estate. Does any of your money find its 5 we'll provide for portfolio companies. Of equal 6 way into development or buying properties, or are you 6 importance, however, will be the network of knowledge 7 prohibited from doing that? 7 we create for the Florida business community, because 8 MR. PERRY: We're actually prohibited from 8 there will be a number of businesses who come to us, 9 investing in real estate, the Florida Growth Fund. 9 and partnerships, who are not investable by our 10 MR. COLLINS: Ambassador? 10 institutional standards but who have legitimate ideas 11 MR. COBB: Two questions. First, Ash, I 11 for enterprise growth and job creation. And we want to 12 appreciate your continued warning that we shouldn't 12 create a network where we can properly inform and match 13 focus on the number of jobs that have been created. 13 sources and uses of capital for productive outcomes for 14 And I totally understand this is not -- so I'm not 14 Florida. 15 disagreeing with that. But my first question is, why 15 And so the emphasis on the information side of the 16 don't we promote this great success of our organization 16 growth fund from the onset was largely within the 17 to the leaders of Florida, editorial boards and others? 17 business community, the community, the 18 This is just a terrific success. That's my first 18 business development community, the professional 19 question. My second question is, how does Hamilton 19 community overall in the financial sector in the state, 20 Lane report in to the organization? That's my second 20 as opposed to the broad press, et cetera. 21 question. 21 Now, as time has gone by, with all the years of 22 MR. WILLIAMS: Okay. To your first question, 22 the growth fund attending various venture conferences, 23 actually, one of the key things about developing the 23 et cetera, around Florida, I think that network is 24 growth fund, I remember the day in -- it was in June of 24 built. And it includes the universities, the business 25 2009 when we launched it. And Mario Giannini, the 25 community, the financial community, the financial

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1 services community, et cetera. 1 MR. COLLINS: One thing I would say, too, 2 So as far as the editorial boards and that sort of 2 Ambassador, having worked here and worked with the 3 thing, we have tended historically -- we're obviously 3 legislature and then having not worked in the 4 pretty visible. We report to legislative committees. 4 legislature but been here, you know, it's oftentimes 5 We report to our trustees in public meetings. Well, 5 that a lot of people have good ideas with how we should 6 until a minute ago we had a TV camera here from The 6 use the pension fund for the benefit of Florida. And 7 Florida Channel. Apparently they got tired. But at 7 some of those ideas are good and some of them, quite 8 any rate, we -- wait, they are still here. So we do 8 frankly, are not good. And for every Hamilton Lane 9 have press present. They do know what's going on. But 9 idea that has worked like this, there's probably been 10 we've just tended to keep our heads down and leave that 10 ten that would have been colossal mistakes, I think. 11 side of things to our elected official trustees and the 11 So I think that you're right. We should be able 12 legislature and whatnot. On the second question, well, 12 to talk about this. Honestly, my biggest fear is the 13 follow up on that -- 13 more we talk about it, the more we give some people an 14 MR. COLLINS: Go ahead. I was just going to say 14 idea over there about, hey, I've got an idea, too, and 15 something on that, but answer the second question. 15 I've got an idea, too. I know we shouldn't run that or 16 MR. WILLIAMS: Question two, how do they report 16 shouldn't not promote this. But, honestly, that's a 17 up, the Florida Growth Fund comes up through private 17 fear that I have. 18 equity and strategic investments. Those are the two 18 The second thing I will say is, going back to the 19 areas that have knowledge and have historically had 19 secondary thing, I don't think we should politicize or 20 input. And when the fund was created, we had fully 20 use the pension fund for social engineering whatsoever, 21 segregated the two, as I recall. But it's been a very 21 whether it's divesting of tobacco stocks or what have 22 productive relationship within the board. 22 you. I think as fiduciaries it's difficult to manage 23 MR. WEBSTER: Yeah. So the Florida Growth Fund 23 under constraints like that. That said, I think that 24 has at least a monthly call with (inaudible). So we're 24 there -- if we're going to do this -- and we have to 25 up to date on everything that they're doing. 25 remember that this idea started out as a way of

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1 promoting businesses in Florida and growing businesses 1 you. 2 in Florida and all the things that Ash said. 2 I guess the only other comment I would make is 3 Personally, I just wonder how much impact that has if 3 that we've been mindful, from the onset of the growth 4 we're doing secondaries. 4 fund, that particularly when you get earlier in the 5 I love making money. I hate telling you what to 5 capital stage, the more -- the closer to true venture 6 do. I'm just saying, if it's me, if you brought me two 6 you get, the higher the loss ratios go, the higher -- 7 deals and one was a direct investment and one was a 7 the broader the base of the J-curve gets, et cetera. 8 secondary and you'd ask me, you know, if they were 8 And we took advantage of the timing, when this 9 similar, I would take the direct investment. But I 9 fund was created in '09, to start off with a lot of 10 want it clear that I'm not trying to tell you what you 10 investments, knowing full well we were 11 should do, and I'm certainly not trying to politicize 11 seeing the ability to steal businesses because of the 12 or social engineer the assets of the pension fund in 12 market cycle and that we would mitigate the J-curve, we 13 any way. 13 would have exits, we would put points on the board with 14 MR. PERRY: Fair point. 14 early returns that would position us in subsequent 15 MR. COLLINS: Any other questions or comments? 15 years to really have a sustainable fund, because I 16 MR. WILLIAMS: One last point. John Kuczwanski, 16 think in the public environment, notwithstanding the 17 our communications officer, just reminded me that there 17 good intentions of those who voted for the law that 18 is, by law, an annual independent review of the Florida 18 created the growth fund, had we had a typical venture 19 Growth Fund's activity that's done by a part of the 19 capital level of losses in the first five years of this 20 state auditor general's office, the Office of Program 20 fund, I would argue there's a pretty good chance the 21 Policy Analysis and Government Accountability. And 21 law would have been repealed and I would have been in 22 their last report confirmed that we created over 15,000 22 front of a grand jury, as opposed to sitting here eight 23 jobs, the numbers that we see here. And they have very 23 years later telling you what a great story it is. 24 carefully and closely reviewed and talked with our 24 So that's part of the reason the thing has been 25 staff about the nature of the investments and what have 25 managed the way it has. We've tried to look around the

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1 bend and avoid outcomes that we think would be 1 First of all, it goes to the Ambassador's point that 2 misunderstood in a negative way. 2 we've got a good story to tell here. And to the extent 3 MR. COLLINS: This is a question to the board. 3 that story is readily distinguishable and repeatable, 4 And I know how Mr. Wendt feels about this, I think. If 4 that's a good thing for the state. So I think it's 5 this was a typical private equity fund that reported 5 positive that way. 6 up, say, through John or even Trent, we wouldn't have 6 It's also positive from the standpoint that the 7 that additional reporting requirement to whatever the 7 attention focused on it might have some sort of 8 group is that you just said that we report to, or in 8 inoculation benefit. I think, Peter, you correctly 9 the auditor general's office, I guess. And I know that 9 pointed out that there's no shortage of ideas for how 10 we have from time to time in the past gone in our 10 to invest money that come our way. The number of them 11 legislative package to try and simplify things. 11 that come from non-investment channels that are 12 Is this something that is worth going to them 12 actually worth listening to, not so many. And the 13 or -- because really the SBA, you just don't have a dog 13 degree of daylight shined on the Florida Growth Fund 14 in the fight. And if the auditor general wants to have 14 every year may be helpful in a protective sense. 15 a separate audit with Hamilton Lane, that's fine with 15 So it doesn't bother us. We have a great 16 you, or is this something that we can simplify? I 16 relationship with OPPAGA. They know the program well. 17 mean, we're several years into this now. And if we 17 It's not a big drain on our resources to talk to them. 18 wouldn't -- if we wouldn't do it the way that it's 18 They're very professional in the way they conduct 19 being done had we just made the investment through our 19 themselves and they understand it. And we think their 20 normal process, then I don't see why we would continue 20 reporting has been very fair and pretty darn accurate 21 to do that. 21 over the years, so we have no -- 22 MR. WILLIAMS: If I may. I think the presence of 22 MR. COLLINS: I tried, Nayef. I really did. I 23 the OPPAGA requirement in the law is constructive 23 mean, you saw it. It was a good try, right? All 24 because of the unusual nature of this program, with the 24 right. If there's no more questions, thank you, 25 in-state focus. I think it's good for two reasons. 25 everybody, for that.

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1 MR. PERRY: Thank you guys. 1 ahead and jump in. 2 MR. COLLINS: Now we get Alison and Tim, our 2 So, quickly, on the objectives slide, it's 3 global equity update. 3 relatively straightforward both worth reviewing 4 MS. ROMANO: Good afternoon, everyone. Thank you 4 nonetheless. Our asset class is tasked with meeting or 5 for this opportunity to do a deep dive on the global 5 exceeding equity market returns. How do we do this? 6 equity asset class. Our goal today is to cover really 6 We have to be well diversified and we have to size our 7 five key areas. We'll review global equities' 7 passive investments, taking into account where we can 8 objective and policy parameters. We'll detail how our 8 generate alpha, i.e., where can we be rewarded for our 9 structure is to meet those objectives. We'll describe 9 risk, what the capacity is in various strategies and 10 how our structure has led to consistent outperformance. 10 the liquidity that we need to raise each and every 11 We'll discuss the key milestones that we reached in 11 month to meet beneficiary payments. 12 2017 and what we're doing in 2018. And we'll highlight 12 A summary of our benchmark. It's very broad. 13 our internal management and external oversight 13 MSCI All Country World Investable Market Index. This 14 processes. It's a lot to cover. 14 is large cap, mid cap, small cap. It covers a lot of 15 If there's anything that you walk away with today, 15 securities in a lot of countries, and it's very diverse 16 I'd like to highlight we continue to provide consistent 16 in sectors. It also reflects our PFIA restrictions. 17 returns, exceed the benchmark within our risk 17 What this doesn't include is frontier markets. It 18 parameters, and we do this in three ways. One, we're 18 doesn't include microcap, and at least as of now, it 19 long-term focused. Two, we have deliberate 19 doesn't yet include China A shares. Both FM and 20 diversification, a theme we'll hit on frequently, with 20 microcap are areas that we are invested in despite it 21 risk control. And, three, we're disciplined in 21 not being in our benchmark. And you can see, 22 overseeing and selecting various strategies. 22 regionally, currently it's about 52.3 percent U.S., the 23 We have today 45 minutes between us and our 23 remainder non-U.S. With that, I'll turn it over to 24 consultant, so we will move through some of these 24 Tim. 25 slides quickly. If you have any questions, please go 25 MR. TAYLOR: Good afternoon, everyone. Structural

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1 considerations. So investing $85 billion presents 1 annually since 2012, each and every year, annualized 2 challenges. However, it also has its advantages. We 2 return. We have raised an average of $5.4 billion in 3 need to be diversified but not to the level where we 3 recent years for liquidity, and we're on track for that 4 are simply a large index fund. What advantage size 4 and probably a little bit more this fiscal year, this 5 gives us is when we're negotiating fees. Our size and 5 calendar year I should say. 6 investment horizon are always kept in mind when 6 We have roughly 48 percent of our assets passively 7 negotiating fees. Because we invest globally in so 7 managed, and we have invested within our 75-basis-point 8 many countries, we have multiple regulatory and tax 8 risk budget. Regard for risk at the bottom of the 9 responsibilities. As the largest asset class, we have 9 page, that's the information ratio, the excess returns 10 been a regular provider of liquidity. 10 you generate divided by the standard deviation of those 11 These events do allow us to strategically 11 excess returns. A high information ratio of 1.25 12 rebalance to be relatively neutral to our target, but 12 indicates that the reward has been high, but at the 13 the negative there is that global equity bears the cost 13 same time risk has not been volatile. 14 of raising that liquidity. Trading is not free. Also 14 Philosophy and goals on the next page drive how we 15 we always have to keep this in mind as a big provider 15 structure global equity. We are to provide market beta 16 of liquidity when we're looking at potential 16 or exposure to the global equity markets, while at the 17 investments. Those investments that might have the 17 same time managing costs. The average blended fee of 18 highest alpha opportunity many times are the least 18 our total asset class is 18.2 basis points, and this is 19 liquid. And so we have to keep that in mind. 19 a combination of two things. One, it's aggressively 20 Next page. SBA policy relative to global equity 20 negotiating fees. Two, it's combining -- or combining 21 and a snapshot of where we were at the end of the 21 that with managing 42 percent of our assets internally. 22 fiscal year June 30th. The total fund targets 22 We'll talk more about internal management later. But 23 53 percent to global equity. As of fiscal year-end, we 23 we currently manage 42 percent of our assets 24 were 57 percent. The strength of our markets has been 24 internally. 25 remarkable. They've returned almost 12 percent 25 Within our risk budget, Alison alluded to this,

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1 we've been successful with what we would call 1 developed assets ex-U.S., because we have a provider on 2 entrepreneurial type developments, entrepreneurial 2 the passive side that does that in a very 3 opportunities, off-benchmark investments. U.S. 3 cost-effective manner. And this way we can allocate 4 microcap we have exposure. We also have exposure to 4 resources efficiently. 5 frontier markets and also our currency program. I'll 5 And finally, our off-benchmark allocations, though 6 turn it back over to Alison. 6 they may be small in each of their groupings, for 7 MS. ROMANO: So delving a little further into how 7 instance, 206 million on U.S. microcap, in aggregate 8 we're structured, on this slide, we have a snapshot of 8 they have added considerable basis points in 9 our structure. Top left, matching objectives. We're 9 outperformance. 10 diverse in our holdings, countries, currencies and 10 On the next couple of pages I'm going to answer 11 types of strategies. Top right, we're taking risk 11 two questions; one, what drives our sector and regional 12 where risk is rewarded. So, for instance, you can see 12 weights that we see here and, secondly, why aren't 13 on the domestic side, a vast majority of our assets are 13 these over- and underweights bigger. And I know that 14 managed passively. And I would like to note that that 14 that's a question that's come up in some recent 15 number has come up a couple percent over the past year 15 meetings with the IAC, so we wanted to take an 16 since we last spoke. We have decreased our active 16 opportunity to address that. 17 exposure on the U.S. large cap side and brought a 17 So first on this slide, why are we positioned the 18 couple of those percentages internally to do the 18 way we are? First, individual manager decisions. So 19 passive. 19 we give managers the flexibility to invest as they see 20 On the bottom left, again, you can see here, 20 fit given their process. In some cases this can be 21 internal versus external. The majority of our internal 21 very different than the benchmark. We have 22 assets are domestic. But over the last several years 22 international managers that can invest in emerging 23 we have increased our exposure to internally globally 23 markets, and they will make those off-benchmark bets. 24 managed funds, both active and passive. 24 Secondly, it's how we, as the global equity asset 25 We do not yet manage strictly foreign assets, so 25 class, decide to weight the managers that we hire.

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1 Generally speaking, we have made the decision that we 1 We've really taken the same approach in global 2 will weight these managers in line with the exposure of 2 equity. So country, industry, style, stock specific, 3 the benchmark. So whatever, for instance, the 3 they're all sources of risk and they're all sources of 4 benchmark weight is in emerging markets, we will give 4 return, and we want exposure to all of those. We have 5 emerging market managers collectively that same percent 5 that. You can see in the pie chart on this slide, this 6 of assets. Again, that doesn't mean that our holdings 6 is a predicted risk decomposition. And you can see 7 will exactly match EM, FM in foreign and U.S., but 7 that we have risk coming from all these sources. 8 that's how we have aligned it. The third point that 8 Currently, the biggest percent risk, at 39 percent, is 9 can impact us is simply performance. If we have a 9 factor exposure, partly because we're slightly lower 10 quarter where our U.S. managers have continued to 10 beta than the index. 11 outperform, the U.S. weight will be overweight. 11 We've designed it this way because this helps us 12 Probably most important is risk and our risk 12 align with our strategic objective. Again, it's to 13 budget. There's a ceiling on how big we can make over- 13 provide market return. To provide market return, we 14 and underweights based on a 75 BP risk target, which 14 need exposure to the market. It gives us multiple 15 leads me to the next page. I think a question that may 15 sources of excess return. We don't have to get one 16 have come up in a past meeting was, well, if everything 16 call right. We don't have to get one country call 17 is looking expensive and emerging markets is looking 17 right, again, to deliver that outperformance. We can 18 cheap relative to history in the other regions, why 18 smooth excess returns and we can allow the individual 19 don't you go overweight there? 19 manager strategies to drive performance as opposed to 20 Let's take a step back. I think most of us in the 20 larger macro calls. 21 room have bought into the premise, at the total fund 21 On the flip side, there are risks to making a big 22 level, that to meet our objectives, we want to be 22 over- or underweight. And, again, I'll use EM as an 23 diversified. We want fixed income. We want strategic. 23 example. Potential deviation for our diversified risk 24 We want global equity. We want long-term focus. And 24 and strategic objective. Liquidity, as Tim alluded to, 25 this diversification helps us meet those returns. 25 we have to raise a lot of money each month. If you put

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1 a lot of money into EM, that would be more challenging 1 MR. COLLINS: Ambassador Cobb. 2 to do. If you put money in EM, you get unintended 2 MR. COBB: -- ask a question on this? Because I 3 exposures. 3 guess I'm the one that maybe motivated that 4 EM right now is very dependent on the companies 4 presentation, from my questions at the last meeting. 5 like and Alibaba and Samsung. So you're making 5 And your answer addressed most of my questions, except 6 a technology bet if you make an EM bet. There's timing 6 one. Right now our target is 57 percent, if I recall 7 risk. You have to get in and get out at the right 7 correctly, or 53 or 57, our target. 8 time, and you have to take into account the transaction 8 MS. ROMANO: Fifty-three. We're at 57. 9 cost to get in and out. 9 MR. COBB: So we're at 57, and our target is 53. 10 All that can result in potentially higher 10 So that is a judgment that you as a management team 11 volatility. And to put some numbers around this, if we 11 have made. I personally am a little concerned that 12 were to, say, take $5 billion and put it into EM over 12 we're at 57 percent, because I think there's 13 what we already have, our risk that you see on this 13 vulnerability in the markets, particularly the U.S. 14 page would jump 40 percent. So we would be pushing the 14 markets. So I'm worried that we have 57. We can't be 15 limit as to our risk budget and concentrating our risk 15 too scientific here, but we are taking a degree of 16 in that one bet. 16 risk, from my point of view. 17 The point is to say that we're, again, taking the 17 Now, it's my understanding that our allocations 18 approach that the whole total fund is taking. We're 18 are pretty much geared to the index, and so we feel 19 doing it within the global equity asset class. And 19 we're driven by the index between our mix of 20 that approach has consistently worked and driven 20 international and domestic. And so I guess that's 21 returns in various markets, when various regions are 21 really what I'm questioning. I'm not questioning 22 doing well and various factors are doing well. 22 minimizing risks. I'm questioning should we be a slave 23 Tying that then to the individual managers on the 23 to the indexes with our mix of international and 24 next slide -- 24 domestic. 25 MR. COBB: Mr. Chairman, can I -- 25 And if we're going to use our judgment, which we

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1 are using on going from 53 to 57, I would use that 1 funds? At 57 percent, I think we're one of the highest 2 judgment today, if I was in your shoes, by maybe 2 in the nation. 3 overweighting slightly international, including 3 MS. ROMANO: And, Ash, I don't know if you want to 4 emerging markets. It would not be 5 billion, as you 4 address it. It's not necessarily a judgment. It's 5 just said, which I think it would be an extreme and too 5 defined by how we -- 6 risky of a judgment. So that's my editorial comment. 6 MR. WILLIAMS: Well, I was going to pick up on a 7 What's your response to that? 7 couple of things Alison said, Ambassador. Number one, 8 MS. ROMANO: I think by giving managers 8 the way we manage equities, global equities in the 9 discretion, they are better suited, given their scale, 9 liquid sense, is very risk constrained. So we don't 10 to make those calls and move in and out of those 10 take huge basis bets against the benchmark. 11 markets. What you're seeing is a collective picture. 11 But to your point, what we have done -- and I 12 Individual managers are making pretty significant bets. 12 would draw attention to it, from what Alison had said 13 And they're aligned with their skills. So we have 13 so far. The fact that when a lot of people were very 14 managers that are more macro focused that can make 14 down on emerging markets and lightened up there in 15 those calls. We have managers that are stock-specific 15 favor of U.S. exposure, we did not. We maintained our 16 and frankly we don't necessarily want making those 16 emerging weights at weight. 17 calls. 17 We have also maintained the component of frontier 18 I think again also we're long-term focused. And 18 market exposure, which is by definition non-U.S. And 19 while we're not a slave to the benchmark, that is one 19 to the extent we have significant capability on the 20 of our objectives. And to make big timing decisions I 20 active side of our book, to let managers make 21 think would ultimately result in a lower return for a 21 allocations away from the U.S., and many of them have 22 given level of risk. 22 done exactly that. I think what Alison was saying a 23 MR. COBB: You really didn't answer the point of, 23 moment ago is, rather than do the U.S., non-U.S. 24 at 57 percent today, aren't we assuming a risk compared 24 structurally on our end, we effectively accomplish the 25 to other institutional investors, particularly other 25 same thing by giving active managers in our book the

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1 latitude to take that judgment and to be held 1 MR. COBB: I guess my question would be, why don't 2 accountable for the performance resulting therefrom. 2 we reduce our U.S. domestic equities but keep our 3 And we also have certain structural attributes. 3 international about the same? That would be my 4 One being the frontier managers. The other being the 4 question. 5 currency overlays that were mentioned on an earlier 5 MR. WILLIAMS: Right. May I? 6 slide. What's it been, about two years, three years 6 MR. COLLINS: Yeah. 7 ago now? 7 MR. WILLIAMS: So I guess the short answer to that 8 MR. TAYLOR: Three years. 8 is we've not done that explicitly at the macro level by 9 MR. WILLIAMS: Three years. We put on a 9 us simply saying we're suppressing the U.S. component. 10 not-insignificant amount of money, of currency, active 10 And the reason is the -- I think it's the risk 11 currency management overlay, the liquidity needs of 11 escalation that would represent relative to the 12 which are met by the global equity book. So we have 12 benchmark. And over long periods of time, those kinds 13 not allocated cash to meet the liquidity component. 13 of timing decisions historically we've not been very 14 We're using the obvious and deep liquidity in our 14 good at. 15 global equity book. 15 MR. COLLINS: So let me ask you this, to that 16 And the objective of that program has been to add 16 question. You-all get together how often on asset 17 about 50 basis points of non-correlated return over a 17 allocation, heads of investment and you? How often do 18 three year period. The program has in fact 18 y'all get together? Monthly? 19 outperformed and overachieved that objective. So 19 MR. WILLIAMS: We don't really -- we are not 20 that's a very powerful diversifier that's not an 20 tactical allocators. 21 allocation mechanism, but it's worked. 21 MR. COLLINS: I understand. But you still do get 22 MR. COBB: You didn't answer the 57 percent, 22 together and discuss -- 23 whether there's a degree of risk there. 23 MR. WILLIAMS: Oh, yeah. So no less than monthly 24 MR. WILLIAMS: So you're talking about just 24 we get all the senior investment officers together, 25 ramping down the 57 in and of itself? 25 really every other week, and have the conversation of,

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1 given the current environment, is there anything we 1 MR. COLLINS: I do recall it that way. 2 should be doing differently. Is there something we 2 MR. WILLIAMS: You can run but you can't hide. 3 could fine-tune intra-class, could we change emphasis, 3 But, anyway, part of the problem you've got is, and do 4 do this, do that. 4 what with it? Because equities generally are pretty 5 MR. COLLINS: Which I'm sure out of a few of those 5 rich everywhere. They've appreciated nicely. And I 6 meetings is where the currency overlay was born. 6 agree you with, Ambassador, I think things ex-U.S. 7 MR. WILLIAMS: Yes. 7 maybe have a little more runway than they do here. But 8 MR. COLLINS: Right. So you-all are talking about 8 you start looking around at other places, as charming 9 this. You're talking about it monthly. And at this 9 as Katy makes fixed income, it's still hard to get 10 point you feel comfortable with where we are at the 10 excited at a macro level to ramp up the allocation. 11 57 percent and the relative -- the ratio of the 11 Then when you look at real estate, you look at private 12 international to U.S.? 12 equity, everything is priced up at this point. That's 13 MR. WILLIAMS: Well, I'm going to give you two 13 the problem. 14 answers to that. I would say you could not be a person 14 MR. COBB: The answer is the Florida Growth Fund. 15 drawing a breath and having cognitive capability and 15 MR. COLLINS: All right. Moving on. 16 not be holding your nose a little bit at this point. 16 MS. ROMANO: So on the next slide, continuing with 17 So I would describe us as fully invested bears in that 17 the theme of diversification, we really make an effort 18 regard. 18 to have a diverse set of managers, both in terms of 19 But then you have the "or what" question to 19 their process and their philosophy, and this is a 20 answer. And I would take you back to the discussion 20 little bit of a pictorial of how we think about our 21 some of us had in 2013 about, gee, should we have fixed 21 managers. For instance, we'll have global managers, 22 income, because we all know fixed income is going to be 22 we've talked in the past, that tend to be defensive and 23 miserable for the next five years. 23 should outperform in a down market. The same is true 24 MR. WENDT: You were the one that wanted to get 24 with a number of international and EM managers. 25 out. I wanted to stay in. 25 On the far right side we'll have high growth

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1 managers. So these are the managers that will take 1 have most of our active management with developed large 2 advantage of some of the secular trends that we're 2 cap, with emerging, with global managers, less so 3 seeing now with the Facebooks or the Tencents of the 3 elsewhere. And our currency program is purely an 4 world, and these are some of the small cap growth guys 4 active program. 5 that will take advantage of high growth environments. 5 In terms of sizing the investments we have with 6 On the bottom you can see we have a wide range of 6 individual managers or the number of investments, it's 7 manager processes in all of the active buckets. I will 7 driven by a number of things. One, liquidity. Two, 8 highlight, versus last year, one thing has changed. On 8 capacity. So we only want to be so much of a manager's 9 the U.S. large cap side, we now, on the active side, 9 product, and their capacity is dependent upon the 10 only have quant managers. It's not necessarily by 10 liquidity in that market. 11 design, because we think quant is definitely better 11 Operational bandwidth. So we are only so many 12 than fundamental in this space. But as we've 12 people, and we don't want to have too much manager 13 restructured the large cap growth aggregate, or large 13 proliferation, because we need to understand what all 14 cap aggregate overall, we wanted to take a 14 these managers are doing and monitor that. And fees. 15 risk-controlled approach, because we think, again, 15 So we want the scale where we can really negotiate and 16 there's some alpha to be had, maybe not as much as 16 get aggressive fees, but we don't want to take on too 17 other areas. Quant managers tend to be much more risk 17 much risk and have too much money with one individual 18 controlled than fundamental managers. So that's why 18 manager, because if things change, then there's a cost 19 we're structured in that manner. 19 to transacting and getting out of that manager. 20 And then finally in terms of the managers 20 MR. TAYLOR: Turn next to a review of performance. 21 themselves and how much we put to work, on this next 21 We've put together things structurally. The first 22 slide, which is ordered for your reference by the total 22 slide deals with what we try to achieve, consistency of 23 dollars that we have in aggregate and active management 23 performance. Just to give you a very brief history. 24 under each of the buckets, again, hitting on that 24 In July of 2010, the former domestic equity asset class 25 theme, we're taking risk where it's rewarded. So we 25 and the international equity asset class merged. We

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1 became the global equity asset class. We merged staff. 1 factors, and active management has rebounded. We were 2 We merged investments, and we took on a global target. 2 hopeful that that would happen. It has happened. And 3 So since July 1st of 2010 there have been 72 rolling 3 you can see this in the strong calendar-year-to-date 4 one year periods. And we have outperformed in 67 of 4 excess return of 77 basis points. And that is really 5 those 72 periods. 5 what took us positive for the one year ending 6 The next slide gives you a little more longer-term 6 June 30th. 7 perspective, the period ending June 30th, 2017. 7 This next page is to show you a real simple 8 Performance over all periods is above the benchmark. 8 attribution of, over the last year, how did we add 9 The fiscal year ending 2017 was a challenging, 9 value. And this demonstrates that stock selection was 10 interesting year, but we were able to best the 10 the predominant reason for successful results. This is 11 benchmark by 53 basis points. 11 consistent with our intent to stay relatively neutral 12 Notice the from inception in 2010, global equity 12 with respect to our benchmark, U.S., non-U.S., large 13 return of 11 and a half percent, again annualized each 13 cap, small cap, et cetera. 14 and every year since that time. The size of global 14 I'll move along swiftly in light of the agenda. 15 equity as part of the FRS would be much higher. 15 Next page presents returns by approach and by region. 16 However, we have been, as we talked about, taking a lot 16 By approach, both passive and active strategies have 17 of money and harvesting those profits via liquidity and 17 exceeded benchmark returns over all these periods. And 18 also through our automatic rebalance that was 18 as expected, actively managed strategies have provided 19 triggered. So we've had real strong performance, and 19 a higher level of excess returns. When you look at it 20 we've benefited and actually been able to benefit from 20 by region, U.S. strategies have obviously struggled. 21 the performance by selling down some of that global 21 Notable underperformance, particularly in our U.S. 22 equity exposure. 22 large cap space, drove this beginning in late 2015. 23 The second half of 2016 was a very difficult 23 And this has caused longer-term returns to fall below 24 environment for active managers. In 2017 year to date, 24 the benchmark in, again, the U.S. strategies. 25 however, we've seen more of a focus on fundamentals and 25 I'm going to dig in just a little more now on the

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1 next page. And I'm not going to comment on each 1 along with U.S. small cap, one of our most challenging 2 sub-aggregate but would welcome questions if you do 2 spaces and one of the greatest topics of discussion. 3 have any. These are how we've defined our active 3 There are a few reasons. One -- and I won't cover them 4 aggregates, active sub-aggregates. And you can see 4 all probably. One is just the sheer strength of the 5 these are one, three and five year returns ending 5 markets over that time. Markets have been very strong, 6 June 30th. Positive active returns have been present 6 as we've talked about earlier. In a rising market 7 in all of these aggregates except U.S. large cap and 7 environment, when returns are very strong, it is 8 U.S. small cap. We have made changes to both of these 8 difficult for active management. 9 aggregates in response to the underperformance. We're 9 There has been a lot of indiscriminate buying. 10 going to briefly address some of those changes later in 10 Investors don't really care about fundamentals. They 11 the presentation. 11 don't care about factors so much. If investors, and 12 But note that our other five active groupings have 12 many are moving to passive, things like that, buy the 13 all been successful over the long-term. And in some 13 benchmark, everything goes up. That's one reason. 14 instances we've generated very high positive excess 14 In some of the -- the U.S. large cap growth 15 returns. For example, listed at the top there, the 15 benchmark, there has been a large concentration in, 16 foreign developed standard aggregate has been very 16 terminology, the FANG stocks, so Facebook, Apple, 17 successful. I'll turn now to the business review and 17 , , . Those stocks have become even 18 Alison. 18 higher proportions, components of those benchmarks. 19 MR. COLLINS: Can I ask one question before you go 19 Managers generally underweight those. Because of the 20 to that? 20 valuations, they've continued to do well, and that has 21 MR. TAYLOR: Sure. 21 hurt. So there's a couple of examples there to explain 22 MR. COLLINS: What's the reason for the one, three 22 that. 23 and five year on the U.S. large cap, on the poor 23 We have made some changes -- and I think Alison is 24 performance there relative to the benchmark? 24 going to talk about it here in a few slides -- to 25 MR. TAYLOR: For U.S. large cap, that has been, 25 address that large cap aggregate a little bit. It's a

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1 challenging space. We think we can be successful 1 them to get their view on does active management work 2 there. I do want you to note, however, the weight of 2 in this space, do I take a barbell approach, do I take 3 the asset class, 5.4 percent is devoted to U.S. large 3 a low risk approach, do I get out completely. 4 cap active. And we actually have brought that down 4 And based on all their input, we decided that 5 even more. I think that's recognition that that's a 5 given our ability to negotiate fees -- which is key, 6 difficult space. But we still think we can be 6 because a lot of the studies that look at active 7 successful there. 7 management on the U.S. side are assuming much higher 8 MR. COLLINS: So is it one of those that you sit 8 fees than we pay. Given that, we felt that we could, 9 around internally, outside the monthly asset allocation 9 in a risk-controlled manner, reduce our exposure to 10 discussion, is it something that you sit down 10 active management but have risk-controlled strategies 11 internally and say, you know, the whole method here has 11 that over the long-term should outperform. 12 changed or the playing field has changed from 12 I'd also note, we only have four managers in this 13 historical money management in U.S. large cap, and we 13 space. So whereas in the other aggregates you get 14 have to change with it, and when you're saying you're 14 diversification in style and some of that risk is 15 making some changes there, not just necessarily getting 15 diversified away, with only four managers, if you have 16 out of it but how you access it and how you're going 16 one manager that has a tough quarter or a tough year, 17 about it, manager change, different types of strategies 17 you'll see it in these numbers that we present to you. 18 different -- what's a way to overcome the new normal? 18 MR. TAYLOR: And just a final remark. If you look 19 MS. ROMANO: So maybe just to give a sense of the 19 at the end of 2015, our U.S. large cap active program 20 process, because this is something we spent a lot of 20 was all positive. It had been successful from its 21 time on. We knew we were underperforming. A lot of 21 history, had been consistently successful. But in 22 discussion, does active management even work in this 22 2016, when active managers began to have such a 23 space. We knew we wanted to get rid of a manager. 23 challenging time, and actually before that, we were not 24 Instead of jumping in, we have a pool of consultants 24 immune to that. We were caught up in that, and in some 25 that we could speak with. We spoke with every one of 25 cases we had some deep levels of underperformance. So

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1 with some of the changes we've made, we hope to address 1 We've done something similar with our developed 2 that so that we can again be successful. 2 large cap managers. We've renegotiated fees. And one 3 MR. COLLINS: Any questions? Okay. 3 thing that really has allowed us to do this is spending 4 MS. ROMANO: So just as we structured our managers 4 time and money on developing our internal analytics 5 together to meet our objectives, we structured our team 5 platform, so we can really break down what's driving 6 and our group to meet those objectives. We really do 6 managers' returns and make sure that we're paying for 7 have a tremendous team, with experience and passion for 7 true active management and paying less for what might 8 trading, for internal management, for analytics and 8 be smart beta exposure if that's what we want. 9 what we term fund of fund management. 9 Looking forward, for this coming year, we are at 10 I would like to also acknowledge, they're not on 10 the end of a U.S. small cap manager search, both on the 11 this page, but we couldn't do what we do without a 11 value and growth side. So we look to be funding there. 12 strong financial ops team, accounting team, a legal 12 We will further diversify our lineup of developed large 13 team. Because we're structured with separate accounts, 13 cap managers. You might recall, the average assets in 14 we can have low fees. We couldn't do that without the 14 one of those managers is 1.9 billion. That's a lot of 15 support of all those folks. 15 money in one manager. And we think we might benefit 16 So turning over to what we've accomplished in this 16 from some diversification and broadening out of value 17 past year and what we plan to do going forward, I think 17 exposure there. 18 we've pretty much already hit on the U.S. large cap 18 A couple other points to highlight. We're 19 manager search and making some changes on that front. 19 working, as we've talked in the past, about getting 20 We've also made some changes to our international small 20 exposure to the Hong Kong Connect program so that we 21 cap aggregate, increasing our exposure to value, and 21 can access that portion of the China A share market. 22 taking a look at where we're paying fees to managers 22 And then, finally, we're evaluating our approach to 23 and getting okay performance, but maybe we can get 23 transition management. We talk a lot about raising 24 lower fee performance at lower risk with the same 24 liquidity and making manager changes. Well, that 25 return. So we've made some adjustments on that front. 25 requires moving money, and we need to be very vigilant

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1 about the costs associated with that and the time 1 money internally. We've never done it. Could you talk 2 involved in that. And we've had a good lineup of 2 to us about how you do it? This is the differentiator 3 transition managers when we don't do those transitions 3 we have. 4 in-house, and we're going to continue to, as that 4 MR. COLLINS: Do you charge for that? 5 industry has evolved, make sure we have the best lineup 5 MR. TAYLOR: We might, yeah, absolutely. Over 6 there as well. 6 roughly a six year period, the amount of our internally 7 MR. TAYLOR: The last section that we -- 7 managed assets have increased by almost 7 percent. You 8 MR. COLLINS: One more question. Are you looking 8 can see that in the graph there at the top of the page. 9 at international value still? 9 Two important milestones are included during this time. 10 MS. ROMANO: We have international value and will 10 One was the launch of a global passive strategy in 11 continue to -- 11 January of 2014, emphasis on global because we've run 12 MR. COLLINS: And are you adding or are you 12 U.S. money passively successfully for a very long time, 13 looking at that even more? 13 and now we're running successfully a global strategy 14 MS. ROMANO: Our search currently on the developed 14 since January 2014. And also the initiation of a 15 side is for a value-leaning manager. 15 global active strategy in May of 2016. So this is SBA 16 MR. COLLINS: Gotcha. 16 portfolio managers. This is SBA traders. This is all 17 MR. TAYLOR: The last section that we'll review 17 SBA employees managing these strategies. 18 today or present today is a review of our investment 18 What are the benefits? I'm not going to hit on 19 processes. And I want to flip to the first page in 19 every one there listed at the bottom of the page, but 20 this section, internal asset management. And I want us 20 obviously there's a cost advantage, an explicit cost 21 to spend just a minute here and consider the internal 21 advantage, in that asset management fees are not paid 22 asset capability of the global equity asset class. 22 to external investment firms. When we funded the 23 This is a differentiator relative to many of our peers. 23 active global strategy, we sourced the majority of the 24 In fact, just last week we got contacted, pretty 24 funds from active investment managers who were charging 25 big pension plan, We're interested in managing some 25 us 30 to 35 basis points.

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1 Alison alluded earlier managing transitions 1 We have an environment -- Alison and I, we think 2 internally. Well, now we are able to manage not just 2 we have an environment in global equity where we're 3 U.S. events in-house but global events in-house. We're 3 able to debate among the staff, freely debate the 4 not doing emerging markets yet, but any developed 4 advantages and disadvantage of certain strategies of 5 market in the world, U.S., non-U.S., we can restructure 5 particular managers, should they be retained, should we 6 it entirely in-house. 6 reduce their funding, should we add to their funding. 7 And also this has allowed us to support certain 7 These are things that we do on a regular basis, daily, 8 trading needs of other asset classes. And those -- our 8 monthly, quarterly. 9 colleagues here to my left and my right can attest, 9 Our manager selection process, the last two pages, 10 we're conducting trades on behalf of fixed income at 10 we've listed all of the steps, but I'd like to briefly 11 times, real estate, strategic investments, private 11 highlight just one of them. And that's step six. It's 12 equity, and the liquidity and cash equitization 12 not on this page. It's going to be on the next page, 13 portfolio. 13 because I want us to swiftly move to a close here to 14 So this is a differentiator. There's a lot of 14 allow time for Mercer and everyone else. 15 advantages to it. And just to emphasize, it's 15 Negotiate key terms of the contract and have 16 important for us to recognize the folks who do this, to 16 preliminary fee discussions. So once we've identified 17 retain them, the people that have generated these 17 a potential finalist, before we invite them to 18 results, so that we can continue to generate results 18 Tallahassee for an interview, we will provide them with 19 going forward. 19 the SBA's standard contract. We tell them we don't 20 The last I guess three slides I'll be pretty 20 like to make changes, and we basically try to see are 21 cursory with my comments. We showed you last year our 21 there any deal-breakers, is there something in our 22 manager monitoring process, and I'm certainly not going 22 agreement that you just simply cannot agree to and that 23 to talk about all of these things on this page. But 23 we cannot change. We try to identify what we call 24 what this is, I think, is evidence of a robust, 24 deal-breakers up front so we're not wasting their time 25 disciplined manager monitoring process. 25 and they're not wasting our time.

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1 If there are no deal-breakers, we also talk about 1 low end of industry ranges, which managers have to 2 fees. We're not agreeing at that point in time to a 2 agree to even be in that range simply to make the 3 final fee, but we are wanting to ensure that we're 3 search. And that's just the beginning of the 4 going to be able to get to a final fee that is in line 4 negotiating process. 5 with our expectations, based on the size of our 5 So it's our job typically to make sure a manager 6 account, based on our investment horizon, which is 6 is willing to at least go as low as, needs to be 7 long-term. We have investment managers that we've had 7 included in the search, and then Tim and Alison 8 for 10, 20 years, and they've added alpha for us. We 8 certainly take them behind the wood shed and make sure 9 have every intention of having a relationship with an 9 they are well within a range that's acceptable to you. 10 investment manager for a long time. So that's an 10 So that fee negotiation process is several steps to 11 important part of our selection process. 11 make sure that they are -- any manager is well within a 12 And those are our presented comments today. Happy 12 reasonable bound. And, again, I think it's a sign of 13 to answer questions. I know Mercer would like to talk 13 what good stewards they are. 14 for a few minutes as well, Mr. Chairman. 14 Let me reflect on a couple of pages here. And, 15 MR. COLLINS: So my suggestion would be go ahead 15 honestly, in the interest of time, the things I want to 16 and let Michael from Mercer talk. Michael, we're 16 focus on I think will speak to a couple of the points 17 running a little bit behind, as you can imagine, so if 17 that were made earlier. The first is on page six, just 18 you could start on page six of your presentation, I 18 looking at the comparison of FRS to the various peers. 19 don't think we'll have missed anything that the board 19 Your usage of passive from the internal perspective is 20 really wants to dive into. 20 significantly higher than many of your peers. You 21 MR. SCHLACHTER: Let me start by saying as well 21 really are allocating, I think, your costs where 22 what I think Tim didn't really do service to, is how 22 appropriate. 23 good stewards of your assets your staff really is. 23 So for the internal assets, you have a very large 24 When thinking about those fee negotiations for new 24 passive allocation, you'll see on some other slides, 25 searches, there typically is a range, which is at the 25 that is larger than many of your peers, the amount that

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1 you're allocating to passive investments. Again, a 1 was used before, a slave to something else, a slave to 2 very strong reduction in cost. 2 benchmark reconstitution. 3 Outside of your internal management, so external 3 MR. COLLINS: But if we're judged by that, too, 4 managers, you have a fairly aggressive active program, 4 and our 10 percent includes that, I'm still surprised 5 again, to capitalize on what's available in the 5 that we're half of what other people are. 6 industry. If I look at page eight, getting back to a 6 MR. SCHLACHTER: Is that an effective use of your 7 question that was raised, I think the ambassador has -- 7 resources, though? I think that when you have seen 8 MR. COLLINS: Do you have a question? The 8 other clients do that or other funds do that, it's been 9 internal active, I'm a little surprised to see our 9 more or less effective. In order to really do true 10 peers are ahead of us in that regard. Is that a 10 active management, that's a pretty large investment. 11 specific segment of equities that they're doing 11 MR. COLLINS: No. What I'm saying is, if you're 12 internally that maybe we're not doing as heavily, or is 12 counting index rebalancing as partially active, right, 13 it just across the board? 13 and that's how other people are getting to 20, well, 14 MR. SCHLACHTER: Yeah. So having worked with a 14 I'm assuming you're counting it for us. So if we're 15 handful of other large public funds, I wouldn't call it 15 apples to apples on what is defined as, quote, active, 16 fully active active, the way you'd argue a fundamental 16 even if it's not truly active, we're still 50 percent 17 active manager is you might hire externally. In some 17 of what other people are. 18 cases managers -- or sorry -- funds are taking tilts in 18 MR. SCHLACHTER: There's a -- as I mentioned, 19 their portfolios. They might be using some kind of a 19 there's a spectrum of what constitutes this definition. 20 relative valuation, a highly quantitative process in 20 That is a very fuzzy definition, to say internal 21 their portfolio. 21 active, when it comes to public funds doing internal 22 Some are using index reconstitutions as a way to 22 active management. So it's really anything shy of 23 time reallocations within the portfolio. So it is 23 simply being just a pure slave to that benchmark. 24 still a largely passive process, but there are active 24 So, yes, yours is a bit lower than some of your 25 elements to it, as opposed to being -- I think the word 25 peers. I think that's a recognition of the fact that

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1 where are your resources and assets best spent. Tim 1 plan here is we don't do things as an end in 2 showed the size of your internal team, for example. 2 themselves. We do the things that work and keep doing 3 Those that engage in some of these more active 3 them. And the things that don't work, we stop doing 4 processes, I've seen teams that have 9 to 12 people 4 them, which has been very helpful over the years. 5 simply on the trading desk alone to execute something 5 So, Michael, you would know better than I, but I 6 like this. 6 think a lot of other funds may not be as successful 7 So you can be farther down that path, but you 7 with their aggregate results, notwithstanding their 8 would require a significant expansion of your ability 8 additional in-house activity. A lot of places, 9 to analyze the thousands and thousands of securities 9 internal active portfolios take on a life of their own 10 that are in some of these indexes. 10 because people enjoy running money. I mean, that's why 11 MR. COLLINS: No, I gotcha. 11 we're all in this business. It's satisfying to do. 12 MS. ROMANO: And if I could just add, I don't 12 But I would say, too, as Alison pointed out early 13 expect us to get to that 20 percent number anytime 13 on in the presentation, the amount of money we're 14 soon. However, we continue to explore opportunities to 14 managing in-house is increasing, and it's increasing 15 bring money in-house. We have a couple of projects 15 not just in global equity but in fixed income as well. 16 underway, and I expect that that number could expand. 16 And we're finding that in some circumstances we're 17 But we have to make sure we have the resources and the 17 managing the money as well or better than some of our 18 commitment and the staff to do that. 18 external players. And to the extent that's happening, 19 MR. WILLIAMS: Follow on, Mr. Chairman? 19 they're getting terminated and that money is coming 20 MR. COLLINS: Yes. 20 in-house. 21 MR. WILLIAMS: A little ancient history here. 21 And I think as our resources, our human resource 22 There was a time many years ago when the SBA managed a 22 quality stays and builds at the level or to and from 23 lot of active money in-house and had every flavor of 23 the level it's at now, we'll be able to do more of 24 active strategy you could imagine. Guess what. It 24 those. 25 didn't work. It wasn't very successful. So our game 25 MR. COLLINS: Go ahead.

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1 MR. SCHLACHTER: There's two more slides I wanted 1 Tim showed. What you can see on this page is that you 2 to reflect on. First, looking at asset allocation 2 have a far higher allocation to passive in places like 3 among the various regions, the ambassador had a 3 the U.S. and obviously much more in active outside of 4 question earlier about deweighting the size of the U.S. 4 the U.S. 5 allocation in the portfolio. I will say that this is a 5 So what we're seeing on this page -- and forget 6 bit lagged. This is based on a third-party survey of 6 the comparison to your peers for a second, just looking 7 the ten largest public pension plans in the U.S. It's 7 at how you allocate assets among the various types of 8 about a year lagged. 8 equity markets around the world, you're taking a 9 But you can see that historically you have had a 9 passive approach. And we would argue that markets are 10 smaller allocation to the U.S., just historically, so 10 more efficient in where your results have not been as 11 are reflecting a bit more of a global perspective than 11 strong. Where you're taking a far more active 12 even many of your peers have and has resulted again in 12 approach, the results have historically been far more 13 a bit smaller weight to the U.S. So we can debate 13 effective. For example, in emerging markets you're 14 whether or not you want to have an active position for 14 100 percent active. 15 or against the U.S. But the bottom line is simply, 15 So in markets in which there really is some strong 16 compared to many of your peers, you naturally have one 16 opportunity to add value, you're taking those 17 already, less of a home country bias than many other 17 opportunities. And in places again like the U.S., 18 large public pension plans. 18 where you've had less success and there's plenty of 19 The next page just reflects what Tim was talking 19 academic argument that outperformance may not be there, 20 about a few minutes ago, and that was your relative 20 you're taking a far bigger indexed portfolio. 21 success in some asset classes and then we can say lack 21 The final page to look at is page 11 in your 22 of success or less strong results in other asset 22 books, page 64 on the screen. Tim and Alison reported 23 classes or other asset types of equities. 23 results at the aggregate level across all of global 24 For example, U.S. large cap has not been as 24 equity. We've broken it here by U.S., non-U.S. and 25 successful for the last one, three and five years, as 25 then global, dedicated global investments. And the

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1 numbers I want to focus on, I'll skip the U.S. section 1 those have really paid off for you quite well, 2 because again that is so indexed, these numbers are not 2 resulting in a very diversified portfolio. 3 quite as relevant. 3 If I skip forward a couple of more pages, we think 4 If you look at the non-U.S. section, in the middle 4 it's actually a very high quality portfolio as well. 5 section of that page, look for three and five years, 5 Of the 54 strategies that are employed, active external 6 even for since inception. In the parentheses at the 6 strategies employed by your staff, 82 percent are rated 7 bottom of that section, for information ratio, you're 7 by us B-plus or higher. There are a few of those that 8 seeing numbers of three, one and one. 8 either have been downgraded over time and are under 9 So back to -- there's a study someone referenced 9 consideration for change at some point or places where 10 earlier Aon conducted looking at you relative to your 10 frankly we agree to disagree about the quality of the 11 peers across the board. Here you can see as well that 11 external manager. So overall we think that four out of 12 your information ratio for those non-U.S. investments, 12 five managers are, in our opinion, very strong relative 13 where you have about 70 percent in active investing 13 to your peers. 14 versus passive investing, you're ranking at the very 14 MR. COLLINS: Does anyone have any questions on 15 top of your peers on a risk-adjusted basis. 15 this last page here? If not, I just have one. We 16 So where you are deciding to take active positions 16 talked a little bit about U.S. equity and how it's been 17 in this portfolio, it is paying off very well for you. 17 hard on the value side. When I look at three years, 18 And in the global portfolio you can see for five years 18 the information ratio, you see 81, and then five years 19 you're in roughly the top third on an information ratio 19 is 62. That all can't just be coming from large cap, 20 basis as well. 20 right? There's something else going on there. 21 We skipped over many of our summary comments at 21 So when you guys internally are looking at those 22 the very beginning. I always hate to bury the lead. 22 numbers, those information ratios and seeing, hey, 23 But our bottom line conclusion in looking at this 23 we're number 81, what do you -- is it passive versus 24 portfolio is, again, you are selective in where you 24 active? Is it the market has been crazy this last year 25 take active positions versus passively investing, and 25 and that's really done -- that's really had the biggest

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1 effect on the three year number? Because if you look 1 well. You could argue the U.S. stock market is one of 2 at since inception, it's phenomenal. But if you look 2 the most efficient markets in the world. 3 at the last three and five years, again, it's like, is 3 And if you look at the benchmark for even the 4 the paradigm shifting. 4 since inception, where we're number one, the difference 5 MS. ROMANO: In the short-term maybe, yes, the 5 between the benchmark and us is 14 basis points. So, 6 paradigm shifted over the last one and three years. I 6 you know, do you look at active at all in U.S. 7 don't think that it's permanently impaired. As I 7 equities, would be my question. 8 mentioned before, when you only have four managers on 8 MR. TAYLOR: Yeah. I mean, I think we can still 9 our large cap side, you don't get a diversification 9 be successful there. I mentioned earlier where we -- 10 benefit. On the small cap side, we've gone through 10 that we recognize that it is challenging there. And in 11 periods where non-earners, biotech, what some may call 11 terms of how do we allocate our risk budget, how do we 12 low quality, have outperformed. 12 use our risk budget, if you look at U.S. large cap, 13 Some of our managers find those periods 13 it's down to about maybe 4 percent of our asset class 14 challenging. We've had other managers that really are 14 now. That's a lot of money still, obviously, still, 15 exceptional managers, that have managed money for us 15 4 percent. If you look at U.S. small cap, it's less 16 for a long time, who had a bad year or two. And you 16 than 2 percent of our asset class. 17 put all those events together, and it makes for a 17 So we're not spending a lot of our budget on those 18 number that you see here. But we take that very 18 very difficult, challenging areas. Where we are is 19 seriously, and that's why we've made some of the 19 where we've been successful and where we think we can 20 changes that we have. 20 be successful going forward. Foreign developed 21 MR. COLLINS: And so going back to Michael's 21 standard, 26 percent of the asset class. Emerging and 22 comment, relative to how we've done in emerging markets 22 frontier, 11 percent of the asset class. So it's 23 where we're 100 percent active, let's look at it on an 23 difficult there. 24 efficient market basis, right, where the market is less 24 We had one period that really drug down returns, 25 efficient, we're active and we're doing really, really 25 and the ones that you see here, these periods ending

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1 one, three, that make it look relative from 1 large cap managers, if those four -- all you need to 2 inception -- we had a period that really drug things 2 find are four -- you can add value in this portfolio. 3 down. We've seen signs of life. One year, not a 3 So when 80 percent of the U.S. is passive and only 4 long-term, but our value managers actually beat their 4 20 percent of your portfolio is active, you are taking 5 benchmark by 300 basis points for the one year ending 5 some very selective positions, which hopefully will pay 6 June. Surprise. Our value manager is successful. We 6 off. I think that reflects that efficiency argument. 7 were still, though, drug down by the growth. And 7 But it has been difficult. It's been difficult for a 8 that's where we made most of the changes. 8 lot of investors. Many investors have thrown in the 9 So I hope that answers the question a little bit. 9 towel and gone 100 percent passive. But we still 10 But, I mean, we certainly have had the discussion 10 remain convinced that for those who are highly 11 should we just -- should we throw in the towel. It 11 selective in picking managers, there's opportunity to 12 could very well be the worst time to do it. We're 12 find at least a few who can do it. It can be done. 13 starting to see the return of active management. And 13 It's hard to find them, but it can be done. 14 so I think we're going to hold on for now and continue 14 MR. COLLINS: But on those, you're going to have a 15 on. We've made some changes, but we continue on. 15 harder time negotiating fees as well. 16 MR. SCHLACHTER: If I could just add one thing. I 16 MR. TAYLOR: I don't think so, actually. 17 think you can say that there's difficult, there's very 17 MR. COLLINS: Really? 18 difficult and there's impossible to add value. And in 18 MR. TAYLOR: Yeah, yeah. We did a search and we 19 the U.S. market we can argue it is more efficient, it's 19 got a very attractive fee. And I think these managers 20 certainly more efficient than it was decades ago. With 20 have lost a lot of assets over the last few years. We 21 this high concentration in the FANG stocks, maybe it's 21 were -- I don't know of any other people who were 22 becoming easier again because now there are so few real 22 actually searching for a U.S. large cap growth 23 opportunities in the market that are capitalized on. 23 investment manager. Now, they were real interested to 24 But just because it is hard to do doesn't mean it can't 24 take our call. So it was a -- we actually -- I mean, 25 be done. So to the extent that you're only having four 25 it was a good environment for us. As assets are

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1 fleeing that space, we're looking to actually fund up a 1 expanded a little bit at the beginning of this fiscal 2 manager. We ended up with a good -- 2 year. So we -- our goal is preservation of capital, 3 And, you know, there was a comment earlier about 3 but we want to outperform over a long period of time in 4 being a slave to the benchmark. Well, that is 4 a very risk-controlled fashion. 5 perhaps -- all of the names in the benchmark have risen 5 Provide liquidity on demand. Equity markets go 6 for a while. The concern about being a slave to the 6 up. We haven't had to provide liquidity for a year, 7 benchmark is that the valuations are getting -- are 7 but a couple of years ago we did it every single month 8 they getting too expensive. Well, if you throw in the 8 for a year or two. And that's very difficult -- it was 9 towel and you just say, Well, I'm going to go passive, 9 very difficult in that market. Serve as 10 well, you just follow those valuations wherever they 10 diversification to these guys. And if you look at the 11 go, and when they go down, you'll follow them, too. 11 correlations, we actually have negative correlation to 12 If you stay somewhat active, you can actually 12 that asset class. So we've been successful on that 13 capitalize upon hopefully -- stocks don't always go up. 13 front. And you just draw a line and say, sleep well at 14 They'll go down eventually. And hopefully at that 14 night. That's the function of this group, frankly. 15 point in time our active managers will be underweight 15 Just a quick breakdown. Really little change from 16 some of those expensive stocks. 16 last year, so I'm not going to say much about it. The 17 MR. COLLINS: Okay. Thank you. Thank you, 17 vast majority of our benchmark -- and we were 18 Michael. But you're staying around, Michael, right? 18 thoughtful about constructing a benchmark -- is 19 Right. Katy. 19 government related, so government guaranteed, if you 20 MS. WOJCIECHOWSKI: I will do my best to 20 will. 21 outperform on use of time if nothing else. I'm going 21 We have about a 25 percent allocation to 22 to follow a similar agenda to the global equity. Just 22 corporates in our benchmark. We are pretty much 23 a word on our objective. We have a very low risk 23 overweight that persistently. And I can't think of a 24 budget. And our group has expanded a little bit this 24 period where we've been underweight. Also, even if we 25 year. We have a very low risk. And our group, we 25 are equal weighted with the broad asset classes that

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1 are here, we will show significant difference if you 1 total internally we manage about 60 percent of the 2 look within the asset classes. For example, on CMOs, 2 assets. 3 instead of just pools, we will own off-index 3 We have also five external managers. And what we 4 corporates, things like that, and structured assets as 4 did was try to say, all right, we're very thinly 5 well. 5 staffed internally. What can we do that adds on to the 6 Our current allocation is about 18 percent, give 6 people who are staffed. So I have one person managing 7 or take a little bit on any given day. And we have 7 mortgages besides me. And I haven't done a trade in 8 just a little bit of cash, .6 percent cash. This 8 five years. So besides that, we picked a really good 9 includes also, by the way, we have a -- and Tim and 9 mortgage manager, or we picked a really good deep 10 Alison do as well. We have a liquidity portfolio that 10 corporate manager, and try to add -- you know, make 11 we funded a couple of years ago, about one and a 11 them an addition to staff. So we both use them for 12 quarter billion, and they have about one and a quarter 12 research as well as for trading and managing the 13 billion that's in derivatives with cash completely 13 portfolio. 14 under it. That gives us additional liquidity in times 14 And Michael may disagree with this, but when they 15 of need to fund things like benefit payments and also 15 did an asset class review a year ago, felt it was 16 to fund real estate investments, strategic investments, 16 thoughtfully constructed. Had a couple of ideas to 17 things like that. 17 maybe bring more assets in-house, which we have done, 18 Our active risk budget, as I mentioned, went up 18 to maybe fund a different portfolio. 19 just a little bit this year to 75 basis points. Very 19 Our benchmark is totally intermediate aggregate. 20 small. Had been 50 basis points. So active/passive 20 When Gary wanted to -- or I'm sorry, maybe it was 21 split, we lowered this over the past couple of years. 21 Ash -- completely wanted to get rid of fixed income, 22 We are currently about 38, 40 percent in passive, and 22 after much discussion, we changed our benchmark to the 23 that is all internally run. We also are about -- also 23 intermediate ag from the ag. That reduced our duration 24 we run a $6 billion active fund internally. So it's 24 by a year and a half. It also, by the way, did reduce 25 the largest active fund with what we manage. So in 25 our absolute returns. What it also did was increase

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1 our risk-adjusted returns. So we took much less 1 MS. WOJCIECHOWSKI: Let me stress, risk-adjusted 2 volatility and produced a little bit less in returns. 2 performance. So our performance over one, three and 3 If we look at risk-adjusted, it's outperformed one, 3 five years was actually quite good. A year ago when I 4 three and five by about 20 basis points, on a 4 sat here, we had a very tough time with our active 5 risk-adjusted basis. 5 managers, as Ash mentioned. We were the top performer. 6 And I think what you have to think about is, it 6 We were not this past year. We had great performance 7 allowed the board -- and we were very thoughtful about 7 out of our external managers. We had good performance 8 this -- to move some more spready assets or riskier 8 internally as well, by the way. It was a good year. 9 assets down to the strategic group. They have about -- 9 But we had great performance out of them, which is what 10 Trent, correct me if I'm wrong -- about 50 percent in 10 we pay them for. 11 fixed income? Is that fair? 11 Just a note on where we got our return from. And 12 MR. WEBSTER: Probably across all different 12 this is going to be very typical for us. We do not 13 strategies, probably the majority (inaudible). 13 take duration bets. We have very tight -- again, a 14 MS. WOJCIECHOWSKI: So I think if you look at a 14 very small risk budget, so we don't spend it there. We 15 typical fixed income, at least where I've been in the 15 do it in security selection. So it's behind the 16 past, you would have that group housed within our asset 16 scenes, securities that we select. And this is typical 17 class, and you'd look at it on your overall risk basis. 17 for us. 18 We look at it holistically so that the whole board 18 Our process hasn't changed very much, so I'm just 19 looks at it. We have these fixed income assets, and 19 going to pass on that. But one thing I do want to 20 these are the "sleep well at night" so we can do those 20 point out. Our risk has just consistently gotten lower 21 kind of investments elsewhere. 21 and lower. We and our external managers do not -- we 22 MR. COLLINS: I think that was a compliment, Gary, 22 feel it's very full valuation, so we've pulled back on 23 that she was giving you. I'm not really sure. But the 23 risk. We're being very tactical and very close to the 24 end sounded like a compliment, like performance was 24 vest on where we spend our money. 25 better. 25 And this will tell you why, because if you look,

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1 there's just not a lot of spread in a very low 1 comparisons. That is significantly below peers. Most 2 environment. Ten years at two twenty-two, if we go out 2 peers have a much larger active portfolio in fixed 3 50 basis points, we wipe out all of our return for the 3 income. Given Katy's and the fixed income team's tight 4 year. So we're not spending a lot of risk, either in 4 risk budget, there simply isn't the ability to do that. 5 duration or in spready assets. 5 This is where you meaningfully differ from peers, in 6 We continue to look globally, just for 6 that -- we had a long discussion obviously a few 7 opportunities, not that I would suggest we change our 7 minutes ago about efficiency or inefficiency in the 8 benchmark to a global benchmark, because I would not. 8 equity markets. 9 But just as a tool to outperform and to diversify our 9 Most people would argue that fixed income 10 risk. 10 benchmarks are pretty lousy, frankly, to use a 11 So just real quickly, this matches my previous 11 technical term, and that the opportunity to add value 12 graph, which will show you that we take our risk in 12 exists in fixed income. So to the extent you're 13 credit spread and securitized spread and also with 13 willing to take risk, most of your peers are taking 14 security selection within those asset classes. 14 significantly more active risk relative to that 15 Okay. I think that's my last -- yeah. I think I 15 benchmark than you are. 16 did that in under ten minutes. 16 Katy did very quickly jump through all of her 17 MR. COLLINS: Questions for Katy? I think 17 various fixed income performance. The thing that I 18 everybody is still giving you a break from two years 18 will point out on the next several pages is that these 19 ago. Michael, do you have any -- 19 value added lines, the third line down, here you can 20 MR. SCHLACHTER: Yeah. I'll just focus on a 20 see it's positive across the board, with information 21 couple of pages. So just looking at page six in this 21 ratios you can see for three and five years in the top 22 deck. Katy mentioned this has now gone to a 40/60 mix, 22 10 percent, in the top 5 percent. In this case, this 23 40 passive, 60 active. These numbers are, again, 23 is for the entire portfolio. 24 lagged about a year because we want to make this -- 24 If I look at the internal portfolio, again, about 25 this is a third-party database for apples-apples 25 25 basis points of value add for three years and five

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1 years for the active, pretty close to the benchmark for 1 Florida and the Houston area. And I'm happy to report 2 the passive. So, again, consistent outperformance 2 that the damage was relatively minor, for the most part 3 throughout all time periods in fixed income. 3 restricted to landscaping, roof leaks and such. In a 4 And then finally for the external managers, very, 4 few cases it actually was a benefit to us. So we own 5 very strong performance, roughly 30 basis points to 5 self storage. Self storage can be very event-driven. 6 half a percent for three and five years, better for the 6 In Florida we own 21 self-storage facilities. From 7 one year. So, again, in all time periods shown, for 7 before the hurricane event to after, our occupancy 8 all the portfolios shown, the fixed income team has 8 actually went up 2 percent, as people had to relocate 9 added value relative to the benchmark across the board 9 and take the contents of their homes as they rebuild. 10 no matter how we slice and dice the performance. 10 We only own two Houston properties, but those 11 MS. WOJCIECHOWSKI: That's it. 11 occupancies went up 8 percent since the hurricane. We 12 MR. COLLINS: Any questions for Katy or for 12 also own a multifamily apartment tower in Houston, 13 Michael? Okay. SIO updates. We're going to start 13 which was undamaged. We went from 96 percent occupied 14 with Steve, real estate. Tell us why we're not 14 to 100 percent occupied, as people need to find a place 15 overvalued. 15 to live as they rebuild their homes. 16 MR. SPOOK: I'll try. Good afternoon. I promise 16 We had one instance, a really good story in 17 to be shorter than global equities, for sure, so you're 17 Houston. We have a Houston office building. One of 18 welcome for that. 18 the maintenance guys stayed during the storm. He has a 19 MR. COLLINS: Will you pull the microphone a 19 family, a wife and two kids. The storm hit over the 20 little closer to you so the people on the phone can 20 weekend. He fixed a broken pump, moved the pump around 21 hear you better? 21 the building, essentially saved the electrical systems 22 MR. SPOOK: So there was a little bit of 22 and the lobby area from getting flooded. Three days 23 discussion earlier on the hurricanes, and I just wanted 23 later he was able to go home, and his house was totally 24 to give a brief update on the hurricanes as it relates 24 flooded. Fortunately, I think most of the tenants and 25 to real estate. We own a fair number of properties in 25 management appreciated his efforts. A GoFundMe page

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1 has been started and they're raising substantial 1 commingled funds. Same with our geographic 2 amounts of money for him to help rebuild his life. 2 diversification, just slightly below most of our 3 MR. COLLINS: That's great. 3 benchmark exposures, with the exception of the South. 4 MR. SPOOK: So on the first slide, total real 4 And that's because we do have some international 5 estate portfolio performance. Again, over one year, 5 investments which are not included in the benchmark. 6 three year, five year, and if you go further, ten year 6 Recent activity since the last IAC report, these 7 and since inception, strong outperformance. Here is 7 reports -- this report is due about a month before this 8 principal investments performance. If you recall, 8 meeting, so there are some additions to that. Notably, 9 that's our direct-owned portfolio. Same story, strong 9 an office building in Portland for about 103 million. 10 outperformance across all periods. Externally managed 10 It's not levered yet. We're working on putting 11 portfolio is our commingled funds and our separate 11 leverage on it. And two closed-end funds, one for 50 12 account REIT portfolios. Same story there, 12 million, which has a focus on the Nordics in Europe, 13 outperformance across all time periods. 13 and another closed-end fund with a $75 million 14 In our sector allocation, we're right on the money 14 commitment that's not shown on there that has kind of a 15 with our target of 90 percent private, 10 percent 15 focus on specialty property types, senior housing, 16 public, the public being our REIT portfolios. We're 16 student housing, medical office. 17 targeting 20 percent non-core. We're kind of close, 18 17 MR. COLLINS: You said a $75 million fund? 18 percent non-core, 82 percent core. And currently we're 18 MR. SPOOK: Yes. That's our commitment. 19 at 8.9 percent of the total fund, with a 10 percent 19 MR. COLLINS: Oh, okay. 20 target allocation. 20 MR. SPOOK: The fund itself is $750 million. I 21 Property type diversification. In most of the 21 don't have a slide on leverage, but as of 3/31, our 22 major property types, you see we are below the 22 leverage was 24.2 percent. Since then we've resized a 23 benchmark exposures. And, again, that's because of our 23 couple of mortgages, increased them to 40, 45 percent 24 exposure to other property types, ag, student housing, 24 LTV. And we're currently evaluating placing leverage 25 senior housing, hotels, which we only own in our 25 on approximately six existing assets in the portfolio,

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1 which if all those happen, we'll go from 24.2 percent 1 strategies performed best. Over this past year, the 2 to 28.2 percent LTV, returning $433 million capital. 2 U.S. buyout portfolio in particular was impressive, 3 That's all I have for now, unless you have any 3 with a one year return at 23 percent. And then 4 questions. 4 finally, as I mentioned, our GPs do continue to sell 5 MR. COLLINS: Anybody have any questions for 5 assets. Our 2017 year-to-date cash flow has been much 6 Steve? So is 24 percent up? Is it flat? Is it down? 6 stronger than we expected. This is as of August 31st. 7 MR. SPOOK: As of 3/31, adjusted for subsequent 7 We are net cash flow positive by $637 million. 8 transactions until now, 24.2, evaluating six assets 8 This shows our sector exposure. There's been no 9 that are currently in the portfolio to place additional 9 real change since our asset class review in June. Our 10 leverage on them, which would bring us to 28.2, if all 10 GPs continue to be very active in the IT sector. So as 11 those transactions -- 11 such, technology remains the largest exposure in the 12 MR. COLLINS: Think of it like the little engine 12 portfolio. Geographically, the portfolio remains 13 that could. I think I can. I think I can. 13 largely U.S. focused and U.S. based. We've been slowly 14 MR. SPOOK: And pretty much, as you see, most of 14 increasing our exposure outside of the U.S. And you do 15 our new acquisitions have some leverage on them. 15 see this trend continuing. 16 MR. COLLINS: Any questions? All right. John. 16 Here we can see the asset class performance. This 17 MR. BRADLEY: Thank you. And I'll try and be 17 is shown versus our primary benchmark plus a 300 basis 18 brief here. I'll start with a market update. Private 18 point premium. Our one year and ten year performance 19 equity deal activity remains strong. U.S. buyout 19 trails the benchmark by 80 and 20 basis points 20 volume remains steady year over year, while we saw 20 respectively, while our three year, five year and since 21 increases in Europe. Europe was up 13 percent year 21 inception performance exceeds the benchmark. 22 over year. Asia up 37 percent. Across our portfolio 22 MR. COLLINS: Those are good-looking colors for a 23 our GPs remain cautious, given high valuations. And as 23 chart, Steve. Did you see those? 24 a group, they remain net sellers of assets. 24 MR. BRADLEY: We'll just pause here for a minute. 25 Within the portfolio, U.S. buyout and distressed 25 So here we have the underlying performance of the

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1 various sub-strategies within the portfolio, benchmark 1 One of the sub-strategies which we've talked to 2 versus their Cambridge peer benchmark. As I mentioned 2 the IAC about in the past but what we haven't done any 3 at the beginning, both our distressed and U.S. buyout 3 of as of yet is insurance. And we started talking at 4 portfolios led the short-term. Both strategies were up 4 the beginning of this meeting about what's been 5 over 20 percent this past year. While longer term, all 5 happening with the insurance markets. We like 6 strategies, with the exception of our non-U.S. growth 6 insurance longer term because of the very powerful 7 equity portfolio, have outperformed their peer 7 diversification benefits that insurance brings to a 8 benchmark. 8 portfolio, but we haven't liked the pricing. The 9 And finally I'll end with our commitment activity. 9 pricing, from an investment standpoint, has been very 10 This is shown year to date through June 30th. We've 10 soft. 11 committed 1.1 billion to 11 funds, 600 million went to 11 So our original plan was that we would identify 12 six buyout funds, 150 million to three venture funds, 12 somewhere between four to five managers and allocate 13 and 300 million to two distressed funds. That's all I 13 small amounts of capital to them, somewhere around $25 14 had. I'll pass it on to Trent unless there are any 14 million each, and then wait till an event to harden the 15 questions. 15 market and allocate more money to that. 16 MR. COLLINS: Any questions on private equity? 16 Well, we've had two events over the last month. 17 Trent. 17 And though they aren't going to provide us with a 18 MR. WEBSTER: Thank you, Peter. This was the 18 table-pounding buy in insurance, we think more likely 19 strategic portfolio by sub-strategy as of the end of 19 will provide us with a "sweep the dust off the table" 20 the fiscal year. Debt was 29 percent. Equity was 20 type of buy, where instead of perhaps now allocating 21 14 percent. Real assets was 19 percent. The purple 21 $25 million to our managers, maybe it will be 50 or 22 area of the graph is diversifying strategies. That was 22 $75 million. 23 18 percent. Flexible mandates, which is the orange 23 But we'll see how the pricing environment shakes 24 part, that was 14 percent. And special situations was 24 out in insurance. And that will go into diversifying 25 6 percent. 25 strategies. And what you'll see over time, probably in

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1 two, three, four quarters from now, you'll start seeing 1 for all our broad market strategies. And of those six, 2 it growing on that graph. 2 five of them have beaten their benchmark, including 3 This is another way of looking at our portfolio. 3 flexible mandates at the second from the right there. 4 Currently we have 133 funds and a net asset value at 4 Most of flexible mandates are multi-strategy and 5 the end of the previous quarter of $12.7 billion. 5 event-driven funds. And that just shows you how 6 Twenty-one percent of that, or $2.6 billion, is in 6 difficult hedge funds have been for the last three 7 yield-orienting strategies. We've been very active 7 years. 8 investors in private credit for the last ten years, and 8 The benchmarks that we use for those funds are the 9 we know the space pretty well. And we like it longer 9 hedge fund benchmarks, which are 10 term, but we're getting cautious here. 10 peer-based benchmarks put together by Credit Suisse. 11 We've probably been inundated with more private 11 And our benchmark for the flexible mandates actually 12 credit funds this year than any of the ten years that 12 declined by 0.3 percent per year for three years. And 13 I've been here. We've met with many of John's 13 so we've outperformed even though the hedge funds have 14 managers, who are private equity managers now raising 14 gone through a difficult time. 15 private debt funds. And that's because there's this 15 The one strategy which we underperformed was in 16 thirst and hunger for yield around the world. With the 16 the diversifying strategies. And that's entirely due 17 2 percent returns, yield to maturity, in Katy's asset 17 to one fund, which has gone through a very difficult 18 class, it's driving money into private credit. And 18 time, which is now winding down. The way we think 19 that's making us cautious. We're seeing very toppy, 19 about that strategy is very similar to how we think 20 late cycle type of behavior. And so we're just being 20 about Katy's strategy in the total FRS. 21 very selective on who we're investing with currently. 21 We're a little disappointed with those returns. 22 These are the returns. Given the nature of 22 We think over time it should be somewhere around 4 to 23 strategic investments, we don't get too excited about 23 6 percent. But it has provided negative correlation to 24 the near-term returns. What is kind of more 24 the FRS of minus 0.24. And it's even provided negative 25 interesting is that we finally have three year returns 25 correlation to the Barclay's Ag. So it's not just a

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1 bond proxy. So even though the returns have been a 1 We like commodities. We like some of the things that 2 little less than what we had expected, it's pushing our 2 are going on in the commodities markets, particularly 3 portfolio out on the efficient frontier. 3 metals. What's going on in metals are typically 4 So in the quarter, we were cash flow positive at 4 classic. What we're looking for is a value investor. 5 $94 million. That pushed us positive for the year. 5 We've had a lot of money come out. There's not been a 6 And we shouldn't be positive for the year, because 6 lot of investment. This is causing supply shortages, 7 we're a young and growing asset class. We're trying to 7 and the prices have gone up, particularly in the base 8 put money out. But what it represents is money that's 8 metals. The precious metals are still languishing. 9 flowing back to us from the managers is coming back to 9 But our problem with it is finding institutional 10 us faster than they're putting it out, and that's 10 quality managers to invest in. So this is one area 11 demonstrative of the market that we're currently in. 11 that we like. 12 So in the quarter we hired five new funds. We got 12 Another area that's been fairly positive has been 13 to 14 for the fiscal year. We also gave another 13 merger arbitrage spreads, because of some of the 14 $200 million to three existing mandates. And so we put 14 problems that had happened in the merger arb markets 15 out just under $2.1 billion in the last fiscal year, 15 over the last couple of years have blown out spreads. 16 which is what we typically expect each year. 16 So, many of our multi-strategy managers have put fairly 17 For this quarter we've hired three new funds to 17 large allocations into merger arb, in fact, the largest 18 date. This week we plan on closing another three 18 allocation since we started investing in hedge funds. 19 funds, and we may have another one close before the end 19 We like emerging markets long-term. And the world 20 of the month. So we're going to be somewhere between 20 is expensive, which I don't think will surprise 21 six and seven funds for this quarter and having 21 anybody. So that's all I had. Any questions? 22 committed a billion dollars or more. 22 MR. COLLINS: Any questions for Trent? Okay. 23 And finally, actually, our pipeline now is 23 Joan. 24 actually six funds, totaling a billion dollars. Like I 24 MS. HASEMAN: I'm not going to go through all of 25 mentioned, we think private credit is very overheated. 25 my slides. Just to give you a quick update on the

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1 legislation that passed, we have implemented two of the 1 MS. HASEMAN: That will occur starting 2 three major programs. We've had our renewed membership 2 January 1st. 3 in place. We've now got 5,000-plus members who have 3 MR. WENDT: Beginning January 1st. 4 been renewed since July 1st. We have in-line-of-duty 4 MS. HASEMAN: Yes. We won't see an impact of that 5 death benefits being paid to eight special risk 5 default until the fall of 2018, because they have a 6 families, and we have four pending regular class 6 nine-month window to make a choice. So numbers won't 7 applications and three special risk applications 7 start occurring until later. 8 pending. 8 MR. COLLINS: And what's the percentage? Is it 9 We've had a growth in our assets of about 9 holding steady, the people that are directing their own 10 12 percent since last year. As Ash mentioned, we're 10 versus -- 11 sitting now at 10.2 as of the close in August. Our 11 MS. HASEMAN: Yeah, about between 23 and 12 membership is up. And I guess the rest of this is 12 25 percent are making an active election into the 13 pretty much standard of what you're used to seeing. 13 investment plan, yes. 14 This is our . No surprises, not 14 MR. COLLINS: No, no. Those people that are in 15 a big change since we last talked in the last meeting. 15 the plan that are actively picking stocks or picking 16 Performance was very good. And I'll defer to Aon 16 their managers. 17 to discuss that with you, but we were very pleased with 17 MS. HASEMAN: About 45 percent of our membership 18 the results this year. We were happy to see a rebound 18 is in the retirement date funds. Most of those are the 19 for our membership. So very pleased to see this. 19 ones that defaulted as a result of their using the EZ 20 Membership growth. Financial guidance program. We've 20 form, may or may not have changed it. The rest are 21 been busy and continue to be busy. And that's all I 21 either a mix across the retirement date funds and/or 22 have to say, unless we have any questions. 22 their own portfolio. 23 MR. WENDT: I want to make sure I understand 23 MR. COLLINS: Okay. John. Sorry. Mike. 24 something. If people default now when they become new 24 MR. McCAULEY: I will be brief as well. I've only 25 employees, they go into the investment program? 25 got one slide and some slides in the appendix, but you

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1 can reference those. Another pretty busy year for 1 All three of the providers have received a very 2 proxy voting and company engagement. We voted a little 2 significant amount of investor feedback. Council of 3 over 10,500 meetings, which was about 2 percent higher 3 Institutional Investors weighed in, a lot of 4 than last year. The voting statistic against 4 international groups. And FTSE Russell basically came 5 management was very close to last year as well. We 5 out with a very low minimum voting threshold approach. 6 vote against about one out of five ballot items. And 6 So to be eligible for one of their indexes -- it 7 the country breakdown didn't change much at all either. 7 doesn't apply to every index, but for the most part, 8 The top five markets were the same as last year. 8 they're large developed global indices, and 9 One of the -- probably the most significant 9 specifically the Russell 3000 for domestic purposes. 10 regulatory items that -- we talked about this a little 10 So to be eligible for and considered to be a 11 bit at the last meeting. It was kind of early, but 11 constituent in the index, you have to have at least 12 during the second quarter and even into the third 12 5 percent voting power. And that's defined 13 quarter, July and August, the major index providers had 13 essentially -- the numerator is the unrestricted 14 issued consultations with respect to the methodology 14 securities that have voting rights that are in the 15 for including multi-class share structures, kind of 15 public float, divided by all the share classes 16 think Snap IPO. That's what essentially triggered it. 16 regardless of if they're restricted or not. 17 Multi-class share structures with differential voting 17 So it's a pretty low bar, but most market 18 rights. 18 participants view it as a win. Honestly, even though 19 So you had all three of the major providers, FTSE 19 it was a very low minimum threshold, it won't affect 20 Russell, Standard & Poor's, Dow Jones and MSCI issued 20 very many securities, probably a couple of dozen. How 21 consultations. That played out over a couple of 21 many it will affect going forward, this is going to be 22 months. We're still waiting for MSCI to come out with 22 on a prospective application basis, is kind of unknown 23 a position. 23 at this point. 24 But essentially the first one out of the gate was 24 And then on the heels of the FTSE release, S&P 25 FTSE Russell, and they had received a lot of input. 25 came out with kind of the other end of the spectrum,

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1 where they came out with a much more aggressive 1 similar to what is contained in Dodd Frank. But other 2 approach, where they just essentially issued a blanket 2 than that, it was pretty light. Most of the attention 3 prohibition on any multi-class share structures. 3 was on the index providers. And everybody is kind of 4 Again, on a prospective basis, any security that has 4 waiting to see what MSCI will do and then also what all 5 differential voting rights, multi-class shares, will be 5 three of them will do on a prospective basis with new 6 grandfathered in the index. So the Facebooks of the 6 IPOs and new security changes going forward in the 7 world, Berkshire Hathaways of the world, they'll all 7 index. 8 stay in the index, won't be affected. So this is a 8 So that's all I have. And I've got a couple of 9 prospective application. 9 slides that kind of cover the longer term, more 10 MSCI, like I said, has not come out with their 10 granular stuff that's in the meeting materials. Happy 11 position yet. The expectation is they'll probably be 11 to answer any questions. 12 somewhere in the middle, between FTSE and S&P, but that 12 MR. COBB: Can you share with us what your vote is 13 remains to be seen. And then we just had a couple of 13 going to be on the Procter & Gamble? 14 minor regulatory. We weighed in with the Hong Kong 14 MR. McCAULEY: That's a good question. We're 15 exchanges. They had a proposal for a new board, which 15 currently evaluating that. We have a meeting with the 16 not coincidentally contained a dual-class feature as 16 company tomorrow scheduled. We've had some staff meet 17 part of the listing standard. We weighed in with some 17 on a preliminary basis with both sides already during 18 concerns there. That's up in the air as well, though 18 the CII conference. But we're going to kind of get 19 the indications are up to this point it's probably 19 into the weeds and the nitty-gritty in terms of 20 going to go forward in some form or another. 20 analyzing the vote. So we haven't come to a 21 And then in the UK there was a green paper 21 determination yet. 22 proposal late last year that we weighed in on and then 22 But it's a big one. It's slated to be the biggest 23 talked about briefly. They came out with some final 23 proxy contest, both in just cost and scope. And one 24 proposals. It was essentially watered down. They may 24 feature of that, of P&G, which is highly unusual is 25 include a pay ratio disclosure reporting requirement, 25 they have a very high retail ownership shareowner base,

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1 which historically retail investors tend to vote with 1 of us submitted reviews. Those reviews were scored, 2 management. So it will be kind of a key swing vote 2 and Ash did exceedingly well in his review. So the 3 constituency in the outcome of the vote. So who knows 3 subcommittee voted unanimously to recommend Mr. 4 what will happen at this point, but we're still 4 Williams receive the maximum award for the individual 5 reviewing it. 5 component of his incentive comp plan for this next 6 MR. WENDT: I don't know if we're paid for doing 6 year, or for this year, and to increase his salary. 7 this or not, but I think you should vote no. 7 We had done it last year, but we put it in, I 8 MR. McCAULEY: Duly noted. 8 guess, two tranches. And we decided to -- we only did 9 MR. COLLINS: What's your thoughts on -- or have 9 a little bit last time. And so he is still below the 10 you started looking at ADP? 10 median and certainly below, I think, his performance. 11 MR. McCAULEY: We've looked at that as well. 11 So the subcommittee voted not only to -- that he should 12 We're a little more focused on the P&G scenario at this 12 receive the maximum for the individual component of the 13 point. 13 incentive comp but to increase his salary. 14 MR. COLLINS: Any other questions? Thank you, 14 So this has to come before the full board for a 15 Mike. 15 vote before it goes to the trustees. And I will open 16 Ash, before we get into item number seven, I'd 16 it up for discussion or we can have a motion and just 17 like to go out of order here and let's do number nine 17 get right on with it. 18 first. I know Mr. Wendt has to leave, and I'd like him 18 MR. COBB: I move that the committee's 19 here for this. So everybody -- all the members got a 19 recommendation be approved -- 20 memo from Mercer and a letter from Michael Price, along 20 MR. JONES: Second. 21 with the minutes of the subcommittee on compensation, 21 MR. COBB: -- and passed on to the trustees. 22 which we had Monday, September 18th. I was on the 22 MR. COLLINS: All right. So it's been moved and 23 call, Mr. Olmstead, Ash and Michael Price. 23 seconded. Do we have discussion? 24 We heard from Mercer. I think the call lasted 24 MR. WENDT: Is there a typo on Mr. Price's letter 25 about an hour. We went through the review of Ash. All 25 here? A maximum award up to 30,673? Is that the

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1 number or is that the -- 1 Venezuela and interest at the level of the trustees on 2 MR. WILLIAMS: Let me explain that, if I may. 2 ensuring that the pension fund not do anything that 3 MR. COLLINS: Go ahead. 3 would be supportive of the Maduro regime in Venezuela. 4 MR. WILLIAMS: There are two components to 4 We worked very closely with the trustees' offices 5 incentive comp for all employees at the state board. 5 on this and believe this language to be constructive 6 There's a quantitative component that's based on fund 6 and also consistent with our fiduciary 7 performance, and then there's an individual component 7 responsibilities. And it does really two things. It 8 that is based on, for lack of a better term, subjective 8 directs us not to invest in any securities of the 9 elements. 9 sovereign state of Venezuela or any entity controlled 10 MR. COLLINS: Our review. 10 by it or to invest in the securities of any company 11 MR. WENDT: So only piece. The rest is done by 11 doing business with or in Venezuela in violation of the 12 math. 12 United States federal law. 13 MR. WILLIAMS: Correct. 13 That's a critical qualifier because it means a 14 MR. WENDT: All right. Call the question. 14 company, in order to be in this list, would have to be 15 MR. COLLINS: All in favor? 15 violative of the Office of Foreign Asset Control 16 (Ayes) 16 Standards in the U.S. Treasury. 17 MR. COLLINS: Opposed? All right. Passes. The 17 And then the second major part of the language is 18 next thing, if we can get this done real quick, Ash, 18 to say that the SBA will not vote any proxy resolution 19 before Mr. Wendt leaves, we'll go back to the changes 19 that would be deemed to be supportive of the Maduro 20 in the investment policy statement. 20 regime. We're fine with both of these, and that's 21 MR. WILLIAMS: Yes. Very quickly, under Tab 7, 21 that. 22 you will see a red line copy of the investment policy 22 MR. WENDT: Two questions, Mr. Chairman? 23 statement for the defined benefit plan. And if you 23 MR. COLLINS: Yes. 24 look at page ten of that, you'll see the relevant 24 MR. WENDT: One is, this is what the trustees 25 language we're talking about. This has to do with 25 want, they kind of told you this is what they want you

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1 to put in? 1 as it's going to get. And I think any other 2 MR. WILLIAMS: Well, I'll say this. They're very 2 conversation opens it up to maybe not being as good as 3 concerned about Maduro being in charge in Venezuela, 3 it can get in terms of being fiscally prudent while 4 and they want to do all we can to help them, and we 4 still trying to be socially aware. 5 steered them in the direction of this is what we think 5 MR. WILLIAMS: There's one other element of this, 6 is prudent. 6 and that is, there will be a legislative discussion on 7 MR. WENDT: Secondly, do you have a lot of these 7 this in the coming session. And to the extent we have 8 saddles? 8 already addressed it and addressed it in a prudent 9 MR. WILLIAMS: Well, it's a growing number. I'll 9 manner -- 10 say that. 10 MR. COLLINS: In our own investment policy 11 MR. WENDT: Ten, twenty? 11 statement. 12 MR. WILLIAMS: No, no, it's nowhere near that 12 MR. WILLIAMS: -- in our own controlled setting 13 many. I guess right now we have Iran, Sudan, Cuba, an 13 within the executive branch, within the action of three 14 anti-boycott Israel and now this. And in days gone by, 14 statewide-elected fiduciaries, I think it's helpful to 15 we've have northern Africa. I'm sorry, not north 15 be able to point to this and say let's not put things 16 Africa. South Africa, Northern Ireland, tobacco. 16 in the statutes that may not be as prudently worded. 17 MR. JONES: Is North Korea on it yet? That's a 17 MR. WENDT: Are there any existing investments 18 stupid question, but -- 18 that would be affected by the adoption of this policy? 19 MR. WILLIAMS: Wait. Did I hear something go 19 MR. WILLIAMS: No. 20 overhead? 20 MR. WENDT: Do you know of any? 21 MR. WENDT: I call the question. I mean I make a 21 MR. WILLIAMS: No. 22 motion. 22 MR. COLLINS: So Mr. Wendt had made the motion. 23 MR. COLLINS: So good question. So my read on 23 Second? 24 this is we all dislike stuff like this, except I think 24 MR. OLMSTEAD: Second. 25 Ash and the staff have crafted this where it's as good 25 MR. COLLINS: All in favor?

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1 (Ayes) 1 So it just seems to me that we're a captive to the 2 MR. COLLINS: Opposed? Okay. 2 benchmark on global equity and we don't have enough 3 MR. COBB: Mr. Chairman, I have a question on how 3 flexibility, and maybe we have too much flexibility on 4 frequently we review the asset allocation and the 4 fixed income and real estate, where we have a domestic 5 benchmarks. It seems to me we do it annually, or less 5 benchmark and we allow international. 6 or more frequently. Because it seems to me it's timely 6 So it just seems to me that is a timely subject. 7 to discuss again our asset allocation and our 7 We don't have to do it today because we've run over 8 benchmarks, in light of today's discussion. 8 time, but I would request that we have our asset 9 MR. WILLIAMS: The answer to that, Ambassador, is 9 allocation and benchmark meeting the next one or the 10 that each year we do a review of asset allocation, but 10 one after. 11 what we call the major deep dive is done every three 11 MR. WILLIAMS: It would be March '18 normally, 12 years. We review the capital markets assumption 12 which is the one after next. 13 averages across the five major consultancies annually 13 MR. COLLINS: So we would agree. So March of '18 14 to make sure our allocation strategy is still in 14 we're doing the deep dive? 15 keeping. I want to say, I think we're due for a deep 15 MS. COMSTOCK: Right. 16 five when? Is it next year? 16 MR. COLLINS: Okay. I think that's it. Do we 17 MS. COMSTOCK: Right. Next year. 17 have anybody in the audience today? What are we 18 MR. COBB: I would just like to say -- and I've 18 missing? Oh, I'm sorry. Katie and Steve, they came a 19 sort of already said this. But I'm troubled that on 19 long way for me to ignore them. Sorry about that. Go 20 the international, I mean on global equity we -- and 20 ahead with Aon's major mandate review. 21 we've probably overused the term that we are a captive 21 MS. COMSTOCK: Thank you. And thank you for 22 to the benchmark, but I think we are, where on fixed 22 having us back. By way of quick introduction, you'll 23 income and real estate and I think some of the others 23 notice Kristen Doyle, who is normally here, is not. 24 we have a domestic benchmark and we allow international 24 She's expecting twins in December so has been 25 investments to improve on the benchmark. 25 instructed not to travel. But I'm excited to introduce

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1 Steve Voss, who is a senior partner with us, leads up 1 total pension plan performance relative to two 2 our client service for North America practice and also 2 benchmarks shown here. The first is the policy 3 works on a number of other large public pension plans, 3 benchmark, which is represented by the blue line. I'll 4 at least one of which is in that peer universe Ash 4 focus on the fiscal year, where the pension plan 5 mentioned which SBA topped over the past year. So 5 returned 13.8 percent. Again, this data represents the 6 excited to have him here, and he'll weave in comments 6 data that's provided by the custodian. But as Ash 7 as we go through the major mandates performance. 7 mentioned earlier, this is unaudited, so there may be 8 So if there's nothing else that you take away from 8 final tweaks for the returns. 9 this is that, across the board, the major mandates that 9 But 13.8 percent with the data we had when this 10 we represent here have done an excellent job, have 10 report was run. An exceptionally high return, as 11 produced strong returns on both an absolute and a 11 you've heard from each of your asset class teams, 12 relative basis. But we'll dive in and start with the 12 largely driven by the absolute performance of global 13 pension plan's performance. And on slide 153, I 13 equities, though each of the asset classes did generate 14 believe that's slide six of the deck in your book, all 14 positive returns over this one year period. 15 this data is also through June 30 of 2017, just as a 15 On a relative basis, performance has also been 16 reminder on that. 16 very strong, outperforming the policy benchmark by 80 17 The pension plan ended the fiscal year with 17 basis points over the one year period. The value added 18 $153.6 billion in assets under management, representing 18 was again spread out across asset classes, primarily 19 a growth in assets of $12.3 billion, which is net of 19 driven by global equities' outperformance, as well as 20 6.8 billion of benefit payments and contributions, so 20 strategic investments for this one year period, but 21 the outflow of $6.8 billion, and driven by $19 billion 21 again spread out across the asset classes, with the 22 of investment earnings. So very strong fiscal year for 22 exception of private equity, which has the high hurdle 23 the pension program. 23 of outperforming global equities plus a 300-basis-point 24 If you flip ahead two slides, we'll dive right 24 premium. So over short-term time periods and when 25 into the returns which that represents. We measure the 25 we've seen such strong equity markets, that's a tough

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1 hurdle to beat. They did generate an 18 percent -- 1 plan and the median plan in this universe is a greater 2 north of 18 percent absolute return, though, for that 2 allocation to global equities of about 10 percentage 3 one year period. 3 points. And this is the current allocation of the FRS. 4 I will also note that if we look at the past 20 4 The long-term policy is 53 percent. So that does trim 5 years of fiscal year single returns, the FRS has 5 some of that greater allocation. 6 outperformed its policy benchmark 17 out of those 20 6 But if you read, are able to read the fine print, 7 times. So the value add that your team here has 7 I'll tell you what it is, the overweight is all coming 8 generated that been exceptional. And that's 8 from foreign equities, which over the past one year 9 represented, if you look at the performance of the FRS 9 period, that has been a headwind for the FRS, as 10 relative to the policy benchmark, it's outperformed 10 international markets have started to outperform U.S. 11 over all of these trailing time periods shown here. 11 equity markets. And so that's been beneficial as of 12 The second benchmark is the absolute nominal rate 12 late. 13 of return, which is the CPI plus 5 percent. And we 13 And then on the flip side, where that overweight 14 tend to look at this on a longer-term basis. If you 14 is being offset is within alternative investments, and 15 look on the following slide, over the past 20, 25 and 15 so that would be the strategic investments and private 16 30 years, the FRS has outperformed this policy 16 equity. If we were to combine those, that's about 14 17 benchmark as well. 17 and a half percent, relative to the median of peers, 18 We also compare the FRS's performance relative to 18 which is about 23 percent. Again, if you look at the 19 a peer group which Ash had mentioned earlier, the TUCS 19 long-term policy, the FRS has a long-term policy of 20 Top 10 Universe, which is the top ten largest pension 20 18 percent to alternatives. So a little bit more in 21 plans in the United States. And before I'll have Steve 21 line with peers. Not that that is an objective, just a 22 dive into the relative returns of the FRS, I do want to 22 comment when we're looking at these two asset 23 touch on the asset allocation because that's the 23 allocations. 24 largest driver. And this was touched on earlier, but 24 So I'll turn it over to Steve to talk about how 25 you'll notice the greatest difference between the FRS 25 this translates into the relative performance of the

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1 FRS and this peer group. 1 hot dot for the one year period. You're off the 2 MR. VOSS: So before Kristen Doyle asked me to 2 charts. Ash opened his comments up with this, stating 3 come down here, I said, let me look at this page, let's 3 that you're the first percentile ranking. 4 see performance and let's see how they did before I 4 So that 13.8 percent net return that you generated 5 agree to come down. I saw this and I said absolutely. 5 beats your actuarial assumed rate of return of 7.6. 6 The returns here are phenomenal. And you've heard from 6 You exceed your performance benchmark that Katie just 7 your senior investment officers across the different 7 referenced by 80 basis points. And these are 8 asset classes, so you know where it came from. 8 benchmarks that we reviewed, your internal team has 9 But a 14.2 percent gross return -- this is 9 reviewed and you-all have approved. They're not slow 10 unaudited, so I think the numbers will get cleaned up a 10 bunnies. These aren't easy benchmarks. They're in 11 little bit in the coming days. A 14.2 percent gross 11 fact, we think, quite aggressive benchmarks, in 12 return over the fiscal year is truly exceptional, 12 particular for private equity. 13 outperforming your peer universe of 170 basis points. 13 And you've done that at a lower level of risk. We 14 These peers are some of the largest of the large 14 don't show that here, but Katie and I looked at your 15 public pension funds. It's CalPERS, it's CalSTRS, that 15 tracking error at the total fund level, and we also 16 have large, deep teams like you do. They have private 16 looked at your total fund volatility over various time 17 equity investments, hedge fund investments, principal 17 periods. Relative to peers you've generated higher 18 transactions that they engage in, much like you-all do 18 returns on a net-of-fee basis with lower volatility. 19 here. True good apples and apples comparison. The 19 So all in all a great fiscal year. 20 median fund size of about 142 billion or so. So this 20 You've done that, again, with the hard work of the 21 is the largest of the large. 21 people down the line here, using your scale as your 22 Phenomenal returns for all these different time 22 advantage, keeping costs low, diversifying in the right 23 periods here. And if you go to the next slide, let's 23 asset class and maintaining that long-term perspective. 24 take a quick look at that and see the range of returns 24 So congratulations on a great year for your pension 25 over some longer periods of time. Again, you're the 25 fund. Happy to take any questions or comments that

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1 you-all may have, but otherwise we'll go to DC. 1 They were doing it in-house. They were using external 2 MR. COLLINS: Anything, Ambassador? So my 2 managers. And they decided, due to their scale, their 3 question, to dovetail on the ambassador's previous 3 resources were just better spent elsewhere. 4 question, was as you're making some of these 4 So the comment was made by your investment officer 5 presentations to the top ten, I'm sure you're a 5 early, maybe now is not the right time to do that, that 6 consultant to many of them, are they looking at our 6 there is some level of cyclicality in U.S. equity 7 equity concentration and saying, well, that's great for 7 alpha, and we haven't seen it. Last year was a really 8 them, but their day is coming, or -- and how are many 8 tough year for active equity managers. You live 9 of them currently, just as the ambassador said, you 9 through that. So that's something that I think you may 10 know, for us to have the conversation, how many of them 10 want to revisit at some point in time, is that 11 are having a conversation in earnest about where 11 active/passive split. 12 exactly they sit with their own allocations? 12 But the things that I've been hearing here and the 13 MR. VOSS: So increasingly we see more of your 13 things that we see some of our other larger clients 14 large peers looking to balance their equity exposure so 14 doing that have been successful is thinking about what 15 that they have equal share of U.S. and non-U.S. We do 15 your competitive advantages are and how to exploit 16 see some tilts. Sometimes it's active. Sometimes it's 16 that. So your biggest competitive advantage is your 17 just a derivative of what their individual active 17 in-house asset management capability and your size, 18 managers are doing. But more and more we see more of a 18 your scale. 19 balanced approach. 19 I've heard a lot about fee negotiations and 20 There is a fair amount of discussion on active and 20 pushing managers down to reasonable low cost, while 21 passive. We see -- you see this in the media and 21 still trying to extract that alpha, and also using your 22 everywhere. You see a lot more investors going to 22 scale to get access to investment opportunities that 23 passive management in the U.S. space. One of my large 23 might be more niche. I heard frontier investments. I 24 clients, one of your top ten peers, recently, quote, 24 heard microcap and things like that. Not a lot of 25 threw in the towel on active U.S. equity management. 25 other large institutions are doing those things. So

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1 kudos to you and your team for allocating resources and 1 FTEs than you may have budgeted for. 2 energy in those areas. 2 MR. COLLINS: Okay. Thank you. Sorry. I almost 3 MR. COLLINS: And the last one, you know, if you 3 overlooked you, Katie. I should never do that. 4 read P&I or and you see some of 4 MS. COMSTOCK: We have a few more major mandates, 5 these other large pension plans and they're talking 5 if you want to touch on -- 6 about private equity as sort of like the last frontier 6 MR. COLLINS: Yeah. 7 to really go at fees, and some of them say they're 7 MS. COMSTOCK: We'll move on to the defined 8 pulling it in-house and doing direct private equity, 8 contribution plan quickly. As Joan mentioned, 9 you know, that to me just seems like Don Quixote. 9 performance has been great through the June 30th 10 MR. VOSS: So we don't see a lot of that in the 10 period. That table at the top shows, if you were to 11 U.S. You do see some of that in Canada. Some of the 11 aggregate where participants have allocated their 12 Canadian plans of size have investment teams in the 12 assets and the returns of those assets, that number at 13 hundreds of individuals. So they have the ability to 13 the top represents the returns that in aggregate they 14 do private infrastructure and some private equity 14 have earned relative to a benchmark for those 15 in-house. 15 investments, aggregate benchmark. 16 We don't see a lot of that in the United States. 16 And then the row at the bottom is the row to focus 17 What we do see is folks like you-all working with your 17 on, which shows how those assets have outperformed 18 external providers, your advisers, whether it be 18 their respective benchmarks and in aggregate represents 19 Hamilton Lane, Cambridge or Townsend, and doing 19 how the active managers have done in the investment 20 co-invest or doing principal transactions. 20 plan. And over all these trailing time periods, the 21 That is likely the right way to do it, with the 21 aggregate investment plan has outperformed. 22 resources that you have and the types of partners that 22 And if you look at each of the asset classes, 23 you have and the GPs that you have access to. But to 23 which we don't show here, but it is in some of the 24 do a wholesale private equity program in-house would be 24 detailed material that follow, each of those asset 25 a completely different endeavor, require a lot more 25 classes have outperformed their respective benchmark.

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1 So strong performance for the options that are offered 1 manager that manages the global equity portfolio. 2 to the participants in the DC plan. 2 If you look at the performance, as you can imagine 3 We'll move on to the hurricane catastrophe fund, 3 how global equities have done over the most recent time 4 so the CAT Fund shown here. The aggregated assets at 4 period, we're seeing very strong absolute returns over 5 the end of June 30 were at 16.6 billion, so a very 5 that one year period, 15.3 percent, and outperforming 6 large, stable pool of money. Again, just to refresh 6 the performance benchmark of 13.1 percent. And over 7 everyone's minds, these assets are invested in highly 7 all these trailing time periods, longer term as well, 8 liquid, short-term, high quality investments. And 8 the total endowment has outperformed its policy 9 that's to be able to provide liquidity on demand when 9 benchmark. 10 that is needed. 10 And then the last major mandate we cover is 11 So being with that opportunity set, you'll see 11 Florida PRIME. Similar mandate as the CAT Fund. The 12 some fairly low returns here, given the interest rate 12 primary goal is safety of assets, liquidity and then, 13 environment. However, on a relative basis, the 13 thirdly, competitive returns. So, again, on an 14 operating pool and the 2013 A and 2016 A portfolios 14 absolute basis, modest returns here through June 30th. 15 have outperformed their respective benchmarks over all 15 But on a relative basis, the PRIME portfolio has 16 trailing time periods shown here. 16 outperformed its benchmark, which is a peer group of 17 And moving right along to the Lawton Chiles 17 other local government investment pools, over all of 18 Endowment Fund, I'll pause quickly on slide 18 to 18 these trailing time periods shown here. 19 refresh everyone's mind that this is a pool of assets 19 And we do include one other exhibit on the Florida 20 that is primarily invested in global equities at 20 PRIME, which is to put this in perspective of the 21 71 percent. The rest of the portfolio is within fixed 21 risk-adjusted return. So you'll see Florida PRIME is 22 income and TIPS. But I just want to remind everyone 22 at the way top and slightly to the right, but I'll 23 that this is -- given the large allocation to equities, 23 point out that the X axis there is very low, a very low 24 this is what drives largely the absolute and the 24 risk number, and that it's incremental in one basis 25 relative performance, as the only active manager is the 25 point. So if it looks like it's at a high risk, it's a

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1 very -- it's achieving a relatively high return for a 1 issue with the CAT Fund. One tends to think of the CAT 2 very strong or a reasonable level of risk. 2 Fund as a long-term institution, particularly at a time 3 And with that, that sums up the major mandate 3 when you've had ten years of pretty good luck with 4 performance. Again, very strong returns through the 4 storms making landfall in Florida. It wasn't that long 5 June 30th period, both on an absolute and a relative 5 ago, in '04 and '05, when we had a 500-year probability 6 basis. I'll pause there to see if there are any 6 event, which was, I think, what, four or five storms -- 7 questions. 7 MR. COLLINS: Four. 8 MR. COLLINS: Any questions? 8 MR. WILLIAMS: Four, during that period of time. 9 MS. COMSTOCK: Thank you. 9 MR. COLLINS: Charley, Frances, Jeanne. I forget 10 MR. COLLINS: Thank you. Ash, I have one question 10 the fourth one. 11 for you on the CAT Fund. I was here when they created 11 MR. WILLIAMS: I was in Connecticut. I'll take 12 it, and you were, too. And it occurs to me that 12 your word for it. But, anyway, the fund was broke. 13 it's -- I don't know. It was a few hundred million 13 And when I got back in Q4 of '08, it had very little 14 maybe when we started. Now it's $16 billion, and it's 14 money and had been given all kinds of additional 15 still all invested short-term. 15 liability and no assets to back up all that liability 16 I'm wondering if there's ever been anybody in the 16 with. And I remember going to then President of the 17 last couple of years that said, hey, maybe 20 percent 17 Senate Jeff Atwater and all -- I was meeting all the 18 of that we could invest in a longer-term vehicle to get 18 legislative leadership and all the people I'd gotten 19 our returns a little higher. 19 out of touch with in 12 years of being gone. 20 MR. WILLIAMS: There was a guy named, what was it, 20 And all of them said, Gosh, you must be terrified 21 an ambassador, Cobb was his name. Oh, Charles Cobb, 21 coming into the pension fund with the financial markets 22 yes. 22 where they are. And I said, No, quite the opposite. 23 MR. COLLINS: If it was a good idea then, it's 23 That house has burned to the ground. We're all up from 24 still probably a good idea. 24 here. We're going to rebalance. We're going to ride 25 MR. WILLIAMS: It's a tough group. So here's the 25 this back up. The pension fund is going to be fine.

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1 Where there's crazy risk that's got to be addressed is 1 Fund, which is focused on liquidity and safety is 2 in this hurricane catastrophe fund, because there's no 2 appropriate in that regard. 3 money there. The liabilities have gone to the moon. 3 MR. COLLINS: But let's say that you took 4 And, boy, if the wind blows and nature calls us on 4 20 percent of the CAT Fund and put it in an 80/20 even 5 this, we're done. 5 domestic equity and an intermediate bond portfolio, how 6 And President Atwater, to his credit, heard every 6 much liquidity are you really taking out? I just 7 word of that and said, Let's get the CAT Fund people, 7 wonder how much liquidity you're really taking off the 8 the insurance commissioner's office, FIGA, the Florida 8 table. 9 Insurance Guaranty Association, et cetera, in here, 9 MR. WILLIAMS: Well, let me say this. I think 10 together with the staffs of the House and Senate 10 there has been some change in the CAT Fund's investment 11 insurance committees, and figure this out. And we did. 11 policy of late. And Katy has worked -- we're working 12 And that led to a reduction of liabilities, an 12 on this now. Because I do think it went a little too 13 accelerated building of cash assets through the rapid 13 far in the extreme direction of liquidity and safety, 14 cash buildup factor, which is sort of a premium charged 14 and we modified that a bit. The question is how much 15 on certain lines of the CAT Fund. Long story short, we 15 is enough, sort of like leverage, at risk of -- 16 built the thing back. But nonetheless, the fundamental 16 MR. COLLINS: You know I don't like that. 17 truth about the CAT Fund is, in any given year, 17 MR. WILLIAMS: -- at risk of sticking both feet in 18 100 percent of its assets can be called. 18 the bear trap at the same time. We can do better than 19 And its primary mission is to be a stabilizer to 19 we were, but equities or long duration stuff -- 20 the primary insurance market. Being a stabilizer means 20 MR. COLLINS: Call it leverage or call it what you 21 being absolutely dependable in your ability to meet 21 will, but it just seems to me we're outperforming our 22 claims and meet them timely and without hedging, 22 benchmark by 40 basis points, and we're not even 23 without hedging in the sense of, "Well, maybe," that 23 getting to 100 basis points. So when I see a chart 24 kind of hedging, not financial hedging. 24 that says, wow, we overperformed our benchmark by crazy 25 So I think that the investment strategy of the CAT 25 numbers, I just look at it and I go, Well, so?

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1 MR. WILLIAMS: But it hasn't always been thus. I 1 MS. WOJCIECHOWSKI: Oh, yeah, don't forget your 2 mean, there was a time, what was it, seven years ago, I 2 rating for the bonds. 3 think, or eight years ago, when there was -- actually 3 MR. COLLINS: All right, Ambassador Cobb. 4 it was longer than that. It was more like ten years 4 MR. COBB: I never said that -- I never said I 5 ago, when the board had a number of commingled pools 5 thought any of it ought to be invested in equities. So 6 in-house, and one of them was a cash management sleeve 6 I just think that it would be prudent for a small 7 that was allocated -- 7 percentage to go to longer-term, higher-yielding U.S. 8 MR. COLLINS: See, you're just trying to drop the 8 Treasuries. That's the only -- I think that's the only 9 mike and walk away. 9 challenge I made. 10 MR. WILLIAMS: No, no. Well, it's a fact. That's 10 MR. WILLIAMS: Fair enough. Katy, how far are we 11 what triggered this, because there were losses in the 11 going in bounds now? 12 CAT Fund attributable to investment strategy. That's 12 MS. WOJCIECHOWSKI: We've been discussing that, 13 what led to the CAT Fund constituency saying, Holy cow, 13 actually, you know, does it make sense to go out to 14 we do not want you guys taking risk in this. It's too 14 five years or does it make sense to go maybe a little 15 important. It's got to be available for claims. So 15 bit down in credit, AA to A, or where do we want to 16 that's what got us where we were. 16 take our risk and what is the most prudent. I don't 17 MS. WOJCIECHOWSKI: What happens when 50 percent 17 know that we have a final answer on that. But duration 18 of the fund has to go away to pay for this hurricane? 18 risk would be very dangerous. 19 And now you're way overallocated to equities, and if 19 MR. WILLIAMS: The discussion is being had, 20 equities happen to drop 5, 10 percent -- 20 optimizing efficiency. 21 MR. WILLIAMS: You're done. 21 MS. WOJCIECHOWSKI: By the way, we were late 22 MS. WOJCIECHOWSKI: -- you're way out of whack. 22 stages in revising our guidelines when this happened. 23 MR. WILLIAMS: And the market no longer takes you 23 So right now we've had to shore up liquidity. 24 seriously, and there goes your stabilization 24 MR. COLLINS: Any other comments? Do we have any 25 capability. 25 comments from the audience today? Anybody you know of,

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1 Ash? 1 2 MR. WILLIAMS: Anybody want to be heard? No? 2 CERTIFICATE OF REPORTER 3 MR. COLLINS: Anybody want a little more leverage? 3 4 No? Okay. All right. Do I have a motion to adjourn? 4 STATE OF FLORIDA ) 5 MR. COBB: Move it. 5 COUNTY OF LEON ) 6 MR. OLMSTEAD: Second. 6 7 MR. COLLINS: All in favor. 7 I, Jo Langston, Registered Professional Reporter, 8 (Ayes) 8 do hereby certify that the foregoing pages 3 through 147, 9 MR. COLLINS: All right. We are adjourned. 9 both inclusive, comprise a true and correct transcript of 10 MR. WILLIAMS: Thank you all. 10 the proceeding; that said proceeding was taken by me 11 (Whereupon, the meeting was concluded at 4:20 11 stenographically and transcribed by me as it now appears; 12 p.m.) 12 that I am not a relative or employee or attorney or counsel 13 13 of the parties, or a relative or employee of such attorney 14 14 or counsel, nor am I interested in this proceeding or its 15 15 outcome. 16 16 IN WITNESS WHEREOF, I have hereunto set my hand 17 17 this 13th day of October 2017. 18 18 19 19 20 20

21 21 ______

22 22 JO LANGSTON Registered Professional Reporter 23 23 24 24 25 25

ACCURATE STENOTYPE REPORTERS, INC. ACCURATE STENOTYPE REPORTERS, INC. RICK SCOTT STATE BOARD OF ADMINISTRATION GOVERNOR OF FLORIDA CHAIR

JIMMY PATRONIS 1801 HERMITAGE BOULEVARD, SUITE 100 CHIEF FINANCIAL OFFICER TALLAHASSEE, FLORIDA 32308 PAM BONDI (850) 488-4406 ATTORNEY GENERAL

POST OFFICE BOX 13300 ASH WILLIAMS 32317-3300 EXECUTIVE DIRECTOR & CIO

MEMORANDUM To: Board of Trustees From: Gary Price, Chairman Participant Local Government Advisory Council (PLGAC) Date: November 13, 2017

Subject: Quarterly Update – Florida PRIME™

The Participant Local Government Advisory Council (the “Council”) last met on September 21, 2017 and will meet next on December 14, 2017. Over the prior quarter, the Council continued to oversee the operations and investment management of Florida PRIME™.

CASH FLOWS / PERFORMANCE • During the 3rd quarter of 2017, Florida PRIME™ delivered an aggregate $30.2 million in gross investment earnings. • During the 3rd quarter of 2017, participant deposits totaled $2.9 billion; participant withdrawals totaled $4.3 billion; providing a net decrease in the fund’s net asset value (NAV) of approximately $1.3 billion. • Performance of Florida PRIME™ has been consistently strong over short-term and long-term periods. For the period ending September 30, 2017, Florida PRIME™ generated excess returns (performance above the pool’s benchmark) of approximately 34 basis points (0.34 percent) over the last 12 months, 24 basis points (0.24 percent) over the last three years, and 19 basis points (0.19 percent) over the last five years. Based on September 30, 2017 fund values, the last 12 month excess return equals earnings of approximately $27.2 million. • Florida PRIME™ has outperformed all other government investment pools statewide. • Through the five-year period ending September 30, 2017, Florida PRIME™ ranked as the highest performing investment vehicle when compared to all registered money market funds within iMoneyNet’s First Tier Institutional Fund Universe. POOL CHARACTERISTICS • As of September 30, 2017, the total market value of Florida PRIME™ was approximately $8.0 billion. • As of September 30, 2017, the investment pool had a seven-day SEC Yield equal to 1.36 percent, a Weighted Average Maturity (WAM) equal to 51.9 days, and a Weighted Average Life (WAL or Spread WAM) equal to 81.4 days.

STATE BOARD OF ADMINISTRATION Audit Committee Open Meeting Agenda November 13, 2017TBD 9:30 A.M. – Noon

1. Call to Order

2. Approval of the minutes of meeting held on July 31, 2017

3. SBA Executive Director & CIO status report  SBA Update: investment performance, risks, opportunities and challenges

4. Presentation of the results for the 2017 Auditor General Operational Audit of the State Board of Administration

5. Presentation on the results of the following financial statement audits: a. KPMG i. Florida Hurricane Catastrophe Fund (FHCF) b. Crowe Horwath i. Florida Retirement System Trust Fund ii. Florida Retirement System Investment Plan Trust Fund

6. Presentation of OIA issued reports: a. Internal Controls over Financial Reporting FRS Investment Plan Advisory Project

7. Office of Internal Audit Quarterly Report

8. Chief Risk & Compliance Officer Quarterly Report

9. Other items of interest

10. Closing remarks of the Audit Committee Chair and Members

11. Adjournment

November 13, 2017 Status of the FY 2017-18 Annual Audit Plan: • Internal Audit and Advisory Engagements 4 • External Engagement Oversight 5 • Special Projects, Risk Assessment, and Other Activities 6 Presentation of OIA Report Issued and Status of Management Action Plans/Recommendations: • Real Estate Externally Managed Portfolio Operational Audit 8 • New and Closed Action Plans/Recommendations 9 • Details of open items – Audit and Advisory Projects 10-11 Other OIA Activities: • Data Analytics Program Accomplishments & Timeline 13 • Status of FY 2017-18 OIA Department Goals 14 • Other Items for Discussion 15

2 33 Internal Audit and Advisory Engagements

Planned Projects Status Type Timing Not Yet Completed Completed Started 27% 36% Internal Controls over Financial Reporting - DC (see Tab 6) OIA Advisory Q1 Real Estate, commingled (see Appendix B) OIA Operational Audit Q1 Continuous Monitoring - GE (Cost by Dealer report only) OIA Advisory Q1 In Progress Quarterly Follow-up Audits/Action Plan Monitoring OIA Operational Audit/Project Management Ongoing Internal Controls Assessment - RE Cash Transfers OIA Advisory Q2 Continuous Monitoring - Payroll OIA Advisory Q2 Compliance Advisory, automation, efficiencies and gaps OIA Advisory Q2/Q3 In Progress Not Started 37% Continuous Monitoring - Accounts Payable OIA Advisory Q3/Q4 Continuous Monitoring - Pcards OIA Advisory Q3/Q4 Incentive Compensation Audit OIA Operational Audit Q3/Q4 Highlighted: Completed since prior quarterly report. Externally Managed Derivatives Audit OIA Operational Audit Q3/Q4

4 External Engagement Oversight

Planned Project Status Type Timing Completed In Progress Auditor General Operational Audit (follow-up on report #2015-083) External Operational Audit Q1/Q2 44% Network Security Assessment, outsourced External IT Audit Q1/Q2 Florida Hurricane Catastrophe Fund External Financial Statement Audit Q1/Q2 Florida Retirement System (FRS) Trust Fund External Financial Statement Audit Q1/Q2 FRS Investment Plan Trust Fund External Financial Statement Audit Q1/Q2 In Progress Auditor General financial statement audit of Florida PRIME External Financial Statement Audit Q1/Q2 Auditor General financial statement audit as part of the statewide CAFR External Financial Statement Audit Q2/Q3 Completed 56% OPPAGA’s review of Florida Growth Fund Initiative External Operational Audit Q1/Q2 Triennial Governance, Risk and Compliance Assessment External Advisory Q1/Q2 Not Started Highlighted: Completed since None prior quarterly report.

5 Special Projects, Risk Assessments, and Other Activities

Project Status Type Planned Timing Not Yet Started Completed 27% None Ongoing/In Progress Special requests from SBA management and/or Audit Committee OIA Special Projects Ongoing WorkSmart Portal Enhancements OIA Special Projects Ongoing Integrated Risk Management Solution Cost Benefit Analysis OIA Special Projects Q2/Q3 Data Analytics Tools Enhancements OIA Special Projects Ongoing ISO 22301 Implementation Analysis (new request from management) OIA Special Projects Q2 OIA process improvement initiatives, including QAR identified OIA Quality Assurance Ongoing initiatives Ongoing / Annual Risk Assessment OIA Risk Assessment Q1/Q2 In Progress Audit Committee Related Activities OIA Audit Committee Ongoing 73% Not Yet Started Risk Assessment Updates OIA Risk Assessment Q3/Q4 Annual Audit Plan OIA Risk Assessment Q3/Q4 Annual Quality Assessment Review OIA Quality Assurance Q3/Q4

6 77 Our risk-based audit assessed the existence, adequacy and effectiveness of internal controls and efficiency of operations over the RE EMP processes and compliance to relevant policies and procedures for the period April 1, 2016–March 31, 2017. For certain controls we obtained documentation outside of this audit period. When possible, we performed data analytics on select data for the same period. Our audit focused on the below processes. For detailed flowcharts of these processes, see the appendix included in the report.

Primary Processes In-Scope Primary Staff Involved Real Estate, External Investment Manager Oversight, Deputy Executive Director, Fund Selection & Due Diligence Executive Director & Chief Investment Officer, General Counsel Real Estate, Senior Operating Officer-Accounting & Administrative Services, Capital Calls & Management Fees Accounting, Financial Operations Monitoring of Funds/Managers Real Estate, External Investment Manager Oversight, Accounting

Legend for Control # of Key Effectiveness Rating Controls Observations: Status of Action Plan:

Effective 32 0 High NA

Improvement Needed 2 1 Medium 1 closed per mgmt

Not Effective 0 0 Low NA

Total Key Controls 34 1 Total Observations

8 Audit and Advisory Engagements

# of Recs Source New recommendations 1 OIA Report 2017-08 Real Estate Externally Managed Portfolios Operational Audit (Appendix B) 3 OIA Report 2017-07 Internal Controls Over Financial Reporting Advisory - FRS Investment Plan (Tab 6A) 2 AG Operational Audit 2017 (Tab 4) 23 Network Security Assessment 2017 (BDO) 29 Total recommendations added to the database Closed action plans and recommendations: (2) Network Security Assessment 2015 (Ernst & Young) Followed-up during BDO’s Network (15) Network Security Assessment 2016 (Ernst & Young) Security Assessment 2017 (17) Total action plans/recommendations closed in the database 12 Total Change for both Audit and Advisory Action Plans/Recommendations

9 18 Risk Rating Status 16 Report Title Report Date High Med Low Total NYI PIRP OTV Total 14 Travel Services Operational Audit (OIA) 02/13/2015 1 1 1 1 12 Accounts Payable Continuous Audit (OIA) 08/07/2015 2 2 2 2 Fixed Income Trading Activities Operational Audit (OIA) 01/29/2016 1 1 2 2 2 10 Low Trust Services Operational Audit (OIA) 07/25/2016 1 1 1 1 Global Equity Internal Trading Activities Operational 8 Med 01/18/2017 1 1 1 3 2 1 3 Audit (OIA) 6 High Internally Managed Derivatives Operational Audit (OIA) 03/31/2017 5 3 4 12 11 1 12 Real Estate Externally Managed Portfolios Operational 09/29/2017 1 1 1 1 4 Audit (OIA) Auditor General Operational Audit 2017 11/2017 1 1 2 1 1 2 2 7 9 8 24 17 2 5 24 0 29% 38% 33% 71% 8% 21% NYI PI OTV Legend: NYI - Not Yet Implemented PIRP - Partially Implemented and the Remainder is in Progress For details, see Appendix A. OTV - OIA to Verify

Management Action Plans relating to findings from audits performed by internal or external auditors. The OIA monitors and performs follow-up procedures on the management action plans in accordance with the IIA Standard 2500. A1. In certain cases, follow-up procedures are performed by external auditors.

10 Status

Report Title Report Date Pending NYI PI IMP Total Information Technology General Controls Advisory Engagement (OIA) 01/20/2017 6 5 11 Internal Controls Over Financial Reporting Advisory – FRS Pension Plan 07/19/2017 4 4 (OIA) Internal Controls Over Financial Reporting Advisory – FRS Investment 09/28/2017 2 1 3 Plan (OIA) Network Security Assessment 2017 (BDO) 11/2017 9 14 23 6 15 5 15 41

Legend: Pending - Further management discussion needed NYI - Not yet implemented PI - Partially Implemented, as represented by SBA management IMP - Implemented, as represented by SBA management

Advisory Recommendations made by OIA or external consultants resulting from an assessment of a program or activity such as governance, risk management, compliance, ethics, disaster recovery preparedness program, etc. The OIA monitors the disposition of these recommendations in accordance with the IIA Standard 2500.C1.

At the advice of the Audit Committee, the OIA closes Advisory Recommendations that management represented as “complete” once the OIA has considered those in the annual risk assessment. The next annual risk assessment will occur during Fiscal Year 2016-2017.

11 1212 Accomplishments as of July 2017 OIA Project Support: July 2017– October 2017  Accounts Payable (A/P) Audit FY 2017-18  Continuous Monitoring: Payroll Audit  Continuous Monitoring:  Combined use of IDEA & Tableau to Fixed Income (FI) Trading write/run scripts automating the  Transition from IDEA to Tableau Audit dashboard. Convert Payroll, AP,  metrics and dashboard data Trust Services Audit  and Travel & Expense packaged  Improved “Cost by Dealer Activity” Global Equity (GE) Trading dashboard using Tableau IDEA scripts to be used in Tableau Audit   Determine available data and  Tested compliance with specific Derivatives Audit policy and Investment Portfolio current payroll monitoring done by Guidelines (IPG) where IPG Human Resources, Financial Obtained data from SBA systems: Operations, and Information  requirements could be tested using PeopleSoft Financials Technology staff and assess where  data analytics PeopleSoft HR  data analytics is relevant for the  With FI management input selected Eagle STAR Continuous Payroll Monitoring  other metrics to perform data BNYM Workbench  Develop a plan for long-term  analytics using Tableau Charles River  Determined data analytics tool(s) to sustainability, output, and be used on various audit and maintenance of continuous consulting projects for cost- monitoring projects, including “Cost effectiveness and functionalities by Dealer Activity” monthly reports.

Greater Efficiency and Effectiveness 13 Not Started 15% Completed In Progress / Not Yet Ongoing Started Completed Annual Audit Plan 3 2 1 48% Successfully deliver the fiscal year 2016-17 Audit Plan and budget. Enhance communication of the COSO internal control framework. Internal Audit Process 3 3 2 Focus on enhancing OIA processes, programs and procedures, resulting in more efficient operation of the department administration and the effective development and utilization of department resources.

Use of Technology 2 3 0 Implement audit technology solutions to enhance department effectiveness and efficiency. In Progress / People 5 2 1 Ongoing Evaluate staffing and development needs. 37%

14  2018 Audit Committee Meeting Dates

◦ Monday, January 29, 2018

◦ Monday, April 30, 2018

◦ Monday, July 30, 2018

◦ Monday, November 5, 2018

15

RICK SCOTT STATE BOARD OF ADMINISTRATION GOVERNOR OF FLORIDA CHAIR

JIMMY PATRONIS 1801 HERMITAGE BOULEVARD, SUITE 100 CHIEF FINANCIAL OFFICER TALLAHASSEE, FLORIDA 32308 PAM BONDI (850) 488-4406 ATTORNEY GENERAL

POST OFFICE BOX 13300 ASH WILLIAMS 32317-3300 EXECUTIVE DIRECTOR & CIO

MEMORANDUM

To: Ash Williams From: Michael McCauley Date: November 13, 2017 Subject: Quarterly Standing Report - 3Q 2017 / Investment Programs & Governance

GLOBAL EQUITY PROXY VOTING & OPERATIONS During the 3rd quarter of 2017, the SBA cast votes at 1,246 public companies, voting on ballot items including director elections, audit firm ratification, executive compensation plans, merger & acquisitions, and a variety of other management and shareowner proposals. The table below provides major statistics on the SBA’s proxy voting activities during the most recent quarter ending on September 30, 2017:

Votes Votes aligned to Management’s in Favor Recommendation 76.9% 77.7%

Most Voted Market Total Eligible Ballot Items (# of Votes) (All Markets) India (355) 9,791

CORPORATE GOVERNANCE & PROXY VOTING OVERSIGHT GROUP The most recent meeting of the Corporate Governance & Proxy Voting Oversight Group (Proxy Committee) occurred on September 29, 2017, and the Committee will meet next on December 12, 2017. The Proxy Committee continues to discuss ongoing governance issues including the volume and trends for recent SBA proxy votes, company-specific voting scenarios, corporate governance policies, governance-related investment factors, major regulatory developments and individual company research related to the Protecting Florida’s Investments Act (PFIA) and recent statutory investment requirements implemented for Israel and Northern Ireland, including a trustee resolution concerning companies with ties to the government of Venezuela.

LEADERSHIP & SPEAKING EVENTS Staff periodically participates in and often is an invited presenter at investor and other governance conferences. Typically, these events include significant involvement by corporate directors, senior members of management, and other key investor or regulatory stakeholders. The following items detail involvement at events that occurred recently:

• On October 25th, SBA staff participated on a panel during the Southeast Institutional Investor Forum, covering the impact of environmental, social and governance (ESG) issues, as well as manager diversity, on the portfolio construction process. Quarterly Standing Report 3Q2017 November 13, 2017

• In November, SBA staff participated in the annual meeting of Standard & Poor’s U.S. Advisory Panel, discussing the role of corporate governance in domestic equity markets, the role of index providers, the future of active management, and environmental issues in the investment management industry. • In November, SBA staff participated in the Board Performance Review webinar, sponsored by Corporate Solutions, Boardroom Resources, and PwC’s Governance Insights Center, along with a public pension fund representative from NYCERS and two established company directors. The panel discussion covered the results of PwC’s 2017 Annual Corporate Directors Survey including topics of board composition and performance evaluation. Staff also participated in a webinar episode of Inside America’s Boardrooms and discussed investor expectations, the Investor Stewardship Group, and the effectiveness of board self-assessments.

ACTIVE OWNERSHIP & CORPORATE ENGAGEMENT From late September through early November, SBA staff conducted engagement meetings with companies owned within Florida Retirement System (FRS) portfolios, including , Procter & Gamble, and ADP.

Bundled Director Voting in Sweden In late 2015, the SBA participated with a group of international investment organizations led by APG Investment Management of the Netherlands approaching 40 companies in Sweden proposing they unbundle their existing slate voting structures for all directors. This group also engaged the Chairman of the Swedish Corporate Governance Board to address investor concerns about bundled director elections. Because unbundled director voting offers support at an individual director level and removes any linkage with other director votes, SBA staff view unbundled proxy voting as a more efficient method that leads to higher levels of board accountability for a company’s investors. As a result of these engagements, almost 43 percent of targeted companies unbundled the election of directors at their 2016 and 2017 annual general meeting (AGMs). A few of the companies offering unbundled director voting included Nordea Bank, Swedish Match, and Atlas Copco. Engagement efforts by the investor group are scheduled to continue into 2018, aimed at all remaining public companies in Sweden that do not currently offer investors unbundled director voting.

NOTABLE RESEARCH & GOVERNANCE TRENDS Executive Compensation In an update to major research in 2016, MSCI released its 2017 version of “Out of Whack—U.S. CEO Pay and Long-term Investments Returns.” In the 2016 version of the study, MSCI found companies that awarded their Chief Executive Officers (CEOs) higher equity incentives had below-median stock returns. For this year’s study, MSCI incorporated additional forms of “realized” compensation figures, or actual amounts received by executives. The 2016 study examined pay only using “awarded” amounts, which are based on the value of the company’s stock on the date of grant (or award). MSCI found that when using realized pay, the disconnect between compensation and performance was even more severe—finding more than three-fifths of U.S. companies examined had cumulative 10-year realized CEO pay totals that were poorly aligned with their 10-year total shareholder return (TSR) performance. The study concludes, “Long term, these findings suggest that the 40-year-old approach of using equity compensation to align the interests of CEOs with shareholders may be broken.”

“Placeholder” Directors Since late 2016, over 50 companies have amended their bylaws adding new requirements for board nominees, including the need to intend to serve if elected to the board of directors. The bylaw amendments, made unilaterally and not involving shareowner approval, were in response to a proxy contest by Corvex Management at Williams Companies. In the summer of 2016, Corvex attempted to seat 10 employees as “placeholder” director nominees until permanent directors could be placed. Ultimately, the company and Corvex agreed on an alternative slate and none of the placeholder nominees were elected. Most of the bylaw amendments resulting since the attempted Corvex tactic specify that board nominees must intend to remain directors for their entire term, typically requiring service for at least 12 months and thereby prohibiting any dissident candidates elected on a temporary basis. Although none of the bylaws has been legally challenged, proxy advisors are expected to oppose such director qualification requirements because they have not been put up for shareowner ratification.

SBA Investment Programs & Governance (IP&G) Page 2 Quarterly Standing Report 3Q2017 November 13, 2017

HIGHLIGHTED PROXY VOTES Procter & Gamble (United States)—On October 10, 2017, P&G became the largest company in history to face a proxy contest, with Nelson Peltz of Trian Fund Management seeking a single seat on the P&G board. Combined the two sides spent over $60 million on the battle, dwarfing the most expensive proxy fight spending of about $15 million before it. Trian holds 1.5% of the company’s shares (over $3 billion dollars) and made a broad critique of P&G’s laggard performance, operational inefficiencies, and slow pace of response to poor growth and loss of market share among its many well-known brands. This approach in their assessment of P&G was similar to their proxy contest and public campaign at DuPont two years ago. Trian took a more limited approach this time, possibly in an effort to dampen the negative reaction from the company and to gain support from other shareowners, especially the significant (40%) retail shareowner base. At DuPont retail votes had been instrumental in allowing management to narrowly prevail (at least in the contest as CEO Ellen Kullmann abruptly resigned shortly afterward). At P&G, the retail shareowner base was again just sufficient to carry the company nominees to victory, but by a razor slim victory of 0.2%. Trian sought just one seat for fund-founder Nelson Peltz, as opposed to its DuPont campaign when they sought four seats. If Peltz had been elected to the board, he pledged to seek to expand the current eleven-person board to twelve, so that the director Peltz challenged could be reappointed to the board. Trian had also insisted that they were not seeking the removal of the CEO, who has been in place less than two years and has begun implementing a turn-around strategy that Trian in part supported but felt did not go far enough to address their concerns.

While Trian had shifted its proxy contest strategy, P&G kept a similar playbook as DuPont. They attacked the Trian performance record in an analysis that has generally been poorly received by the market, so far as to prompt a Fortune article titled “Procter & Gamble Needs To Work On Its Math”. They also challenged Trian’s ability to cooperatively work with boards, as well as given a defense that P&G’s own turnaround plan is working and needs only more time to be realized.

As part of its evaluation, SBA conducted a total of four meetings with P&G and Trian, both in person and by telephone. Ultimately, SBA staff voted 4.3 million shares in support of Trian. In our view, Peltz has a credible history of success and operational improvements at companies in which Trian has invested significantly, including some instances where a proxy contest was held, and former board members of those companies contradicted the assertion that he would be antagonistic in the boardroom. As Glass Lewis stated in their proxy analysis, “…we note Mr. Peltz has a clear track record of engagement and activism, predominantly at large, consumer-focused enterprises with established brands, including Wendy's, Heinz and Mondelez International. On-the-record support from the senior executives of these firms, among others, has been forthcoming and unequivocal. We consider Mr. Peltz's experience, which includes packaged goods, consumer brands, marketing and structural pivoting, is well established and germane to P&G, and may prospectively add value to a board room with limited retail and CPG experience external to the company.”

Both of the SBA’s proxy advisory services also recommended in favor of Trian. Both published analyses sharply questioning the integrity of the accounting figures and logic that P&G used in making its case that the existing cost cutting and business- line streamlining plans are sufficient to improve value. While P&G has begun a variety of efforts to combat their performance problems, the criticisms by advisory services and the press of P&G’s own figures, as well as their flawed critique of Trian’s past performance, were not reassuring. In sum, we agreed with Glass Lewis and ISS concerning the potential value that Nelson Peltz would have brought to the board and found the risk inherent in adding one experienced director who is backed by a large financial investment in the company to be quite low, despite the company’s claims of Peltz’s ideas being dangerous. Glass Lewis noted, ”…we consider investors have an opportunity to encourage fresh discussion through the election of a qualified, well-established shareholder candidate backed by what we believe to be cogent, well-framed arguments and a set of strategic initiatives that should, at the very least, set the table for a more candid evaluation of P&G's risks and opportunities.” ISS concluded similarly in their analysis, “Given the alignment of interest between Trian and unaffiliated shareholders, the fact that the dissident is asking the right questions, and the board's uneven performance over the course of the last decade, the potential reward of adding new perspective and experience from Peltz seems, on balance, to exceed the possible risks of disruption in the boardroom.”

The results surprised many in the market, particularly because cautious mega-shareowners BlackRock and State Street Global Advisors, two of P&G’s top 3 shareowners, had backed Peltz with their combined 10% stake (Vanguard sided with

SBA Investment Programs & Governance (IP&G) Page 3 Quarterly Standing Report 3Q2017 November 13, 2017

management in the contest). Once again, the votes of retail owners and employee holdings proved pivotal in providing management a win. Trian has pledged to continue to work constructively with management and remain an active shareowner.

Automated Data Processing (United States)—On November 7, 2017, investors voted overwhelmingly for retaining the company’s board nominees in a proxy contest at ADP. Pershing Square, led by activist investor Bill Ackman, initiated a proxy contest for three board seats at the company after it had spent several years underperforming peers’ stock returns by a small margin and losing market share among core business lines. Because the underperformance was relatively muted and even largely disputed by the company, SBA focused on the strategic differences in the vision for the company between the board and Pershing Square. Ultimately, SBA supported two of the three dissident board nominees because of ongoing strategy execution and performance issues and Pershing’s credible history in working with companies to improve operations and efficiency, as well as the sizable ownership stake held. One Pershing Square nominee was already serving on three public company boards, so staff did not support that candidate due to the intensive nature of those existing commitments.

All three dissident candidates were supported by proxy advisory firm Glass, Lewis & Co. In their advisory report, they stated, “Therefore, rather than supporting the status quo, we believe investors have an opportunity to convey their discontent with the board's continuation of a potentially sub-optimal business plan, and to encourage fresh perspectives, analysis and discussion in the boardroom of the best path forward for ADP, through the election of qualified director candidates, including a well-established shareholder representative, supported by what we believe to be convincing, well- framed arguments outlining the substantial opportunity for ADP and its shareholders to realize superior returns and value in the long term.”

In a rare move, proxy advisory firm ISS had recommended withholding from a single management nominee, instead of voting to directly support the dissident candidate Ackman. They indicated in their analysis that a high enough withhold vote for the single management nominee would allow Ackman to gain a seat on the board. However, no Pershing Square nominee received more than 25% of votes cast. All company-nominated directors won re-election, and the company has promised responsiveness to investor concerns raised through their engagement efforts during the contest.

GLOBAL REGULATORY & MARKET DEVELOPMENTS PCAOB Expands Auditor’s Report In late October 2017, the SEC approved the PCAOB’s new audit standard (“AS 3101”), including disclosures on critical audit matters ("CAMs"), auditor tenure and other information. One of the most significant changes to the auditor’s report is the requirement for auditors to identify CAMs, which are any matters that were communicated or require disclosure to the audit committee and that: 1) relate to accounts or disclosures that are material to the financial statements; and 2) involve "especially challenging, subjective, or complex auditor judgment." The audit report must identify each CAM and describe why the auditor designated the matter as a CAM, how it was evaluated as part of the audit, and identify the affected financial statement accounts it impacts. Under the new audit standard, the auditor is also required to disclose the auditor’s tenure, a statement on its independence, and a new standardized form of the auditor’s report.

Congressional Legislation to Regulate Proxy Advisors On November 9, 2017, SBA staff joined the Council of Institutional Investors and 45 other investors and investor organizations to express opposition to legislation that has recently been introduced and is pending in the Committee on Financial Services related to proxy advisory firms. While promoted as an investor protection, the legislation actually increases regulation of proxy advisors to a degree that could force some of them out of the market. As noted in the letter of opposition, the proposed legislation “would weaken corporate governance in the United States; undercut proxy advisory firms’ ability to uphold their fiduciary obligation to their investor clients; and reorient any surviving firms to serve companies rather than investors.”

MSCI Consultation on Non-Voting Share Structures As described in the 2Q Trustees Standing Report, the SBA submitted a response to MSCI’s Consultation on the Treatment of Non-Voting Shares in the MSCI Equity Indexes in late August. On November 2, 2017, MSCI announced it would temporarily

SBA Investment Programs & Governance (IP&G) Page 4 Quarterly Standing Report 3Q2017 November 13, 2017

treat, on a prospective basis, any securities of companies exhibiting unequal voting structures as ineligible for addition to the MSCI ACWI IMI and MSCI US Investable Market 2500 Index. Any potential additions of securities during regular Index reviews will start with the November 2017 Semi-Annual Index Review and including initial public offerings (IPOs). This temporary restriction will not affect any companies currently in the indexes. MSCI identified numerous unequal voting structures that would make it ineligible for index inclusion: 1) investor voting rights are not proportionate to their economic interest (such as the existence of a non-voting share class or share classes with differentiated votes per share); 2) any share class has restrictions on voting on agenda items (if shareowners of one share class are not allowed to vote on at least one item on the agenda, while shareowners of another share class can vote on all agenda items); and 3) voting rights for any share class are conditional upon certain events (such as shareowners of a share class get voting rights only for the years where no dividends are paid to them). MSCI also announced it would expand its Consultation to evaluate the treatment of all securities with unequal voting structures. MSCI stated in its news release, "In particular, the consultation will focus on the theoretical and practical issues of the application of a ‘one share, one vote’ principle to the investment opportunity set of international institutional investors.

SBA Investment Programs & Governance (IP&G) Page 5 RICK SCOTT STATE BOARD OF ADMINISTRATION GOVERNOR OF FLORIDA CHAIR JIMMY PATRONIS 1801 HERMITAGE BOULEVARD, SUITE 100 CHIEF FINANCIAL OFFICER TALLAHASSEE, FLORIDA 32308 PAM BONDI (850) 488-4406 ATTORNEY GENERAL

. !...... POST OFFICE BOX 13300 ASH WILLIAMS 32317-3300 EXECUTIVE DIRECTOR & CIO

MEMORANDUM

To: Ashbel C. Williams, Executive Director & CIO j+''- From: Maureen M. Hazen, General Counsel 1497f--- Date: November 13, 2017

Subject: Office of General Counsel: Standing Report For Period September 1, 2017 — November 8, 2017

SBA Agreements.

During the period covered by this report, the General Counsel's Office drafted, reviewed and negotiated: (i) 23 new agreements — including 4 Private Equity investments, 2 Strategic Investments, 2 Real Estate investments, 2 new Investment Management Agreement for the Global Equity asset class; and 2 new Master Forward Agreements for Fixed Income (i.e. for TBA and other forward trading as will be required under the FINRA); and (ii) 91 contract amendments, addenda or renewals.

SBA Litigation.

(a) Passive. As of November 8, 2017, the SBA was monitoring (as an actual or putative passive member of the class) 644 securities class actions. From September 1, 2017 — October 31, 20171, the SBA collected recoveries in the amount of $260,344.82 as a passive member in 31 securities class actions.

(b) Active.

(i) In re Tribune Litigation. On January 24, 2012, the SBA was served a complaint (along with other defendants) now pending in the U.S. Bankruptcy Court, Southern District of New York by the Official Committee of Unsecured Creditors of the Tribune Company alleging damages for fraudulent conveyance and requesting the return of proceeds received by all defendant investors in a leveraged buy- out of the Tribune Company (which subsequently declared bankruptcy). Pursuant to a plan approved in the bankruptcy proceeding, the claim was transferred to the U.S. District Court, Southern District of New York (the "Court") and consolidated with additional parallel cases for multi-district litigation. The SBA

I As of the date of this report, November numbers were not available. November 13, 2017 Page 2

received approximately $11 million in connection with this leveraged buy-out. Several amended complaints have been filed in the action in which the SBA was originally served in January, 2012 (the "FitzSimons Action"). In early 2017, the Court dismissed the intentional fraudulent transfer count (the only claim applicable to the SBA), and the SBA (and other defendants) are monitoring for a possible appeal.

(ii) Valeant Opt-Out Action. During the past year, the General Counsel's Office has been reviewing and monitoring the securities class action filed against Valeant Pharmaceuticals International, Inc. for alleged violations of the federal securities laws. The SBA may have incurred more than $62,000,000 in LIFO losses. The General Counsel's Office believes this is a highly meritorious cases and that the SBA will significantly enhance its recovery by opting out of the class cases and pursuing a direct action. On November 8, 2017, the Trustees authorized SBA staff to file the opt-out action and engage Bernstein Litowitz ("BL"). The General Counsel's Office is in the process of formally engaging BL and preparing the Complaint.

(c) FRS Investment Plan. During the period covered by this report, the General Counsel's Office monitored and/or managed the following cases for the Florida Retirement System Investment Plan (the "Investment Plan"). The SBA issued ten (10) Final Orders, received notice of filing of six (6) new cases, and continued to litigate fourteen (14) cases that were pending during the periods covered by previous reports.

Other Matters.

(a) Public Records. During the period covered by this report, the General Counsel's Office received 13 new public records requests and provided responses to 12 requests. As of the date of this report, the General Counsel's Office continues to work on 6 open requests.

(b) SBA Rule Activities.

(i) The following amendments have been drafted, received approval from OFARR to proceed with rulemaking and have been set forth in Notices of Development of Rulemaking that were published in Florida Administrative Register on August 30, 2017 (with no hearing requested). On October 17, 2017, the Trustees approved the filing of the rule amendments for notice and further to file for adoption if no member of the public requests a timely hearing.

(A) Rule Chapter 19-7: Rule 19-7.002, F.A.C.: Rule 19-7.002, F.A.C., (Investment Policy Statements) is being amended to adopt the most recent revised Investment Policy Statement approved and made effective by the Trustees on June 14, 2017 for the Local Government Surplus Funds Trust Fund (Non-Qualified).

(B) Rule Chapter 19-9: Rule 19-9.001, F.A.C.: Rule 19-9.001, F.A.C., (Investment Policy Statement) is being amended to adopt the most recent revised Investment Policy Statement approved and made effective by the Trustees on June 14, 2017 for the Florida Retirement System Investment Plan. November 13, 2017 Page 3

(C) Rule Chapter 19-11: Revisions have been drafted for the following rules:

19-11.001 Definitions 19-11.002 Beneficiary Designations and Distributions for FRS Investment Plan 19-11.003 Distributions from FRS Investment Plan Accounts 19-11.004 Excessive Trading in the FRS Investment Plan 19-11.006 Enrollment Procedures for New Hires 19-11.007 Second Election Enrollment Procedures for the FRS Retirement Programs 19-11.008 Forfeitures 19-11.009 Reemployment with an FRS-covered Employer after Retirement 19-11.012 Rollovers or Plan to Plan Transfers to or from the FRS Investment Plan 19-11.013 FRS Investment Plan Self-Directed Brokerage Account 19-11.014 Benefits Payable for Investment Plan Disability and In-Line-Of-Duty Death Benefits.

Certain changes to Rules 19-11.001 and 19-11.009 are necessitated by Chapter 2017-88, Laws of Florida, which amends Section 121.122, Florida Statutes to provide that a retiree of the Investment Plan, Senior Management Service Optional Annuity Program (SMSOAP), State University System Optional Retirement Program (SUSORP) or State Community College System Optional Retirement Program (SCCSORP) who is reemployed with a FRS-participating employer in a covered position on or after July 1, 2017 will be a mandatory renewed member of the Investment Plan, unless employed in a position eligible for participation in the SUSORP or SCCSORP. Such renewed member will be enrolled in the Regular Class, unless the position meets the requirements to enroll in the Special Risk Class, Elected Officers' Class or Senior Management Service Class.

New forms are being adopted by amendments to Rules 19-11.002, 19-11.003, 19-11.004, 19- 11.006, 19-11.007, and 19-11.012, F.A.C.

Rules 19-11.002 and 19-11.014, F.A.C. are being amended to indicate that, as provided by Chapter 2017-88, Laws of Florida, survivorship benefits paid to the surviving spouse and children of an Investment Plan member killed in the line-of-duty shall be paid as provided in Section 121.091(7)(d) and (i), Florida Statutes. As required by Executive Order 11-211, the proposed amendments were timely submitted to OFARR for review. No comments were received. A Notice of Development of Rulemaking then was published in the August 30, 2017 edition of the Florida Administrative Register, notifying the public of the proposed changes and offering a rule development workshop on September 15, 2017.

The rule amendments to Rule 19-13.001 serve to indicate that there no longer are just ten (10) target date funds that are available investment options to investment plan members. The total number of funds may continue to vary over time. Rule 19-13.002 is being amended to recognize that Chapter 2017-88, Laws of Florida, amended Section 121.591(4), Florida Statutes, to provide for special in line-of-duty death benefits for the spouse and child(ren) of any investment plan November 13, 2017 Page 4

member, and not just special risk class members. Thus, the Division of Retirement will now administer in-line-of-duty death benefits for all members.

(D) Rule Chapter 19-13: Rules 19-13.001 and 19-13.002, F.A.C. : The rule amendments to Rule 19-13.001 serve to indicate that there no longer are just ten (10) target date funds that are available investment options to investment plan members. The total number of funds may continue to vary over time. Rule 19-13.002 is being amended to recognize that Chapter 2017-88, Laws of Florida, amended Section 121.591(4), Florida Statutes, to provide for special in line-of-duty death benefits for the spouse and child(ren) of any investment plan member, and not just special risk class members. Thus, the Division of Retirement will now administer in-line-of-duty death benefits for all members.

For all of the above changes, there are no significant policy issues or controversial issues connected to the rule amendments. The amendments simply serve as an informational update. The proposed rule amendments do not impose any burdens on businesses; they do not restrict entry into a profession; they have no impact on the availability of services to the public; they have no impact on job retention; they do not impose any restrictions on employment seekers; and they do not impose any costs. No legislative ratification is required.

(ii) Annual Regulatory Plan:

As required pursuant to Section 120.74(2), Florida Statutes, the SBA timely filed a copy of the SBA's 2017-2018 Annual Regulatory Plan ("ARP"), together with the certification required by Section 120.74(1)(d), Florida Statutes, on September 28, 2017 with JAPC. The plan includes the Florida Hurricane Catastrophe Fund. The SBA published the regulatory plan on the SBA's website and a notice identifying the date of publication appeared in the September 29th Edition of Florida Administrative Register. Due to changes set forth by Chapter 2017-088, Laws of Florida (SB 7022) dealing with re- employed retirees and the extension of in-line-of-duty death benefits to the spouse and children of any Investment Plan member, and not just special risk Investment Plan members, several rules needed to be amended. The rule modifications are discussed above, and were set forth in the Annual Regulatory Plan. The Annual Regulatory Plan identified several new/amended laws that are applicable to all Florida governmental entities but that do not need to be implemented by rulemaking. The SBA indicated that it recognizes the existence of such laws and stated that it may revise, or already has revised, the SBA's internal policies, procedures and contracts in view of the changes.

RICK SCOTT STATE BOARD OF ADMINISTRATION GOVERNOR OF FLORIDA AS CHAIR

JIMMY PATRONIS 1801 HERMITAGE BOULEVARD CHIEF FINANCIAL OFFICER TALLAHASSEE, FLORIDA 32308 PAM BONDI (850) 488-4406 ATTORNEY GENERAL

POST OFFICE BOX 13300 ASH WILLIAMS 32317-3300 EXECUTIVE DIRECTOR & CIO

DATE: November 13, 2017

TO: Ash Williams, Executive Director & CIO

FROM: Karen Chandler, Chief Risk & Compliance Officer

SUBJECT: Trustee Update – November 2017 ______

The role of the Risk Management and Compliance (RMC) unit is to assist the Executive Director & CIO in maintaining an appropriate and effective risk management and compliance program to identify, monitor and mitigate key investment and operational risks. RMC plays a critical role in developing and enhancing the enterprise-wide system of internal controls. RMC proactively works with the Executive Director & CIO and designees to ensure issues are promptly and thoroughly addressed by management.

SBA senior management has created a culture of risk management and compliance through the governance structure, allocation of budgetary resources, policies and associated training and awareness. Management is committed to ethical practices and to serving the best interests of the SBA’s clients. The SBA’s mission statement further supports this culture: “To provide superior investment management and trust services by proactively and comprehensively managing risk and adhering to the highest ethical, fiduciary and professional standards.”

Included below is a brief status report of RMC activities and initiatives completed or in progress during the period September 7, 2017 to November 13, 2017.

Compliance Exceptions No material compliance exceptions were reported during the period.

Risk Assessments and Management Plans The Risk and Compliance Committee (RCC) held its quarterly meeting on October 11, 2017. Due to changes made in July 2017 to the SBA’s Enterprise Risk Management (ERM) Framework, modifications were made to the Risk Appetite statements in October in preparation for the Annual Risk Assessment. This included revisions and appetites related to Ethics, Fiduciary, Reputational, and Contractual Provisions Risks. The revised Risk Appetite Statements are posted on the SBA’s WorkSmart Portal for all employees to access. With the Annual Risk Assessment currently in progress, management action plans remain the same and will be reevaluated once the Assessment is complete. The RCC is scheduled to meet later this week to discuss the Annual Risk Assessment results.

Charles River - Trading and Compliance System The SBA is currently in the process of upgrading to the new Charles River Development (CRD) Software as a Service model for the Charles River Investment Management Solution (CR IMS). The upgrade project is in the early stages of implementation, and is anticipated to go live in spring 2018. Once the conversion is complete, upgrades will occur on an annual basis and will help ensure the SBA is utilizing the latest technology offered by CRD with respect to trading and compliance for internally managed Global Equity portfolios.

A. Williams Page 2

Triennial GRC Assessment One of the responsibilities of the SBA Audit Committee is to commission a Governance, Risk Management, and Compliance (GRC) program evaluation and performance improvement analysis (including the assessment of the utilization and effectiveness of both the internal and external audit functions) to be performed by an external provider no less frequently than every three years. This year’s triennial assessment is currently underway and a report is scheduled to be issued in the first quarter of 2018.

Margin Call Stress Testing RMC is working closely with Financial Operations and MSCI, the total fund risk model provider, to develop a test on the applicable instruments for margin call stress testing. The stress testing of margins is intended to be used for information in liquidity management considerations.

Risk Transfer – Insurance Coverage Following RMC’s completion of a project to document current insurance coverage held by the SBA and to determine potential coverage options for transferable risks, RMC is researching potential costs of fiduciary insurance coverage.

Counterparty Renewal and Monitoring The annual counterparty renewal process has been completed, with RMC facilitating the process. A conflict of interest disclosure for internal traders was added to the process this year. RMC is continuing to enhance and streamline counterparty evaluation and monitoring processes via a dashboard intended to integrate available financial, trading, and market data on a real-time basis.

RMC Awards Our team strives for continuous improvement through developing and implementing leading practices. Recent awards received by staff for such endeavors are: • Kelly Marsey, Deanna Wasson and Carolina Ramirez- served on a team earning a Teamwork Award for developing On-Demand Reporting making the most recent data available to all of the SBA. • Marcia Main – Superior Accomplishment Award for Exceptional Performance Developing the System & Organizational Controls Program

Page 2 of 2

State Board of Administration

Strategic Investments Asset Class Review

Trent Webster Senior Investment Officer, Strategic Investments & Private Equity

Investment Advisory Council Meeting December 4, 2017 Policy Objectives

1. Generate a 4.5% real return 2. Diversify the Florida Retirement System 3. Provide a hedge against inflation 4. Invest opportunistically Staffing

• Senior Investment Officer • Three Senior Portfolio Managers • Two Portfolio Managers • One Analyst • One administrative support staff • Staffing expected to expand as assets increase Process – Fund Selection

There are three broad screens for managers in this order

1. High ethical standards 2. Institutional quality 3. Attractive, process-driven, repeatable risk-adjusted performance Process – Fund Selection Process – Due Diligence

• Multiple calls/meetings with manager • Investment Review Summary • Review of decks, past letters, LPA, PPM, and other documentation • Onsite meetings • Due diligence questionnaire • Analytics • Ongoing discussions internally • Ongoing discussions with consultant • Multiple reference checks • Investment memorandum • Consultant memorandum • Typically 20-40 hours of work on an individual manager during the due diligence process • Can take years to develop a relationship with a manager Process – Risk Management

• Thorough due diligence • Diversification • Sizing limits • High bar to first-time and new funds • Contrarian investment philosophy • Ongoing manager monitoring • Portfolio monitoring and risk management system • Structuring rights in legal documentation • Ongoing dialogue with consultants • Ongoing dialogue with • Heightened sensitivity to operational issues • Background checks by consultants • Monitored by External Investment Manager Oversight • Monitored by Internal Audit • Monitored by Senior Leadership Group • Approval of new strategies by Senior Leadership Group • Approval of Annual Work Plan by Executive Director & CIO Process – Manager Monitoring

• Weekly internal discussion of managers • Monthly or quarterly calls with managers • Review manager letters • Review manager exposure reports • Weekly calls with Cambridge Associates • Quarterly calls with Townsend • Monthly and quarterly internal reports • Monthly and quarterly reports from Cambridge Associates • Quarterly reports from Townsend • Annual meetings with managers • Attendance at annual meetings • Membership on advisory committees • Review changes in documentation • Portfolio monitoring and risk management system Process – Asset Allocation • Periodic State-of-the-World calls with managers • Quarterly market update meeting • Weekly staff meeting and discussion of managers’ views • Annual portfolio and market review with Cambridge • Mean-variance optimization • Asset allocation meetings • Pacing model • Target weights set for next three to five years Asset Allocation

• Policy target allocation of 12% of the FRS • Allocation range of 0% to 16% • Statutory restriction of 20% on alternative investments • Current weight is 8.2% Percent of Strategic Investments in FRS Portfolio

• Net asset value of $12.9 billion • Net asset value plus unfunded commitments of $17.7 billion • 86 relationships managing 136 funds • Illiquid strategies 53% of NAV, liquid strategies 47% of NAV Recent Activity

• Quarterly cash outflows were $57 million • Cash outflows for the calendar year have been $95 million • Five new funds totaling $800 million were closed in the most recent quarter • Two new funds totaling $350 million have been closed this quarter • There are six funds totaling $600 million in the pipeline Performance v Benchmarks Benchmarks

• Primary asset class benchmark – weighted average of fund benchmarks • Secondary asset class benchmark – CPI + 4.5% • Fund benchmarks include market indices, peer groups and asset class secondary benchmark • Benchmarking is difficult in alternative investments Performance v FRS ex-SI Strategy Allocations Sub-Strategy Weights Fund Liquidity Profile Gross and Net Exposures Largest Allocations by Manager Debt Portfolio

• 29% of Strategic Investments NAV • Medium-term target is 26% • Parts of the credit market are very over- heated • Little emphasis on credit hedge funds – FRS credit exposure accessed through illiquid credit markets and in Fixed Income • Fee structures better in private funds than in hedge funds • Researching opportunities in Emerging Markets Debt Portfolio Equity Portfolio

• 14% of Strategic Investments NAV • Medium-term target is 11% • Focus on strategies not invested in Global Equities or Private Equity • FRS is 90% equity risk – thus, the bar is very high • Equities are expensive • Will increase allocation during the next bear market Equity Portfolio Real Assets Portfolio

• 19% of Strategic Investments NAV • Medium-term target is 20% • Mining is attractive but can be hard to access • Energy is attractive but there is a lot of capital • Developed Markets supply/demand imbalance makes infrastructure broadly unattractive • Infrastructure tailwinds in Emerging Markets • Cautious on real estate debt • New Transportation sub-strategy will be added Real Assets Portfolio Diversifying Strategies Portfolio

• 18% of Strategic Investments NAV • Medium-term target is 24% • Longer-term, the allocation could rise above 30% • Powerful diversification benefits • Should provide a hedge in a bear market • CTA allocation increased due to recent double-digit drawdown • Global Macro should improve as central bank actions diverge • Initial investments in insurance funds expected on January 1, 2018 Diversifying Strategies Portfolio Flexible Mandates Portfolio

• 14% of Strategic Investments NAV • Medium-term target is 12% • Reducing Event-Driven strategies given high equity correlation but may increase during the next bear market • The allocation to Multi-Strategy is expected to decline over time • Open Mandate funds are platform-driven and provide flexibility and eclectic opportunities Flexible Mandates Portfolio Special Situations Portfolio

• 6% of Strategic Investments NAV • Medium-term target is 7% but … • The allocation will fall to zero as funds are reallocated to other sub-strategies • The “Miscellaneous” portfolio in Strategic Investments • Investments in transportation, private equity hybrid strategies, and the Florida Growth Fund Special Situations Portfolio Strategic Investments Hedge Funds Strategic Investments Hedge Funds

• No hedge fund program – instead a program that includes hedge funds • $4.7 billion invested in hedge funds • 38% of Strategic Investments • 3.0% of the FRS • Allocation is expected to fall in the near-term • Does not include activist managers Hedge Fund Returns, 1994-2009 Hedge Fund Returns, post-2009 Hedge Fund Correlations Strategic Investments Hedge Funds

• First investments in 2011 • Original focus was on big, institutional funds that protected capital during The Global Financial Crisis • Later evolved to focus on uncorrelated returns to equity

• Program Evolution • Beginning stage – hedge funds recommended by Cambridge • Next stage – competitors to hedge funds first recommended by Cambridge • Current stage – internal sourcing of hedge funds alongside Cambridge Strategic Investments Hedge Funds

• Focus on accessing strategies and exposures not available elsewhere within the FRS or the asset class • Will look at high-quality managers regardless of strategy • Strategic Investments not a source of liquidity, thus less reason to access liquid strategies • Over time, exposures are expected to shift to smaller, more specialized managers and away from larger managers Strategic Investments Hedge Fund Returns Strategic Investments Hedge Fund Sharpe Ratios Hedge Fund Correlation Strategic Investments Hedge Fund Returns Overview of FSBA’s Strategic Investments As of September 30, 2017

Note: Strategic Investments allocation weights are calculated based on categorization of individual investments provided by FSBA. Opaque shading in right pie chart indicates primarily illiquid strategies, while dotted shading denotes primarily hedge fund/marketable strategies. Hedge Funds Hedge Fund Investing Summary Why Invest in Hedge Funds?

Hedge funds offer investors access to managers who possess the potential to generate alpha, or returns in excess of their commensurate risk.

Hedge fund managers possess the flexibility to invest in areas where they see the best opportunities for good risk-adjusted returns.

Hedge funds offer investors the ability to diversify the economic sources of returns, thus reducing risk through the uncorrelated nature of their investment strategies, which are not replicable through traditional long- only investment.

A carefully constructed portfolio of hedge funds should reduce the volatility of an overall portfolio while adding to returns over a full market cycle because of the added diversification.

Despite recent challenges to active management, certain hedge fund managers should be able to deliver attractive risk adjusted returns and cyclical pressures abate. How Are Hedge Funds Different From Traditional Investments?

Hedge Fund strategies bridge the gaps between traditional asset classes, allowing for access to a variety of investments. The breadth of the investable universe within the Hedge Fund space is more expansive and diversified. Investing in Hedge Funds Program Goals Determine How Portfolios are Constructed Different investors have different goals for their hedge fund investments.

Goals Typical Portfolio Construction

Focus on multi-strategy, credit-focused, and global macro funds that have low beta or correlation to equity markets. Diversification Potentially include open mandate managers who shift their exposures depending on market opportunities and short-biased managers whose returns are negatively correlated with equity markets.

Invest in a mix of multi-strategy, credit-focused, and global macro funds in addition Blend to equity long/short funds with a long bias. Selectively include open mandate managers. Heavily weighted to long/short equity managers who have a long bias and moderate beta and equity correlation. Return Include open mandate managers who are more aggressive in seeking and implementing opportunities to generate outsized returns.

As of September 30, 2017, the FSBA has invested $4.01 billion in 27 managers focusing primarily on diversifying strategies. Going forward, we will continue to focus on managers that generate strong risk-adjusted returns, diversify total plan assets and complement the FSBA’s current hedge fund portfolio. These may include smaller and newer managers. What Are Our Expectations For Hedge Funds? April 1, 2011 (Inception) through September 30, 2017 (78 months)

Return has been close to the CPI-U+5% return goal, with positive measures on other objectives.

1Represented by the return of the HFRI Fund of Funds Diversified Index. 2Represented by the return of the MSCI Investable Market Index. The MSCI Investable Market Index (“IMI”) is the broad public benchmark for the FRS Pension Plan. FSBA’s Hedge Fund Program Performance Since Inception April 1, 2011 (Inception) through September 30, 2017 (78 months)

Since inception, the hedge fund program has outperformed the HFRI Fund of Funds Diversified Index, while trailing the blended public benchmark and the CPI-U+5%. The hedge fund program has successfully captured ~55.9% of equity market returns, while also providing meaningful downside protection - capturing only ~24.6% of the equity market maximum drawdown.

Note: All returns are monthly and net of fees. The MSCI Investable Market Index (“IMI”) is the broad public benchmark for the FRS Pension Plan. Hedge Fund Program Cumulative Return Since Inception April 1, 2011 (Inception) through September 30, 2017 (78 months)

The FSBA hedge fund program has returned approximately 32.3% on a cumulative basis since inception and 4.4% annualized net of all fees and expenses.

Note: All returns are monthly and net of fees. The MSCI Investable Market Index (“IMI”) is the broad public benchmark for the FRS Pension Plan. The Evolution of the FSBA’s Hedge Fund Portfolio

After a lengthy research and due diligence effort, the FSBA has continued to diversify its hedge fund program, focusing n less economically sensitive strategies in order to adapt to evolving market valuations and become less correlated with the broad market. The FSBA’s hedge fund program has reduced its correlation to the rest of the FRS Pension Plan by 30 bps and the MSCI IMI Index by 31 bps over the last 41 months.

Pre-April 2014 Post-April 2014

Correlation Matrix Correlation Matrix May 1, 2011 through March 31, 2014 - 2.92 Years May 1, 2014 through September 30, 2017 - 3.42 Years

Composites Total Pension Composites Total Pension

% of % of

Total Total Composites FSBA HF Multi-StratCredit Long/Short Total FSBA HF ProgramTotal FRS ex. SI Composites FSBA HF Multi-StratCredit Global MacroLong/Short Total FSBA HF ProgramTotal FRS ex. SI Multi-Strat 62.2% 1.00 0.75 0.60 0.92 0.69 Multi-Strat 29.5% 1.00 0.70 -0.06 0.49 0.79 0.69 # Credit 17.8% 0.75 1.00 0.57 0.84 0.67 Credit 10.8% 0.70 1.00 -0.21 0.36 0.55 0.51 # Long/Short 19.5% 0.60 0.57 1.00 0.84 0.72 Global Macro 38.7% -0.06 -0.21 1.00 0.17 0.49 -0.18 # Total FSBA HF Program 100.0% 0.92 0.84 0.84 1.00 0.79 Long/Short 11.8% 0.49 0.36 0.17 1.00 0.61 0.44 # Total FSBA HF Program 100.0% 0.79 0.55 0.49 0.61 1.00 0.49 # Total Pension Total FRS ex. SI 0.69 0.67 0.72 0.79 1.00 Total Pension #N/A #N/A #N/A #N/A #N/A Total FRS ex. SI 0.69 0.51 -0.18 0.44 0.49 1.00 # #N/A #N/A #N/A #N/A #N/A # Indices #N/A #N/A #N/A #N/A #N/A #N/A #N/A #N/A #N/A #N/A #N/A #N/A # MSCI IMI 0.70 0.66 0.73 0.79 1.00 Indices MSCI IMI 0.70 0.52 -0.23 0.43 0.48 0.99 #

Note: All returns are monthly and net of fees. The MSCI Investable Market Index (“IMI”) is the broad public benchmark for the FRS Pension Plan. Total FSBA HF Program includes Relative Value as of May 1, 2015. Hedge Fund Market Environment Hedge Fund Outlook

Hedge fund returns should continue to improve as they have over the past 18 months

We expect hedge funds to contribute to performance contribute to performance given the current market environment, and offer downside protection in tough market

Cyclical factors affecting hedge funds are at peak levels and are likely to mean revert.

Many investment strategies continue to be investible only through hedge funds.

Investors are fleeing hedge funds, reducing capital pursuing hedge fund strategies.

Fees are coming down and terms are improving.

Performance expectations should continue to be met over the medium to long term:

Hedge fund strategies that are not dependent on the market for returns should provide reasonable returns in sideways markets. Rising interest rates will improve hedge fund returns at the same time as they hurt stocks and bonds. Hedge funds will continue to protect capital in a market correction. Hedge funds will continue to reduce the volatility of total portfolio returns, an important consideration for pools of capita l that require spending/withdrawals. US Fixed Income Yields January 31, 1900 – July 31, 2017 • Percent (%)

17

16 3-Month Treasury Bills (Bond Equivalent Yield)

15

14 10-Year Treasury Bonds

13

12

11

10

9

8

7

6

5

4

3

2.30 2

1 1.07

0 1900 1904 1908 1912 1916 1920 1924 1928 1932 1936 1940 1944 1948 1952 1956 1960 1964 1968 1972 1976 1980 1984 1988 1992 1996 2000 2004 2008 2012 2016

Sources: Global Financial Data, Inc., Moody's Investor Service, Thomson Reuters Datastream, and US Treasury Department. Notes: Ten-year Treasury bond yields prior to January 31, 1962, are from Global Financial Data. Yields for 30-year Treasury bonds prior to February 28, 1977, are from Global Financial Data. AAA corporate bond yields prior to January 31, 1980, are from Global Financial Data. Rates for 91-day Treasury bills prior to January 31, 1982, are from Global Financial Data. The Treasury ceased issuance of the 30-year constant maturity series on February 18, 2002 and reintroduced it on February 9, 2006. During that period, the 30-year Treasury yield is an extrapolation of the Long-Term Average Rate series. Data are based on monthly yields.

1042m Rolling 12-month S&P 500 Correlation and Dispersion December 31, 1991 – June 30, 2017

Low Correlation/High Dispersion - Broad Opportunity Low Correlation/Low Dispersion - Moderate Opportunity

High Correlation/High Dispersion - Moderate Opportunity High Correlation/Low Dispersion - Limited Opportunity Correlation (LHS) Dispersion (RHS) 0.7 15

14

0.6 13

12

11 0.5 10

9 (%) Dispersion 0.4 8

7 Correlation 0.3 6

5 0.2 4

3

0.1 2

1

0 0 Dec- 91 Jun-94 Dec- 96 Jun-99 Dec- 01 Jun-04 Dec- 06 Jun-09 Dec- 11 Jun-14 Dec- 16

Source: Standard & Poor's. Notes: Correlation is calculated as the w eighted average pair-w ise correlation across the stocks in the index over one month. Dispersion is calculated as the w eighted cross- sectional standard deviation of the performance of stocks w ithin the index during one month. Lines are 12-month moving average. "High" and "Low " are based on above or below long-term historical average correlation and dispersion (0.3 and 6.9%, respectively). 6045m S&P 500 Price to Earnings & Subsequent S&P 10-Year Nominal Returns December 31, 1948 – June 30, 2017 Bond Index Yield and Subsequent AACR

US Aggregate Bond Index January 1, 1976 – September 30, 2017 • Percent (%)

25

20

Barclays Aggregate Bond Index YTM

5-Year Subsequent AACR

15

10

5

0 1976 1979 1982 1985 1988 1991 1994 1997 2000 2003 2006 2009 2012 2015

Sources: , Bloomberg L.P., and Thomson Reuters Datastream. Notes: Data are monthly. The last full five-year period w as October 1, 2012 to September 30, 2017. The September 30, 2017 yield-to-maturity of 2.55% on the Barclays Aggregate Bond Index implies low nominal returns at best. Conclusion

The FSBA’s hedge fund program has performed well.

Headwinds facing hedge funds include: low interest rates, strong equity markets, a difficult shorting environment, and fees.

We expect the FSBA’s well diversified hedge fund program to overcome these headwinds and continue to perform well by: Adjusting portfolio to respond to risks opportunities created by changing market conditions Using strategies which are different than in other parts of the portfolio Accessing top-tier managers due to the FSBA’s reputation and Cambridge Associates’ expertise in alternatives Private Credit Market Environment Private Strategic Investments Overview As of September 30, 2017 Total Exposure (NAV + Unfunded) Asset Class Exposure ($ millions) Flexible Mandates 6% Senior Loans Senior Debt Mezzanine Loans Debt Distressed Special 10% Situations Debt GP Investments 11% Mezzanine Commodities 14% Infrastructure Real Estate Timberland 14% Diversifying Strategies Diversifying Debt Strategies Distressed Real Estate 2% 23% Special Situations Flexible Mandates Timberland 4% GP Infrastructure Commodities Investments 6% 4% 3% NAV Unfunded

As of September 30, 2017, total exposure of the FSBA’s private strategic investments program was $11.9 billion, with $7.1 billion of unrealized value (NAV).

The program is diversified across different strategies and well positioned based on current trends in the credit markets.

The overall program is performing well, generating a net IRR of 10.5% and net TVPI of 1.4x since inception.

Note: Asset allocation data provided by FSBA as of 9/30/2017. Performance figures calculated from Cambridge associates data as of 6/30/2017. Overview of Private Credit Strategies

Direct Lending Appreciation Credit Opportunities Distressed

• Origination of, or participation in, • Origination of subordinated debt and • Origination of primarily subordinated • Opportunistic investments across • Investments across balance sheet of senior secured loans at par second liens at par debt or structured (i.e., not common) multiple asset classes and companies experiencing stress or equity geographies distress • Includes primarily first lien and • Debt is typically combined with small unitranche holdings positions in equity securities for • Structures can also include senior • Managers have broad skill set, • Can include both purchases and upside return potential debt and some common equity resources, and can rotate capital originations of registered securities • Meaningful current income component based on available opportunity set and private debt component; floating rate, usually • Return driven mainly by current paid quarterly income component • Return driven more by capital • Funds may also invest in more • Aside from traditional corporates, appreciation than by current income traditional distressed opportunities funds often have flexibility to invest • Funds often offered with unlevered in structured finance, hard assets, and levered vehicles • Returns primarily driven by capital and asset pools appreciation

Target US, Europe, Global US US, Europe US, Europe, Global US, Europe, Asia, Global Geo

Target Small- to upper-middle-market Small- to upper-middle-market Small- and middle-market Varies Varies Market companies companies companies Mid to high single digits Net IRR (unlevered) Low-teens Mid-teens Mid- to High-teens Mid- to High-teens Target High single to low-teens (levered) Private Fund Private Fund Private Fund Private Fund Private or Hedge Fund Vehicle 6-10 year lock-up 10 year lock-up 10 year lock-up 6-10 year lockup 6-10 year lockup

Other Niche Strategies: Sector Focused Credit (Aviation, Shipping, Real Assets, Royalties), CLO Debt/Equity, NPLs, Marketplace Lending Defining private credit Return spectrum: private credit vs liquid credit and private equity strategies Our views on private credit opportunities Selectivity is critical at this point in the cycle

More attractive

Less at t r act i ve

Least at t r act i ve

Mezzanine Speci al t y Finance Hi gher Cur r ent Yi el d Di r ect Lendi ng Cr edi t Opportunities Di st r essed Cr edi t

Hi gher Upsi de Pot ent i al Our views on private credit opportunities Direct lending and mezzanine strategies caution and avoidance

US Unsponsored Market Direct lending: Mezzanine: High EBITDA Adjustments All the points at left plus Covenant Light Issuance Vanishing Free Equity High Multiples High Valuations Weak Documentation Unitranche ”Crowding Out” Unprecedented competition US Sponsor Market European Sponsored Market

More attractive

Less attractive

Least attractive Specialty finance offers good options Specialty finance provides better risk-reward tradeoff today

What is specialty finance? Specialty finance strategies tend to be:

Consumer finance Performing credit cards  Shorter lived, reducing exposure to rate and credit risk

Litigation finance Non-performing credit cards  Self liquidating – they tend to pay down rapidly and do not rely on refinancing for exit NPLs Installment loans  Backed by an asset that has residual value such as a Payment acceleration Merchant cash advances receivable, a rail car, a plane, etc.

Factoring New car leases  Are not as competitive as the current US direct lending market. Life settlements Used car leases Bankruptcy claims Movie royalties LPs should seek defensive credit exposure in structured, self liquidating, asset based strategies Aviation leasing Music royalties Railcar leasing Pharmaceutical royalties Small ticket leasing Refugee camp receivables Corporate defaults today are still low and recoveries high

Fundamentals: US High Yield Default & Recovery Rates

25 Default Rates (%) January 31, 1998 – September 30, 2017

20

15

The data set suggests that we are in the longest, 10 most benign default period on record

5

1.3 0 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Recovery Rates (Per $100 Par) February 29, 2012 – September 30, 2017 70 63.79 60

50

40

30

20

10 2012 2013 2014 2015 2016 2017

Sources: Securities Inc. and Moody's Investors Service. Notes: High yield default rates data includes distressed exchanges. High yield recovery rates are represented by US high yield senior unsecured bonds. All data are monthly. Default rate data prior to June 30, 2017 are represented by Moody's default rates as provided by the Deutsche Bank US Credit Strategy Chartbook. All default rate data on & after June 30, 2017 are sourced from the Moody's Investor Services Default Report. High LBO purchase prices indicative of robust demand for leveraged lending… Not only are buyout multiples at peaks, so are EBITDA add-backs. Terms are very weak, with covenant light issuance approaching 70% in the broadly syndicated market...

LBO Purchase Price Multiples by Size: All LBOs, Purchase Price of $500M or More

12x 11.2x 12x 10.9x11.3x 10.6x 10.5x 10.3x10.0x 10.2x 10.2x 10.3x 9.7x 9.7x 9.8x 9.5x 9.1x 9.1x 10x 8.8x 8.7x 8.8x 10x 8.8x 8.9x 8.8x 8.8x 8.8x 9.0x 8.4x 8.4x 8.5x 8.3x 7.8x 7.9x 8.0x 7.6x 7.3x 7.7x 7.5x 7.7x 8x 7.1x 7.1x 7.1x 8x 7.0x 7.0x 7.3x 6.4x 6.7x 6.4x 6.6x 6.7x 6x 6x

4x 4x

2x 2x

0x 0x 1996 (31)1996 (71)1997 (90)1998 (51)2001 (40)2002 (66)2003 (69)2008 (23)2009 (78)2010 (97)2011 (97)2012 (95)2013 (95)2016 1996 (31)1996 (71)1997 (90)1998 (51)2001 (40)2002 (66)2003 (69)2008 (23)2009 (78)2010 (97)2011 (97)2012 (95)2013 (95)2016 1999 (133)1999 (116)2000 (127)2004 (134)2005 (178)2006 (207)2007 (136)2014 (114)2015 1999 (133)1999 (116)2000 (127)2004 (134)2005 (178)2006 (207)2007 (136)2014 (114)2015 1994/5 (34)1994/5 1994/5 (34)1994/5 YTD (118) 2017 YTD (118) 2017 3ME 3ME (42)9/2017 3ME 3ME (42)9/2017

Purchase Price Fees/Expenses Total PPM Purchase Price Fees/Expenses …Even at the smaller end of the market ...and 30% in the middle market. Competition among direct lenders and mezzanine is being displaced by the unitranche.

LBO Purchase Price Multiples by Size: Purchase Price of $250M to $499M, Less Than $250M

12x 10x 10.3x 8.7x 9x 8.5x 9.5x 7.8x 9.0x 7.6x 10x 8.8x 8.9x 8.6x 7.3x 7.3x 7.3x 8.3x 8.3x 8.4x 8.4x 8.4x 8.4x 8x 7.1x 6.9x 7.8x 8.1x 8.0x 6.6x 6.8x 6.6x 7.7x 6.5x 6.5x 6.2x 7.0x 7.1x 7.0x 7.2x 7x 6.1x 8x 6.8x 6.8x 6.6x 5.8x 6x 5.4x 6x 5x 4x 4x 3x

2x 2x 1x 0x 0x 1996 (6)1996 (8)2009 2009 (8)2009 (3)2012 (7)2013 (4)2014 (6)2015 (2)2016 1997 (13)1997 (32)1998 (29)1999 (25)2000 (14)2001 (14)2002 (16)2003 (39)2004 (39)2005 (45)2006 (46)2007 (21)2008 (19)2010 (26)2011 (29)2012 (24)2013 (33)2014 (22)2015 (14)2016 1996 (11)1996 (42)1997 (33)1998 (82)1999 (70)2000 (25)2001 (12)2002 (24)2003 (38)2004 (32)2005 (46)2006 (40)2007 (14)2008 (14)2010 (14)2011 1994/5 (12)1994/5 1994/5 (16)1994/5 YTD (0) 2017 YTD (15) 2017 3ME 3ME (5)9/2017 3ME 3ME (0)9/2017

Purchase Price Fees/Expenses Purchase Price Fees/Expenses Investors are now concerned about equity valuations, particularly in US

MSCI US Composite Normalized P/E December 31, 1969 – September 30, 2017

45.0

40.0

35.0

30.0 Ending Value: 25.3 (91st %ile) 25.0

20.0

15.0

10.0

5.0

0.0 1969 1974 1979 1984 1989 1994 1999 2004 2009 2014

Sources: MSCI Inc. and Thomson Reuters Datastream. MSCI data provided "as is" without any express or implied warranties. Notes: The composite normalized price-earnings (P/E) ratio is calculated by dividing the inflation-adjusted index price by the simple average of three normalized earnings metrics: ten-year average real earnings (i.e., Shiller earnings), trend-line earnings, and return on equity–adjusted earnings. All data are monthly. U.S. Dealer Inventory Drastically Lower Since 2008

Net US Dealer Inventories in Investment-Grade and High-Yield Corporate Bonds June 1, 2005 – October 18, 2017 • US Dollar (billions) 300

250

200

150 $ in in $ Billions

100

50

0 Jun-2005 Jun-2006 Jun-2007 Jun-2008 Jun-2009 Jun-2010 Jun-2011 Jun-2012 Jun-2013 Jun-2014 Jun-2015 Jun-2016 Jun-2017

Source: New York Federal Reserve Note: Data is weekly. September’s FOMC announcement brought no surprises Fed may hike one more time in 2017 and start allowing its balance sheet to slowly wind down Interest in credit has increased as investors seek a source of returns with some downside protection, but spreads have been approaching historic lows. BAML US High Yield Option-Adjusted Spread

25

20

15 %

10

5

0 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017 Historical Default Rates January 1, 1998 through September 30, 2017

14%

12.1% 12%

High Yield Leveraged Loans High Yield Average Leveraged Loans Average 10% 9.7% 8.7% 8.6% 8.2% 8% 7.3% 7.0% 6.4%

6% 5.3% 4.9% 4.9% 4.5% 4.3% 3.9% 4%

Default Rate (IssuerWeighted) 2.8% 2.8% 2.7% 2.3% 2.9% 2.4%2.6% 2.1% 2.1% 1.9% 2.2% 2.1% 2.3% 2.0% 2.0% 2.1% 1.6% 1.6% 2% 1.2% 1.5% 1.9% 1.1% 1.3% 0.8% 0.9% 0.3% 0%

Source: JP Morgan. Historical Default Rates January 1, 1998 through December 31, 2015 Private lending yields still attractive But we worry about aggressive underwriting and compromises made in risk management The State Board of Administration of Florida (“SBAF”)

Strategic Investments: Real Estate Debt and Timber Report

December 2017

Table of Contents

1) Strategic Investments – Real Estate Debt and Timber Performance 2) Market Update – Real Estate and Timber 3) Townsend Update

Appendix: A. Definitions and Disclosures

2 1) Strategic Investments – Real Estate Debt and Timber Performance

Strategic Investments Highlights and Significant Events

Portfolio Highlights

• Townsend support SBAF’s initiatives in Real Estate Credit and Timber within the Strategic Investments Portfolio.

• Real Estate Credit and Timber portfolio was carved out of the Strategic Investments portfolio in June 2007, with the first investment made in 2008. Real Estate Credit and Timber investments represent approximately $1.6 billion of market value, or 12.4% of the Strategic Investments Portfolio, or 1.0% of total plan assets (as of June 2017).

• This portfolio consists of 16 active Real Estate Debt investments and two Timber investments (two additional fully realized Debt Funds).

• On approximately $3.1 billion of committed capital, the portfolio has returned approximately $1.7 billion of capital to SBAF, and has $754 million of unfunded commitments (as of June 2017).

• The combined investment performance net return exceeded the CPI + 500 bps benchmark over the quarter, one-year, three-year, and five-year periods, and has generated a since inception net IRR of 8.7% (as of June 2017).

Significant Events

• During 2016, SBAF made two follow-on commitments targeting the following strategies (no new fund commitments have been made in 2017):

– Acquisition or recapitalize capital starved properties and/or the loans on such properties and execute value-add plans designed to renovate and reposition assets in the U.S., and

– Mezzanine lending with top tier sponsors, generally in Class A assets within second tier markets.

All performance as of 6/30/17 unless otherwise noted. 4 Townsend’s views are as of the date of this publication and may be changed or modified at any time and without notice. Past performance is not indicative of future results. Strategic Investments Performance

• Performance below is the combined Real Estate Credit and Timber performance compared to the CPI + 500 bps benchmark.

• The portfolio outperforms the current benchmark over all measured periods below, with a significant component coming from income.

• While the Real Estate Credit and Timber investments are relatively new, when taking into account the commitment amounts and strong performance from the portfolio, the combined net IRR since inception is return is 8.7%.

• SBAF Strategic Investments Staff is in process of creating a blended benchmark to more closely match risk/return strategies within the broader portfolio.

10% 9.5%

9% 8.7%

8% 7.7% 7.4%

7% 6.7% 6.4% 6.0% 6%

5%

4%

Time WeightedTime Returns 3%

2%

1%

0% One Year Return Three Year Return Five Year Return IRR*

Real Estate Credit and Timber CPI + 500 *IRR as of 6/30/17 5 Townsend’s views are as of the date of this publication and may be changed or modified at any time and without notice. Past performance is not indicative of future results. Real Estate Debt Performance

• Within the Strategic Asset Class portfolio, SBAF has committed approximately $2.5 billion to ten current real estate debt focused managers across 15 funds and one separate account. The debt portfolio targets opportunities throughout the capital stack and across property types as well as regions.

• Performance for the real estate debt investments has been strong over all time periods. The five-year net return of 10.4% exceeds the CPI plus 500 bps real return objective and has improved resulting from strong recent performance generated across the portfolio.

• Starting in 2008, the portfolio has invested across nine vintage years and is seeing realizations and distributions from early commitments. No commitments have been made in 2017 and the portfolio has seen more capital distributions than contributions over the past six quarters.

$1,400 $180 12%

10.4% $160 $1,200 10% 9.3% 9.0% 8.9% $140 $1,000 8% $120 6.7% 6.4% $800 $100 6.0% 6%

$600 $80 NAV (millions) NAV

$60

Time WeightedTime Returns 4% $400 $40 2%

$200 Contributions/Distributions/Withdrawals (millions) $20

0% $0 $0

08 10 12 14 16 07 09 11 13 15

08 10 12 14 09 11 13 15 16

08 10 15 17 09 11 12 13 14 16

08 11 13 15 17 09 10 12 14 16

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One Year Return Three Year Return Five Year Return IRR* -

Jun Jun Jun Jun Jun Jun Jun Jun Jun Jun

Sep Sep Sep Sep Sep Sep Sep Sep Sep

Dec Dec Dec Dec Dec Dec Dec Dec Dec Dec

Mar Mar Mar Mar Mar Mar Mar Mar Mar Mar

Real Estate Debt CPI + 500 Real Estate Debt Contributions Real Estate Debt Distributions/Withdrawals Real Estate Debt NAV *IRR as of 6/30/17 6 Townsend’s views are as of the date of this publication and may be changed or modified at any time and without notice. Past performance is not indicative of future results. Timber Performance

• The Timber Portfolio currently consists of two separate accounts established in 2012 totaling $500 million of commitments. Approximately, $405 million has been funded to date.

• The portfolio is well diversified with exposure to the Northwest, South, Northeast, and Chile. In addition, the portfolio is diversified by age class and species.

• Both managers started making cash distributions in the second quarter 2013 and have distributed $43.8 million of cash flow. Since inception, the Timber Portfolio has generated an 6.6% net IRR.

• While generating a strong return, the Timber portfolio has underperformed the NCREIF NTI and NTSAI over most time periods. This can be attributed to the build up of SBAF’s portfolio compared to an established benchmark comparison of stabilized assets. 8% 7.2% 7.3% 7.0% 7% 6.6% 6.3% Other Hardwood Ex-US* North East 6% 5.6% 9.2% Pulpwood 9.6% 9.1% 6.6% Hardwood Sawtimber 5% 11.8% 4.5% Pacific Softwood Northwest 4% Sawtimber 29.9% 3.3% 3.4% 3.4% 30.1% South Land 51.4%

3% 26.1% Time WeightedTime Returns 1.9% 2% Softwood Softwood Chip Pulpwood N Saw 6.3% *"Ex-US" refers to Timberland in Chile 1% 0.7% 0.7% 9.9%

0% 2Q17 Return One Year Return Three Year Return Three Year Return IRR*

Timber Portfolio (Net) NCREIF NTI (Gross) NCREIF NTSAI (Net) *IRR as of 6/30/17 7 Townsend’s views are as of the date of this publication and may be changed or modified at any time and without notice. Past performance is not indicative of future results. 2) Real Estate Market Update Recovering Economy And Inflation Offers Growth Opportunities

US Real GDP Forecast (YoY%) . U.S. GDP is expected to recover, however, economists diverge on the extent of the 6% recovery and forecasts show a wide range . Monetary tightening has started in the U.S., but experts disagree on the extent of 4% rate increases and the outcome of such measures 2% . The long end of the interest rate curve is expected to be low as demographic trends in the U.S. are less favorable – the baby-boom driven rise in population 0% growth of up to 1.4% p.a. in the early 1990s is now down to 0.8% p.a. -2% . Labor productivity growth has declined; in the current cycle (2007-2016) it is just

-4%

1.1% p.a., compared to 2.7% p.a. in the previous cycle (2001-2007)

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 . Emergence of fiscal policy as a tool to rejuvenate growth in the U.S. has raised 2000 optimism; but now doubts have emerged and the implementation timeframe and Real GDP Low Consensus High outcome remains uncertain as political consensus is unclear US CPI . Asset value inflation across all major asset classes (equities, bonds, private equity, 6% real estate, and other real assets) continues, but those asset classes that can grow earnings will outperform in the era of interest rate increases in the U.S. 4% . Real estate and real assets offer stable income streams that provide stability to 2% returns in an uncertain time (while also having the ability to leverage economic growth through capital value appreciation) 0% . Risks within the real estate sector remain manageable as most supply is for

-2%

replacing old and tired assets or addressing changing needs of tenants and

02 04 07 09 12 14 17

01 05 06 06 10 11 11 15 16 16

03 08 13 18

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- - -

residents -

Jun Jun Jun

Oct Oct Oct Oct

Apr Apr Apr

Feb Feb Feb

Dec Dec Dec Dec

Aug Aug Aug Aug CPI Low Consensus High 5YR Compounding Source: Bloomberg, Bureau of Labor Statistics, World Bank 9 Townsend’s views are as of the date of this publication and may be changed or modified at any time and without notice. Past performance is not indicative of future results. World Economy To Grow, But At Uneven Rates Across Countries Inflation Headwinds: . Global growth continues to recover and is expected to rise from around 3.1% p.a. 2.5% Population & Labor Force Growth 80% in 2016 to 3.4% and 3.6% p.a. in 2017 and 2018, respectively . Global growth is likely to be uneven as the U.S. and Australia remain on a gradual recovery path, while growth rates in the euro area and Japan will continue to be 2.0% 70% lackluster . Monetary easing will continue in several regions around the world including the 1.5% 60% euro area, Japan, and even the U.K. in contrast with the tightening trend in the U.S.

. Like in the U.S., the long end of the interest rate curve is expected to remain low as 1.0% 50%

demographic trends in many countries continue to be unfavorable, limiting future

1964 1967 1970 1973 1976 1979 1982 1985 1988 1991 1994 1997 2000 2003 2006 2009 2012 2015 growth and inflation expectations (e.g. Population growth rates in euro area, Japan, 1961 and China are expected to be around 0.2%, -0.1%, and 0.5% p.a., respectively) World Population Growth (% - LHS) . In Continental Europe, the ECB is not concerned about inflation and has signaled Real GDP Growth % that its easing policy will continue, leading to a longer than expected period of low 3.0% 2.8% interest rates 2.5% 2.5% . The market is also expecting some fiscal reform across major countries and the 1.8% 1.8% period of austerity to be over 2.0% 1.6% . In Japan, the GDP growth rate is expected to be in the 0.3-0.5% p.a. range, and 1.5% 1.3% inflation is likely to be well below the 2% target; as such we expect interest rates to 1.0% 1.0% remain low as well 1.0% . Finally, emerging countries also show divergence in growth outlook – China is on a 0.5% long-term slowdown path, but near-term prospects are boosted by capital 0.0% injection; India is on a longer-term acceleration path, but near-term prospects are UK Eurozone Japan Australia clouded by government measures to control corruption 2016 2018 Consensus Forecast

Source: Bloomberg, World Bank, IMF, Bank of Japan 10 Townsend’s views are as of the date of this publication and may be changed or modified at any time and without notice. Past performance is not indicative of future results. Returns Expected To Be Driven By Yield, Not Further Cap Rate Compression

30% Historical Cap Rates and ODCE Gross Returns

20%

10% 6.3% 9.9% 8.3% 8.7% 5.1% 5.4% 6.9% 0%

-10%

82 88 93 99 04 10 15

79 83 90 94 01 05 12 16

86 87 97 98 08 09

80 81 81 84 89 91 92 92 95 00 02 03 03 06 11 13 14 14

85 96 07

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Jul Jul Jul

Jan Jan Jan Jan

Jun Jun Jun

Oct Oct Oct Oct

Apr Apr Apr

Feb Sep Feb Sep Feb Sep Feb

Dec Dec Dec Dec

Aug Aug Aug

Nov Nov Nov Nov

Mar Mar Mar Mar

May May May Total Return Cap Rate . In the past, periods of rising cap rates have limited property returns . While we are not forecasting cap rates to materially rise from current levels, we do expect a modest expansion over the next few years. In the U.S., the potential expansion of real estate cap rates will likely lead to lower total returns over the next five years vs. the last five years . Capital flows could materially impact property values. Over the last year, capital flows into the U.S. have slowed, while those to European markets have increased, a trend explained by investors’ preference to benefit from weaker currencies and lower interest rates . Strong interest in the U.S. markets continues, indicated by the deposit queues of Core and Core-Plus funds . On the debt side, increased regulations have lead to the growth of non-bank lenders and some are very aggressive in their underwriting; while the overall leverage in the real estate markets is currently under control, this situation will have to be monitored . Overall, we expect rents to rise with an improving economy and the supply to remain in check for the foreseeable future . Consequently, we expect the next five-seven years to provide normal returns, which in the Core sector of real estate have typically kept pace with returns from equities (and in some instances exceeded those returns) Source: NCREIF 11 Townsend’s views are as of the date of this publication and may be changed or modified at any time and without notice. Past performance is not indicative of future results. Spreads Compress When Interest Rates Rise

. BBB Bond Yields Spread to 10 YR There are concerns that the interest rate increase cycle might adversely 8% impact property valuations . It is important to understand that periods of rising interest rates coincide 6% with shrinkage in spreads across asset classes 4% . For example, the 20-year history of spread of BBB bonds to 10-YR nominal interest rates demonstrates four-seven year long periods of spreads 2% shrinking when rates rise and vice versa

0%

. This same phenomenon is witnessed in the 20-year history of cap rate

97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16

------

spreads -

Dec Dec Dec Dec Dec Dec Dec Dec Dec Dec Dec Dec Dec Dec Dec Dec Dec Dec Dec . In addition, as inflation expectations are rising many investors are seeking Dec assets that hedge inflation like real estate, primarily because of its ability Nominal 10 YR Yield BBB Spread to 10 YR Avg Spread to grow rents in such periods Real Estate Cap Rate Spread to 10 YR . Lastly, it is possible that the yield curve flattens and the fed actions result 8% in less than expected increase on the long-end that drives cap rate increases 6%

. Consequently, our expectations are for a modest increase in cap rates. 4% Such an increase will definitely moderate real estate returns closer to historical norms 2% . It is also important to point out that the impact of a rise in interest rates

0%

raises the discount rate which impacts all asset classes

97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16

------

Dec Dec Dec Dec Dec Dec Dec Dec Dec Dec Dec Dec Dec Dec Dec Dec Dec Dec Dec Dec Nominal 10 YR Yield Cap Rate Spread to 10 YR

Source: Bloomberg 12 Townsend’s views are as of the date of this publication and may be changed or modified at any time and without notice. Past performance is not indicative of future results. Global Economic Outlook and Real Estate Investment Opportunities

Macro Factors U.S. Europe China Japan

GDP (‘17) 2.2% 1.4% (U.K. 1.7%, DE 1.7%, FR 1.4%) 6.6% 1.2%

Unemployment (‘17) 4.5% 8.0% (U.K. 4.9%, DE 5.8%, FR 9.9%) 4.1% 3.1%

Fundamentals diverge significantly across sectors and Yields typically higher than in the U.S., but lower Slowing growth raising oversupply risks, but continued Low growth despite easing submarkets growth strong urbanization Key Existing stock old, provides attractive repositioning Real Estate Core offers good income and protection against a Repositioning opportunities attractive Focus on Tier I and II cities opportunities Themes potential slowdown Low debt cost offers good leverage, without adding Leverage preferred equity/mezz structure to lower Low debt cost offers good leverage, without adding Non-Core selectively mispriced much risk risk much risk

Select markets offer good rent growth, while energy Recovery in Continental Europe providing modest rent High supply and slowing economy could lead to Modestly rising rent growth outlook and even tech-based markets may be peaking tailwind; attractive income generation potential pockets of oversupply Old stock in good locations in Tokyo/ Osaka offers Office Repositioning and high income producing investments In the U.K., Brexit related demand slowdown and Prefer asset repositioning opportunities at attractive attractive upgrading opportunities likely to outperform low cap rate opportunities significant new supply to limit returns basis

E-commerce and imports driving demand at record- Strong demand from logistic players and e-commerce Strong demand for industrial properties conforming to Strong demand for modern logistics assets driven by high level modern standards 3PLs Industrial Stable fundamentals offer attractive cash returns Supply rising in hotbeds, requiring focus on quality boosted by low-cost debt Limited deal flow due to delay in land availability Supply building in town peripheries that is likely to limit assets in neglected markets rent growth

E-commerce reshaping landscape leading to shrinkage E-commerce driven reshaping will put retail at risk Shift to consumer economy leading to strong demand Select repositioning opportunities attractive given poor in per capita space for productive sites existing asset quality Retail New neighborhoods require retail development Oversupply in central locations, but Non-Core E-commerce likely to be a headwind locations still undersupplied

Rent affordability stretched in higher-end apartments; Most large cities undersupplied with dwellings, but still Urbanization trend driving strong demand albeit very Attractive residential development opportunities in Supply at inflection point in key markets limited opportunities volatile high-growth cities like Tokyo and Osaka Residential Refurbishing Class B attractive, prefer debt-oriented Select condo conversion and repositioning plays Prefer preferred equity/mezz structures to contain risk Secular demand growth for aged care entry point attractive

Actively Pursuing Neutral Selectively Pursuing Source: The Townsend Group, Consensus Estimates- Bloomberg (May 15, 2017) 13 Townsend’s views are as of the date of this publication and may be changed or modified at any time and without notice. Past performance is not indicative of future results. Hybrid Strategies Offer Attractive Risk/Return Tradeoff 20% 20% Typical Expected Return Preferred Strategy 14% 15% 15% 11% 12% 10% 8%

5% 3.5% 8% 8% 9% 9% 6% 7% 2.5% 0% Core Senior Debt Core Preferred Equity Transitional K-Series B-Note Preferred Equity + Development Opportunistic Debt Subordinate Debt and Kickers Subordinate Debt Strategies Development Senior Debt

Return Range . In the low interest rate environment, real estate debt offers attractive alternatives with reasonable risk given that U.S. real estate is experiencing an upward cycle of rent growth . Debt for transitional assets offers attractive returns as CMBS issuance is scaling back amid very high levels of expiries and banks are unwilling or unable to increase real estate exposure; however, poor asset selection could exacerbate downside risk in the event of an unexpected slowdown . Senior debt for development also offers attractive returns as banks are not that active, but caution is needed to avoid good assets in poor locations with elevated leasing risk . Preferred equity with kickers is a good way to enhance returns without full equity risk, but such options are typically only possible on transitional assets or assets that require major renovations . Opportunistic debt strategies could have a wide range of outcomes; execution options could be very limited

Source: The Townsend Group (based on various manager interactions) 14 Townsend’s views are as of the date of this publication and may be changed or modified at any time and without notice. Past performance is not indicative of future results. Timberland Market Update Timberland – Market Update (2Q17) Timber Markets • U.S. timber markets remained mixed during the quarter with the Northwest continuing to outperform the rest of the country driven by strong export and domestic demand. – Exports driven by growing demand from China and Japan and bolstered by aggressive log purchasing from local mills seeking to capitalize on the attractive market.

• Sawtimber and stumpage prices in the South continued trending downward as favorable logging conditions led to robust harvests and oversupplied markets given the already supply laden conditions from the ongoing inventory supply overhang.

• U.S. housing starts improved by 8%, ending three months of declines, while boosting annual starts to 1.2 million. – Total housing starts are expected to reach 1.3 million in 2017, driving increased demand for wood products; however, oversupply issues in the U.S. South will keep timber price growth in check over the near-to-medium term.

• Deal flow in the U.S. during the quarter was relatively quiet with all of the recorded transactions occurring in the Southeast.

Delivered Prices for Doug-fir #2 Sawlogs by Regions, U.S. West Coast Southwide Sawtimber Stumpage by Product

Second Quarter 2017 Source: LogLines via Campbell Timber Trends Source: Timber Mart-South via Campbell Timber Trends Timberland – Market Update (2Q17) Performance Update

• Income returns have remained relatively steady around 0.6% for the past several quarters. Appreciation remains more volatile with the most significant marks generally coming in at year-end.

• Rolling 12 month returns appear to have stabilized over the past several quarters, which have been trending downwards since mid-2015 as previously bullish housing forecasts continued to be pushed further out. – Annualized income returns have ranged from 2.5%-2.9% in recent years, indicating the market having found some stability as harvesting activity remains relatively consistent despite oversupply in the U.S. South.

• The Northwest continues to perform well driven by both domestic and export demand, while the Southeastern markets continue to face supply/demand headwinds in sawtimber and pulp markets.

NCREIF Timber Index Returns (annualized through June 30, 2017) Timberland Quarterly Total Return Trends by Region

20% Total Return $2,050 Income Return $1,850 $ Per Acre 15% $1,650

$1,450 10%

$1,250 weightedReturn

- $1,050 5% $850 PricePerAcre

$650 Gross Time Gross 0% $450

-5% $250

2000 2002 2003 2004 2005 2006 2007 2009 2011 2013 2014 2015 2016 2017 2001 2008 2010 2012

Second Quarter 2017 Source: NCREIF 3) Townsend Update The Townsend Group ONE OF THE LARGEST REAL ASSET INVESTMENT & ADVISORY PLATFORMS

REAL ESTATE ASSETS MANAGED/ADVISED $14.2 BILLION AUM │$182.6 BILLION OF AA1

BROAD INSTITUTIONAL CLIENT BASE PUBLIC & PRIVATE PENSION PLANS │ SOVEREIGN WEALTH FUNDS ENDOWMENTS & FOUNDATIONS│ INSURANCE COMPANIES

EXTENSIVE HISTORY AND TRACK RECORD 34 YEARS OF FOCUSED EXPERIENCE ONE OF THE OLDEST REAL ESTATE REGISTERED INVESTMENT ADVISERS

DEDICATED REAL ESTATE FOCUS ~100 PROFESSIONALS GLOBALLY CLEVELAND │ SAN FRANCISCO │ LONDON │ HONG KONG

COMPREHENSIVE GLOBAL EXPERTISE EQUITY & DEBT │ DIRECT & INDIRECT ALL MAJOR REGIONS AND SECTORS GLOBALLY

1As of March 31, 2017, Townsend had assets under management of approximately $14.2 billion. As of March 31, 2017, Townsend provided advisory services to clients who had real estate/real asset allocations exceeding $182.6 billion. Please refer to back pages for additional disclosures and definitions. Employee numbers as of 2Q17. 19 A. Definitions and Disclosure Definitions

• The NCREIF Timberland Property Index (NTI) – The NCREIF Timberland Property Index represents data collected from the Voting Members of the National Council of Real Estate Investment Fiduciaries (NCREIF). The NTI is an unlevered domestic index, gross of fees, that aggregates the returns of approximately 450 privately owned institutional investment properties valued at $24 billion. All properties have been acquired, at least in part, on behalf of tax-exempt institutions and held in a fiduciary environment. The properties are wholly owned and joint venture investments consisting of Timberland properties only. Note that the NTI is not an investable or duplicable universe. Also, the NTI may not fully illustrate the performance of the institutional property universe.

• The NCREIF Timberland Fund and Separate Account Index (NTSAI) – The NCREIF Timberland Fund and Separate Account Index is a levered domestic capitalization-weighted index based on each Funds’ Net Asset Value, which represents data collected from the Voting Members of the National Council of Real Estate Investment Fiduciaries (NCREIF). The NTSAI is a gross and net of fees time-weighted return index consisting of commingled funds and individually managed accounts held in a fiduciary environment for taxable and tax-exempt investors, and mostly comprised of Timber, Timberland and cash equivalent assets, which are invested at 95% or more in the United States. The Funds comprised in the index may change if (i) existing Funds are removed from the index due to recurring underperformance, (ii) liquidation or termination, as well as (iii) entry of new Funds or new members of NCREIF. The NTSAI may not fully illustrate the performance of the institutional property universe.

• The Consumer Price Index (CPI) – The Consumer Price Index illustrates monthly changes in the weighted average of prices of consumers’ good and services, excluding income taxes, financial instruments, and other saving-related items. Data is collected on a monthly basis by the Bureau of Labor Statistics (BSL economic assistants) in 87 urban areas nationwide and from approximately 80,000 items regrouped in more than 200 categories, which includes 23,000 retail and service establishments, as well as 50,000 landlords or tenants. The Consumer Expenditure Survey derives each item’s weight from their reported expenditures.

Source: www.ncreif.org www.bls.gov/cpi 21 Disclosures

This presentation (the “Presentation”) is being furnished to a limited number of sophisticated individuals meeting the definition of a Qualified Purchaser under the Investment Advisors Act of 1940 for informational and discussion purposes only and does not constitute an offer to sell or a solicitation of an offer to purchase any security. This document has been prepared solely for informational purposes and is not to be construed as investment advice or an offer or solicitation for the purchase or sale of any financial instrument. While reasonable care has been taken to ensure that the information contained herein is not untrue or misleading at the time of preparation, The Townsend Group makes no representation that it is accurate or complete. Some information contained herein has been obtained from third-party sources that are believed to be reliable. The Townsend Group makes no representations as to the accuracy or the completeness of such information and has no obligation to revise or update any statement herein for any reason. Any opinions are subject to change without notice and may differ or be contrary to opinions expressed by other divisions of The Townsend Group as a result of using different assumptions and criteria. No investment strategy or risk management technique can guarantee returns or eliminate risk in any market environment. Statements contained in this Presentation that are not historical facts and are based on current expectations, estimates, projections, opinions and beliefs of the general partner of the Fund and upon materials provided by underlying investment funds, which are not independently verified by the general partner. Such statements involve known and unknown risks, uncertainties and other factors, and undue reliance should not be placed thereon. Additionally, this Presentation contains “forward-looking statements.” Actual events or results or the actual performance of the Fund may differ materially from those reflected or contemplated in such forward-looking statements. Material market or economic conditions may have had an effect on the results portrayed. Neither Townsend nor any of its affiliates have made any representation or warranty, express or implied, with respect to the fairness, correctness, accuracy, reasonableness or completeness of any of the information contained herein (including but not limited to information obtained from third parties unrelated to them), and they expressly disclaim any responsibility or liability therefore. Neither Townsend nor any of its affiliates have any responsibility to update any of the information provided in this summary document. The products mentioned in this document may not be eligible for sale in some states or countries, nor suitable for all types of investors; their value and the income they produce may fluctuate and/or be adversely affected by exchange rates, interest rates, or other factors. Prospective investors in the Fund should inform themselves as to the legal requirements and tax consequences of an investment in the Fund within the countries of their citizenship, residence, domicile and place of business. There can be no assurance that any account will achieve results comparable to those presented. Past performance is not indicative of future results.

22 Disclosures/Definitions

GENERAL DISCLOSURES There can be no assurance that any account will achieve results comparable to those presented. Past performance is not indicative of future results. Investing involves risk, including possible loss of principal. Returns reflect the equal-weighted returns calculated during the periods indicated. Note: If including Core, this is value-weighted. In addition, the valuations reflect various assumptions, including assumptions of actual unrealized value existing in such investments at the time of valuation. As a result of portfolio customization/blending and other factors, actual investments made for your account may differ substantially from the investments of portfolios comprising any indices or composites presented. Due to the customized nature of Townsend’s client portfolios, the performance stated may be considered “hypothetical” as it does not reflect the experience of individual client portfolios, but rather aggregate client positions in the stated investment strategy. ASSETS UNDER MANAGEMENT As of March 31, 2017, Townsend had assets under management of approximately $14.2 billion. When calculating assets under management, Townsend aggregates net asset values and unfunded commitments on a quarterly basis. Townsend relies on third parties to provide asset valuations, which typically takes in excess of 90 days after the quarter end. Therefore, assets under management have been calculated using March 31, 2017 figures where available but may also include December 31, 2016 figures. Assets under management are calculated quarterly. Regulatory AUM is calculated annually and available in our ADV or upon request. ADVISED ASSETS As of March 31, 2017, Townsend provided advisory services to clients who had real estate/real asset allocations exceeding $182.6 billion. Advised assets includes real estate and real asset allocation as reported by our clients for whom Townsend provides multiple advisory services—including strategic and underwriting advice for the entire portfolio. Advised assets are based on totals reported by each client to Townsend or derived from publicly available information. Advised assets are calculated quarterly. Select clients report less frequently than quarterly in which case we roll forward prior quarter totals. The recent change in Advised Assets is due to a change in the reporting of certain special projects. TREA STRATEGIES (NON-CORE) employ a global non-core multi strategy approach with 50% or more of the investments invested in non primary fund investments such as co-investments, joint ventures, secondaries and clubs. Strategies are diversified by geography, sector, property type, manager and . CORE-PLUS STRATEGIES (CORE) employ a global core/core plus multi strategy approach investing in primary funds, joint ventures, co-investments, secondaries, direct investments, debt strategies and REITs. Strategies are diversified by geography, sector, property type, manager and vintage year.

SEPARATE ACCOUNTS includes all Townsend active discretionary accounts which invest in a variety of investment styles and structures. 23 Disclosures

For Institutional and Professional investor use only. Not for retail use or distribution. The views expressed in this commentary are of Townsend Holdings LLC d/b/a The Townsend Group (together with its affiliates, “Townsend”). The views expressed reflect the current views of Townsend as of the date hereof and Townsend does not undertake to advise you of any changes in the views expressed herein. This commentary does not constitute an offer to sell any securities or the solicitation of an offer to purchase any securities. Such offer may only be made by means of an Offering Memorandum, which would contain, among other things, a description of the applicable risks. Townsend employees may have positions in and effect transactions in securities of companies mentioned or indirectly referenced in this commentary, including a long or short position or holding in the securities, options on securities, or other related investments of those companies. Investment concepts mentioned in this commentary may be unsuitable for investors depending on their specific investment objectives and financial position. Where a referenced investment is denominated in a currency other than the investor’s currency, changes in rates of exchange may have an adverse effect on the value, price of, or income derived from the investment. Tax considerations, margin requirements, commissions and other transaction costs may significantly affect the economic consequences of any transaction concepts referenced in this commentary and should be reviewed carefully with one’s investment and tax advisors. Certain assumptions may have been made in this commentary as a basis for any indicated returns. No representation is made that any indicated returns will be achieved. Differing facts from the assumptions may have a material impact on any indicated returns. Past performance is not necessarily indicative of future performance. The price or value of investments to which this commentary relates, directly or indirectly, may rise or fall. This commentary does not constitute an offer to sell any security or the solicitation of an offer to purchase any security. Investing involves risk including possible loss of principal

NOTE REGARDING PROJECTIONS AND FORWARD-LOOKING STATEMENTS: The information provided in this report contains estimates, return data and valuations that are based upon assumptions and projections. Such estimates and assumptions involve judgments with respect to, among other things, future economic and competitive conditions; real estate market conditions; occupancy and rental rates; and the like, which may not be realized and are inherently subject to significant uncertainties and changes, all of which are difficult to predict and many of which are beyond the control of the General Partner and Townsend Holdings LLC d/b/a The Townsend Group (“Townsend”) and the investment managers of any indirect fund investments. Accordingly, no assurance can be given that such projections will be realized, and actual conditions, operations and results may vary materially from those set forth herein. The Limited Partner is cautioned that the predictions and other forward-looking statements reflected in this report involve risks and uncertainty, including without limitation, risks incident to investment in real estate and to investment in “non-core” real estate funds. In light of the foregoing factors, actual returns and results are likely to differ substantially from the forward-looking statements contained in this report, and the Limited Partner is cautioned not to place undue reliance on such forward-looking statements and projections. The words “estimate,” “anticipate,” “expect,” “predict,” “believe” and like expressions are intended to identify forward-looking statements. Investors should make their own investment decisions without relying on this document. Only investors with sufficient knowledge and experience in financial matters to evaluate the merits and risks should consider an investment in any issuer or market discussed herein and other persons should not take any action on the basis of this document.

Global Equity Update Alison Romano, Senior Investment Officer Tim Taylor, Senior Investment Officer

Investment Advisory Council December 4, 2017 Rising Equity Markets Supported Global Growth

Strong Equity Markets across Regions Growth and Risk in Favor Regional Returns World Return Spreads 21.43% 18.71% 18.98% 8.84%

7.59% 4.57% 5.86% 1.88% 1.38% 1.33% 0.71% 0.09% US Developed Ex US Emerging Growth - Value World - Min Volatility Small - Large Q3 1 Year Q3 1YR Cyclicals and Secular Growth Lead Markets Global Market Dynamics ACWI Returns by Sector 40% • Despite some lingering geopolitical uncertainty, most economies continued to grow and corporate earnings were better than expected 30% • Number of US companies issuing positive earnings guidance in 3Q reached seven year high 20% • Economically sensitive sectors like energy and materials were particularly 10% strong in Europe as economic activity continued to improve

0% • Emerging markets delivered third consecutive quarter of positive gains, helped by declining dollar and global growth. Significant portion of benchmark performance driven by strength among internet services and smartphone companies Q3 1 Year Note: As of September 30, 2017. Based on Russell indices for domestic markets and MSCI IMI for Developed Ex-US and Emerging Markets. 3 Aggregate Performance Summary

3Q17 FYTD CYTD 1 Yr 3 Yr 5 Yr Incept. Total Asset Class Return 5.52 5.52 18.33 19.74 8.55 11.28 11.98 Benchmark 5.31 5.31 17.29 18.76 7.78 10.49 11.02 Excess Return 0.21 0.21 1.05 0.98 0.77 0.79 0.96 Tracking Error 0.56 0.51 0.52 Return / Risk (IR) 1.98 1.24 1.39 1.62

ASSET CLASS EXCESS RETURN (%)

1.20

1.00

0.80

0.60

0.40

0.20

0.00 QTD FYTD CYTD 1 Yr 3 Yr 5 Yr Incept.

Note: All returns through 9/30/2017. Inception 7/1/10. Benchmark is Custom Iran Sudan Free ACWI IMI Index. 4 Active Performance Summary

Excess Returns by Aggregate What Happened this Quarter Weight (% of Active Strategy Group Asset Class) 3Q 2017 1 Year 3 Year 5 Year 3Q17 Performance Drivers Foreign Developed Large 21% 0.86% 2.97% 2.37% 1.67% Strong stock selection supported by momentum tailwinds and China exposure Cap Emerging Markets 11% -0.88% -0.65% 0.23% 0.46% Hurt by underweight to high beta stocks, including Chinese Internet names, and by cash exposure

Dedicated Global 8% 0.04% -0.53% 0.53% 0.17% Solid performance from growth managers offset by lower-beta defensive managers

Foreign Developed Small 5% 0.43% 1.09% 0.22% 0.44% Helped by exposure to momentum and stock selection in Japan Cap US Large Cap 5% 1.31% 0.31% -1.61% -0.75% Strong stock selection supported by beta and momentum tailwinds

Currency 5% -0.34% -0.02% 0.74% -- Aggregate long USD positioning detracted

US Small Cap 2% -0.68% -1.71% -1.68% -1.24% Hurt by larger size tilt, market favoring non-earners, and stock selection challenges within healthcare

Total Active Aggregate 52% 0.27% 1.14% 0.76% 0.68% Positive stock selection supported by momentum tailwinds

Note: All returns through 9/30/2017. Excess returns are relative to strategy group benchmark. Currency weight includes passively managed equity notional. Weights are relative to total equity assets under management. 5 Update on Initiatives

Provide Alpha • Initiated and/or completed aggregate structure enhancements – Funded two new US Small Cap strategies – Initiated Foreign Developed Value search – Researching opportunities for internally managed strategies • Continued to negotiate fee concessions on select strategies • Established structure to support investment managers’ access to local Chinese stocks (“A- share” market) • Bolstered resources to support internal management and enhance custom analytics platform

Provide Liquidity • Raised $5.1 Billion YTD through 3Q17 to support beneficiary payments as well as asset allocation resulting from equity market strength

6 State Board of Administration Fixed Income Update Katy Wojciechowski Senior Investment Officer Fixed Income

Investment Advisory Council December 4, 2017 Fixed Income Review and Outlook December 2017 • 12 Month Returns for the Fixed Income benchmark – Barclays Intermediate Aggregate through 10/31/2017were 0.61%. – Annual Returns were slightly positive– with positive contributions from all spread sectors, especially credit and CMBS. – Treasury yields rose slightly during the quarter– 2.30 at the end of July to 2.38 on the 10 Year Treasury at 10/31. Yield on the entire Benchmark is only 2.41% with a 4.2yr duration

Fixed Income Benchmark Returns Fixed Income Asset Class Returns 10/31/2017 10/31/2017 3 2.5 2 2 1 1.5 1 0 0.5 -1 0 Fiscal YTD 1 Year 3Yr Ann 5Yr Ann 3 month 6 month 12 month Fixed Income Benchmark Value Added Fixed Income Review December 2017 Incremental yield for Credit tightened as the reach for yield continued and global QE continues Fixed Income Review and Outlook December 2017 Looking Forward: Update on Recommendations from Mercer Structure Review Mercer’s Recommendations Support Fixed Income Structure and Workplan • Consider moving more assets in house • Moved additional funds into Internal Active portfolio – SBA already possesses the needed infrastructure and internal staff to manage assets internally; taking the opportunity to use current resources while driving down costs • Consider increasing active allocation • Moderately increased allocation to Internal Active portfolio • Increased allocation to Core Plus strategy – move from Passive • Consider adding dedicated exposure to out of benchmark structured products in a dedicated strategy • Coordinated research with current managers continues – Consider opportunity to reduce risk to a rising rate environment within overall allocation • Continue to take thoughtful, incremental approach to opportunistic investments • Researching several new portfolio strategies

6 Securities Lending for the FRS Defined Benefits Program • The purpose of the program is to generate additional income by loaning out our securities within an extremely risk controlled program • Securities Lending program is value driven with a conservative collateral profile • Fixed Income, Global Equity and Real Estate participate • Lend securities to qualified borrowers through the use of multiple agents • Agents can reinvest cash collateral in money market type securities • Lendable Assets: $102.7 billion as of June 30, 2017 • Weighted Average Utilization: 11.08% for Fiscal Year 2016/2017 Net Earnings As of June 30, 2017

9,000,000 Monthly Net Earnings 8,000,000 Annual Net Earnings 7,000,000 FRS 6,000,000

5,000,000 2013 $ 45,019,446

4,000,000 2014 $ 45,616,855 3,000,000 2015 $ 34,578,572 2,000,000

1,000,000 2016 $ 49,084,712 - YTD 2017 $ 23,386,283 Jul-14 Jul-15 Jul-16 Jan-14 Jan-15 Jan-16 Jan-17 Sep-14 Sep-15 Sep-16 Nov-14 Nov-15 Nov-16 Mar-14 Mar-15 Mar-16 Mar-17 May-14 May-15 May-16 May-17 State Board of Administration

Real Estate Update Steve Spook SIO Real Estate

Investment Advisory Council Meeting December 4, 2017 Total Real Estate Portfolio Performance Data Through June 30, 2017

Market Value $13,666 M 14% 12.5% 12% 10.7% 10.6% 9.9% 10% 7.7% 8% 6.5% 6%

4%

2%

0% One Year Return Three Year Return Five Year Return

SBA RE Total Net Return SBA RE Primary Benchmark

Source: The Townsend Group Principal Investments Performance Data Through June 30, 2017 Market Value $8,482 M 16%

14% 12.6% 12% 10.8% 10.8% 10.6% 10.3% 9.9% 10% 7.8% 8% 6.9% 6.5% 6%

4%

2%

0% One Year Return Three Year Return Five Year Return

PI Total Net Return ODCE Total Net Return SBA Primary Benchmark

Source: The Townsend Group Externally Managed Portfolio Performance Data Through June 30, 2017 Market Value $5,184 M 14% 12.1% 12% 11.4% 10.5% 10.5% 10.7% 9.9% 10%

8% 7.2% 6.9% 6.2% 6%

4%

2%

0% One Year Return Three Year Return Five Year Return

EMP Total Net Return External Custom Benchmark Net Return SBAF Primary Benchmark

Source: The Townsend Group Real Estate Portfolio Sector Allocation Total RE Portfolio Florida Retirement System Defined Benefit Fund Public 10% Strategic Inv. Real Estate 8.2% 8.9% Private Private Equity 90% 6.4%

Cash Fixed Income 0.8% 17.9% Private Market

Non-Core 19%

Global Equities Core 57.8% 81%

Source: IBP 6/30/17 Report Private Market Property Type Diversification Target NFI-ODCE +/- 15%

40% 36.8% 35% 30% 28.8% 24.1% 25% 22.4% 19.1% 20.2% 20% 14.1% 15.0% 15.7% 15% 10% 4.0% 5% 0% Apartment Industrial Retail Office Other *

SBA Exposure ODCE

* Other includes Agriculture, Student Housing, Senior Housing, Hotel, Land Private Market Geographic Diversification Target NFI-ODCE +/- 15%

50% 41.1% 40.5% 40% 29.9% 31.1% 30%

19.9% 18.9% 20% 9.4% 10% 5.4% 3.8% 0% 0% East Midwest South West Other *

SBA Exposure ODCE * Other includes International Investments Recent Activity (Since Last IAC Report)

Direct Owned: Acquisitions (Price/Equity) - Self-Storage $7 million/$3.5 million - Medical Office Building $6.3 million/$3.2 million - Retail $24.7 million/13 million Dispositions - Senior Housing $17.5 million - Industrial $52.9 million - Student Housing $25.1 million - Multifamily $138.5 million Commingled Funds (New Commitments): - Domestic Value Add Fund $75 million - European Value Add Fund €50 million

State Board of Administration

Private Equity Asset Class Update John Bradley, SIO Strategic Investments & Private Equity

Investment Advisory Council December 4, 2017 Market/Portfolio Update • Market/Portfolio Update: – Market • U.S. buyout activity picked up in the 3rd quarter - YTD activity still trails 2016 • Pricing continues to rise at the large end of the market while the small/middle market trended downward • GPs continue to sell assets and purchase activity remains muted – Portfolio • Net cash flow through October 2017: $687 million • Distressed and non-U.S. buyout strategies performed best over the past 12 months Sector Exposure As of June 30, 2017 100% 8% 8% 90% • Technology remains the largest 10% 11% 18% 80% exposure in the portfolio at 40%. 11% 13% 6% 70% Other This is 700 bps higher than the PE 11% 14% 60% 16% Financials benchmark exposure of 33% Energy/Nat. Resources 50% 20% 16% • Relative to the asset class primary Healthcare 40% 17% Mfg/Industrial benchmark, the portfolio has a large 30% 21% Consumer/Retail overweight to technology (+21%) 20% 40% IT/Media 33% and a large underweight to the 10% 19% financials sector (-10%) 0% PE NAV Cambridge MSCI ACWI IMI PE/VC Bmrk

Source: Cambridge Associates Geographic Exposure As of June 30, 2017 100% 7% 90% • 14% 20% The portfolio remains overweight 15% 80% North America while underweight 20% 70% Africa 22% Europe and Asia 60% Middle East • Exposure outside of the U.S. Latin America 50% Other Geo continues to grow 40% 75% Asia 30% 62% 55% Europe 20% North America

10%

0% PE NAV Cambridge PE/VC MSCI ACWI IMI Bmrk

Source: Cambridge Associates Private Equity Asset Class Performance Asset Class - Net Managed and Benchmark Returns (IRRs) as of June 30, 2017

25.0% 21.0% 20.0% 17.4% 15.6% 15.3% 15.0% 12.9% 12.8% 12.0% 11.1% 11.0% 10.0% 7.8%

5.0%

0.0%

-5.0% 1 Year 3 years 5 years 10 years Since Inception

Private Equity Asset Class Benchmark

Note: Asset class IRR performance data is provided by Cambridge Associates. Benchmark IRRs are provided by the Florida State Board of Administration. The PE benchmark is currently the Custom Iran- and Sudan-free ACWI IMI + 300bps. From July 2010 through June 2014 the benchmark was the Russell 3000 + 300 bps. Prior to July 2010 , the benchmark was the Russell 3000 + 450 bps. Prior to November 1999, Private Equity was part of the Domestic Equities asset class and its benchmark was the Domestic Equities target index + 750 bps. Sub-strategy Performance As of June 30, 2017

1yr 3yr 5yr 10yr Since Inception Benchmark U.S. 20.0% 13.6% 16.1% 10.4% 12.1% 10.8% Non-U.S. Buyouts 21.1% 11.3% 16.5% 10.5% 10.5% 9.1% U.S. Venture 8.6% 12.1% 14.1% 11.2% 10.5% 8.0% U.S. Growth Equity 16.6% 14.7% 16.9% 12.7% 12.8% 10.0% Non-U.S. Growth Equity 15.0% 7.5% 11.2% -- 6.9% 10.5% Distressed/Turnaround 21.8% 13.5% 16.3% 14.1% 20.6% 10.0% Secondaries 16.5% 9.4% 12.2% 9.9% 15.9% 14.9%

Total PE Asset Class 17.4% 12.9% 15.6% 11.1% 12.8% 10.4%

Sub-strategy returns and benchmark returns provided by Cambridge Associates and are calculated net of all fees and expenses. The Cambridge benchmark is the median return for the respective sub-strategy. 2017 Commitment Activity

• PE committed $1.6 billion to 16 funds through Sept. 30, 2017 – $1.1 billion to 11 buyout funds • Small 56%, Middle-Market 9%, Large 35% – $150 million to 3 venture funds – $300 million to 2 distressed/turnaround fund

– Geographic Focus • US 43%, Europe 14%, Asia 22%, Global 21% Appendix Private Equity Aggregates Dollar-Weighted Performance (IRRs) as of June 30, 2017

Market Value Since Inception Date (in Millions) 1yr 3yr 5yr 10yr Inception Total Private Equity 1/27/1989 17.3% 12.8% 14.9% 9.5% 9.3% Custom Iran- and Sudan-free ACWI IMI +300bps 22.0% 7.7% 15.3% 10.1% 10.8%

Private Equity Legacy Portfolio 1/27/1989 3.0% -4.5% -21.5% -8.0% 3.7% Custom Iran- and Sudan-free ACWI IMI +300bps 22.2% 5.4% 17.2% 5.3% 9.9%

Private Equity Asset Class Portfolio 8/31/2000 17.4% 12.9% 15.6% 11.1% 12.8% Custom Iran- and Sudan-free ACWI IMI +300bps 21.0% 7.8% 15.3% 11.0% 12.0%

Note: Asset class IRR performance data is provided by Cambridge Associates. Benchmark IRRs are provided by the Florida State Board of Administration. The PE benchmark is currently the Custom Iran- and Sudan-free ACWI IMI + 300bps. From July 2010 through June 2014 the benchmark was the Russell 3000 + 300 bps. Prior to July 2010 , the benchmark was the Russell 3000 + 450 bps. Prior to November 1999, Private Equity was part of the Domestic Equity asset class and its benchmark was the Domestic Equity target index + 750 bps. FRS INVESTMENT PLAN FRS Investment Plan Snapshot (as of September 30, 2017)

• Assets: $10.338 B (11.5% increase since September 30, 2016)  +3.90% - 3rd Quarter 2017  +11.79% - Calendar Year to Date Return  +3.90% - Fiscal Year to date (Jul 17 – Sep 17) • Members: 183,752 (up 7.7% since September 30, 2016)  Active – 125,079  Inactive – 58,673 • Average Acct Balance: $56,263 (3.5% increase since September 30, 2016) • Average Age: 46  Males 47 (36.7% of members)  Females 45 (63.3% of members) • Average Yrs of Service: 6 (active members) • Retirees: 118,929 (increase of 10% since September 30, 2016) • Distributions: $11.0 B  Lump Sum Payouts – 39%  Rollovers – 61% FRS Investment Plan AUM by Asset Class (as of September 30, 2017 in $ millions)

Total Assets: $10.3 Billion Int’l / Global Equities Funds, $781, 8%

Domestic Stock Funds, Fixed Income Funds, $2.786, 27% $665, 6%

Inflation Adj Multi-Asset Fund, $91, 1%

Money Market Fund, Retirement Date Funds, $937, 9% $4.529, 44% Self-Directed Brokerage Account, $548, 5%

Asset allocation is a result of member investment selection FRS Investment Plan Performance by Asset Class (as of September 30, 2017)

QTD FYTD 1 Year 3 Years 5 Years Inception

Total Fund 3.90% 3.90% 13.35% 6.89% 7.96% 7.04%

Money Market 0.34% 0.34% 1.06% 0.57% 0.43% 1.52% -0.54% Real Assets & TIPS 2.56% 2.56% 4.54% 1.03% -0.68% (7/1/14) Fixed Income 1.06% 1.06% 1.79% 3.43% 2.62% 4.93%

Domestic Equities 2.92% 2.92% 19.94% 11.30% 14.63% 10.17%

Global & Intl Equities 6.24% 6.24% 20.12% 6.45% 9.25% 8.63%

5.20% Retirement Date Funds 3.99% 3.99% 13.10% 6.47% N.A. (7/1/14) 6.13% TF x RDFs 3.82% 3.82% 13.53% 7.24% N.A. (7/1/14) FRS Investment Plan Membership Growth Percent Membership Growth Year to Year

185,000 183,752 3.6% 175,000 177,218 4.3%

169,576 165,000 3.6% 163,456 3.8% 155,000 157,227 4.1%

150,721 4.3% 145,000 144,299 5.3%

135,000 FY 11-12 FY 12-13 FY 13-14 FY 14-15 FY 15-16 FY 16-17 FY 17-18 (thru Sep 17) FRS Financial Guidance Program (as of September 30, 2017)

INVESTMENT EDUCATION

EY FINANCIAL # FINANCIAL ATTENDANCE WEBSITE PLANNER PLANNING FINANCIAL WEBSITE HITS CALLS WORKSHOPS WORKSHOPS CHATS 2,399,049 287,936 479 16,663 30,676

-2% -12% -10% +12% +6%

14 Annuities purchased last 12 months ($1.28 million) 101 Total Annuities purchased inception to date ($12.41 million) State Board of Administration of Florida

Major Mandate Review Third Quarter 2017

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Table of Contents

1. Executive Summary 2. Pension Plan Review 3. Investment Plan Review 4. CAT Fund Review 5. Lawton Chiles Endowment Fund Review 6. Florida PRIME Review 7. Appendix

Aon Hewitt | Retirement and Investment Investment advice and consulting services provided by Aon Hewitt Investment Consulting, Inc., an Aon Company. 2 Executive Summary

ƒ The major mandates each produced generally strong returns relative to their respective benchmarks over both short- and long-term time periods ending September 30, 2017. ƒ The Pension Plan outperformed its Performance Benchmark during the third quarter and over the trailing one-, three-, five-, ten-, and fifteen-year periods. – Over the long-term, Global Equity is the leading source of value added, followed by Strategic Investments, Real Estate and Fixed Income. – Over the trailing one-, three-. five-, and ten-year periods, the Pension Plan’s return ranked in the top quartile of the TUCS Top Ten Defined Benefit Plan universe. ƒ The FRS Investment Plan has outperformed the Total Plan Aggregate Benchmark over the trailing one-, three-, five-, and ten-year periods. ƒ The Lawton Chiles Endowment Fund outperformed its benchmark during the third quarter and over the trailing one-, three-, five-, and ten-year periods. ƒ The CAT Funds’ performance is strong over both short-term and long-term periods, outperforming the benchmark over the trailing one-, three-, five-, and ten-year time periods. ƒ Florida PRIME has continued to outperform its benchmark over both short and long time periods.

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Aon Hewitt | Retirement and Investment Investment advice and consulting services provided by Aon Hewitt Investment Consulting, Inc., an Aon Company. 4 Pension Plan: Executive Summary

ƒ The Pension Plan assets totaled $157.6 billion as of September 30, 2017 which represents a $4.0 billion increase since last quarter. ƒ The Pension Plan, when measured against the Performance Benchmark, outperformed its return during the third quarter and over the trailing one-, three-, five-, ten-, and fifteen-year periods. ƒ Relative to the Absolute Nominal Target Rate of Return, the Pension Plan underperformed over the trailing ten-year period, and outperformed over the trailing one-, three-, five-, fifteen-, twenty-five-, and thirty-year time periods. ƒ The Pension Plan is well-diversified across six broad asset classes, and each asset class is also well-diversified. – Public market asset class investments do not significantly deviate from their broad market-based benchmarks, e.g., sectors, market capitalizations, global regions, credit quality, duration, and security types. – Private market asset classes are well-diversified by vintage year, geography, property type, sectors, investment vehicle/asset type, and investment strategy. – Asset allocation is monitored on a daily basis to ensure that the actual asset allocation of the Pension Plan remains close to the long-term policy targets set forth in the Investment Policy Statement. ƒ Aon Hewitt Investment Consulting and SBA staff revisit the plan design annually through informal and formal asset allocation and asset liability reviews. ƒ Adequate liquidity exists within the asset allocation to pay the monthly obligations of the Pension Plan consistently and on a timely basis.

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FRS Pension Plan Change in Market Value Periods Ending 9/30/2017

Summary of Cash Flows

Third Quarter Fiscal YTD*

Beginning Market Value $153,573,300,932 $153,573,300,932 +/- Net Contributions/(Withdrawals) $(1,889,325,543) $(1,889,325,543) Investment Earnings $5,876,596,851 $5,876,596,851

= Ending Market Value $157,560,572,240 $157,560,572,240 Net Change $3,987,271,308 $3,987,271,308

*Period July 2017 – September 2017

Aon Hewitt | Retirement and Investment Investment advice and consulting services provided by Aon Hewitt Investment Consulting, Inc., an Aon Company. 6 Asset Allocation as of 9/30/2017 Total Fund Assets = $157.6 Billion

* Global Equity became an asset class in July 2010. The historical return series prior to July 2010 was derived from the underlying Domestic Equities, Foreign Equities, and Global Equities components.

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FRS Pension Plan Investment Results Periods Ending 9/30/2017

Total FRS Pension Plan Performance Benchmark Absolute Nominal Target Rate of Return

20.0

15.0 13.8 12.8

10.0 9.3 8.4 8.5 8.1 7.5 7.2 6.8 6.8 6.9 6.2 6.3 5.6 4.9 5.0 3.8 3.6

1.9 Annualized Return (%) (%) Annualized Return 0.0

-5.0 Quarter 1-Year 3-Year 5-Year 10-Year 15-Year

Aon Hewitt | Retirement and Investment Investment advice and consulting services provided by Aon Hewitt Investment Consulting, Inc., an Aon Company. 8 FRS Pension Plan Investment Results Periods Ending 9/30/2017

Long-Term FRS Pension Plan Performance Results vs. SBA's Long-Term Investment Objective 12.0

Total FRS Pension Plan Absolute Nominal Target Rate of Return 10.0

8.4 8.6 8.0 7.2 6.8 6.8 6.9

6.0

4.0 Annualized Return (%) Annualized Return (%) 2.0

0.0 20-Years 25-Year 30-Year

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Comparison of Asset Allocation (TUCS Top Ten) As of 9/30/2017

FRS Pension Plan vs. Top Ten Defined Benefit Plans

FRS TOTAL FUND TUCS TOP TEN Cash Other Strategic 3.3% 0.0% Investments Cash 8.3% 0.8%

Alternatives Private Equity 22.4% 6.5% Global Equity** 46.0%

Real Estate 8.7% Global Equity* 57.5% Fixed Income 18.1% Real Estate 7.2%

Fixed Income 21.1%

*Global Equity Allocation: 26.4% Domestic Equities; 25.2% Foreign Equities; **Global Equity Allocation: 28.4% Domestic Equities; 17.5% Foreign 5.6% Global Equities; 0.4% Global Equity Liquidity Account. Percentages are Equities. of the Total FRS Fund. Note: The TUCS Top Ten Universe includes $1,474.0 billion in total assets. The median fund size was $146.3 billion and the average fund size was $147.4 billion. Note: Due to rounding, percentage totals displayed may not sum perfectly. Aon Hewitt | Retirement and Investment Investment advice and consulting services provided by Aon Hewitt Investment Consulting, Inc., an Aon Company. 10 FRS Results Relative to TUCS Top Ten Defined Benefit Plans Periods Ending 9/30/2017

Total FRS (Gross) Top Ten Median Defined Benefit Plan Fund (Gross) 25.0

20.0

14.2 15.0 12.8

9.7 10.0 9.1 7.9 7.4 5.9 5.6 5.0 3.9 3.9

Rate of Return (%) (%) Return of Rate 0.0

-5.0

-10.0

-15.0 Quarter 1-Year 3-Year 5-Year 10-Year

Note: The TUCS Top Ten Universe includes $1,474.0 billion in total assets. The median fund size was $146.3 billion and the average fund size was $147.4 billion.

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Top Ten Defined Benefit Plans FRS Universe Comparison (TUCS) Periods Ending 9/30/2017

Total FRS Top Ten Median Defined Benefit Plan Universe

15.0

13.0

11.0

9.0

7.0

5.0 Rate of Return (%) of Return Rate 3.0

1.0

-1.0 1-Year 3-Year 5-Year 10-Year

FRS Percentile Ranking 1 25 25 5

Note: The TUCS Top Ten Universe includes $1,474.0 billion in total assets. The median fund size was $146.3 billion and the average fund size was $147.4 billion.

Aon Hewitt | Retirement and Investment Investment advice and consulting services provided by Aon Hewitt Investment Consulting, Inc., an Aon Company. 12 Investment Plan: Executive Summary

ƒ The FRS Investment Plan outperformed the Total Plan Aggregate Benchmark over the trailing one-, three-, five-, and ten-year periods. This suggests strong relative performance of the underlying fund options in which participants are investing.

ƒ The FRS Investment Plan’s total expense ratio is slightly higher, on average, when compared to a defined contribution peer group and is lower than the average corporate and public defined benefit plan, based on year-end 2016 data. The total FRS Investment Plan expense ratio includes investment management fees, as well as administration, communication and education costs. Communication and education costs are not charged to FRS Investment Plan members; however, these and similar costs may be charged to members of plans within the peer group.

ƒ Management fees are lower than the median as represented by Morningstar’s mutual fund universe for every investment category.

ƒ The FRS Investment Plan offers an appropriate number of fund options that span the risk and return spectrum.

ƒ The Investment Policy Statement is revisited periodically to ensure that the structure and guidelines of the FRS Investment Plan are appropriate, taking into consideration the FRS Investment Plan’s goals and objectives.

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Total Investment Plan Returns & Cost

Periods Ending 9/30/2017*

One-Year Three-Year Five-Year Ten-Year FRS Investment Plan 13.3% 6.9% 8.0% 4.8% Total Plan Aggregate Benchmark** 12.6% 6.6% 7.6% 4.4% FRS Investment Plan vs. Total Plan Aggregate 0.7 0.3 0.4 0.4 Benchmark

Periods Ending 12/31/2016*** Five-Year Average Five-Year Net Expense Return**** Value Added Ratio FRS Investment Plan 7.2% 0.1% 0.33%***** Peer Group 8.2 0.2 0.26 FRS Investment Plan vs. Peer Group -1.0 -0.1 0.07

*Returns shown are net of fees. **Aggregate benchmark returns are an average of the individual portfolio benchmark returns at their actual weights. ***Source: 2016 CEM Benchmarking Report. Peer group for the Five-Year Average Return and Value Added represents the U.S. Median plan return based on the CEM 2016 Survey that included 145 U.S. defined contribution plans with assets ranging from $72 million to $49.6 billion. Peer group for the Expense Ratio represents a custom peer group for FSBA of 17 DC plans including corporate and public plans with assets between $2.3 - $15.5 billion. ****Returns shown are gross of fees. *****The total FRS Investment Plan expense ratio includes investment management fees, as well as administration, communication and education costs. These latter costs are not charged to FRS Investment Plan members; however, these and similar costs may be charged to members of plans within the peer group utilized above.

Aon Hewitt | Retirement and Investment Investment advice and consulting services provided by Aon Hewitt Investment Consulting, Inc., an Aon Company. 14 CAT Fund: Executive Summary

ƒ Returns on an absolute basis continue to be modest given the current low interest rate environment. ƒ Performance on a relative basis has been favorable over both short- and long-term periods, as the CAT Funds outperformed during the quarter and over the trailing one-, three-, five-, and ten-year time periods. ƒ The CAT Funds are adequately diversified across issuers within the short-term bond market. ƒ The Investment Policy Statement appropriately constrains the CAT Funds to invest in short-term and high quality bonds to minimize both interest rate and credit risk. ƒ Adequate liquidity exists to address the cash flow obligations of the CAT Funds. ƒ The Investment Policy Statement is revisited periodically to ensure that the structure and guidelines of the CAT Funds are appropriate, taking into consideration the CAT Funds’ goals and objectives.

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CAT Funds Investment Results Periods Ending 9/30/2017

CAT Operating Fund* Performance Benchmark** Rate of Return (%) of Return Rate

CAT 2013 A Operating Fund Performance Benchmark** Rate of Return (%) Return of Rate

CAT 2016 A Operating Fund Performance Benchmark** Rate of Return (%) Return of Rate

*CAT Operating Fund: Beginning March 2008, the returns for the CAT Fund reflect marked-to-market returns. Prior to that time, cost-based returns are used. **Performance Benchmark: The CAT Fund was benchmarked to the IBC First Tier through February 2008. From March 2008 to December 2009, it was the Merrill Lynch 1-Month LIBOR. From January 2010 to June 2010, it was a blend of the average of the 3-Month Treasury Bill rate and the iMoneyNet First Tier Institutional Money Market Funds Gross Index. From July 2010 to September 2014, it was a blend of the average of the 3-Month Treasury Bill rate and the iMoneyNet First Tier Institutional Money Market Funds Net Index. Effective October 2014, it is a blend of the average of the Merrill Lynch 1-Yr US Treasury Bill Index and the iMoneyNet First Tier Institutional Money Market Funds Net Index. Aon Hewitt | Retirement and Investment Investment advice and consulting services provided by Aon Hewitt Investment Consulting, Inc., an Aon Company. 16 Lawton Chiles Endowment Fund: Executive Summary

ƒ Established in July 1999, the Lawton Chiles Endowment Fund (LCEF) was created to provide a source of funding for child health and welfare programs, elder programs and research related to tobacco use. – The investment objective is to preserve the real value of the net contributed principal and provide annual cash flows for appropriation. – The Endowment’s investments are diversified across various asset classes including global equity, fixed income, inflation-indexed bonds (TIPS) and cash. ƒ The Endowment assets totaled $731.9 million as of September 30, 2017. ƒ The Endowment’s return outperformed its Target over the quarter and the trailing one-, three-, five-, and ten-year time periods.

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Asset Allocation as of 9/30/2017 Total LCEF Assets = $731.9 Million

Aon Hewitt | Retirement and Investment Investment advice and consulting services provided by Aon Hewitt Investment Consulting, Inc., an Aon Company. 18 LCEF Investment Results Periods Ending 9/30/2017

Total LCEF Performance Benchmark

25.0

20.0 15.3 15.0 13.1

10.0 8.4 7.4 7.2 6.2 5.0 4.6 4.1 4.2 5.0

0.0

-5.0 Annualized Return (%) Annualized Return (%) -10.0

-15.0 Quarter 1-Year 3-Year 5-Year 10-Year

Aon Hewitt | Retirement and Investment Investment advice and consulting services provided by Aon Hewitt Investment Consulting, Inc., an Aon Company. 19

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Aon Hewitt | Retirement and Investment Investment advice and consulting services provided by Aon Hewitt Investment Consulting, Inc., an Aon Company. 20 Florida PRIME: Executive Summary

ƒ The purpose of Florida PRIME is safety, liquidity, and competitive returns with minimal risk for participants. ƒ The Investment Policy Statement appropriately constrains Florida PRIME to invest in short-term and high quality bonds to minimize both interest rate and credit risk. ƒ Florida PRIME is adequately diversified across issuers within the short-term bond market, and adequate liquidity exists to address the cash flow obligations of Florida PRIME. ƒ Performance of Florida PRIME has been strong over short- and long-term time periods, outperforming its performance benchmark during the third quarter and over the trailing one-, three-, five-, and ten-year time periods. ƒ As of September 30, 2017, the total market value of Florida PRIME was $8.0 billion. ƒ Aon Hewitt Investment Consulting, in conjunction with SBA staff, compiles an annual best practices report that includes a full review of the Investment Policy Statement, operational items, and investment structure for Florida PRIME.

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Florida PRIME Investment Results Periods Ending 9/30/2017

FLFL PRIME YiYieldeld 30-Day30-Day AAverageverage S&P AAA & AA GIP All 30-Day30-Day Net Yield IndexIndex****

*Returns less than one year are not annualized. **S&P AAA & AA GIP All 30-Day Net Yield Index for all time periods shown.

Aon Hewitt | Retirement and Investment Investment advice and consulting services provided by Aon Hewitt Investment Consulting, Inc., an Aon Company. 22 Florida PRIME Risk vs. Return 5 Years Ending 9/30/2017

Florida PRIME

1 M LIBOR

S&P US AAA & AA Rated GIP All 30-Day Net

90-Day T-Bill

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Return Distribution Periods Ending 9/30/2017

Aon Hewitt | Retirement and Investment Investment advice and consulting services provided by Aon Hewitt Investment Consulting, Inc., an Aon Company. 24 Standard Deviation Distribution Periods Ending 9/30/2017

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Appendix

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FRS Investment Plan Costs

Average Mutual Fund Investment Category Investment Plan Fee* Fee**

Large Cap Equity 0.15% 0.84%

Small-Mid Cap Equity 0.59% 1.03%

International Equity 0.31% 1.05%

Diversified Bonds 0.15% 0.58%

Target Date 0.12% 0.64%

Money Market 0.06% 0.18%

*Average fee of multiple products in category as of 9/30/2017. **Source: AHIC’s annual mutual fund expense analysis as of 12/31/2016.

Aon Hewitt | Retirement and Investment Investment advice and consulting services provided by Aon Hewitt Investment Consulting, Inc., an Aon Company. 28 Investment Plan Fiscal Year End Assets Under Management

By Fiscal Year ($ millions)

Source: Investment Plan Administrator

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Investment Plan Membership

*Period Ending 9/30/2017 Source: Investment Plan Administrator

Aon Hewitt | Retirement and Investment Investment advice and consulting services provided by Aon Hewitt Investment Consulting, Inc., an Aon Company. 30 Florida Hurricane Catastrophe Fund Background

ƒ The purpose of the Florida Hurricane Catastrophe Fund (FHCF) is to provide a stable, ongoing and timely source of reimbursement to insurers for a portion of their hurricane losses. ƒ Both the CAT Fund (Operating Fund) and the CAT 2013 A Fund are internally managed portfolios benchmarked to a blend of the average of the Merrill Lynch 1-Yr US Treasury Bill Index and the iMoneyNet First Tier Institutional Money Market Funds Net Index. ƒ As of September 30, 2017, the total value of all FHCF accounts was $17.0 billion.

Aon Hewitt | Retirement and Investment Investment advice and consulting services provided by Aon Hewitt Investment Consulting, Inc., an Aon Company. 31

CAT Operating Fund Characteristics Period Ending 9/30/2017

Maturity Analysis 1 to 30 Days 38.42% 31 to 60 Days 11.01 61 to 90 Days 5.85 91 to 120 Days 1.42 121 to 150 Days 6.74 151 to 180 Days 4.37 181 to 270 Days 7.05 271 to 365 Days 12.43 366 to 455 Days 2.49 >= 456 Days 10.22 Total % of Portfolio: 100.00%

Bond Rating Analysis AAA 46.21% AA 15.29 A 38.50 Baa 0.00 Other 0.00 Total % of Portfolio 100.00%

Aon Hewitt | Retirement and Investment Investment advice and consulting services provided by Aon Hewitt Investment Consulting, Inc., an Aon Company. 32 CAT 2013 A Fund Characteristics Period Ending 9/30/2017

Maturity Analysis 1 to 30 Days 12.82% 31 to 60 Days 4.43 61 to 90 Days 3.32 91 to 120 Days 1.26 121 to 150 Days 9.28 151 to 180 Days 4.64 181 to 270 Days 6.62 271 to 365 Days 37.90 366 to 455 Days 3.32 >= 456 Days 16.41 Total % of Portfolio: 100.00%

Bond Rating Analysis AAA 73.67% AA 12.64 A13.69 Baa 0.00 Other 0.00 Total % of Portfolio 100.00%

Aon Hewitt | Retirement and Investment Investment advice and consulting services provided by Aon Hewitt Investment Consulting, Inc., an Aon Company. 33

CAT 2016 A Fund Characteristics Period Ending 9/30/2017

Maturity Analysis 1 to 30 Days 22.24% 31 to 60 Days 8.99 61 to 90 Days 8.25 91 to 120 Days 3.10 121 to 150 Days 3.73 151 to 180 Days 0.59 181 to 270 Days 9.53 271 to 365 Days 20.79 366 to 455 Days 2.08 >= 456 Days 20.70 Total % of Portfolio: 100.00%

Bond Rating Analysis AAA 68.60% AA 12.98 A 18.42 Baa 0.00 Other 0.00 Total % of Portfolio 100.00%

Aon Hewitt | Retirement and Investment Investment advice and consulting services provided by Aon Hewitt Investment Consulting, Inc., an Aon Company. 34 Florida PRIME Characteristics Quarter Ending 9/30/2017

Cash Flows as of 9/30/2017 Third Quarter Fiscal YTD* Opening Balance $9,329,349,587 $9,329,349,587 Participant Deposits $2,939,117,513 $2,939,117,513 Gross Earnings $30,151,547 $30,151,547 Participant Withdrawals ($4,254,907,968) ($4,254,907,968) Fees ($736,465) ($736,465) Closing Balance (9/30/2017) $8,042,974,215 $8,042,974,215

Change ($1,286,375,372) ($1,286,375,372)

*Period July 2017 – September 2017

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Florida PRIME Characteristics Quarter Ending 9/30/2017

Portfolio Composition

Bank Instrument - Fixed

Repurchase Agreements

Corporate Commercial Paper - Fixed

Bank Instrument - Floating

Mutual Funds - Money Market

Asset-Backed Commercial Paper - Fixed

Corporate Notes - Floating

Corporate Commercial Paper - Floating

Asset-Backed Commercial Paper - Floating

Aon Hewitt | Retirement and Investment Investment advice and consulting services provided by Aon Hewitt Investment Consulting, Inc., an Aon Company. 36 Florida PRIME Characteristics Period Ending 9/30/2017

Effective Maturity Schedule 1-7 Days 38.2% 8 - 30 Days 21.3% 31 - 90 Days 23.7% 91 - 180 Days 10.2% 181+ Days 6.6% Total % of Portfolio: 100.0%

S & P Credit Quality Composition A-1+ 70.6% A-1 29.4% Total % of Portfolio: 100.0%

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FRS Pension Plan | Third Quarter 2017 Quarterly Investment Review Visit the Aon Hewitt Retirement and Investment Blog (http://retirementandinvestmentblog.aon.com); sharing our best thinking. (This page is left blank intentionally)

Table of Contents

1 Market Environment 1 2 Total Fund 17 3 Global Equity 27 4 Domestic Equities 29 5 Foreign Equities 33 6 Global Equities 37 7 Fixed Income 39 8 Private Equity 43 9 Real Estate 47 10 Strategic Investments 51 11 Cash 53 12 Appendix 55 (This page is left blank intentionally)

Market Environment

1 Market Highlights

SHORT TERM RETURNS AS OF 09/30/2017 25% 22.5% Third Quarter 2017 One-Year 20.7% 19.1% 20% 18.6%

15% 8.9% 10% 7.9% 5.7% 4.5% 5.4% 5% 2.2% 2.9% 2.0% 2.5% 0.8% 0.1% 0.6% 0% -0.3% -5% -6.1% -10% S&P 500 Russell 2000 MSCI EAFE MSCI Emerging Bloomberg Barclays Bloomberg Barclays Bloomberg Barclays Bloomberg Barclays Bloomberg Markets Aggregate Long Gov't Long Credit High Yield Commodity Index Source: Russell, MSCI, Bloomberg Barclays, Bloomberg

LONG TERM ANNUALIZED RETURNS AS OF 09/30/2017 20% Five-Year Ten-Year 14.2% 13.8% 15%

10% 7.8% 8.4% 7.6% 7.8% 7.4% 6.8% 6.4% 4.0% 4.3% 4.7% 5% 2.9% 1.3% 1.3% 2.1% 0%

-5%

-10% -6.8% -10.5% -15% S&P 500 Russell 2000 MSCI EAFE MSCI Emerging Bloomberg Barclays Bloomberg Barclays Bloomberg Barclays Bloomberg Barclays Bloomberg Markets Aggregate Long Gov't Long Credit High Yield Commodity Index Source: Russell, MSCI, Bloomberg Barclays, Bloomberg

2

Market Highlights

ReturnsÿofÿtheÿMajorÿCapitalÿMarkets PeriodÿEndingÿ09/30/2017 Year-to- ThirdÿQuarter Date 1-Year 3-Year1 5-Year1 10-Year1 Equity MSCI AllÿCountryÿWorldÿIMI 5.32% 17.24% 18.73% 7.72% 10.42% 4.18% MSCI AllÿCountryÿWorld 5.18% 17.25% 18.65% 7.43% 10.20% 3.88% DowÿJonesÿU.S.ÿTotalÿStockÿMarket 4.57% 13.95% 18.66% 10.69% 14.15% 7.64% Russellÿ3000 4.57% 13.91% 18.71% 10.74% 14.23% 7.57% S&Pÿ500 4.48% 14.24% 18.61% 10.81% 14.22% 7.44% Russellÿ2000 5.67% 10.94% 20.74% 12.18% 13.79% 7.85% MSCI AllÿCountryÿWorldÿex-U.S.ÿIMI 6.27% 21.47% 19.55% 5.16% 7.32% 1.59% MSCI AllÿCountryÿWorldÿex-U.S. 6.16% 21.13% 19.61% 4.70% 6.97% 1.28% MSCI EAFE 5.41% 19.96% 19.10% 5.04% 8.38% 1.34% MSCI EAFEÿ(LocalÿCurrency) 3.36% 11.16% 19.02% 7.87% 12.26% 2.62% MSCI EmergingÿMarkets 7.89% 27.78% 22.46% 4.90% 3.99% 1.32% FixedÿIncome BloombergÿBarclaysÿGlobalÿAggregate 1.76% 6.25% -1.26% 1.30% 0.48% 3.31% BloombergÿBarclaysÿAggregate 0.85% 3.14% 0.07% 2.71% 2.06% 4.28% BloombergÿBarclaysÿLongÿGov't 0.59% 6.06% -6.15% 4.84% 2.87% 6.83% BloombergÿBarclaysÿLongÿCredit 2.17% 8.75% 2.88% 5.98% 4.71% 7.62% BloombergÿBarclaysÿLongÿGov't/Credit 1.53% 7.65% -0.79% 5.45% 3.94% 7.36% BloombergÿBarclaysÿUSÿTIPS 0.86% 1.72% -0.72% 1.62% 0.02% 3.90% BloombergÿBarclaysÿHighÿYield 1.98% 7.00% 8.88% 5.83% 6.37% 7.84% CitiÿGroupÿNon-U.S.ÿWGBI 2.57% 8.63% -3.14% 0.47% -1.07% 2.67% JPÿMorganÿEMBI Globalÿ(EmergingÿMarkets) 2.38% 8.73% 4.15% 6.05% 4.32% 7.28% Commodities BloombergÿCommodityÿIndex 2.52% -2.87% -0.29% -10.41% -10.47% -6.83% GoldmanÿSachsÿCommodityÿIndex 7.22% -3.76% 1.79% -19.56% -14.38% -10.02% HedgeÿFunds HFRI Fund-WeightedÿComposite2 2.06% 5.70% 6.95% 3.34% 4.67% 3.06% HFRI FundÿofÿFunds2 2.24% 5.52% 6.43% 2.21% 3.84% 1.07% RealÿEstate NAREITÿU.S.ÿEquityÿREITS 0.94% 3.67% 0.67% 9.86% 9.69% 5.83% NCREIFÿNFI -ÿODCE3 1.86% 5.43% 7.66% 10.85% 11.59% 5.03% PrivateÿEquity BurgissÿPrivateÿiQÿGlobalÿPrivateÿEquity4 NA NA 12.92% 9.63% 11.68% 8.98% Infrastructure FTSEÿGlobalÿCoreÿInfrastructureÿIndex 2.20% 11.92% 8.76% 3.27% 6.97% 3.66%

MSCI Indices showÿnetÿreturns. Allÿotherÿindices showÿtotalÿreturns. 1 Periodsÿareÿannualized. 2 Latestÿ5 months ofÿHFRÿdataÿareÿestimatedÿbyÿHFRÿandÿmayÿchangeÿinÿtheÿfuture. 3ÿThirdÿquarterÿresultsÿare preliminary. 4ÿSource:ÿBurgissÿPrivateÿiQ.ÿBenchmarkÿisÿasÿofÿ03/31/2017.

3 Global Equity Markets

GLOBAL MSCI IMI INDEX RETURNS AS OF 09/30/2017 30% Third Quarter 2017 One-Year 25.9% 21.4% 19.6% 20% 18.7% 17.9% 15.4% 14.9% 13.8% 13.7%

10% 7.5% 7.2% 7.6% 5.3% 6.3% 5.6% 4.4% 4.4% 3.7%

0% -2.6%

-10% -8.2% ACWI IMI 48.3% 51.7% 6.0% 8.1% 3.2% 0.2% 15.4% 3.9% 11.5% ACWI ex-U.S. IMI USA IMI UK IMI Japan IMI Canada IMI Israel IMI Europe ex-UK IMI Pacific ex-Japan Emerging Source: MSCI IMI Markets IMI

Evidence of improving global growth and low inflation continued to sustain the global equity market rally over the last quarter. Moreover, markets were broadly unperturbed by heightened tensions between the U.S. and North Korea. Global equity markets returned 5.3% in Q3 2017 in U.S. dollar terms. The broad weakening of the U.S. dollar (1.7% in trade-weighted terms) led to a lower return of 4.5% in local currency terms.

All regions shown above generated positive returns with the exception of Israel which moved sharply lower over the quarter. Emerging markets (EM) were once again the strongest performers, returning 7.6% in the third quarter of 2017.

4

Global Equity Markets

MSCI ALL COUNTRY WORLD IMI INDEX MSCI ALL COUNTRY WORLD EX-U.S. IMI INDEX GEOGRAPHIC ALLOCATION AS OF 09/30/2017 GEOGRAPHIC ALLOCATION AS OF 09/30/2017 Pacific ex-Japan Canada 3.9% Israel 3.2% Japan 0.4% 8.1% Latin America Europe ex-UK Latin America UK Israel 3.0% 6.0% 0.2% 1.5% 31.9% Europe ex-UK 15.4%

Emerging Asia Emerging Markets Asia Markets 8.4% Japan 23.8% 17.4% 11.5% 16.7%

Eastern Eastern USA Europe, Middle Europe, Middle 51.7% East & Africa East & Africa Pacific ex-Japan Canada 1.6% 3.3% 8.1% 6.7% UK 12.4% Source: MSCI Source: MSCI

The two exhibits on this slide illustrate the percentage that each country/region represents of the global and international equity markets as measured by the MSCI All Country World IMI Index and the MSCI All Country World ex-U.S. IMI Index, respectively.

5 U.S. Equity Markets

RUSSELL STYLE RETURNS RUSSELL GICS SECTOR RETURNS AS OF 09/30/2017 AS OF 09/30/2017 Third Quarter 2017 Third Quarter 2017 25.0% 23.4% 30.0% 28.2% One-Year One-Year 26.9% 20.5% 21.0% 24.2% 18.7% 25.0% 20.0% 17.8% 21.5% 16.0% 20.0% 18.7% 15.0% 13.4% 16.1% 15.3% 15.0% 10.0% 8.0% 7.9% 6.2% 10.0% 6.8% 6.1% 5.3% 5.6% 5.5% 4.6% 5.1% 4.6% 4.9% 4.2% 5.0% 3.6% 5.0% 3.8% 3.3% 2.1% 1.8%

0.0% 0.0% Russell 31.6% 34.6% 14.7% 11.2% 3.8% 4.0% -1.0% -5.0% -1.9% 3000 Large Value Large Medium Medium Small Value Small Russell 18.9% 13.8% 13.4% 6.5% 5.8% 4.0% 11.0% 21.4% 5.1% Growth Value Growth Growth 3000 Technology Healthcare Cons. Disc Cons. Energy Materials & Producer Financial Utilities Source: Russell Indexes Source: Russell Indexes Staples Processing Durables Services

The Russell 3000 Index returned 4.6% during the third quarter and 18.7% over the one-year period.

During the third quarter, the technology sector continued to be the strongest performer, posting returns of 8.0%. Consumer staples were the weakest and the only sector which posted negative returns in Q3 2017 by falling 1.9%.

Performance was positive across the market capitalization spectrum over the quarter. Renewed expectations for U.S. tax reform, announced late in the quarter, provided a boost for small cap stocks which outperformed their large cap peers. However, despite the recent outperformance, small cap stocks still lagged large cap stocks since the start of the year. In general, growth stocks outperformed value stocks.

6

U.S. Fixed Income Markets

BLOOMBERG BARCLAYS U.S. AGGREGATE RETURNS BLOOMBERG BARCLAYS U.S. AGGREGATE RETURNS BY MATURITY AS OF 9/30/2017 BY QUALITY AND HIGH YIELD RETURNS AS OF 9/30/2017 2.0% 10.0% 8.9% Third Quarter 1.5% Third Quarter 1.5% One-Year 8.0% One-Year 1.0% 1.0% 0.9% 0.7% 0.6% 6.0% 0.4% 0.5% 0.3% 0.0% 4.0% 3.2% 0.0% 2.0% 1.4% 1.6% 2.0% 1.0% 1.3% -0.5% 0.6% 0.4% 0.0% -1.0% -1.0% -2.0% -0.7% -1.5% -1.3% 1-3 Yr. 3-5 Yr. 5-7 Yr. 7-10 Yr. >10 Yr. Aaa Aa A Baa High Yield Source: Bloomberg Barclays Source: Bloomberg Barclays The Bloomberg Barclays U.S. Aggregate Bond Index BLOOMBERG BARCLAYS U.S. AGGREGATE RETURNS returned 0.9% in the third quarter. Credit spreads BY SECTOR AS OF 9/30/2017 narrowed over the quarter which supported corporate 2.5% 2.2% Third Quarter 2.0% One-Year bond returns. Corporate bonds posted the highest return 1.5% 1.3% 1.0% at 1.3%, particularly outperforming government bonds 1.0% 0.9% 0.9% 0.8% 0.4% 0.3% 0.4% which had the lowest return of only 0.4%. 0.5% 0.1% 0.0% -0.5% -0.1% High yield bonds outperformed their investment grade -1.0% bond peers, returning nearly 2.0%. -1.5% -2.0% -1.6% Barclays 43.9% 25.6% 28.2% 0.5% 1.8% Long duration bonds outperformed intermediate and U.S. Agg. Gov't Corp. MBS ABS CMBS short duration bonds through the quarter. Source: Bloomberg Barclays

7 U.S. Fixed Income Markets

U.S. TREASURY YIELD CURVE U.S. 10-YEAR TREASURY AND TIPS YIELDS 5.0% 3.5% 9/30/2016 10Y TIPS Yield 3.0% 6/30/2017 4.0% 10Y Treasury Yield

2.5% 9/30/2017 3.0%

2.0% 2.0%

1.5% 1.0%

1.0% 0.0%

0.5% -1.0% 0.0% -2.0% 0 5 10 15 20 25 30 Sep 07 Sep 09 Sep 11 Sep 13 Sep 15 Sep 17 Maturity (Years) Source: U.S. Department of Treasury Source: U.S. Department of Treasury

The Treasury yield curve marginally flattened over the quarter, as yields of short maturity bonds inched higher while longer maturity bonds were relatively unchanged.

The 10-year U.S. Treasury yield ended the quarter at 2.3%, 2 basis points (bps) higher than at the start of the quarter. This was largely driven by higher breakeven inflation which moved 11 bps higher and offset the fall in real yields.

The 10-year TIPS yield fell by 9 bps over the quarter and ended the period at 0.5%.

8

European Fixed Income Markets

EUROZONE PERIPHERAL BOND SPREADS (10-YEAR SPREADS OVER GERMAN BUNDS)

20% Spain Italy Portugal Greece Ireland 16%

12%

8%

4%

0% Sep 12 Sep 13 Sep 14 Sep 15 Sep 16 Sep 17 Source: DataStream In the Eurozone, bond spreads were mixed across peripheral region. Spain’s government bond yields rose by 8 bps with the majority of the increase coming towards the end of the quarter as political instability due to Catalonian Independence referendum grew. Meanwhile, Portuguese government bond yields fell sharply after the rating agency Standard & Poor’s raised the nation’s credit rating to investment grade from junk status, resulting in the yield on 10 year Portuguese government debt ending 64 bps lower over Q3 2017. Meanwhile, the spread between Greek bonds and German Bunds moved 24 bps higher over the same period.

9 Credit Spreads

Spread (bps) 30/09/2017 30/06/2017 30/09/2016 Quarterly Change (bps) 1-Year Change (bps) U.S. Aggregate 38 43 47 -5 -9 Long Gov't 2 2 3 0 -1 Long Credit 149 157 195 -8 -46 Long Gov't/Credit 90 94 118 -4 -28 MBS 22 32 14 -10 8 CMBS 71 74 84 -3 -13 ABS 44 46 55 -2 -11 Corporate 101 109 138 -8 -37 High Yield 347 364 480 -17 -133 Global Emerging Markets 235 255 299 -20 -64 Source: Bloomberg Barclays

Improved risk appetite and a benign global credit backdrop saw spreads over U.S. Treasuries fall across all areas of the credit market. However, movement in U.S investment grade credit spreads were more muted.

Global emerging market bond spreads fell by the most over the quarter, narrowing by 20 bps. They were closely followed by high yield bonds, their fellow outperformers in the credit universe this year, which fell by 17 bps.

10

Currency

TRADE WEIGHTED U.S. DOLLAR INDEX U.S. DOLLAR RELATIVE TO EUR, GBP AND JPY (1997 = 100) REBASED TO 100 AT 09/30/2012 135 170 130 160 Stronger Dollar 150 125 Weaker Dollar 120 140 130 115 120 110 110 105 100 EUR/USD 100 90 GBP/USD JPY/USD 95 80 90 70 Sep 12 Sep 13 Sep 14 Sep 15 Sep 16 Sep 17 Sep 12 Sep 13 Sep 14 Sep 15 Sep 16 Sep 17 Source: Federal Reserve Source: DataStream

The U.S. dollar weakened by 1.7% on a trade-weighted basis over the quarter. Market expectations of a rate hike were lowered after a flurry of disappointing inflation releases, although the U.S. Federal Reserve (Fed) continued to believe that the factors suppressing inflation are transitory.

The U.S. dollar depreciated against all the major currencies with the exception of the Japanese yen. Bank of England officials indicated UK monetary policy struck a more hawkish tone in September which sent sterling 3.2% higher against the U.S. dollar. Despite a brief period of safe-haven flow activity amid escalating geopolitical tensions in the Korean peninsula, the yen fell by 0.2% against the U.S. dollar. Resilient economic data emanating from the Eurozone supported the euro’s 3.5% appreciation against the ‘greenback’.

11 Commodities

COMMODITY RETURNS AS OF 09/30/2017 -40.0% -30.0% -20.0% -10.0% 0.0% 10.0% 20.0% 30.0% 2.5% Bloomberg Commodity Index -0.3% Ex-Energy -0.2% 0.6% 9.8% Energy -2.9% Industrial Metals 9.9% 24.0% 2.3% Prec. Metals -6.6% -6.1% Agric. -11.1% Third Quarter 2017 Softs -0.7% One-Year -28.1% -9.5% Grains -5.5% -7.5% Livestock 24.4% Source: Bloomberg

A strong upturn in commodity prices over the quarter saw the Bloomberg Commodity Index return 2.5%, driven mainly by the rise in crude oil prices.

Over the quarter, the best performing segment was industrial metals with a return of 9.9%, closely followed by Energy (9.8%). Agriculture remained the laggard with a return of -6.1% which weighed on the overall index return.

Grains was the worst performing sector over the quarter with a return of -9.5%.

12

Hedge Fund Markets Overview

HEDGE FUND PERFORMANCE AS OF 09/30/2017 -2.0% 0.0% 2.0% 4.0% 6.0% 8.0% 10.0% 12.0% 14.0% 16.0% 1.1% Fixed Income/Convertible Arb. 6.4% 0.2% Global Macro -1.2% 3.5% Equity Hedge 11.0% 4.8% Emerging Markets 13.7% 1.8% Event-Driven 9.6% 1.3% Distressed-Restructuring 10.2% 1.4% Third Quarter 2017 Relative Value 6.0% One-Year 2.1% Fund-Weighted Composite Index 7.0% 2.2% Fund of Funds Composite Index 6.4% Note: Latest 5 months of HFR data are estimated by HFR and may change in the future. Source: HFR

Hedge fund performance was positive across all strategies in the third quarter.

The HFRI Fund-Weighted Composite Index and the HFRI Fund of Funds Composite Index produced returns of 2.1% and 2.2%, respectively, during the quarter.

Emerging market hedge funds continued to be the best performer, posting a return of 4.8% during the third quarter which brought the one-year return to 13.7%.

13 U.S. Commercial Real Estate Markets

PRIVATE VS. PUBLIC REAL ESTATE RETURNS CAP RATES BY PROPERTY TYPE AS OF 06/30/2017 9.5% 14.0% Private (NFI-ODCE Gross)* 11.6% Industrial Retail 12.0% Public (NAREIT Gross) 10.9% 9.9% 9.7% 8.5% 10.0% Apartment Office 7.7% 8.0% 5.8% 7.5% 6.0% 5.0% 4.0% 1.9% 6.5% 2.0% 0.9% 0.7% 0.0% Third Quarter 1-Year 3-Years 5-Years 10-Years 5.5% 2017 '08 '09 '10 '11 '12 '13 '14 '15 '16 '17 *Third quarter returns are preliminary Sources: NCREIF, NAREIT Sources: RCA, AHIC 6/30/2017 Returns continue to moderate. The trailing one-year return for U.S. core real estate was 7.7%* in the third quarter, down 242 bps from this time last year. While moderating, returns are now back in line with the sector’s long run average range of 7.0-9.0%. During the quarter, returns climbed slightly to 1.9%*, up 16 bps over Q2 but 21 bps lower year-on-year and 182 bps lower than 3Q2015. Income is now, and will continue to be, the larger driver of the sector’s total return. Continued moderation is expected. Property stocks are up 7.3% YTD, globally. In 3Q, global property stocks (FTSE EPRA/NAREIT Developed Index) posted modest gains (1.8%), with positive returns in each of the major regions. Both the Europe (4.9%) and Asia (2.0%) regions outperformed. The U.S. REIT market (FTSE NAREIT Equity REITs Index), while slightly positive (0.9%), underperformed on a relative basis during the quarter and also lags year to date. During the quarter, strong share price gains were seen in the Industrial, Data Center, Net Lease, and Storage sectors, with weakness in the Health Care and Mall sectors. Values for high quality assets have remained relatively stable; however, there is a wide disparity in relative valuations within the property sectors, with the overall U.S. REITs market ending the quarter trading at an approximate 2.0% premium. Despite the significant destructive impact of Hurricanes Harvey (Houston) and Irma (Florida), the negative financial impact to the REITs is expected to be minimal. Overall U.S. public REIT exposure is only approximately 3.0% to Houston, 5.0% to Florida and <0.5% to Puerto Rico. Pricing. The more typical relationship between deal volume and pricing has not moved in unison for almost two years now. While the reason varies by property type,in most cases, volume has moved lower while prices have moved higher. This indicates a continuing disconnect between buyers’ and sellers’ expectations, which has been evident in sales trends since volume peaked in 4Q2015. Cap rates, however, have remained at or near recent lows — that said, there is little expectation of them going lower. Capital flows remain robust. Private real estate dry powder globally (capital already allocated to new investments) now totals over $240.0bn; and far exceeds the peak of the last recession. The majority of the sector’s dry powder sits in opportunistic and value add funds, accounting for 41.0% and 24.0% of the total, respectively. Capital flows into U.S. commercial real estate, in particular, remain healthy and have not been disrupted by on-going global events as investors continue to favor the U.S. at this point in the cycle due to the maturity and liquidity of U.S. markets. Portfolio structure important. Overall, real estate fundamentals and pricing are at a mature point in the real estate cycle. Given that, it is important to ensure that risk mitigation strategies are incorporated into all portfolios’ structure. Preferred equity, secondaries, and debt structures are important investment considerations that can help mitigate medium term cyclical risks.

Sources: NCREIF, RCA, CBRE-EA, Aon Hewitt *Indicates preliminary NFI-ODCE data gross of fees

14

Private Equity Market Overview – Second Quarter 2017

LTM Global Private Equity-Backed Buyout Deal Volume Purchase Price Multiples – All Transactions Sizes

$600 Deal Value ($ Billions) 4,500 12.0 x 10.3x Number of Deals 4,000 9.8x 10.3x 10.0x $500 10.0 x 9.1 x 3,500 8.5 x 8.8 x 8.7x 8.8x 7.7 x 8.0 x

$400 3,000 #ofDeals

2,500 6.0 x $300 2,000 4.0 x

Value ($ Billions) $200 1,500 2.0 x 1,000 $100 0.0 x 500

$0 0 1Q09 4Q09 3Q10 2Q11 1Q12 4Q12 3Q13 2Q14 1Q15 4Q15 3Q16 2Q17 Senior Debt/EBITDA Sub Debt/EBITDA Equity/EBITDA Others Source: Preqin Source: S&P

Fundraising: In 2Q 2017, $162.0 billion was raised by 297 funds, which was up 8.7% on a capital basis and 11.2% by number of deals from the prior quarter. Dry powder stood at $1.3 trillion at the end of the quarter, up 3.7% and 31.1% compared to 1Q 2017 and the five year average, respectively 1. Buyout: Global private equity-backed buyout deals totaled $93.2 billion in 2Q 2017, which was up 67.9% and 7.5% from the prior quarter and five year average, respectively 1. At the end of 2Q 2017, the average purchase price multiple for all U.S. LBOs was 10.3x EBITDA, up from 10.2x as of the end of 1Q 2017. Large cap middle-market purchase price multiples stood at 10.3x, up compared to both 1Q 2017 and full year 2016 levels of 9.6x and 10.0x, respectively. The weighted average purchase price multiple across all European transaction sizes averaged 10.8x EBITDA on an LTM basis in 2Q 2017, down slightly from 10.9x in 1Q 2017. Purchase prices for transactions of €1.0 billion or more decreased from 11.8x in 1Q 2017 to 11.6x in the second quarter. Transactions between €500.0 million and €1.0 billion were down 0.1x from the end of 1Q 2017, and stood at 11.2x 2. Globally, exit value totaled $68.7 billion on 417 deals in 2Q 2017 compared to $49.9 billion on 437 deals in the prior quarter 1. Venture: During the second quarter, 1,152 venture backed transactions totaling $18.4 billion were completed, up on a capital basis from 1Q 2017’s total of $14.4 billion across 1,206 deals. This was 44.9% higher than the five-year average of $12.7 billion3. Total U.S. venture backed exit activity totaled $10.5 billion across 156 completed transactions in 2Q 2017, down from $14.6 billion across 196 exits in 1Q 2017 4. Mezzanine: 10 funds closed on $2.3 billion during the quarter, down from 1Q 2017’s total of $3.0 billion raised by 11 funds and the five year quarterly average of $4.7 billion. Estimated dry powder was $50.0 billion at the end of 2Q 2017, down from $51.6 billion in 1Q 2017 1. Fundraising activity remains robust with an estimated 66 funds in market targeting $14.3 billion of commitments 1. Distressed Debt: The LTM U.S. high-yield default rate was 2.2% as of June 2017, which was down from March 2017’s LTM rate of 3.9% 5. Distressed debt and bankruptcy restructuring activity totaled $105.9 billion during the first half of 2017, up 28.0% from 1H 2016. U.S. activity accounted for $55.7 billion in 1H 2017 and was up 123.2% from the same period last year 6. Secondaries: 10 funds raised $4.2 billion during the second quarter, down from $19.4 billion by nine funds in 1Q 2017 1. The average discount rate for all private equity sectors declined 0.2% quarter-over-quarter to 8.1% 7. Infrastructure: $5.3 billion of capital was raised by 11 funds in 2Q 2017 compared to $30.7 billion of capital closed on by 18 partnerships in 1Q 2017. At the end of the quarter, dry powder stood at $150.2 billion, up from 1Q 2017’s record total of $147.0 billion. Infrastructure managers completed 256 deals with an estimated aggregate deal value of $104.0 billion in 2Q 2017 compared to 372 deals totaling $216.9 billion a quarter ago 1. Natural Resources: During 2Q 2017, eight funds closed on $4.9 billion compared to three funds totaling $0.8 billion in 1Q 2017. Energy and utilities industry managers completed approximately 70 deals totaling an estimated $12.6 billion through 1H 2017, which represents 59.8% of 2016’s full year capital deployment 1. Sources: 1 Preqin 2 Standard & Poor’s 3 PWC / CB Insights MoneyTree Report 4 PitchBook/NVCA Venture Monitor 5 Fitch Ratings 6 Thomson Reuters 7 UBS Notes: FY: Fiscal year ended 12/31; YTD: Year to date; LTM: Last twelve months (aka trailing twelve months); PPM: Purchase Price Multiples: Total Purchase Price / EBITDA.

15 (This page is left blank intentionally)

16

Total Fund

 As of September 30, 2017 Highlights

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Total Fund As of September 30, 2017 Total Plan Asset Summary

Change in Market Value From July 1, 2017 to September 30, 2017 

  

 ($)

Millions 

  

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Return Summary







 





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As of September 30, 2017 Asset Allocation & Performance

Allocation Performance(%) Market 1 1 3 5 10 Value % Policy(%) Fiscal YTD Quarter Year Years Years Years ($) 7RWDO)XQG                Performance Benchmark 3.6 (43) 3.6 (43) 12.8 (35) 6.8 (45) 8.4 (44) 4.9 (61) Absolute Nominal Target Rate of Return 1.9 (98) 1.9 (98) 7.2 (93) 6.2 (68) 6.3 (91) 6.8 (1)

$OO3XEOLF3ODQV!%7RWDO)XQG0HGLDQ       *OREDO(TXLW\     5.5 19.8 8.6 11.3 5.2 Asset Class Target 5.3 5.3 18.8 7.8 10.5 4.4 'RPHVWLF(TXLWLHV               Asset Class Target 4.6 (49) 4.6 (49) 18.7 (33) 10.7 (20) 14.2 (15) 7.6 (20)

$OO3XEOLF3ODQV!%86(TXLW\6HJPHQW0HGLDQ       )RUHLJQ(TXLWLHV               Asset Class Target 6.3 (34) 6.3 (34) 19.6 (45) 5.3 (73) 7.4 (68) 1.6 (66)

$OO3XEOLF3ODQV!%,QWO(TXLW\6HJPHQW0HGLDQ       *OREDO(TXLWLHV         Benchmark 4.9 4.9 18.3 7.6 10.7 4.3 )L[HG,QFRPH                Asset Class Target 0.7 (92) 0.7 (92) 0.2 (81) 2.2 (88) 1.5 (91) 4.0 (84)

$OO3XEOLF3ODQV!%86)L[HG,QFRPH6HJPHQW0HGLDQ       3ULYDWH(TXLW\     4.2 17.9 13.4 15.1 9.1 Asset Class Target 4.0 4.0 21.8 10.8 14.8 9.8 5HDO(VWDWH                Asset Class Target 1.5 (57) 1.5 (57) 6.5 (68) 10.1 (59) 10.6 (77) 4.8 (37)

$OO3XEOLF3ODQV!%5HDO(VWDWH6HJPHQW0HGLDQ       6WUDWHJLF,QYHVWPHQWV          Short-Term Target 1.7 1.7 6.4 4.2 6.2 2.0 &DVK          iMoneyNet First Tier Institutional Money Market Funds Net Index 0.2 0.2 0.7 0.3 0.2 0.6

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 As of September 30, 2017 Plan Sponsor Peer Group Analysis

All Public Plans > $1B-Total Fund 









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Total Fund As of September 30, 2017 Universe Asset Allocation Comparison

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 Total Fund As of September 30, 2017 Attribution

Global Equity 58 Global Equity 47

Fixed Income 6 Fixed Income 7

Real Estate 10 Real Estate 12

-24 Private Equity Private Equity 1

Strategic Investments 27 Strategic Investments 19

-2 Cash AA* -3 Cash AA*

TAA 26 TAA 9

Other** 0 Other** 0

Total Fund 100 Total Fund 93

-100 -50 0 50 100 -100 -50 0 50 100 Basis Points Basis Points

1-Year Ending 9/30/2017 5-Year Ending 9/30/2017

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Total Fund As of September 30, 2017 Asset Allocation Compliance

Market Current Target Minimum Maximum Value Allocation Allocation Allocation Allocation ($) (%) (%) (%) (%) 7RWDO)XQG    *OREDO(TXLW\      )L[HG,QFRPH      3ULYDWH(TXLW\      5HDO(VWDWH      6WUDWHJLF,QYHVWPHQWV      &DVK     

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Global Equity

 Global Equity* As of September 30, 2017 Global Equity* Portfolio Overview

Current Allocation September 30, 2017 : $90,656M

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Domestic Equities

 Domestic Equities As of September 30, 2017 Domestic Equities Portfolio Overview

Current Allocation September 30, 2017 : $41,566M

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As of September 30, 2017 Plan Sponsor Peer Group Analysis

All Public Plans > $1B-US Equity Segment 







 Return







 Year 1 1 3 5 10 To 2016 2015 2014 Quarter Year Years Years Years Date  'RPHVWLF(TXLWLHV                    $VVHW&ODVV7DUJHW                  

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Foreign Equities

 Foreign Equities As of September 30, 2017 Foreign Equities Portfolio Overview

Current Allocation September 30, 2017 : $39,660M

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As of September 30, 2017 Plan Sponsor Peer Group Analysis

All Public Plans > $1B-Intl. Equity Segment 







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 Year 1 1 3 5 10 To 2016 2015 2014 Quarter Year Years Years Years Date  )RUHLJQ(TXLWLHV                    $VVHW&ODVV7DUJHW                  

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Global Equities

 Global Equities As of September 30, 2017 Global Equities Performance Summary

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Fixed Income

 Fixed Income As of September 30, 2017 Fixed Income Portfolio Overview

Current Allocation September 30, 2017 : $28,527M

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As of September 30, 2017 Plan Sponsor Peer Group Analysis

All Public Plans > $1B-US Fixed Income Segment 







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 Year 1 1 3 5 10 To 2016 2015 2014 Quarter Year Years Years Years Date  )L[HG,QFRPH                    $VVHW&ODVV7DUJHW                  

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Private Equity

 Private Equity As of September 30, 2017 Overview

FRS Private Equity by Market Value* Preqin Private Equity Strategies by Market Value** Other*** 10.3%

Other**** 37.7% LBO 46.8%

Venture Capital 20.7%

LBO 69.0%

VentureÿCapital 15.5%

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Private Equity Time-Weighted Investment Results

Private Equity Return Summary as of September 30, 2017 

        

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Private Equity Legacy Return Summary as of September 30, 2017       

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Private Equity Post Asset Class Return Summary as of September 30, 2017 

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 Private Equity Dollar-Weighted Investment Results As of September 30, 2017 Since Inception

25.0 20.0 13.3 12.2 15.0 9.1 10.9 9.9 10.0 4.4 5.0 0.0 -5.0

Rate (%) Rate of Return Private Equity Legacy Portfolio* Post-AC Portfolio**

Private Equity Target

As of September 30, 2017

Since Inception

25.0 20.0 13.2 13.4 13.3 12.3 15.0 9.1 10.0 4.4 5.0 0.0 -5.0

Rate (%) Rate of Return Private Equity Legacy Portfolio* Post-AC Portfolio**

Private Equity Secondary Target***

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Real Estate

 Real Estate As of June 30, 2017 Overview

NFI-ODCE FRS* Index*

Other** Other*** 15.6% Apartment 3.9% Apartment 22.4% 24.1%

Office 36.8%

Office Industrial 28.8% 14.1% Industrial 15.0%

Retail Retail 19.1% 20.2%

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Real Estate As of September 30, 2017 Real Estate Portfolio Overview

Current Allocation September 30, 2017 : $13,752M

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 Real Estate

Principal Investments Return Summary as of September 30, 2017           Return       

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Pooled Funds Return Summary as of September 30, 2017 

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REITs Return Summary as of September 30, 2017 

      

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Strategic Investments

 Strategic Investments As of September 30, 2017 Strategic Investments Portfolio Overview

Current Allocation September 30, 2017 : $13,112M

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Cash

 Cash As of September 30, 2017 Cash Performance Summary

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Appendix

 As of September 30, 2017 Appendix

Total FRS Assets 3HUIRUPDQFH%HQFKPDUN$FRPELQDWLRQRIWKH*OREDO(TXLW\7DUJHWWKH%DUFOD\V&DSLWDO86,QWHUPHGLDWH$JJUHJDWH,QGH[WKH3ULYDWH(TXLW\7DUJHW,QGH[ WKH5HDO(VWDWH,QYHVWPHQWV7DUJHW,QGH[WKH6WUDWHJLF,QYHVWPHQWV7DUJHW%HQFKPDUNDQGWKHL0RQH\1HW)LUVW7LHU,QVWLWXWLRQDO0RQH\0DUNHW)XQGV1HW ,QGH[7KHVKRUWWHUPWDUJHWSROLF\DOORFDWLRQVWRWKH6WUDWHJLF,QYHVWPHQWV5HDO(VWDWHDQG3ULYDWH(TXLW\DVVHWFODVVHVDUHIORDWLQJDQGEDVHGRQWKHDFWXDO DYHUDJHPRQWKO\EDODQFHRIWKH*OREDO(TXLW\DVVHWFODVV3OHDVHUHIHUWRVHFWLRQ9,,3HUIRUPDQFH0HDVXUHPHQWLQWKH)56'HILQHG%HQHILW3ODQ,QYHVWPHQW 3ROLF\6WDWHPHQWIRUPRUHGHWDLOVRQWKHFDOFXODWLRQRIWKH3HUIRUPDQFH%HQFKPDUN3ULRUWR2FWREHUWKH3HUIRUPDQFHEHQFKPDUNZDVDFRPELQDWLRQRI WKH*OREDO(TXLW\7DUJHWWKH%DUFOD\V$JJUHJDWH%RQG,QGH[WKH3ULYDWH(TXLW\7DUJHW,QGH[WKH5HDO(VWDWH,QYHVWPHQWV7DUJHW,QGH[WKH6WUDWHJLF ,QYHVWPHQWV7DUJHW%HQFKPDUNDQGWKHL0RQH\1HW)LUVW7LHU,QVWLWXWLRQDO0RQH\0DUNHW)XQGV1HW,QGH[7KHVKRUWWHUPWDUJHWSROLF\DOORFDWLRQVWRWKH6WUDWHJLF ,QYHVWPHQWV5HDO(VWDWHDQG3ULYDWH(TXLW\DVVHWFODVVHVDUHIORDWLQJDQGEDVHGRQWKHDFWXDODYHUDJHPRQWKO\EDODQFHRIWKH*OREDO(TXLW\DVVHWFODVV3ULRUWR -XO\WKH3HUIRUPDQFH%HQFKPDUNZDVDFRPELQDWLRQRIWKH5XVVHOO,QGH[WKH)RUHLJQ(TXLW\7DUJHW,QGH[WKH6WUDWHJLF,QYHVWPHQWV7DUJHW %HQFKPDUNWKH%DUFOD\V$JJUHJDWH%RQG,QGH[WKH5HDO(VWDWH,QYHVWPHQWV7DUJHW,QGH[WKH3ULYDWH(TXLW\7DUJHW,QGH[WKH%DUFOD\V86+LJK

Total Global Equity 3HUIRUPDQFH%HQFKPDUN$FXVWRPYHUVLRQRIWKH06&,$OO&RXQWU\:RUOG,QYHVWDEOH0DUNHW,QGH[DGMXVWHGWRH[FOXGHFRPSDQLHVGLYHVWHGXQGHUWKH SURYLVLRQVRIWKH3URWHFWLQJ)ORULGD V,QYHVWPHQWV$FW 3),$ 3ULRUWR-XO\WKHDVVHWFODVVEHQFKPDUNLVDZHLJKWHGDYHUDJHRIWKHXQGHUO\LQJ 'RPHVWLF(TXLWLHV)RUHLJQ(TXLWLHVDQG*OREDO(TXLWLHVKLVWRULFDOEHQFKPDUNV

Total Domestic Equities 3HUIRUPDQFH%HQFKPDUN7KH5XVVHOO,QGH[3ULRUWR-XO\WKHEHQFKPDUNZDVWKH:LOVKLUH6WRFN,QGH[3ULRUWR-DQXDU\WKH EHQFKPDUNZDVWKH:LOVKLUH6WRFN,QGH[H[7REDFFR3ULRUWR0D\WKHEHQFKPDUNZDVWKH:LOVKLUH6WRFN,QGH[3ULRUWR6HSWHPEHU WKHEHQFKPDUNZDVWKH6 36WRFN,QGH[ Total Foreign Equities 3HUIRUPDQFH%HQFKPDUN$FXVWRPYHUVLRQRIWKH06&,$&:,H[86,QYHVWDEOH0DUNHW,QGH[DGMXVWHGWRH[FOXGHFRPSDQLHVGLYHVWHGXQGHUWKH3),$3ULRUWR $SULOLWZDVWKH06&,$OO&RXQWU\:RUOG,QGH[H[86,QYHVWDEOH0DUNHW,QGH[3ULRUWR6HSWHPEHUWKHWDUJHWZDVWKH06&,$OO&RXQWU\:RUOG H[86)UHH,QGH[3ULRUWR1RYHPEHUWKHEHQFKPDUNZDV06&,(XURSH$XVWUDODVLDDQG)DU(DVW ($)( )RUHLJQ6WRFN,QGH[DQG,)&, (PHUJLQJ0DUNHWV,QGH[ZLWKDKDOIZHLJKWLQ0DOD\VLD3ULRUWR0DUFKWKHEHQFKPDUNZDVWKH($)(,QGH[

Total Global Equities 3HUIRUPDQFH%HQFKPDUN$JJUHJDWHGEDVHGRQHDFKXQGHUO\LQJPDQDJHU VLQGLYLGXDOEHQFKPDUN7KHFDOFXODWLRQDFFRXQWVIRUWKHDFWXDOZHLJKWDQGWKH EHQFKPDUNUHWXUQ7KHEHQFKPDUNVXVHGIRUWKHXQGHUO\LQJPDQDJHUVLQFOXGHERWKWKH06&,)6%$OO&RXQWU\:RUOGH[6XGDQH[,UDQ1HW,QGH[DQG06&,)6% $OO&RXQWU\:RUOGH[6XGDQH[,UDQ1HW,QYHVWDEOH0DUNHW,QGH[ ,0, 



As of September 30, 2017 Appendix

Total Fixed Income 3HUIRUPDQFH%HQFKPDUN7KH%DUFOD\V&DSLWDO86,QWHUPHGLDWH$JJUHJDWH,QGH[3ULRUWR2FWREHULWZDVWKH%DUFOD\V86$JJUHJDWH%RQG,QGH[ 3ULRUWR-XQHLWZDVWKH)L[HG,QFRPH0DQDJHPHQW$JJUHJDWH ),0$ 3ULRUWR-XO\WKHEHQFKPDUNZDVWKH)ORULGD+LJK

Total Private Equity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

Total Real Estate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

Total Strategic Investments 3HUIRUPDQFH%HQFKPDUN/RQJWHUPSOXVWKHFRQWHPSRUDQHRXVUDWHRILQIODWLRQRU&3,6KRUWWHUPDZHLJKWHGDJJUHJDWLRQRILQGLYLGXDOSRUWIROLROHYHO EHQFKPDUNV

Total Cash 3HUIRUPDQFH%HQFKPDUN7KHL0RQH\1HW)LUVW7LHU,QVWLWXWLRQDO0RQH\0DUNHW)XQGV1HW,QGH[3ULRUWR-XO\LWZDVWKHL0RQH\1HW)LUVW7LHU,QVWLWXWLRQDO 0RQH\0DUNHW)XQGV*URVV,QGH[3ULRUWR-XQHLWZDVWKHUHWXUQRIWKH0HUULOO/\QFK'D\ $XFWLRQ$YHUDJH 7UHDVXU\%LOO

 As of September 30, 2017 Appendix

Description of Benchmarks

Barclays Capital U.S. Intermediate Aggregate Bond Index $PDUNHWYDOXHZHLJKWHGLQGH[FRQVLVWLQJRI867UHDVXU\VHFXULWLHVFRUSRUDWHERQGVDQG PRUWJDJHUHODWHGDQGDVVHWEDFNHGVHFXULWLHVZLWKRQHWRWHQ\HDUVWRPDWXULW\DQGDQRXWVWDQGLQJSDUYDOXHRIPLOOLRQRUJUHDWHU

Consumer Price Index (CPI) 7KH&3,DQLQGH[FRQVLVWLQJRIDIL[HGEDVNHWRIJRRGVERXJKWE\WKHW\SLFDOFRQVXPHUDQGXVHGWRPHDVXUHFRQVXPHULQIODWLRQ

FTSE EPRA/NAREIT Developed Index $QLQGH[GHVLJQHGWRUHSUHVHQWJHQHUDOWUHQGVLQHOLJLEOHUHDOHVWDWHHTXLWLHVZRUOGZLGH5HOHYDQWUHDOHVWDWHDFWLYLWLHV DUHGHILQHGDVWKHRZQHUVKLSGLVSRVXUHDQGGHYHORSPHQWRILQFRPHSURGXFLQJUHDOHVWDWH7KLVLQGH[FRYHUVWKHIRXUSULPDU\FRUHDVVHWFODVVHV ,QGXVWULDO 5HWDLO2IILFHDQG$SDUWPHQW  iMoneyNet First Tier Institutional Money Market Funds Net Index $QDYHUDJHRIQRQJRYHUQPHQWDOLQVWLWXWLRQDOIXQGVWKDWGRQRWKROGDQ\VHFRQGWLHU VHFXULWLHV,WLQFOXGHVPRQH\PDUNHWPXWXDOIXQGVQHWRIIHHVWKDWLQYHVWLQFRPPHUFLDOSDSHUEDQNREOLJDWLRQVDQGVKRUWWHUPLQYHVWPHQWVLQWKHKLJKHVWUDWLQJV FDWHJRU\DQGLVRSHQWRFRUSRUDWLRQVDQGILGXFLDULHVRQO\

MSCI All Country World Investable Market Index $IUHHIORDWDGMXVWHGPDUNHWFDSLWDOL]DWLRQZHLJKWHGLQGH[WKDWLVGHVLJQHGWRPHDVXUHWKHHTXLW\PDUNHW SHUIRUPDQFHRIGHYHORSHGDQGHPHUJLQJPDUNHWV7KLVLQYHVWDEOHPDUNHWLQGH[FRQWDLQVFRQVWLWXHQWVIURPWKHODUJHPLGDQGVPDOOFDSVL]HVHJPHQWVDQG WDUJHWVDFRYHUDJHUDQJHDURXQGRIIUHHIORDWDGMXVWHGPDUNHWFDSLWDOL]DWLRQ

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As of September 30, 2017 Appendix

Description of Universes

Total Fund $XQLYHUVHFRPSULVHGRIWRWDOIXQGSRUWIROLRUHWXUQVQHWRIIHHVRISXEOLFGHILQHGEHQHILWSODQVFDOFXODWHGDQGSURYLGHGE\%1<0HOORQ 3HUIRUPDQFH 5LVN$QDO\WLFVDQG,QYHVWPHQW0HWULFV$JJUHJDWHDVVHWVLQWKHXQLYHUVHFRPSULVHGWULOOLRQDVRITXDUWHUHQGDQGWKHDYHUDJHPDUNHWYDOXH ZDVELOOLRQ

Domestic Equity $XQLYHUVHFRPSULVHGRIWRWDOGRPHVWLFHTXLW\SRUWIROLRUHWXUQVQHWRIIHHVRISXEOLFGHILQHGEHQHILWSODQVFDOFXODWHGDQGSURYLGHGE\%1< 0HOORQ3HUIRUPDQFH 5LVN$QDO\WLFV$JJUHJDWHDVVHWVLQWKHXQLYHUVHFRPSULVHGELOOLRQDVRITXDUWHUHQGDQGWKHDYHUDJHPDUNHWYDOXHZDVELOOLRQ

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Strategic Investments $QDSSURSULDWHXQLYHUVHIRUVWUDWHJLFLQYHVWPHQWVLVXQDYDLODEOH

 As of September 30, 2017 Appendix

Explanation of Exhibits

Quarterly and Cumulative Excess Performance 7KHYHUWLFDOD[LVH[FHVVUHWXUQLVDPHDVXUHRIIXQGSHUIRUPDQFHOHVVWKHUHWXUQRIWKHSULPDU\EHQFKPDUN 7KHKRUL]RQWDOD[LVUHSUHVHQWVWKHWLPHVHULHV7KHTXDUWHUO\EDUVUHSUHVHQWWKHXQGHUO\LQJIXQGV UHODWLYHSHUIRUPDQFHIRUWKHTXDUWHU

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As of September 30, 2017 Notes

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Table Of Contents

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FRS Investment Plan

 As of September 30, 2017 Asset Allocation & Performance

Allocation Performance(%) Market Year 1 1 3 5 10 Value % To Quarter Year Years Years Years ($) Date FRS Investment Plan 10,338,430,190 100.0 3.9 11.8 13.3 6.9 8.0 4.8 Total Plan Aggregate Benchmark 3.7 10.9 12.6 6.6 7.6 4.4

Blank Retirement Date 4,529,151,129 43.8

Blank )565HWLUHPHQW)XQG              Retirement Custom Index 2.7 (39) 7.6 (58) 6.7 (70) 4.2 (68) 4.0 (91) -

,05HWLUHPHQW,QFRPH 0) 0HGLDQ       )565HWLUHPHQW'DWH)XQG              2015 Retirement Custom Index 2.8 (41) 8.3 (80) 7.6 (76) 4.6 (85) 4.7 (95) -

,00L[HG$VVHW7DUJHW 0) 0HGLDQ       )565HWLUHPHQW'DWH)XQG              2020 Retirement Custom Index 3.2 (28) 9.9 (50) 9.7 (48) 5.3 (61) 6.1 (62) -

,00L[HG$VVHW7DUJHW 0) 0HGLDQ       )565HWLUHPHQW'DWH)XQG              2025 Retirement Custom Index 3.6 (27) 11.4 (46) 11.7 (45) 6.0 (63) 7.4 (58) -

,00L[HG$VVHW7DUJHW 0) 0HGLDQ       )565HWLUHPHQW'DWH)XQG              2030 Retirement Custom Index 4.0 (26) 12.7 (50) 13.4 (44) 6.6 (59) 8.7(52) -

,00L[HG$VVHW7DUJHW 0) 0HGLDQ       )565HWLUHPHQW'DWH)XQG              2035 Retirement Custom Index 4.3 (38) 13.9 (53) 14.8 (47) 7.0 (67) 9.7(47) -

,00L[HG$VVHW7DUJHW 0) 0HGLDQ       )565HWLUHPHQW'DWH)XQG              2040 Retirement Custom Index 4.6 (24) 14.9 (42) 16.1 (45) 7.4 (68) 10.0 (50) -

,00L[HG$VVHW7DUJHW 0) 0HGLDQ       )565HWLUHPHQW'DWH)XQG              2045 Retirement Custom Index 4.8 (26) 15.4 (42) 16.8 (35) 7.6 (68) 10.1 (55) -

,00L[HG$VVHW7DUJHW 0) 0HGLDQ       )565HWLUHPHQW'DWH)XQG              2050 Retirement Custom Index 4.8 (24) 15.4 (43) 16.8 (53) 7.6 (73) 10.1 (61) -

,00L[HG$VVHW7DUJHW 0) 0HGLDQ       )565HWLUHPHQW'DWH)XQG              2055 Retirement Custom Index 4.8 (32) 15.4 (55) 16.8 (66) 7.6 (85) 10.1 (74) -

,00L[HG$VVHW7DUJHW 0) 0HGLDQ       )565HWLUHPHQW'DWH)XQG      2060 Retirement Custom Index 4.8 (32) -----

,00L[HG$VVHW7DUJHW 0) 0HGLDQ      



As of September 30, 2017 Asset Allocation & Performance

Allocation Performance(%) Market Year 1 1 3 5 10 Value % To Quarter Year Years Years Years ($) Date Cash 937,618,959 9.1 0.3 (1) 0.9 (1) 1.1 (1) 0.6 (1) 0.4 (1) 0.7 (4)

,0867D[DEOH0RQH\0DUNHW 0) 0HGLDQ       )560RQH\0DUNHW)XQG               iMoneyNet 1st Tier Institutional Net Index 0.2 (20) 0.6 (19) 0.7 (19) 0.3 (21) 0.2 (18) 0.6 (10)

,0867D[DEOH0RQH\0DUNHW 0) 0HGLDQ       Real Assets 91,027,565 0.9 )56,QIODWLRQ$GMXVWHG0XOWL$VVHWV)XQG         FRS Custom Real Assets Index 2.7 5.1 4.0 2.0 -0.6 - Fixed Income 664,892,444 6.4 1.1 (5) 4.0 (2) 1.8 (17) 3.4 (1) 2.6 (9) 4.8 (8) Total Bond Index 1.0 (5) 3.6 (5) 1.4 (40) 3.1 (2) 2.4 (11) 4.4 (15)

,086,QWHUPHGLDWH,QYHVWPHQW*UDGH 0) 0HGLDQ       )5686%RQG(QKDQFHG,QGH[)XQG               Blmbg. Barc. U.S. Aggregate 0.8 (2) 3.1 (33) 0.1 (4) 2.7 (33) 2.1 (21) 4.3 (39)

,086/RQJ7HUP7UHDVXU\*RYW%RQG 0) 0HGLDQ       )56,QWHUPHGLDWH%RQG)XQG               Blmbg. Barc. U.S. Intermediate Aggregate 0.7 (17) 2.3 (29) 0.2 (91) 2.2 (23) 1.7 (40) 3.8 (31)

,086,QWHUPHGLDWH,QYHVWPHQW*UDGH 0) 0HGLDQ       )56&RUH3OXV%RQG)XQG              FRS Custom Core-Plus Fixed Income Index 1.1 (54) 3.8 (58) 1.6 (56) 3.3 (42) 3.2 (34) -

,086%URDG0DUNHW&RUH)L[HG,QFRPH 6$&) 0HGLDQ       Domestic Equity 2,786,158,307 26.9 4.9 (36) 13.8 (46) 19.9 (32) 11.3 (16) 14.6 (21) 8.3 (16) Total U.S. Equities Index 4.6 (45) 12.9 (56) 18.7 (42) 11.0 (19) 14.1 (34) 7.7 (26)

,0860XOWL&DS(TXLW\ 0) 0HGLDQ       )56866WRFN0DUNHW,QGH[)XQG               Russell 3000 Index 4.6 (51) 13.9 (55) 18.7 (49) 10.7 (34) 14.2 (32) 7.6 (35)

,086/DUJH&DS(TXLW\ 0) 0HGLDQ       )5686/DUJH&DS6WRFN)XQG              4.5 (48) 14.2 (41) 18.5 (46) 10.6 (32) 14.3 (34) -

,086/DUJH&DS(TXLW\ 6$&) 0HGLDQ       )56866PDOO0LG&DS6WRFN)XQG              FRS Custom Small/Mid Cap Index 4.7 (36) 11.0 (51) 17.8 (53) 11.2 (30) 11.4 (83) -

,08660,'&DS(TXLW\ 6$&) 0HGLDQ      

 As of September 30, 2017 Asset Allocation & Performance

Allocation Performance(%) Market Year 1 1 3 5 10 Value % To Quarter Year Years Years Years ($) Date International/Global Equity 781,130,958 7.6 6.2 (50) 22.4 (55) 20.1 (46) 6.4 (37) 9.3 (29) 3.0 (26) Total Foreign and Global Equities Index 6.1 (52) 20.9 (66) 19.5 (51) 5.5 (51) 8.4 (39) 1.9 (45)

,0,QWHUQDWLRQDO(TXLW\ 0) 0HGLDQ       )56)RUHLJQ6WRFN,QGH[)XQG               MSCI All Country World ex-U.S. IMI Index 6.3 (50) 21.5 (61) 19.6 (51) 5.2 (56) 8.2 (43) 1.5 (54)

,0,QWHUQDWLRQDO(TXLW\ 0) 0HGLDQ       )56*OREDO6WRFN)XQG               MSCI All Country World Index Net 5.2 (43) 17.3 (46) 18.6 (40) 7.4 (46) 10.2 (54) 3.8 (56)

,0*OREDO(TXLW\ 0) 0HGLDQ       )56)RUHLJQ6WRFN)XQG               MSCI All Country World ex-U.S. Index 6.2 (33) 21.1 (36) 19.7 (35) 5.0 (35) 7.4 (62) 1.3 (44)

,0,QWHUQDWLRQDO/DUJH&DS&RUH(TXLW\ 0) 0HGLDQ       FRS Self-Dir Brokerage Acct 548,450,827 5.3

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As of September 30, 2017 Asset Allocation & Performance

Performance(%) 2016 2015 2014 2013 2012 2011 2010 2009 2008 FRS Investment Plan 8.0 -0.9 4.9 15.2 10.5 0.7 10.6 18.4 -23.2 Total Plan Aggregate Benchmark 8.5 -1.3 4.9 14.6 9.7 0.9 10.2 16.8 -23.4

Blank Retirement Date

Blank )565HWLUHPHQW)XQG                  Retirement Custom Index 6.2 (48) -1.8 (95) 3.6 (90) 3.4 (96) 8.5 (74) 5.0 (1) 9.9 (80) 19.1 (84) -

,05HWLUHPHQW,QFRPH 0) 0HGLDQ          )565HWLUHPHQW'DWH)XQG                  2015 Retirement Custom Index 6.5 (50) -1.8 (92) 3.7 (92) 5.7 (88) 9.6 (88) 3.2 (1) 10.4 (85) 22.2 (65) -

,00L[HG$VVHW7DUJHW 0) 0HGLDQ          )565HWLUHPHQW'DWH)XQG                  2020 Retirement Custom Index 7.1 (31) -1.6 (82) 3.9 (88) 9.7 (75) 11.0 (74) 1.5 (21) 11.2 (86) 24.2 (58) -

,00L[HG$VVHW7DUJHW 0) 0HGLDQ          )565HWLUHPHQW'DWH)XQG                  2025 Retirement Custom Index 7.6 (19) -1.5 (75) 4.2 (91) 13.8 (74) 12.4 (73) -0.3 (26) 11.8 (93) 26.3 (65) -

,00L[HG$VVHW7DUJHW 0) 0HGLDQ          )565HWLUHPHQW'DWH)XQG                  2030 Retirement Custom Index 8.0 (36) -1.5 (63) 4.4 (83) 18.2 (52) 13.8 (53) -2.0 (49) 12.5 (91) 29.2 (47) -

,00L[HG$VVHW7DUJHW 0) 0HGLDQ          )565HWLUHPHQW'DWH)XQG                  2035 Retirement Custom Index 8.3 (46) -1.7 (63) 4.3 (85) 22.0 (38) 15.2 (46) -3.1 (47) 13.3 (89) 30.1 (57) -

,00L[HG$VVHW7DUJHW 0) 0HGLDQ          )565HWLUHPHQW'DWH)XQG                  2040 Retirement Custom Index 8.6 (45) -1.7 (66) 4.3 (84) 22.4 (48) 15.2 (50) -3.1 (38) 13.3 (85) 30.1 (53) -

,00L[HG$VVHW7DUJHW 0) 0HGLDQ          )565HWLUHPHQW'DWH)XQG                  2045 Retirement Custom Index 8.9 (37) -1.7 (59) 4.3 (83) 22.4 (60) 15.2 (68) -3.1 (26) 13.3 (89) 30.1 (63) -

,00L[HG$VVHW7DUJHW 0) 0HGLDQ          )565HWLUHPHQW'DWH)XQG                  2050 Retirement Custom Index 8.9 (37) -1.7 (62) 4.3 (82) 22.4 (53) 15.2 (58) -3.1 (20) 13.3 (87) 30.1 (70) -

,00L[HG$VVHW7DUJHW 0) 0HGLDQ          )565HWLUHPHQW'DWH)XQG               2055 Retirement Custom Index 8.9 (33)-1.7(68)4.3(80)22.4(72)15.2(75)----

,00L[HG$VVHW7DUJHW 0) 0HGLDQ          )565HWLUHPHQW'DWH)XQG  2060 Retirement Custom Index ------

,00L[HG$VVHW7DUJHW 0) 0HGLDQ         

 As of September 30, 2017 Asset Allocation & Performance

Performance(%) 2016 2015 2014 2013 2012 2011 2010 2009 2008 Cash 0.6 (1) 0.2 (4) 0.1 (1) 0.2 (1) 0.3 (1) 0.2 (1) 0.3 (2) 0.3 (34) 2.4 (41)

,0867D[DEOH0RQH\0DUNHW 0) 0HGLDQ          )560RQH\0DUNHW)XQG                   iMoneyNet 1st Tier Institutional Net Index 0.3 (24) 0.0 (26) 0.0 (23) 0.0 (23) 0.1 (23) 0.1 (23) 0.2 (7) 0.7 (3) 3.0 (5)

,0867D[DEOH0RQH\0DUNHW 0) 0HGLDQ          Real Assets )56,QIODWLRQ$GMXVWHG0XOWL$VVHWV)XQG          FRS Custom Real Assets Index 6.2 -5.0 1.8 -8.9 6.6 4.6 13.0 17.2 - Fixed Income 4.7 (9) 0.3 (78) 4.7 (3) -1.1 (85) 6.0 (36) 6.7 (1) 7.6 (30) 11.7 (55) 1.4 (51) Total Bond Index 4.3 (11) 0.1 (84) 4.9 (2) -1.2 (88) 4.8 (62) 7.4 (1) 7.0 (35) 8.9 (78) 1.9 (49)

,086,QWHUPHGLDWH,QYHVWPHQW*UDGH 0) 0HGLDQ          )5686%RQG(QKDQFHG,QGH[)XQG                   Blmbg. Barc. U.S. Aggregate 2.6 (3) 0.5 (43) 6.0 (36) -2.0 (17) 4.2 (15) 7.8 (67) 6.5 (49) 5.9 (7) 5.2 (89)

,086/RQJ7HUP7UHDVXU\*RYW%RQG 0) 0HGLDQ          )56,QWHUPHGLDWH%RQG)XQG                   Blmbg. Barc. U.S. Intermediate Aggregate 2.0 (69) 1.2 (16) 4.1 (6) -1.0 (83) 3.6 (79) 6.0 (11) 6.1 (48) 6.5 (86) 4.9 (11)

,086,QWHUPHGLDWH,QYHVWPHQW*UDGH 0) 0HGLDQ          )56&RUH3OXV%RQG)XQG                  FRS Custom Core-Plus Fixed Income Index 4.9 (41) 0.2 (41) 5.1 (79) 0.8 (20) 7.8 (51) 7.6 (31) 9.1 (42) 18.7 (31) -

,086%URDG0DUNHW&RUH)L[HG,QFRPH 6$&) 0HGLDQ          Domestic Equity 13.7 (27) 0.7 (32) 11.5 (43) 35.2 (44) 16.9 (34) 0.3 (38) 20.4 (23) 30.9 (50) -36.5 (33) Total U.S. Equities Index 14.9 (22) -0.5 (43) 11.1 (47) 34.0 (54) 16.5 (37) -0.1 (40) 19.3 (29) 28.4 (63) -36.5 (33)

,0860XOWL&DS(TXLW\ 0) 0HGLDQ          )56866WRFN0DUNHW,QGH[)XQG                   Russell 3000 Index 12.7 (26) 0.5 (52) 12.6 (34) 33.6 (40) 16.4 (40) 1.0 (39) 16.9 (20) 28.3 (53) -37.3 (51)

,086/DUJH&DS(TXLW\ 0) 0HGLDQ          )5686/DUJH&DS6WRFN)XQG                  Russell 1000 Index 12.1 (33) 0.9 (43) 13.2 (33) 33.1 (47) 16.4 (31) 1.5 (41) 16.1 (31) 28.4 (43) -

,086/DUJH&DS(TXLW\ 6$&) 0HGLDQ          )56866PDOO0LG&DS6WRFN)XQG                  FRS Custom Small/Mid Cap Index 19.6 (26) -4.2 (72) 7.7 (33) 22.0 (98) 15.3 (53) 1.1 (22) 21.3 (85) 26.4 (86) -

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As of September 30, 2017 Asset Allocation & Performance

Performance(%) 2016 2015 2014 2013 2012 2011 2010 2009 2008 International/Global Equity 4.5 (42) -2.6 (48) -3.2 (42) 21.6 (33) 18.6 (53) -11.3 (23) 10.1 (73) 34.8 (62) -40.9 (20) Total Foreign and Global Equities Index 4.9 (38) -4.4 (55) -3.0 (40) 20.6 (39) 16.6 (72) -11.3 (23) 10.1 (73) 32.4 (69) -42.8 (30)

,0,QWHUQDWLRQDO(TXLW\ 0) 0HGLDQ          )56)RUHLJQ6WRFN,QGH[)XQG                   MSCI All Country World ex-U.S. IMI Index 4.4 (42) -4.6 (55) -4.2 (51) 21.0 (36) 16.4 (72) -12.2 (30) 8.9 (78) 33.7 (66) -43.6 (36)

,0,QWHUQDWLRQDO(TXLW\ 0) 0HGLDQ          )56*OREDO6WRFN)XQG                   MSCI All Country World Index Net 7.9 (45) -2.4 (54) 4.2 (39) 22.8 (60) 16.3 (38) -5.5 (35) 11.8 (61) 30.0 (65) -40.7 (43)

,0*OREDO(TXLW\ 0) 0HGLDQ          )56)RUHLJQ6WRFN)XQG                   MSCI All Country World ex-U.S. Index 5.0 (8) -5.3 (80) -3.4 (16) 15.8 (76) 17.4 (69) -13.3 (56) 11.6 (13) 32.5 (47) -43.1 (60)

,0,QWHUQDWLRQDO/DUJH&DS&RUH(TXLW\ 0) 0HGLDQ          FRS Self-Dir Brokerage Acct

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 FRS Investment Plan As of September 30, 2017 Asset Allocation

Asset Allocation as of 9/30/2017 U.S. Equity Non-U.S. Equity U.S. Fixed Income Real Assets Cash Brokerage Total % of Total )565HWLUHPHQW)XQG          )565HWLUHPHQW'DWH)XQG          )565HWLUHPHQW'DWH)XQG          )565HWLUHPHQW'DWH)XQG          )565HWLUHPHQW'DWH)XQG          )565HWLUHPHQW'DWH)XQG          )565HWLUHPHQW'DWH)XQG          )565HWLUHPHQW'DWH)XQG          )565HWLUHPHQW'DWH)XQG          )565HWLUHPHQW'DWH)XQG          )565HWLUHPHQW'DWH)XQG          Total Retirement Date Funds$ 1,460,857,970 $ 1,348,603,239 $ 1,119,545,409 $- 598,024,165 $-$$43.8% 4,529,151,129 )560RQH\ 0DUNHW)XQG    Total Cash$- - $-$-$$- 937,618,959 $$9.1% 937,618,959 )56,QIODWLRQ$GMXVWHG0XOWL$VVHWV)XQG    Total Real Assets$- - $-$$- 91,027,565 $-$$0.9% 91,027,565 )5686%RQG(QKDQFHG,QGH[ )XQG   )56,QWHUPHGLDWH%RQG)XQG   )56&RUH3OXV%RQG)XQG   Total Fixed Income$- - $$- 664,892,444 $-$-$$6.4% 664,892,444 )56866WRFN0DUNHW,QGH[ )XQG   )5686/DUJH&DS6WRFN)XQG   )56866PDOO0LG&DS6WRFN)XQG   Total Domestic Equity$- 2,786,158,307 $-$-$-$-$$26.9% 2,786,158,307 )56)RUHLJQ6WRFN,QGH[ )XQG   )56*OREDO6WRFN)XQG   )56)RUHLJQ6WRFN)XQG   Total International/Global Equity$ - $- 781,130,958 $-$-$-$$7.6% 781,130,958 )566HOI'LU%URNHUDJH$FFW    Total Self-Dir Brokerage Acct $548,450,827 $5.3% 548,450,827 Total Portfolio$ 4,247,016,277 $ 2,129,734,197 $ 1,784,437,853 $ 689,051,729 $ 937,618,959 $ 548,450,827 $ 10,338,430,190 100.0% Percent of Total 41.08% 20.60% 17.26% 6.66% 9.07% 5.30% 100.0%

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As of September 30, 2017 Multi Timeperiod Statistics

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Appendix

 As of September 30, 2017 Benchmark Descriptions

Retirement Date Benchmarks $ZHLJKWHGDYHUDJHFRPSRVLWHRIWKHXQGHUO\LQJFRPSRQHQWV EHQFKPDUNVIRUHDFKIXQG iMoneyNet 1st Tier Institutional Net Index $QLQGH[PDGHXSRIWKHHQWLUHXQLYHUVHRIPRQH\PDUNHWPXWXDOIXQGV7KHLQGH[FXUUHQWO\UHSUHVHQWVRYHUIXQGVRU DSSUR[LPDWHO\SHUFHQWRIDOOPRQH\IXQGDVVHWV

FRS Custom Real Assets Index$PRQWKO\ZHLJKWHGFRPSRVLWHRIXQGHUO\LQJLQGLFHVIRUHDFK7,36DQG5HDO$VVHWVIXQG7KHVHLQGLFHVLQFOXGH%DUFOD\V867,36,QGH[ 06&,:RUOG$&:RUOG,QGH[DQGWKH%ORRPEHUJ&RPPRGLW\7RWDO5HWXUQ,QGH[1$5(,7'HYHORSHG,QGH[6 3*OREDO,QIUDVWUXFWXUH,QGH[6 3*OREDO1DWXUDO5HVRXUFHV,QGH[

Total Bond Index$ZHLJKWHGDYHUDJHFRPSRVLWHRIWKHXQGHUO\LQJEHQFKPDUNVIRUHDFKERQGIXQG

Barclays Aggregate Bond Index $PDUNHWYDOXHZHLJKWHGLQGH[FRQVLVWLQJRIJRYHUQPHQWERQGV6(&UHJLVWHUHGFRUSRUDWHERQGVDQGPRUWJDJHUHODWHGDQGDVVHWEDFNHG VHFXULWLHVZLWKDWOHDVWRQH\HDUWRPDWXULW\DQGDQRXWVWDQGLQJSDUYDOXHRIPLOOLRQRUJUHDWHU7KLVLQGH[LVDEURDGPHDVXUHRIWKHSHUIRUPDQFHRIWKHLQYHVWPHQWJUDGH86 IL[HGLQFRPHPDUNHW

Barclays Intermediate Aggregate Bond Index $PDUNHWYDOXHZHLJKWHGLQGH[FRQVLVWLQJRI867UHDVXU\VHFXULWLHVFRUSRUDWHERQGVDQGPRUWJDJHUHODWHGDQGDVVHWEDFNHG VHFXULWLHVZLWKRQHWRWHQ\HDUVWRPDWXULW\DQGDQRXWVWDQGLQJSDUYDOXHRIPLOOLRQRUJUHDWHU

FRS Custom Core-Plus Fixed Income Index$PRQWKO\UHEDODQFHGEOHQGRI%DUFOD\V86$JJUHJDWH%RQG,QGH[DQG%DUFOD\V86+LJK

Total U.S. Equities Index$ZHLJKWHGDYHUDJHFRPSRVLWHRIWKHXQGHUO\LQJEHQFKPDUNVIRUHDFKGRPHVWLFHTXLW\IXQG

Russell 3000 Index $FDSLWDOL]DWLRQZHLJKWHGLQGH[FRQVLVWLQJRIWKHODUJHVWSXEOLFO\WUDGHG86VWRFNVE\FDSLWDOL]DWLRQ7KLVLQGH[LVDEURDGPHDVXUHRIWKHSHUIRUPDQFH RIWKHDJJUHJDWHGRPHVWLFHTXLW\PDUNHW

Russell 1000 Index $QLQGH[WKDWPHDVXUHVWKHSHUIRUPDQFHRIWKHODUJHVWVWRFNVFRQWDLQHGLQWKH5XVVHOO,QGH[

FRS Custom Small/Mid Cap Index$PRQWKO\UHEDODQFHGEOHQGRI6 3,QGH[5XVVHOO,QGH[5XVVHOO9DOXH,QGH[DQG5XVVHOO0LG&DS *URZWK,QGH[

Total Foreign and Global Equities Index$ZHLJKWHGDYHUDJHFRPSRVLWHRIWKHXQGHUO\LQJEHQFKPDUNVIRUHDFKIRUHLJQDQGJOREDOHTXLW\IXQG

MSCI All Country World ex-U.S. IMI Index $FDSLWDOL]DWLRQZHLJKWHGLQGH[RIVWRFNVUHSUHVHQWLQJGHYHORSHGFRXQWU\VWRFNPDUNHWVDQGHPHUJLQJFRXQWULHVH[FOXGLQJWKH 86PDUNHW

MSCI All Country World Index $FDSLWDOL]DWLRQZHLJKWHGLQGH[RIVWRFNVUHSUHVHQWLQJDSSUR[LPDWHO\GHYHORSHGDQGHPHUJLQJFRXQWULHVLQFOXGLQJWKH86DQG&DQDGLDQ PDUNHWV

MSCI All Country World ex-U.S. Index $FDSLWDOL]DWLRQZHLJKWHGLQGH[FRQVLVWLQJRIGHYHORSHGDQGHPHUJLQJFRXQWULHVEXWH[FOXGLQJWKH86



As of September 30, 2017 Descriptions of Universes

Retirement Date Funds  7DUJHWGDWHXQLYHUVHVFDOFXODWHGDQGSURYLGHGE\/LSSHU

FRS Money Market Fund $PRQH\PDUNHWXQLYHUVHFDOFXODWHGDQGSURYLGHGE\/LSSHU

FRS U.S. Bond Enhanced Index Fund $ORQJWHUPERQGIL[HGLQFRPHXQLYHUVHFDOFXODWHGDQGSURYLGHGE\/LSSHU

FRS Intermediate Bond Fund $EURDGLQWHUPHGLDWHWHUPIL[HGLQFRPHXQLYHUVHFDOFXODWHGDQGSURYLGHGE\/LSSHU

FRS Core Plus Bond Fund $FRUHSOXVERQGIL[HGLQFRPHXQLYHUVHFDOFXODWHGDQGSURYLGHGE\/LSSHU

FRS U.S. Stock Market Index Fund $ODUJHFDSEOHQGXQLYHUVHFDOFXODWHGDQGSURYLGHGE\/LSSHU

FRS U.S. Large Cap Stock Fund $ODUJHFDSXQLYHUVHFDOFXODWHGDQGSURYLGHGE\/LSSHU

FRS U.S. Small/Mid Cap Stock Fund $VPDOOPLGFDSXQLYHUVHFDOFXODWHGDQGSURYLGHGE\/LSSHU

FRS Foreign Stock Index Fund $IRUHLJQEOHQGXQLYHUVHFDOFXODWHGDQGSURYLGHGE\/LSSHU

FRS Global Stock Fund $JOREDOVWRFNXQLYHUVHFDOFXODWHGDQGSURYLGHGE\/LSSHU

FRS Foreign Stock Fund$IRUHLJQODUJHEOHQGXQLYHUVHFDOFXODWHGDQGSURYLGHGE\/LSSHU

 As of September 30, 2017 Notes

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7KLVSDJHLVOHIWEODQNLQWHQWLRQDOO\ Table of Contents

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7KLVSDJHLVOHIWEODQNLQWHQWLRQDOO\ LCEF Total Fund



LCEF Total Fund As of September 30, 2017 Total Plan Asset Summary

Change in Market Value From July 1, 2017 to September 30, 2017 



   ($)

Millions 



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Summary of Cash Flow

1 Fiscal YTD* Quarter LCEF Total Fund %HJLQQLQJ0DUNHW9DOXH   $GGLWLRQV:LWKGUDZDOV  ,QYHVWPHQW(DUQLQJV   = Ending Market Value 731,882,839 731,882,839

3HULRG-XO\6HSWHPEHU

 LCEF Total Fund As of September 30, 2017 Total Plan Performance Summary

Return Summary 





  Return             

  )LVFDO<7'     ,QFHSWLRQ 4XDUWHU

Quarterly Excess Performance Ratio of Cumulative Wealth - 10 Years  

 



 

 

                       

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As of September 30, 2017 Asset Allocation & Performance

Allocation Performance(%) Market 1 1 3 5 10 Value % Policy(%) Quarter Year Years Years Years ($) /&()7RWDO)XQG              Total Endowment Target 4.1 (6) 13.1 (20) 6.2 (23) 7.2 (57) 4.2 (56)

$OO(QGRZPHQWV7RWDO)XQG0HGLDQ      *OREDO(TXLW\         Global Equity Target 5.5 18.9 7.7 10.5 5.3

Blank )L[HG,QFRPH              Blmbg. Barc. U.S. Aggregate 0.8 (39) 0.1 (55) 2.7 (35) 2.1 (42) 4.3 (62)

$OO(QGRZPHQWV86)L[HG,QFRPH6HJPHQW0HGLDQ      7,36         Barclays U.S. TIPS 0.9 -0.7 1.6 0.0 3.9

Blank &DVK(TXLYDOHQWV         S&P US AAA & AA Rated GIP 30D Net Yield Index 0.3 0.8 0.4 0.2 0.6

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 As of September 30, 2017 Calendar Year Performance

Performance(%) 2016 2015 2014 2013 2012 2011 2010 2009 2008 2007 LCEF Total Fund 9.2 (5) -1.4 (46) 5.2 (42) 14.7 (53) 13.2 (22) 1.9 (15) 14.0 (14) 21.2 (48) -29.2 (75) 6.3 (83) Total Endowment Target 7.0 (27) -1.6 (49) 4.3 (54) 12.8 (77) 12.2 (46) 1.5 (17) 13.7 (18) 19.6 (59) -28.9 (74) 6.5 (78)

$OO(QGRZPHQWV7RWDO)XQG0HGLDQ           *OREDO(TXLW\           Global Equity Target 8.4 -2.4 3.9 24.1 19.4 -2.2 16.1 30.5 -39.2 7.2

Blank )L[HG,QFRPH                     Blmbg. Barc. U.S. Aggregate 2.6 (60) 0.5 (33) 6.0 (21) -2.0 (76) 4.2 (89) 7.8 (40) 6.5 (82) 5.9 (87) 5.2 (15) 7.0 (51)

$OO(QGRZPHQWV86)L[HG,QFRPH6HJPHQW0HGLDQ           7,36           Barclays U.S. TIPS 4.7 -1.4 3.6 -8.6 7.0 13.6 6.3 11.4 -2.4 11.6

Blank &DVK(TXLYDOHQWV           S&P US AAA & AA Rated GIP 30D Net Yield Index 0.4 0.1 0.0 0.1 0.1 0.2 0.3 0.7 2.3 4.7

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As of September 30, 2017 Plan Sponsor Peer Group Analysis

All Endowments-Total Fund 







 Return







 1 1 3 5 10 2016 2015 2014 Quarter Year Years Years Years  /&()7RWDO)XQG                  7RWDO(QGRZPHQW7DUJHW                

WK3HUFHQWLOH         VW4XDUWLOH         0HGLDQ         UG4XDUWLOH         WK3HUFHQWLOH        

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 LCEF Total Fund As of September 30, 2017 Universe Asset Allocation Comparison

/&()7RWDO)XQG %1< 0HOORQ(QGRZPHQW8QLYHUVH

Cash Cash TIPS 1.5% Alternativeÿ RealÿEstate 0.1% 9.4% Investments 4.9% 5.0%

FixedÿIncome 15.1%

FixedÿIncome GlobalÿEquity 35.0% 55.0%

GlobalÿEquity 74.0%



LCEF Total Fund As of September 30, 2017 Attribution

Global Equity 182 Global Equity 107

Fixed Income 1 Fixed Income 2

TIPS 2 TIPS 2

Cash 1 Cash 1

TAA 43 TAA 5

Other* -3 -2 Other*

Total Fund 226 Total Fund 115

-250 -200 -150 -100 -50 0 50 100 150 200 250 -200 -150 -100 -50 0 50 100 150 200

Basis Points Basis Points

1-Year Ending 9/30/2017 5-Year Ending 9/30/2017

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 Appendix



As of September 30, 2017 Benchmark Descriptions

LCEF Total Fund 7RWDO(QGRZPHQW7DUJHW $ZHLJKWHGEOHQGRIWKHLQGLYLGXDODVVHWFODVVWDUJHWEHQFKPDUNV

Total Global Equity 06&,$&:,,0,H[7REDFFR)URPIRUZDUGDFXVWRPYHUVLRQRIWKH06&,$&:,,0,H[FOXGLQJWREDFFRUHODWHGFRPSDQLHV)URPWRDFXVWRP YHUVLRQRIWKH06&,$&:,,0,DGMXVWHGWRUHIOHFWDIL[HGZHLJKWLQWKH06&,86$,0,DQGDIL[HGZHLJKWLQWKH06&,$&:,H[86$,0,DQGH[FOXGLQJFHUWDLQHTXLWLHVRI WREDFFRUHODWHGFRPSDQLHV)URPWRDFXVWRPYHUVLRQRIWKH06&,$&:,,0,H[FOXGLQJWREDFFRUHODWHGFRPSDQLHV3ULRUWRWKHEHQFKPDUNLVD ZHLJKWHGDYHUDJHRIERWKWKH'RPHVWLF(TXLWLHVDQG)RUHLJQ(TXLWLHVKLVWRULFDOEHQFKPDUNV

Total Domestic Equities 5XVVHOO,QGH[H[7REDFFR3ULRUWRDQLQGH[WKDWPHDVXUHVWKHSHUIRUPDQFHRIWKHVWRFNVWKDWPDNHXSWKH5XVVHOODQG5XVVHOO,QGLFHVZKLOH H[FOXGLQJWREDFFRFRPSDQLHV

Total Foreign Equities 06&,$&:,H[86,0,H[7REDFFR3ULRUWRDFDSLWDOL]DWLRQZHLJKWHGLQGH[UHSUHVHQWLQJFRXQWULHVEXWH[FOXGLQJWKH8QLWHG6WDWHV7KHLQGH[LQFOXGHVGHYHORSHG DQGHPHUJLQJPDUNHWFRXQWULHVDQGH[FOXGHVWREDFFRFRPSDQLHV

Total Fixed Income %DUFOD\V$JJUHJDWH%RQG,QGH[$PDUNHWYDOXHZHLJKWHGLQGH[FRQVLVWLQJRIWKH%DUFOD\V&UHGLW*RYHUQPHQWDQG0RUWJDJH%DFNHG6HFXULWLHV,QGLFHV7KHLQGH[DOVRLQFOXGHV FUHGLWFDUGDXWRDQGKRPHHTXLW\ORDQEDFNHGVHFXULWLHV7KLVLQGH[LVWKHEURDGHVWDYDLODEOHPHDVXUHRIWKHDJJUHJDWHLQYHVWPHQWJUDGH86IL[HGLQFRPHPDUNHW

Total TIPS %DUFOD\V867,36$PDUNHWYDOXHZHLJKWHGLQGH[FRQVLVWLQJRI867UHDVXU\,QIODWLRQ3URWHFWHG6HFXULWLHVZLWKRQHRUPRUH\HDUVUHPDLQLQJXQWLOPDWXULW\ZLWKWRWDORXWVWDQGLQJ LVVXHVL]HRIPLOOLRQRUPRUH

Total Cash Equivalents 6 386$$$ $$5DWHG*,3'D\1HW

 As of September 30, 2017 Universe Descriptions

LCEF Total Fund $XQLYHUVHFRPSULVHGRIWRWDOHQGRZPHQWSRUWIROLRUHWXUQVQHWRIIHHVFDOFXODWHGDQGSURYLGHGE\%1<0HOORQ3HUIRUPDQFH 5LVN$QDO\WLFVDQG,QYHVWPHQW0HWULFV $JJUHJDWHDVVHWVLQWKHXQLYHUVHFRPSULVHGELOOLRQDVRITXDUWHUHQGDQGWKHDYHUDJHPDUNHWYDOXHZDVPLOOLRQ

Total Fixed Income $XQLYHUVHFRPSULVHGRIWRWDOIL[HGLQFRPHSRUWIROLRUHWXUQVQHWRIIHHVRIHQGRZPHQWSODQVFDOFXODWHGDQGSURYLGHGE\%1<0HOORQ3HUIRUPDQFH 5LVN$QDO\WLFVDQG ,QYHVWPHQW0HWULFV$JJUHJDWHDVVHWVLQWKHXQLYHUVHFRPSULVHGELOOLRQDVRITXDUWHUHQGDQGWKHDYHUDJHPDUNHWYDOXHZDVPLOOLRQ



As of September 30, 2017 Explanation of Exhibits

Quarterly and Cumulative Excess Performance 7KHYHUWLFDOD[LVH[FHVVUHWXUQLVDPHDVXUHRIIXQGSHUIRUPDQFHOHVVWKHUHWXUQRIWKHSULPDU\EHQFKPDUN7KHKRUL]RQWDO D[LVUHSUHVHQWVWKHWLPHVHULHV7KHTXDUWHUO\EDUVUHSUHVHQWWKHXQGHUO\LQJIXQGV UHODWLYHSHUIRUPDQFHIRUWKHTXDUWHU

Ratio of Cumulative Wealth Graph $QLOOXVWUDWLRQRIDSRUWIROLR VFXPXODWLYHXQDQQXDOL]HGSHUIRUPDQFHUHODWLYHWRWKDWRILWVEHQFKPDUN$QXSZDUGVORSLQJOLQHLQGLFDWHV VXSHULRUIXQGSHUIRUPDQFHYHUVXVLWVEHQFKPDUN&RQYHUVHO\DGRZQZDUGVORSLQJOLQHLQGLFDWHVXQGHUSHUIRUPDQFHE\WKHIXQG$IODWOLQHLVLQGLFDWLYHRIEHQFKPDUNOLNH SHUIRUPDQFH

Performance Comparison - Plan Sponsor Peer Group Analysis $QLOOXVWUDWLRQRIWKHGLVWULEXWLRQRIUHWXUQVIRUDSDUWLFXODUDVVHWFODVV7KHFRPSRQHQW VUHWXUQLVLQGLFDWHGE\ WKHFLUFOHDQGLWVSHUIRUPDQFHEHQFKPDUNE\WKHWULDQJOH7KHWRSDQGERWWRPERUGHUVUHSUHVHQWWKHWKDQGWKSHUFHQWLOHVUHVSHFWLYHO\7KHVROLGOLQHLQGLFDWHVWKHPHGLDQZKLOH WKHGRWWHGOLQHVUHSUHVHQWWKHWKDQGWKSHUFHQWLOHV

 As of September 30, 2017 Notes

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Proposed 2018 IAC Meeting Dates

Monday, March 19, 2018 Monday, June 11, 2018 Monday, September 17, 2018 Monday, December 10, 2018