STATE OF MICHIGAN INVESTMENT BOARD MEETING March 19, 2020 State of Michigan Retirement System Quarterly Investment Review

Rachael Eubanks, State Treasurer Prepared by Bureau of Investments Michigan Department of Treasury

STATE OF MICHIGAN INVESTMENT BOARD MEETING

MARCH 19, 2020

Agenda  9:30 a.m. Call to Order and Opening Remarks

9:40 a.m. Approval of the 12/19/19 SMIB Meeting Minutes

9:45 a.m. Executive Summary & Performance for Periods Ending 12/31/19

10:00 a.m. Current Asset Allocation Review

Markets Review and Outlook

10:15 a.m. Action Item:

 Removal of Oakmark Equity and Income Fund from 401(k)/457 DC Plans Investment Manager Lineup

10:25 a.m. Review of Investment Reports

 Defined Contribution  International Equity  Domestic Equity  Fixed Income  Private Equity – Receive and File  Real Estate & Infrastructure – Receive and File  Real & Opportunistic Return – Receive and File  Absolute Return – Receive and File

Basket Clause – Receive and File

11:00 a.m. Public Comment

Closing Remarks ~ Adjournment



2020 Meeting Schedule

Thursday, June 11, 2020 Thursday, September 10, 2020 Thursday, December 10, 2020

All meetings start at 9:30 a.m.

www.michigan.gov/treasury

State of Michigan Retirement System MINUTES State of Michigan Investment Board Meeting March 19, 2020

Robert L. Brackenbury Deputy C hief Investment Officer Bureau of Investments

STATE OF MICHIGAN INVESTMENT BOARD December 19, 2019 Meeting Minutes

Board Members Present: Chairman – Treasurer Rachael Eubanks Ms. Dina Richard Mr. Chris Kolb Mr. Reginald Sanders Mr. James Nicholson

Members of the Public and Bureau of Investments Staff Present: Molly Jason Jamie Prevo Jack Behar Karl Borgquist Nick Whitman Jim Elkins Clay Davis Anthony Estell Kerrie VandenBosch Taylor Broekstra Todd Warstler Travis Haney Bradley Hartwell Semone James Mark Porrell Matt Hutson Patrick Moraniec Robert Brackenbury Lan Chen Ann Storberg Jennifer Yeung Dick Holcomb Jon Braeutigam Barb Becker Peter Woodford LeAnn Auer Anthony Estell Greg Parker Giles Feldpausch Pavel Stolarczyk Lori Barrett Annette Russell Max Kotary Betty Nicklesen Tim McEnery Marc Dietrich Janet Sudac Dave Klauka Mandy Hitsman Dan Quigley

Opening Remarks: Rachael Eubanks called the meeting to order at 9:30 am.

Approval of Minutes: Approval of the September 12, 2019 SMIB Meeting Minutes – Motion to approve: James Nicholson. Seconded: Chris Kolb. The vote was unanimous to approve.

AGENDA

Executive Summary and Performance Jon Braeutigam, Chief Investment Officer for the Bureau of Investments, reviewed the executive summary performance section discussing returns and markets. He explained that the Plans returns were among the least risky, as measured by standard deviation, but believes they are competitive and compelling. The goal is a 6.8% actuarial targeted rate of return so there is broad equity risk. The BOI strives for a very diversified portfolio which is what it has now. The return since 1979 is 9.4%, the 10-year return is 9.7%. Of course, the last 10 years have been a bull market for the US stock market and it’s not expected that this will be duplicated any time soon.

Approximately $1 Billion in new commitments were approved recently. Staff is very busy working through legal documents in almost every division in the Bureau. There is a lot of physical review of partnership agreements along with compliance so that closings can

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occur now and through the first of the year. He thanked staff for their hard work on locating and pursuing the very best and most appropriate investments for the Plans needs.

Asset Allocation Review, Markets Review and Outlook Gregory Parker, Director of Investments - Public Markets reviewed asset allocation very briefly, explaining the graphical presentation chart on page 2 showing allocation changes over the past 12 months. He reminded us that almost $2 billion a year is paid out as benefits to the pensioners.

Capital markets were covered very briefly as well. Mr. Parker mentioned that we are making 10-year highs on the stock market and are close to 10-year highs in the US. This leaves a backdrop causing the next year, five years, and the next ten years to be very, very challenging. It is difficult to find value in the markets. This is not to be considered as a warning, it is simply that since there has been a great bull market it will be more difficult to obtain this level of return going forward.

Private Equity Review Peter Woodford, Senior Investment Manager discussed the strategies of the Private Equity Division stating that it invests across a broad range of partnerships, geographies and industries. He discussed performance stating it has been quite good, returning 15.4% on an annualized basis for the past 10 years. It also performed well over the past 3, 5, 7, and 10-year time periods, with the one-year return at 11.2%. Mr. Woodford explained that the division made new commitments in the amount of $315 million during the quarter and highlighted two of the largest new investments. He gave a market update relating to private equity and explained the divisions outlook and strategy going forward.

Real Estate & Infrastructure Review Todd Warstler, Senior Investment Manager reviewed the division’s performance stating that performance remains strong relative to the benchmark. The division outperformed the one-year benchmark by 310 basis points. The primary drivers for this are: the portfolio is underweight in retail, several favorable sale executions have taken place, and appreciation has occurred across the entire portfolio. Performance of portfolio credit strategies and the performance of infrastructure portfolio have also contributed to this outperformance. Mr. Warstler discussed the current investment strategies used, and the current market environment of real estate and infrastructure.

Real & Opportunistic Return Review Jennifer Yeung, Senior Investment Manager gave an overview of the portfolio, breaking it into three strategies. The largest percentage at 64% is comprised of real assets which includes investments in both tangible and intangible assets that are expected to provide inflation protection and diversification benefits to the overall pension system. Then 21% is credit funds which focuses on providing capital to the middle market direct lending space or providing financing in distressed or opportunistic situations. The remaining amount is comprised of opportunistic investments which is investments that offer an attractive risk-return profile and do not fit squarely into private market vehicles.

Ms. Yeung discussed the division’s one, three and five-year performance which exceeded the benchmark by 300 to 500 basis points in each of the respective time periods. About one-third of the division’s return can be attributed to current income, specifically income

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from credit investments, natural resource production-linked funds and royalties from intangible assets. The remainder of the return is driven largely by price appreciation, notably investments in the media and entertainment space, as well as the transportation space that are doing very well resulting in higher marks to valuations.

Ms. Yeung explained the strategy for 2020 is to remain focused on finding differentiated strategies that are additive to the current portfolio mix. Stay disciplined and seek investments with attractive risk-adjusted returns with a preference for strategies that have visible cash flows and a high degree of capital protection. She believes it is important to stick to solid investment teams where there is strong alignment of interests.

Absolute Return and Fixed Income Review Dan Quigley, Senior Investment Manager reviewed performance of Absolute Return stating that the portfolio returned 4.1% on a one-year basis, beating the HFRI index. The absolute return portfolio is a broad portfolio consisting of 69 funds across four strategies. The portfolio maintains seven relationships. Mr. Quigley explained key objectives going forward as well as themes and opportunities they will be focusing on.

Mr. Quigley reviewed fixed income stating performance was strong on an absolute basis for all major fixed income indices on a year-to-date basis as both interest rate declines and spread compression have driven performance. The fixed income division portfolio underperformed slightly on a one-year basis but has outperformed peer group and benchmarks across all other time periods.

There were many questions asked by the board members allowing much discussion to take place.

Review of Investment Reports – Received and Filed

Public Comment Treasurer Eubanks asked that any attendees wishing to address the Board come forward. No public comment.

Adjournment Treasurer Eubanks adjourned the meeting at 11:07 am. Motion to adjourn by James Nicholson. Seconded: Reggie Sanders. The vote was unanimous to adjourn.

Approved:

Rachael Eubanks, Chairman

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State of Michigan Retirement System EXECUTIVE SUMMARY State of Michigan Investment Board Meeting March 19, 2020

Gregory J. Parker, CFA Director of Investments – Public Markets Director of Asset Allocation Bureau of Investments

EXECUTIVE SUMMARY December 2019

Performance Great peer comparison. MPSERS Plan (12/31/19) 1-Year 3-Years 5-Years 7-Years 10-Years Annualized Returns 15.4% 11.2% 8.7% 10.2% 10.0% Policy Returns 16.1% 11.1% 9.0% 10.1% 10.1% Peer Median Returns* 15.4% 9.4% 7.3% 8.3% 8.5% *State Street Universe greater than $10 billion.  Over the past three, five, seven, and ten years, the returns are significantly higher than peer median returns. For the calendar year ending December 2019, returns matched peer returns. Compared to the State Street Universe of public pension plans greater than $10 billion, the returns are near the top decile of returns. Also, the plans’ returns were among the least risky, as measured by standard deviation.  The ten-year return begins at the cyclical low of the global financial crisis and because risk assets were trading at depressed prices, the trailing 10-year returns are above average. Over a very long horizon, since 1979, the annualized rate of return on the plan assets has been approximately 9.4%.  Compounding at higher than peer returns can add significant value. For example, based on the $47.1 billion December 2009 market value, a ten-year annualized return of 10.0% compared to the 8.5% peer median return would add about $15.7 billion in excess value.  The returns were generally in-line with the policy benchmark.  Most of the individual asset class returns were better than median, and the domestic equity return over the past year was the highest of the 38 domestic equity peer returns in the State Street greater than $1 billion universe. Asset Allocation A low return environment.

 Given the low rates of return available in the capital markets for safe assets, and in order to earn the actuarial rate of return, additional risks (primarily equity risk) must be assumed. At the end of December 2019, the equity risk (beta) is approximately 0.4 which is the lowest measurement in three decades, and it is lower than peer median at approximately 0.6.  Liquidity is another fundamental risk assumed and it is managed through asset allocation. The plans have outstanding capital commitments to fund approximately $13.8 billion in illiquid assets, primarily in private equity. In the December 2019 quarter, $950 million of new commitments were made.  The combined systems paid out approximately $2.1 billion net of contributions over the past twelve months ending in December 2019. Over the past year, fixed income was a net purchaser of approximately $490 million, private equity $275 million, and real return & opportunistic of approximately $50 million. Over the past year, the allocation to domestic equity was reduced by $2.7 billion, absolute return by $540 million, international equity by $500 million, and real estate decreased by roughly $390 billion. The allocation to short-term cash increased by approximately $1.2 billion.

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Economy and Capital Markets Potentially slowing economy.

 The most recent reading of the annualized U.S. GDP growth was 2.1%, just ahead of the consensus estimate of 2.0%. Current estimates for 2020 GDP growth for the U.S. are around 1.8%, however, there are increasingly more concerns regarding lower than forecasted growth.

 The interest rate curve inversion that lasted through the summer of 2019 reverted to a positive slope by mid-October. However, by the end of January 2020, the curve has once again inverted. An inverted yield curve is often cited as a warning indicator of an impending economic recession; however, a reversion of rates normally does not invalidate the power of the signal and in some ways the re-inversion is even more worrisome now than it was last summer.

 The past decade, coming out from the Global Financial Crisis, has been characterized as a risk-on market; however, many traditional risk premia have not performed as expected. For example; U.S. small cap stocks have lagged large caps, value styles have lagged growth styles, foreign equities have lagged U.S. equities, and within foreign markets, emerging markets have lagged developed.

 Many domestic equity valuation metrics are above historical averages, consequently the returns over the next cycle may not be as strong as the historical average of 11 – 12% year- over-year total returns.

Defined Contribution A summary.

 At the end of December 2019, the Defined Contribution assets were $9.6 billion, up from $7.8 billion the year prior. Index fund strategies represent 41.9% and actively managed funds represent 33.7% of the assets. The default Target Date Funds are 22.3% and the Self- Managed Account is 2.1% of the assets.

 In December 2019, the SECURE Act (Setting Every Community Up for Retirement Enhancement) was signed into law with broad bi-partisan support. While there are 29 provisions in the law, they can be categorized into three main provisions which will allow more Americans to participate in workplace plans and empower greater retirement readiness. The three main provisions are; 1) extend retirement plan access, 2) increase savings contributions, and 3) expand savings distribution options.

 We recommend removing the Oakmark Equity and Income Fund from the 401(k)/457 investment manager lineup. This recommendation is based on the belief that participants would be better off after the change due to the following reasons:

o Oakmark is a balanced fund, investing in both stocks and bonds; and these types of funds were at one time used to provide a one-choice diversified portfolio option. Today, the vast majority of Defined Contribution plans use target date funds as the one-choice diversified portfolio option. o After over ten years, the Oakmark fund has not had much traction. It is one of the least allocated to funds in the lineup. o Participants would pay lower management fees with an alternative allocation. o Participants could earn higher returns with an alternative allocation.

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Investment Update

Highlighting the quarter.

($ Millions)

NEW COMMITMENTS

September 30, 2019 – December 31, 2019

Asset class Fund Name / (Managed By) Commitment

Private Equity Green Equity Investors VIII, L.P. (Leonard Green & Partners, L.P.) $250.0 Jade Equity Investors, L.P. (Leonard Green & Partners, L.P.) 100.0 Advent International LAPEF VII (Advent International Lux LLC) 60.0 FirstMark Capital OF III (FirstMark Capital V GP, LLC) 35.0 FirstMark Capital V, L.P. (FirstMark Capital V GP, LLC) 35.0 SKCP Catalyst Fund I-A, L.P. (SKCP Catalyst Management I, LP) 35.0

Real Estate and Infrastructure Division DM2501, LLC (Domain Capital Advisors, LLC) 100.0 Avanath Affordable Housing IV, LLC (Avanath Capital Management, LLC) 35.0

Real & Opportunistic Division TSSP Agriculture Partners (A), L.P. (TSSP Agriculture Management, LLC) 100.0 TSSP Institutional Credit Partners III, L.P. (TICP Collateral Manager) 100.0 Abernathy Fund II, LLC (Domain Capital Advisors) 100.0

Absolute Return Division No new commitments 0.0

TOTAL $950.0

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State of Michigan Retirement System PERFORMANCE State of Michigan Investment Board Meeting March 19, 2020

Robert L. Brackenbury Deputy C hief Investment Officer Bureau of Investments

Bureau of Investments Mission Statement

The Bureau of Investments continually strives to provide quality investment management services, broad professional expertise, and independent advice to the State of Michigan Investment Board as fiduciary of the State of Michigan Retirement System, and independent of the Board, to the State Treasurer for various Michigan trust funds and the State’s common cash, for which the State Treasurer is the fiduciary.

SMRS Goals

Maintain sufficient liquidity to pay benefits.

Meet or exceed the actuarial assumption over the long term.

Perform in the top half of the public plan universe over the long term.

Diversify assets to reduce risk.

Exceed individual asset class benchmarks over the long term.

1 MPSERS PENSION Time-Weighted Rates of Return Periods Ending December 31, 2019

% of Ten Seven Five Three One Current Portfolio Years 1 Years 1 Years 1 Years 1 Year Quarter 12/31/19 Rate Rank Rate Rank Rate Rank Rate Rank Rate Rank Rate Rank

TOTAL PLAN 100.0 10.0 11 10.2 11 8.7 11 11.2 10 15.4 52 4.7 50 2 Median - Greater than $10 Billion 8.5 8.3 7.3 9.4 15.4 4.7 MPSERS Total Plan Policy 10.1 10.1 9.0 11.1 16.1 4.7 DOMESTIC EQUITIES 22.7 13.4 29 14.8 11 11.5 11 15.7 13 31.8 3 9.1 14 Median 2 11.6 10.9 8.8 12.3 24.7 8.3 S&P 1500 Index 13.5 14.5 11.5 14.7 30.9 8.9

PRIVATE EQUITY AND VENTURE CAPITAL 17.8 14.7 7 14.1 7 12.8 10 14.8 9 8.8 321.649 Median 2 10.5 9.9 8.5 9.9 7.9 1.6 Private Equity and VC Benchmark 3 16.6 16.6 14.1 16.8 7.4 2.5

INTERNATIONAL EQUITIES 16.9 6.2 48 6.6 51 6.7 41 10.8 48 23.2 49 10.1 34 Median 2 6.1 6.6 6.5 10.8 23.2 9.3 4

2 International Blended Benchmark 5.0 5.6 5.5 9.9 21.5 8.9

FIXED INCOME 13.3 4.9 38 4.0 15 4.6 19 5.4 14 9.7 35 0.6 26 Median 2 4.5 3.0 3.6 4.4 8.5 0.4 Barclays Aggregate 3.8 2.7 3.1 4.0 8.7 0.2 REAL RETURN AND OPPORTUNISTIC 11.1 12.1 10.3 13.1 8.2 4.5 50% (CPI +500 bps) + 50% (6.8% actuarial rate) 7.2 7.2 7.2 6.7 1.4

REAL ESTATE & INFRASTRUCTURE 9.1 10.4 60 11.2 39 9.5 44 9.3 36 7.0 52 1.3 68 Median 2 10.8 10.5 9.0 8.5 7.3 1.6 NCREIF - Property Blended Index 5 8.8 7.8 6.9 5.3 5.1 1.2 NCREIF Open Fund Index Net 10.4 9.2 8.0 6.1 4.4 1.3

ABSOLUTE RETURN 5.0 4.8 5.1 3.7 6.0 4.5 0.5 HFRI FOF Cons 1 month lagged 2.7 3.2 2.2 3.1 4.4 0.6

CASH EQUIVALENTS 4.0 0.9 1.1 1.4 2.0 2.6 0.5 1 Month T-Bill 0.5 0.7 1.0 1.6 2.2 0.4

1 Annualized Returns and Percentile Rank. 2 Comparison universe is the State Street Universe comprised of Public Funds greater than $10 billion on the total plan level and greater than $1 billion for asset classes. 3 SP500 + 300 bps with a 3 month lag. 4 International blended benchmark is S&P Developed BMI-EPAC 50/50 prior to 1/1/10. S&P Developed BMI-EPAC 75 USD / 25 Local, 1/1/10 to 9/30/10. MSCI ACWI ex USA Gross 10/1/10 to present. 5 NCREIF - Property Blended Index is NPI minus 130 bps. Source: State Street Analytics; the NCREIF - NPI (Property Index) source is NCREIF; the S&P BMI-EPAC Index source is S&P. Cumulative and Consecutive Total Fund Returns

MPSERS Cumulative For Years Ending 12/31/19

1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10 Year MPSERS 15.4 8.9 11.2 10.3 8.7 9.2 10.2 10.5 9.7 10.0 Public Plan - Median (> $10 billion)* 15.4 6.7 9.4 9.1 7.3 7.3 8.3 8.9 8.1 8.5 Rank 52610151161111611 bp Difference - Median -7 215 183 122 144 183 189 156 156 142 Consecutive For Years Ending

12/19 12/18 12/17 12/16 12/15 12/14 12/13 12/12 12/11 12/10 MPSERS 15.4 2.7 16.2 7.4 2.8 11.3 16.4 12.6 3.3 12.7 Public Plan - Median (> $10 billion)* 15.4 -2.0 15.2 7.9 0.4 7.4 15.1 13.3 2.0 12.7 Rank 52542684536691852 3 bp Difference - Median -7 474 97 -50 237 393 131 -64 137 -2

MSERS Cumulative For Years Ending 12/31/2019

1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10 Year MSERS 15.4 8.9 11.3 10.3 8.8 9.2 10.2 10.5 9.6 9.9 Public Plan - Median (> $1 billion)* 16.6 6.5 9.5 9.1 7.2 6.8 7.8 8.9 8.08.3 Rank 65416169391079 bp Difference - Median -119 239 175 124 158 239 235 157 165 158 Consecutive For Years Ending

12/19 12/18 12/17 12/16 12/15 12/14 12/13 12/12 12/11 12/10 MSERS 15.4 2.7 16.2 7.5 2.8 11.3 16.3 12.6 3.2 12.5 Public Plan - Median (> $1 billion)* 16.6 -3.0 15.3 7.7 0.3 6.9 15.1 13.2 1.6 12.7 Rank 65443573439711555 bp Difference - Median -119 567 96 -20 247 445 118 -64 161 -17

*State Street Public Funds Universe Cumulative and Consecutive Total Fund Returns

MSPRS Cumulative For Years Ending 12/31/19

1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10 Year MSPRS 15.3 8.8 11.2 10.3 8.7 9.2 10.1 10.4 9.6 9.9 Public Plan - Median (> $1 billion)* 16.6 6.5 9.5 9.1 7.2 6.8 7.8 8.9 8.08.3 Rank 67417171041110710 bp Difference - Median -125 236 174 122 157 237 232 154 163 158 Consecutive For Years Ending

12/19 12/18 12/17 12/16 12/15 12/14 12/13 12/12 12/11 12/10 MSPRS 15.3 2.7 16.2 7.5 2.8 11.3 16.2 12.5 3.3 12.6 Public Plan - Median (> $1 billion)* 16.6 -3.0 15.3 7.7 0.3 6.9 15.1 13.2 1.6 12.7

4 Rank 67443584440721554 bp Difference - Median -125 566 96 -23 246 441 110 -71 176 -10

MJRS Cumulative For Years Ending 12/31/19

1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10 Year MJRS 15.3 8.8 11.3 10.3 8.7 9.1 10.0 10.3 9.5 9.8 Public Plan - Median (> $1 billion)* 16.6 6.5 9.5 9.1 7.2 6.8 7.8 8.9 8.08.3 Rank 67416161041011812 bp Difference - Median -126 234 175 123 157 234 222 144 152 144 Consecutive For Years Ending

12/19 12/18 12/17 12/16 12/15 12/14 12/13 12/12 12/11 12/10 MJRS 15.3 2.7 16.3 7.4 2.8 11.0 15.6 12.5 3.1 12.2 Public Plan - Median (> $1 billion)* 16.6 -3.0 15.3 7.7 0.3 6.9 15.1 13.2 1.6 12.7 Rank 67442594446721661 bp Difference - Median -126 563 105 -24 246 418 53 -75 150 -47

*State Street Public Funds Universe State of Michigan Retirement System ASSET ALLOCATION REVIEW State of Michigan Investment Board Meeting March 19, 2020

Robert L. Brackenbury Deputy C hief Investment Officer Bureau of Investments

STATE OF MICHIGAN RETIREMENT SYSTEM PROFILE - DECEMBER 2019 Asset Allocation ~ 12/31/19 Market Value* (Billions of Dollars) Absolute Short Term Return 4.1% $80 $77.7 5.0% $69.9 $69.5 Real Estate & $70 Infrastructure Domestic Equity $60.7 $60.1 $62.2 9.1% 22.7% $60 $56.6 $51.0 $47.1 $49.7 $48.1 $50 Real Return & Opportunistic $40 11.1% Private Equity 17.8% $30

Fixed Income $20 13.3% International Equity $10 16.9% $0 1

Asset Allocation By Market Value (In Millions)

Investment Strategies 12/31/2019 12/31/2018 Market Value By Plan ~ 12/31/19 Domestic Equity $17,645 22.7% $15,693 22.6% (in Millions) Private Equity 13,801 17.8% 12,540 18.0% Pension Plan OPEB** Combined International Equity 13,129 16.9% 11,084 16.0% Mkt. Value Mkt. Value Mkt. Value % Fixed Income 10,305 13.3% 8,894 12.8% Real Return & Opport. 8,651 11.1% 8,017 11.5% MPSERS $52,487 $7,305 $59,792 76.9% Real Estate & Infrastructure 7,084 9.1% 7,045 10.1% MSERS - (closed) 12,624 3,203 15,827 20.4% Absolute Return 3,908 5.0% 4,280 6.2% MSPRS 1,555 246 1,801 2.3% Short Term*** 3,175 4.1% 1,943 2.8% MJRS - (closed) 269 9 278 0.4% TOTAL $77,698 100.0% $69,496 100.0% TOTAL $66,935 $10,763 $77,698 100.0%

MSERS includes the Military Pension Fund

Short Term Equivalents (in Billions) Short Term Strategy*** $3.2 18th Largest DB Public Pension Fund in the U.S. Short Term in Other Inv. Strategies 1.7 TOTAL SHORT TERM $4.9 6.3% of Total Funds Pensions & Investments survey - February 10, 2020 issue

*The combined net payout for the plans for FY 2018 was $1.7 billion with $22.0 billion paid out FY 2009 thru FY 2018 (Pension CAFRs). This represents the amount paid to beneficiaries in excess of employer and employee contributions. **OPEB - Other Post Employment Benefits Sources and Uses of Cash January 2019 ~ December 2019

1/01/19 Short-Term Cash Balance: $ 1,943

12/31/19 Short-Term Cash Balance: 3,176

Net Short-Term Cash Increase: $ 1,233

$2,716 2 $538 $498 $392

-$51 -$275 -$492

Absolute Domestic Fixed Real Return & Return Equity Income Opportunistic

Private International Real Estate & -$2,093 Equity Equity Infrastructure

Net Benefit Payments

A negative number in an asset category indicates a use of cash, a positive number indicates a source of cash. Dollars in millions Asset Allocation Targets As of 12/31/19

MPSERS MSERS MSPRS MJRS SMRS

Asset Class 12/31/19 Target* 12/31/19 Target* 12/31/19 Target* 12/31/19 Target* Ranges

Domestic Equity 22.7% 28.0% 22.7% 28.0% 22.7% 28.0% 22.7% 28.0% 20% - 35%

Private Equity 17.8% 18.0% 17.8% 18.0% 17.8% 18.0% 17.8% 18.0% 10% - 20%

3 International Equity 16.9% 16.0% 16.9% 16.0% 16.9% 16.0% 16.9% 16.0% 15% - 25%

Long Term Fixed 13.3% 10.5% 13.3% 10.5% 13.3% 10.5% 13.3% 10.5% 10% - 20% Income

Real Return & 11.1% 9.5% 11.1% 9.5% 11.1% 9.5% 11.1% 9.5% 5% - 15% Opportunistic

Real Estate & 9.1% 10.0% 9.1% 10.0% 9.1% 10.0% 9.1% 10.0% 5% - 15% Infrastructure

Absolute Return 5.0% 6.0% 5.0% 6.0% 5.0% 6.0% 5.0% 6.0% 3% - 9%

Short Term Fixed 4.0% 2.0% 4.0% 2.0% 4.0% 2.0% 4.0% 2.0% 1% - 6% Income

TOTAL 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%

*Complies with basket clause and international restrictions.

State of Michigan Retirement System MARKETS REVIEW AND OUTLOOK State of Michigan Investment Board Meeting March 19, 2020

Gregory J. Parker, CFA Director of Investments – Public Markets Director of Asset Allocation Bureau of Investments

CAPITAL MARKETS

Return and Risk Assumptions, Benchmark and Outlook A starting point.

Assumed Trailing Return* 10-Year Standard Deviation* MPSERS Plan (Arithmetic) (Benchmark**) Private Equity 10.6% 25.0% 18.1% International Equity 9.1% 21.4% 4.5% Domestic Equity 7.5% 18.2% 13.2% Real Estate (Core) 8.0% 15.0% 8.4% Absolute Return 5.3% 9.0% 4.5% Real Ret/Opportunistic 8.1% 9.5% 6.7% Long-Term Fixed Income 2.5% 4.0% 3.8% Short-Term 2.0% 1.0% 0.5%

* Aon Investment Consultants 2019 Long-Term Return/Risk Assumptions ** Investment Policy Statement; Annualized Returns *** Actual investments may differ due to changing conditions and the availability of new information Overview A market update.  Capital market assumptions used for determining strategic asset allocations are being reduced across the board, and especially for safer, publicly traded fixed income securities. This is the general opinion for most consultants, investment banks, and other market participants. The reason for this phenomenon is the low interest rate environment caused by the policies of the Federal Reserve (Fed) and other central banks, as well as the run-up in prices for most risk assets over the past several years.  The interest rate curve inversion that lasted through the summer of 2019 reverted to a positive slope by mid-October. However, by the end of January 2020, the curve has once again inverted. An inverted yield curve is often cited as a warning indicator of an impending economic recession; however, a reversion of rates normally does not invalidate the power of the signal and in some ways the re-inversion is even more worrisome now than it was last summer.  The past decade, coming out from the Global Financial Crisis, has been characterized as a risk-on market; however, many traditional risk premia have not performed as expected. For example; U.S. small cap stocks have lagged large caps, value styles have lagged growth styles, foreign equities have lagged U.S. equities, and within foreign markets, emerging markets have lagged developed.  Many domestic equity valuation metrics are above historical averages, consequently the returns over the next cycle may not be as strong as the historical average of 11 – 12% year-over-year total returns.  A primary explanation for international equity’s 10-year annualized underperformance of -8.1% is the annualized differences in change in the multiples (-8.2%) of the two indexes. The MSCI ACWI ex USA index multiple contracted at an annualized rate of -9.6% per year, while the multiple contraction in the U.S. market was approximately -1.4%.

1 Interest Rates The Fed cuts again.  At its October 2019 meeting, the Federal Open Market Committee voted to lower its key interest rate by 25 basis points, targeting a range between 1.5% to 1.75%. The market is currently pricing the probability of just one additional rate cut out one year, in late 2020.  Throughout the fall and winter of 2019 and into the new year, the Fed has addressed problems which are within the repo market by re-expanding their balance sheet. This action has accelerated money supply growth and led to higher valuations in risk assets.

 The interest rate curve inversion that lasted through the summer of 2019 reverted to a positive slope by mid-October. However, by the end of January 2020, the curve has once again inverted. An inverted yield curve is often cited as a warning indicator of an impending economic recession; however, a reversion of rates normally does not invalidate the power of the signal and in some ways the re-inversion is even more worrisome now than it was last summer.

 By the end of January 2020, the U.S. 10-year Treasury was yielding 1.5% which was roughly 0.04% below the 3-month T-bill rate.  Spreads on investment-grade and high yield fixed income are not bothered by the curve inversion, both spreads ended January at below average levels.

Domestic Equity Size and Style factors in focus.  The broad U.S. stock market return for the one year ending December 2019 was 30.9%; two and a half times higher than its annual average over the past 25 years. Nearly all of the stock market returns of 2019 came from multiple expansion as year-over-year earnings per share growth slightly contracted -1.1%.  Small caps represented by the Russell 2000 index have underperformed larger caps S&P 500 index over the past decade. Over the past one, three, five, seven, and ten years small caps have underperformed large caps by -6.0%, -6.7%, -3.5%, -3.1% and -1.7% annualized, respectively.  Meanwhile, value style in the U.S. continues to perform very poorly relative to the growth style. Over the past year ending December 2019, growth stocks outperformed value stocks by 9.6% and over longer time periods, it has outperformed by 10.6%, 6.0%, 4.6%, and 3.3% annualized over the past three, five, seven and ten years, respectively. Since 1985, the return difference between Value and Growth stocks in the U.S. is negligible.  Many domestic equity valuation metrics are above historical averages, consequently the returns over the next cycle may not be as strong as the historical average of 11 – 12% year-over-year total returns. However, the market’s returns on equity continues to be historically higher than average and some of the largest companies in the market today are less cyclical (economically sensitive) than past market leaders. These facts lend support to the argument that higher valuations are justified, and therefore the market could perhaps continue to deliver historical average rates of returns in the future.

2 International Equity A compelling case.  International equities underperformed domestic equities over the year ending December 2019 by -9.4%. Over the past three, five, seven, and ten years, the international market index, MSCI ACWI ex USA, underperformed the S&P 1500 index by -4.9%, -5.7%, -8.8%, and -8.1% annualized, respectively.  A primary explanation for international equity’s 10-year annualized underperformance of -8.1% is the annualized differences in change in the multiples (-8.2%) of the two indexes. The MSCI ACWI ex USA index multiple contracted at an annualized rate of -9.6% per year, while the multiple contraction in the U.S. market was approximately -1.4%. International earnings per share growth and dividend yields both were higher than the domestic equity index over the past decade.  Based on a price-to-earnings valuation multiple, excluding non-earning companies, developed international markets trade at approximately a 17.2% discount to U.S. counterparts while emerging markets are at a 30% discount.  Within international equities, emerging market returns trailed developed markets over the past one and ten years by -4.3% and -1.8% annualized, respectively. However, over the past three years, emerging markets returned 2.1% annualized more than developed and over the past five years the returns were the same at 6.0% annualized.

Real Estate The benefit adding REITs.  Over the one year ending December 2019, the NAREIT index increased by 28.7% including dividends, significantly outpacing private real estate returns as measured by the NCREIF-ODCE Index by 23.3%. Over the past ten, twenty, and thirty years, publicly traded REITs have out-returned private real estate by 1.1%, 3.4% and 3.5% annualized, respectively, though they are about three times more volatile.  Although investing in similar assets, the returns of publicly traded REITs and private real estate have historically been lowly (and at times are anti-) correlated to one another, meaning much of the REIT volatility is diversifiable.  In fact, had the REID allocated up to 20% of its portfolio to REITs over the past decade, it could have earned approximately 64 basis points annualized higher returns without meaningfully changing the average annual volatility of returns.  Dividend yields on REITs are around 3.5% which is nearly 2.0% higher than the yield of the ten-year U.S. Treasury. Historically, REIT dividend yields have averaged 1.2% higher than the ten-year U.S. Treasury.

3 Hedge Funds Estimating the asset class return.  Since its inception, the Absolute Return portfolio’s return has had a monthly beta of approximately 0.15 and annualized net alpha of 2.5%. The fund also has a low correlation to the Fixed Income benchmark, -0.1%, making it a good diversifier to equity and rates.  Based on an expected annualized equity market return of approximately 6.5%, should historical hedge fund betas and alphas continue, a 5.1% annualized net return seems like a reasonable assumed rate of return for hedge funds. This return is approximately 3-month U.S. Libor plus 300 basis points.

Commodities Safe havens on a roll.  Over the past ten years, commodities prices broadly have fallen, as measured by the Thomson Reuters CRB Commodity Index, down by roughly -35% from December 2009. Perhaps even more remarkable, commodities are still 7% lower than at the lowest of the Global Financial Crisis of 2008-2009.  The price for crude oil has increased over the past year ending December 2019, up 34% year-over-year to approximately $61 per barrel.  The U.S. dollar, as measured by the DXY index, was virtually unchanged since December 2018 versus a basket of currencies.  Safe haven commodity assets such as gold have performed well recently. At the end of September 2019, the dollar price for an ounce of gold was at $1,523. This is 19% higher than the beginning of the year and 29% higher than five years prior. Over the past decade, the precious metal has appreciated by more than 38%, this is in sharp contrast to the broad commodity market in general.

4 Annual Total Returns of Key Asset Classes 2000 - 2019

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

Best Gov't Corp. Gov't Int'l Int'l Real Int'l Int'l Gov't Int'l U.S. Real Int'l U.S. U.S. Real U.S. Int'l Real U.S. Best Bonds Bonds Bonds Equity Equity Estate Equity Equity Bonds Equity Equity Estate Equity Equity Equity Estate Equity Equity Estate Equity

13.23% 10.40% 11.50% 40.82% 20.90% 20.06% 26.65% 16.65% 12.38% 41.44% 16.38% 14.26% 16.83% 32.80% 13.08% 13.32% 11.93% 27.19% 6.71% 30.90% Real Real Corp. U.S. Real Int'l Real Real Cash U.S. Real Gov't U.S. Int'l Real U.S. Real U.S. Infla- Int'l Estate Estate Bonds Equity Estate Equity Estate Estate Equity Estate Bonds Equity Equity Estate Equity Estate Equity tion Equity

12.24% 7.28% 10.52% 29.58% 14.48% 16.62% 16.59% 15.84% 2.05% 27.24% 13.11% 9.02% 16.17% 15.29% 11.81% 1.01% 7.97% 21.13% 1.91% 22.13% Corp. Gov't Real Hedge U.S. U.S. U.S. Gov't Infla- Corp. Int'l Corp. Real Real Corp. Gov't Corp. Real Cash Corp. Bonds Bonds Estate Funds Equity Equity Equity Bonds tion Bonds Equity Bonds Estate Estate Bonds Bonds Bonds Estate Bonds

9.40% 7.24% 6.74% 9.01% 11.78% 5.65% 15.34% 8.67% 0.10% 16.05% 11.15% 8.35% 10.54% 10.99% 7.53% 0.86% 5.63% 6.96% 1.88% 14.54% Cash Cash Hedge Real Hedge Hedge Hedge Hedge Corp. Hedge Corp. Infla- Corp. Hedge Gov't Infla- Int'l Corp. Gov't Gov't Funds Estate Funds Funds Funds Funds Bonds Funds Bonds tion Bonds Funds Bonds tion Equity Bonds Bonds Bonds

6.16% 4.43% 3.57% 8.99% 5.83% 5.13% 9.21% 7.68% -3.07% 9.65% 8.46% 2.96% 9.37% 7.70% 4.92% 0.66% 4.50% 6.42% 0.88% 6.83% Hedge Hedge Infla- Corp. Corp. Infla- Cash U.S. Real Infla- Gov't U.S. Hedge Infla- Hedge Hedge Infla- Hedge Hedge Real

5 Funds Funds tion Bonds Bonds tion Equity Estate tion Bonds Equity Funds tion Funds Funds tion Funds Funds Estate

5.77% 3.11% 2.39% 7.69% 5.25% 3.42% 4.81% 5.47% -6.46% 2.72% 5.52% 1.75% 4.22% 1.49% 3.14% 0.37% 2.09% 3.88% -1.05% 6.42% Infla- Infla- Cash Gov't Gov't Cash Corp. Corp. Hedge Cash Hedge Cash Gov't Cash Infla- Cash Hedge Gov't Corp. Hedge tion tion Bonds Bonds Bonds Bonds Funds Funds Bonds tion Funds Bonds Bonds Funds

3.39% 1.55% 1.79% 2.36% 3.48% 3.06% 4.27% 5.10% -19.86% 0.19% 5.07% 0.10% 2.02% 0.07% 0.68% 0.01% 1.89% 2.30% -2.51% 6.35% U.S. U.S. Int'l Infla- Infla- Gov't Gov't Cash U.S. Gov't Infla- Hedge Infla- Corp. Cash Corp. Gov't Infla- U.S. Infla- Equity Equity Equity tion tion Bonds Bonds Equity Bonds tion Funds tion Bonds Bonds Bonds tion Equity tion

-6.98% -10.64% -14.95% 1.88% 3.25% 2.65% 3.46% 5.03% -36.72% -2.19% 1.50% -3.55% 1.70% -2.01% 0.04% -0.77% 1.05% 2.12% -4.96% 2.29% Int'l Int'l U.S. Cash Cash Corp. Infla- Infla- Int'l Real Cash Int'l Cash Gov't Int'l Int'l Cash Cash Int'l Cash Equity Equity Equity Bonds tion tion Equity Estate Equity Bonds Equity Equity Equity

Worst -15.31% -19.74% -21.30% 1.16% 1.33% 1.95% 2.55% 4.06% -45.52% -16.86% 0.13% -13.71% 0.11% -2.60% -3.87% -5.67% 0.27% 0.84% -14.20% 2.28% Worst

Annualized Returns 2000 - 2019 Cash Infl. Hedge Int'l. Gov't. Corp. US Eq. R.E. Return 1.77% 2.15% 3.16% 4.27% 4.59% 6.06% 6.44% 8.73% Return Risk 0.96% 1.33% 4.79% 18.66% 4.44% 5.22% 15.93% 4.55% Risk

- Hedge Funds are represented by the HFRI FOF Conservative Index - U.S. Equity is represented by the S&P 1500 Index - Inflation is represented by the U.S. Consumer Price Index (SA) - Real Estate is represented by the NCREIF National Property Index - International Equity is represented by the MSCI - AC World EX-USA Index - Corporate Bonds are represented by the BBG Barclays - U.S. Corp. Inv. Gd. Index - Cash is represented by 30-day T-Bills - Government Bonds are represented by the BBG Barclays - U.S. Government Index

State of Michigan Retirement System ACTION ITEM State of Michigan Investment Board Meeting March 19, 2020

Wood row S. Tyler Senior Investment Manager Defined Contribution, Trusts & Agencies Division

STATE OF MICHIGAN INVESTMENT BOARD RESOLUTION AUTHORIZING REMOVAL OF OAKMARK EQUITY AND INCOME FUND FROM 401(k)/457 DC PLANS INVESTMENT MANAGER LINEUP Resolution 2020-1 WHEREAS, the State of Michigan Investment Board (the “Board”), pursuant to Executive Order 2018-10 and the Investment Policy Statement approved by the Board on November 27, 2018, is required to approve any changes to the investment options of the State of Michigan’s 401(k) and 457 plans (the “DC Plans”), following recommendations of the Bureau of Investments (the “BOI”) working in consultation with the Michigan Office of Retirement Services (the “ORS”); WHEREAS, Oakmark Equity & Income Fund, generally categorized as a balanced fund investing in both stocks and bonds, is currently an option within the DC Plan investment lineup; WHEREAS, the BOI and ORS have determined that, relative to the Oakmark Equity & Income Fund: (i) shifting existing DC Plan participants invested in the Oakmark Equity & Income Fund to a blend of the DC Plan’s current S&P 500 Index Fund and the U.S. Aggregate Bond Index Fund would result in lower fees and an opportunity to generate higher returns over the long-term, and (ii) placing new DC Plan participants in Target Date Funds as a default option would provide more diversified asset allocation, resulting in glide paths better targeted to each participant’s individual retirement date; WHEREAS, the BOI recommends the removal of the Oakmark Equity & Income Fund as an option in the DC Plans investment lineup; and WHEREAS, the Board has received the recommendation of the BOI at a public meeting held on the date of this resolution. NOW, THEREFORE, BE IT RESOLVED, that the Board hereby approves the removal of Oakmark Equity & Income Fund from the DC Plans investment options. Ayes: Nays: Recused: East Lansing, Michigan , 2020

State of Michigan Retirement System DEFINED CONTRIBUTION REVIEW State of Michigan Investment Board Meeting March 19, 2020

Woodrow S. Tyler Senior Investment Manager Defined Contribution, Trusts & Agencies Division

EXECUTIVE SUMMARY

Overview Defined Contribution (DC) plans are participant led investments. The role of the Bureau of Investments is to offer a sufficient range of investment options to allow the participants to diversify their individual retirement accounts and construct portfolios that reasonably span the risk/return spectrum. To this end, the Plans may be comprised of at least one investment option from the categories below. Investments Options Tier I: Target Date Funds and Passively Managed Index Funds  Target Date Funds (TDFs) are the default option for plan participants. Each TDF seeks to achieve its objective by investing in a set of underlying index funds representing various asset classes. Over time, the allocation to asset classes and funds change according to a predetermined "glide path" and will become more conservative as it approaches the target retirement date.  Passively Managed Index Funds are comprised of low-cost index funds which seek to replicate the performance of a variety of cash, bond and stock indices with very little tracking error and at a low fee. Tier II: Actively Managed Funds  These are funds actively managed by investment managers in an attempt to outperform various cash, bond and stock indices over long periods of time. Tier III: Self Directed Brokerage Account – Non-Core Options  TD Ameritrade provides access to a broad range of investment choices including individual stocks, bonds, CDs, over 100 commission-free ETFs, and more than 13,000 mutual funds— including more than 2,100 no-load, no-transaction-fee (NTF) mutual funds. SOM Plans (12/31/19) Number of Participants Combined 401k & 457 401(k) 73,697 $6,768 457 22,649 1,846 Pension Plus 228,329 961 EAA 927 11 Total 195,168* $9,586 ($ in millions) *Adjusted for overlapping participants in Plan Investment Selection  The selection of each investment option for the Plans is based on the prudence standards set by the Governing Documents and applicable law, with flexibility built-in to allow a search to take full advantage of strategic opportunities. The search will focus on finding opportunities which are tailored to the Plans’ specific needs. The BOI, in consultation with the Office of Retirement Services (ORS), will establish search criteria that aligns with the purpose and objective an investment option is seeking to attain. Due diligence will be completed with the goal of selecting a plan that, in the totality of circumstances, offers fair and reasonable investment options for the Plan participants.  With respect to Tier III investments, the universe of available options is extensive. Since the selection of investments is directed solely by the participants which elect the Tier III option, the State does not provide any criteria for selecting or monitoring these non-core investment options.

1 Tier I Line-Up

Return vs Beta Jan 17 ‐ Dec 19 18.0

16.0 Emerging Markets S&P 500 Index, 15.3 14.0 Fund, 11.7 12.0 % 10.0

8.0 Global Equities Fund, S&P Midcap, 9.2

Return 10.1 6.0 SSgA Bond Fund, 4.0 4.0

2.0 Short Term Investments, 1.6 0.0 0 0.2 0.4 0.6 0.8 1 1.2 Beta

Tier II Line-Up

Return vs Beta Jan 17 ‐ Dec 19 24.0 22.0 Jennison 20.0 22.0 18.0 16.0 Artisan % 14.0 17.6 12.0 Prudential Voya PIMCO 10.0 7.3 American Dodge 8.2 Return 8.0 4.3 12.5 SV Oakmark 11.2 6.0 2.5 7.8 4.0 T. Rowe Virtus 2.0 6.1 4.3 0.0 0 0.2 0.4 0.6 0.8 1 1.2 1.4 Beta

2 Market Environment and Outlook

On December 20, 2019, the SECURE Act (Setting Every Community Up for Retirement Enhancement) was signed into law with broad bi-partisan support. While there are 29 provisions in the law, they can be categorized into three main provisions which will allow more Americans to participate in workplace plans and empower greater retirement readiness: 1. Extend Retirement Plan Access a. Authorize open Multiple Employer Plans (MEPs) and repeal of the “one bad apple” rule (effective January 1, 2021) b. Encourage small employers to adopt plans and auto enroll by providing tax credits (effective January 1, 2020) c. Establish long-term part-time worker status (effective January 1, 2021) 2. Increase Savings Contributions a. Increase the limit on automatic escalation from 10% to 15% (effective January 1, 2020) b. Allow contributions to a traditional IRA after age 70½ (effective January 1, 2020) c. Change required minimum distributions age from 70½ to 72 (effective January 1, 2020) 3. Expand Savings Distribution Options a. Modified the fiduciary Safe Harbor for selecting an annuity provider (effective January 1, 2021) b. Enable portability of lifetime income products (effective January 1, 2021) c. Offer penalty-free distributions upon birth or adoption of a child (effective January 1, 2021) d. Amend wealth transfer strategies by limiting the window of post-death payments (effective January 1, 2021) e. Feature lifetime income disclosure- (DOL will establish standards by end of 2020)

DC Plan Evolution

 Version 1.0 (1990s) - offer a lot of investment choices and options for plan participants to select and invest in  Version 2.0 (2010s) - several behavioral economists like Richard Thaler (University of Chicago) did groundbreaking research which indicated the Version 1.0 approach was not resulting in the best outcome for participants. This resulted in the creation of auto enrollment, auto escalation and default investment options (i.e. professionally managed investment products like Target Date Funds (TDFs))  Version 3.0 (2019) - while the previous designs have focused on accumulation, the passage of the SECURE Act is focused on outcomes and retirement readiness of the individual and the entire lifecycle from accumulation to decumulation.

Turning DC Plan Assets into Retirement Income

The BOI, in consultation with ORS and Aon, will research and review the variety of options available for providing lifetime income solutions for plan participants and determine if one or more of them might be worthwhile incorporating into the DC Plan lineup either as a separate investment or part of the Target Date Funds.

Retirement programs need to go beyond accumulating wealth by creating income to last a lifetime:  Income Needs are Increasing o Fewer employers paying for retirement programs coupled with increasing out-of- pocket medical costs o Changes in Social Security likely, since current benefits are projected to be unsustainable after ~2023 (based on current laws)

3  Longevity Risk Being Recognized o Increasing life expectancies o Reduced income level and increased lump sum availability from private pensions o Growing savings in defined contribution plans and product availability  The Business Case is Real o Address participant needs as a plan fiduciary o Facilitate retirement to address workforce management concerns o Support broader employee messages about financial wellness

Proposed Changes to Tier II lineup

We recommend removing the Oakmark Equity and Income Fund from the 401(k)/457 Tier II investment manager lineup. Funds which are currently invested, and future contributions would be reallocated to a blend of the S&P 500 Index Fund and U.S. Aggregate Bond Index Fund currently in the Tier I lineup.

This recommendation is based on the belief that participants would be better off after the change due to the following reasons:  Participants would likely earn higher returns  Participants would pay lower management fees  The Target Date Funds in the lineup offer a more diversified and tailored investment option for participants in the Plan

4 SMRS Defined Contribution Strategies 12/31/19

% of Fee per Markets Amount Total $1,000 QDIA ($ in Millions) 12/31/2019 12/31/2018

Total Target Date Fund $2,134 $1,477 22.3% $0.70

Tier I Index Funds

State Street S&P 500 Index Fund $1,335 $1,046 $0.13 State Street Bond Market Index Fund 866 716 0.20 State Street Global All Cap Equity ex-US Index Fund 689 518 0.45 State Street S&P Mid Cap Index Fund 621 501 0.20 BlackRock Government Short-Term Investment CL F 234 227 0.56 BlackRock S&P Small Cap 600 Equity Index CL F 140 125 0.25 BlackRock Emerging Markets Index CL F 130 112 0.69 Total Tier I Index $4,014 $3,243 41.9% $0.26

Tier II Active Funds

Stable Value Fund $1,154 $1,156 $2.23 Dodge & Cox Stock Fund 596 525 4.13 Jennison Large Cap Growth Fund 423 344 2.92 American Funds EuroPacific Growth R6 327 293 4.90 Voya Small Cap Growth Equity Fund 150 131 4.33 Artisan Mid Cap Fund 126 88 7.05 T. Rowe Price Mid-Cap Value Fund 119 108 6.30 PIMCO Total Return I Fund 117 110 4.60 Oakmark Equity & Income I Fund 117 107 4.30 Virtus Ceredex Small-Cap Value Eq I 71 67 6.80 Prudential High Yield Fund 37 25 3.76 Total Tier II Active $3,236 $2,955 33.7% $3.65

Tier III

Total Self Directed Brokerage Account $202 $166 2.1% NA

Total Defined Contribution Assets $9,586 $7,841 100.0% $1.50

NOTE: Totals may not be exact due to rounding.

5 SMRS Defined Contribution by Investment Strategy 12/31/19

Self Managed Account 2.1%

Target Date Retirement Fund 22.3% Passive Strategies 41.9%

Active Strategies 33.8%

Market Value in Millions

12/31/19 12/31/18 Passive Strategies $4,014 41.9% $3,243 41.4% Active Strategies 3,236 33.8% 2,955 37.7% Target Date Retirement Fund 2,134 22.3% 1,477 18.8% Self Managed Account 202 2.1% 166 2.1% Total Investments $9,586 100.0% $7,841 100.0%

*Loan Fund $206M as of 12/31/19

6 Defined Contribution Performance by Fund 12/31/19

Fund Name Market Value 1-Year 3-Years 5-Years 10-Years

State Street Target Retirement Income Fund $43,699,413 13.3% 6.1% 4.5% 5.5% State Street Income Custom Index 13.2% 6.1% 4.5% 5.6% Morningstar Target-Date Retirement 12.9% 5.9% 4.2% 5.1% Variance State Street Income Custom Index 0.1% 0.0% 0.0% -0.1% Variance Morningstar Target-Date Retirement 0.4% 0.2% 0.3% 0.4%

State Street Target Retirement 2015 Fund 56,840,322 13.7% 6.6% 4.9% 7.2% State Street 2015 Custom Index 13.7% 6.6% 4.9% 7.2% Morningstar Target-Date 2015 15.4% 7.2% 5.2% 6.2% Variance State Street 2015 Custom Index 0.0% 0.0% 0.0% 0.0% Variance Morningstar Target-Date 2015 -1.7% -0.6% -0.3% 1.0%

State Street Target Retirement 2020 Fund 140,766,974 16.9% 8.1% 5.9% 8.2% State Street 2020 Custom Index 16.8% 8.1% 5.9% 8.3% Morningstar Target-Date 2020 16.2% 7.5% 5.4% 6.6% Variance State Street 2020 Custom Index 0.1% 0.0% 0.0% -0.1% Variance Morningstar Target-Date 2020 0.7% 0.6% 0.5% 1.6%

State Street Target Retirement 2025 Fund 203,186,812 19.9% 9.5% 6.9% 9.0% State Street 2025 Custom Index 19.9% 9.5% 6.8% 9.1% Morningstar Target-Date 2025 18.3% 8.6% 6.1% 7.5% Variance State Street 2025 Custom Index 0.0% 0.0% 0.1% -0.1% Variance Morningstar Target-Date 2025 1.6% 0.9% 0.8% 1.5%

State Street Target Retirement 2030 Fund 228,392,089 21.8% 10.3% 7.3% 9.4% State Street 2030 Custom Index 21.7% 10.3% 7.3% 9.5% Morningstar Target-Date 2030 20.1% 9.4% 6.6% 7.8% Variance State Street 2030 Custom Index 0.1% 0.0% 0.0% -0.1% Variance Morningstar Target-Date 2030 1.7% 0.9% 0.7% 1.6%

State Street Target Retirement 2035 Fund 249,466,708 22.9% 10.8% 7.7% 9.6% State Street 2035 Custom Index 22.9% 10.8% 7.6% 9.7% Morningstar Target-Date 2035 22.0% 10.3% 7.3% 8.6% Variance State Street 2035 Custom Index 0.0% 0.0% 0.1% -0.1% Variance Morningstar Target-Date 2035 0.9% 0.5% 0.4% 1.0%

State Street Target Retirement 2040 Fund 247,105,522 23.9% 11.2% 7.9% 9.7% State Street 2040 Custom Index 23.9% 11.2% 7.9% 9.8% Morningstar Target-Date 2040 23.2% 10.7% 7.5% 8.6% Variance State Street 2040 Custom Index 0.0% 0.0% 0.0% -0.1% Variance Morningstar Target-Date 2040 0.7% 0.5% 0.4% 1.1%

State Street Target Retirement 2045 Fund 254,033,883 24.8% 11.5% 8.1% 9.9% State Street 2045 Custom Index 24.8% 11.5% 8.1% 9.9% Morningstar Target-Date 2045 24.3% 11.2% 7.8% 9.1% Variance State Street 2045 Custom Index 0.0% 0.0% 0.0% 0.0% Variance Morningstar Target-Date 2045 0.5% 0.3% 0.3% 0.8%

State Street Target Retirement 2050 Fund 317,437,652 25.0% 11.5% 8.2% 9.9% State Street 2050 Custom Index 25.0% 11.5% 8.1% 9.9% Morningstar Target-Date 2050 24.5% 11.1% 7.8% 8.9% Variance State Street 2050 Custom Index 0.0% 0.0% 0.1% 0.0% Variance Morningstar Target-Date 2050 0.5% 0.4% 0.4% 1.0%

State Street Target Retirement 2055 Fund 308,050,094 25.0% 11.5% 8.2% N/A State Street 2055 Custom Index 25.0% 11.5% 8.1% N/A Morningstar Target-Date 2055 24.9% 11.4% 8.0% N/A Variance State Street 2055 Custom Index 0.0% 0.0% 0.1% N/A Variance Morningstar Target-Date 2055 0.1% 0.1% 0.2% N/A

7 Fund Name Market Value 1-Year 3-Years 5-Years 10-Years

State Street Target Retirement 2060 Fund $84,959,089 25.0% 11.5% N/A N/A State Street 2060 Custom Index 25.0% 11.5% N/A N/A Morningstar Target-Date 2060+ 25.2% 11.5% N/A N/A Variance State Street 2060 Custom Index 0.0% 0.0% N/A N/A Variance Morningstar Target-Date 2060+ -0.2% 0.0% N/A N/A TIER I

State Street S&P 500 Index Fund $1,334,990,716 31.5% 15.3% 11.7% 13.5% S&P 500 Index 31.5% 15.3% 11.7% 13.6% Morningstar Large Blend 28.6% 13.3% 9.5% 11.5% Variance S&P 500 Index 0.0% 0.0% 0.0% -0.1% Variance Morningstar Large Blend 2.9% 2.0% 2.2% 2.0%

State Street Bond Market Index Fund 865,626,076 8.7% 4.0% 3.0% 3.7% Bloomberg Barclays U.S. Aggregate Index 8.7% 4.0% 3.0% 3.7% Morningstar Intermediate-Term Bond 8.3% 3.8% 2.9% 3.8% Variance Bloomberg Barclays U.S. Aggregate Index 0.0% 0.0% 0.0% 0.0% Variance Morningstar Intermediate-Term Bond 0.4% 0.2% 0.1% -0.1%

State Street Global All Cap Equity ex-U.S. Index Fund 688,581,754 21.9% 10.1% 6.0% N/A MSCI ACWI ex USA IMI (Net) 21.6% 9.8% 5.7% N/A Morningstar Foreign Large Blend 21.5% 9.2% 5.2% N/A Variance MSCI ACWI ex USA IMI (Net) 0.3% 0.3% 0.3% N/A Variance Morningstar Foreign Large Blend 0.4% 0.9% 0.8% N/A

State Street S&P Mid Cap Index Fund 621,167,445 26.2% 9.2% 9.0% 12.6% S&P 400 Index 26.2% 9.3% 9.0% 12.7% Morningstar Mid-Cap Blend 25.9% 8.9% 7.0% 10.7% Variance S&P 400 Index 0.0% -0.1% 0.0% -0.1% Variance Morningstar Mid-Cap Blend 0.3% 0.3% 2.0% 1.9%

BlackRock Government Short-Term Investment CL F 234,220,520 2.2% 1.6% 1.1% N/A BofA Merill Lynch US 3-Month Treasury Bill Index 2.3% 1.7% 1.1% N/A Variance BofA Merill Lynch US 3-Month Treasury Bill Index -0.1% -0.1% 0.0% N/A

BlackRock S&P Small Cap 600 Equity Index CL F 139,789,413 22.9% N/A N/A N/A N/A S&P SmallCap 600 Index 22.8% N/A N/A N/A N/A Morningstar Small Blend 23.5% N/A N/A N/A N/A Variance S&P SmallCap 600 Index 0.1% N/A N/A N/A N/A Variance Morningstar Small Blend -0.6% N/A N/A N/A N/A

BlackRock Emerging Markets Index CL F 130,012,063 18.3% 11.7% 5.7% N/A MSCI Emerging Market (Net) 18.4% 11.6% 5.6% N/A Morningstar Diversified Emerging Mkts 19.1% 10.4% 4.6% N/A Variance MSCI Emerging Market (Net) -0.1% 0.1% 0.1% N/A Variance Morningstar Diversified Emerging Mkts -0.8% 1.3% 1.1% N/A TIER II

Stable Value Fund $1,153,705,500 2.9% 2.5% 2.4% 2.3% Barclays Int Gov/Credit A or Higher Index 5.9% 2.9% 2.3% 2.7% Hueler Universe 2.5% 2.2% 2.0% 2.2% Variance Barclays Int Gov/Credit A or Higher Index -3.0% -0.4% 0.1% -0.4% Variance Hueler Universe 0.4% 0.3% 0.4% 0.1%

Dodge & Cox Stock Fund 595,888,438 25.6% 11.2% 9.7% 12.6% Russell 1000 Value Index 26.5% 9.7% 8.3% 11.8% Morningstar Large Value 25.0% 9.9% 7.8% 10.5% Variance Russell 1000 Value Index -0.9% 1.5% 1.4% 0.8% Variance Morningstar Large Value 0.6% 1.3% 1.9% 2.1%

8 Fund Name Market Value 1-Year 3-Years 5-Years 10-Years

Jennison Large Cap Growth Fund 422,591,416 32.5% 22.0% 15.3% N/A Russell 1000 Growth Index 36.4% 20.5% 14.6% N/A Morningstar Large Growth 31.7% 18.1% 12.0% N/A Variance Russell 1000 Growth Index -3.9% 1.5% 0.7% N/A Variance Morningstar Large Growth 0.8% 3.9% 3.3% N/A

American Funds EuroPacific Growth R6 326,921,304 27.4% 12.5% 7.4% 6.7% MSCI EAFE Index - Net Div 22.0% 9.6% 5.7% 5.5% Morningstar Foreign Large Blend 21.5% 9.2% 5.2% 5.1% Variance MSCI EAFE Index - Net Div 5.4% 2.9% 1.7% 1.2% Variance Morningstar Foreign Large Blend 5.9% 3.3% 2.2% 1.6%

Voya Small Cap Growth Equity Fund 150,212,174 25.9% 8.2% 7.5% N/A Russell 2000 Growth Index 28.5% 12.5% 9.3% N/A Morningstar Small Growth 27.7% 13.5% 9.6% N/A Variance Russell 2000 Growth Index -2.6% -4.3% -1.8% N/A Variance Morningstar Small Growth -1.8% -5.3% -2.1% N/A

Artisan Mid Cap Fund 126,072,899 38.7% 17.6% 10.7% 14.1% Russell Midcap Growth Index 35.5% 17.4% 11.6% 14.2% Morningstar Mid-Cap Growth 32.3% 15.4% 10.0% 12.2% Variance Russell Midcap Growth Index 3.2% 0.2% -0.9% -0.1% Variance Morningstar Mid-Cap Growth 6.4% 2.2% 0.7% 1.9%

T. Rowe Price Mid-Cap Value Fund 118,546,838 19.7% 6.2% 7.7% 10.8% Russell Midcap Value Index 27.1% 8.1% 7.6% 12.4% Morningstar Mid-Cap Value 24.8% 7.3% 6.6% 10.7% Variance Russell Midcap Value Index -7.4% -1.9% 0.1% -1.6% Variance Morningstar Mid-Cap Value -5.1% -1.1% 1.1% 0.1%

PIMCO Total Return I Fund 117,292,139 8.3% 4.3% 3.2% 4.2% Bloomberg Barclays U.S. Aggregate Index 8.7% 4.0% 3.0% 3.7% Morningstar Intermediate Core-Plus Bond 8.9% 4.1% 3.1% 4.3% Variance Bloomberg Barclays U.S. Aggregate Index -0.4% 0.3% 0.2% 0.5% Variance Morningstar Intermediate Core-Plus Bond -0.6% 0.2% 0.1% -0.1%

Oakmark Equity & Income I Fund 116,945,730 19.7% 8.1% 6.2% 8.0% 60% S&P 500/40% Barclays U.S. Gov/Credit Index 22.6% 11.0% 8.5% 9.9% Morningstar Allocation--50% to 70% Equity 18.9% 8.2% 5.9% 7.4% Variance 60% S&P 500/40% Barclays U.S. Gov/Credit Index -2.9% -2.9% -2.3% -1.9% Variance Morningstar Allocation--50% to 70% Equity 0.8% -0.1% 0.3% 0.6%

Virtus Ceredex Small-Cap Value Eq I 71,146,789 18.1% 4.9% 7.2% 11.0% Russell 2000 Value Index 22.4% 4.8% 7.0% 10.6% Morningstar Small Value 21.2% 3.8% 5.5% 9.9% Variance Russell 2000 Value Index -4.3% 0.1% 0.2% 0.4% Variance Morningstar Small Value -3.1% 1.1% 1.7% 1.1%

Prudential High Yield Fund 36,689,393 16.7% 7.3% 6.6% N/A Bloomberg Barclays U.S. Corp. HY 1% Issuer Cap Index 14.3% 6.3% 6.1% N/A Morningstar High Yield Bond 12.5% 5.2% 4.8% N/A Variance Bloomberg Barclays U.S. Corp. HY 1% Issuer Cap Index 2.4% 1.0% 0.5% N/A Variance Morningstar High Yield Bond 4.2% 2.1% 1.8% N/A TIER III

Self Directed 201,627,132

TOTAL $9,585,966,297

Loan Fund: $206,062,010

9

State of Michigan Retirement System INTERNATIONAL EQUITY REVIEW State of Michigan Investment Board Meeting March 19, 2020

Patrick M. Moraniec, CFA Senior Investment Manager International Equity Division

EXECUTIVE SUMMARY

Performance

MPSERS Plan (12/31/2019) 1-Year 3-Years 5-Years 7-Years 10-Years Annualized Returns 23.2% 10.8% 6.7% 6.6% 6.2% MSCI ACWI ex USA Returns 21.5% 9.9% 5.5% 5.6% 5.0% Peer Median Returns 23.2% 10.8% 6.5% 6.6% 6.1% Percentile Rank vs. Peers* 49 48 41 51 48 *Source: State Street Universe greater than $1 billion

 The International Equity Division (IED) portfolio outperformed the benchmark by 1.7% over the last twelve months. Outperformance from the quality factor, momentum factor and financials underweight was offset by underperformance in the value factor.

Asset Class Goals

 Construct a non-U.S. equity-focused portfolio to generate, on a consistent basis, ten-year returns that exceed the MSCI ACWI ex USA by 1.0%.

 Perform in the top half of the public plan peer universe percentile rankings.

 Advance people, processes, and systems to continuously improve investment decisions.

Strategy

 The International Equity Division has three distinct portfolio strategies.

o Active investments, 38.4% of assets, to gain specific international stock market exposures.

o Stock plus investments, 36.3% of assets, to implement a portable alpha strategy onto high-level strategic tilts.

o Index investments, 25.3% of assets, to gain broad international stock market exposure with minimal tracking risk.

 Current portfolio drivers of risk and return.

o Tracking error of the portfolio is approximately 1.1% which is below the division’s risk budget of 3.0%.

o The momentum factor, the largest contributor to tracking error, accounts for only 16.0% of the total tracking error indicating the portfolio is not materially exposed to any one single risk.

o Future portfolio returns will be driven by the performance of the quality, value and momentum factors with additional tracking error contributions from the energy, financials and healthcare sectors.

1  Quarterly changes to International Equity Division allocation.

o Rebalanced $1.15 billion of maturing equity swaps to MSCI factor indexes maintaining the portfolio’s exposure to the quality, value and momentum factors.

o Raised $370.0 million from LA Capital Management Emerging Markets portfolio to fund the IED Quality Equity portfolio. The IED Quality Equity portfolio invests in high quality companies for the long-term. Forward looking estimates for return are 12.9% annualized with an estimated information ratio of 0.9.

Market Environment and Outlook

Market Performance

 International stock markets rebounded in 2019, up 21.5%. Earnings per share growth year-over-year contracted -7.0% but was more than offset by price-to-earnings multiple expansion of 27.0%.

 Quality and momentum factors outperformed the MSCI ACWI ex USA in 2019, up 30.1% and 24.0% respectively. Value continued to underperform, up 15.8%. Quality, value, and momentum remain strategically important factors to IED.

 Developed markets outperformed the MSCI ACWI ex USA, up 22.5% while emerging markets underperformed, up 18.4%.

 The U.S. dollar was essentially flat for 2019 and remains range bound since late 2014.

 Commodities returned approximately 7.7% in 2019. Commodities remain down -57.0% from their interim cycle highs back in early 2011. Oil appreciated 34.0% in 2019, copper 6.0%, and gold 18.0%.

 Global risk-free interest rates (index weighted) remain subdued at approximately 1.3%.

Outlook

 Completion of a phase one trade deal with China has temporarily deescalated the trade tensions between the U.S. and China. Enforcement solutions to key issues such as unfair trade practices, intellectual property theft, and forced technology transfer were only partially addressed. The timing of a complete trade deal remains unknown and this uncertainty will continue to negatively impact global trade.

 World trade volumes, a proxy for economic growth, continue to exhibit negative year- over-year growth. Trade volume contracted -1.0% which is below the historical average of 3.4% over the last twenty years. On-going disputes between the U.S., Europe and China may explain the subdued growth.

 Europe remains mired in slow growth. Sales growth continued to expand, albeit at 1.5% year-over-year, indicating a bottoming process may be taking place. Europe manufacturing PMIs remain in contraction but are also exhibiting signs of bottoming.

2  Japan manufacturing PMIs contracted for the ninth consecutive month with a reading below 50.0. Sales growth year-over-year was 1.2% and earnings per share growth contracted -8.0% year-over-year indicating sluggish economic activity.

 The recent COVID-19 outbreak in China will have a negative impact on China’s GDP in 2020. The second largest economy in the world will most likely see manufacturing PMIs fall back below 50.0.

 Global manufacturing PMIs are barely above expansionary territory, currently at 50.4, indicating the global slowdown may not abate until late 2020.

 Global growth will be challenging in 2020 given the slow sales growth and contracting manufacturing PMIs in the aforementioned major international economies. Zero to low single digit growth in earnings per share may be the base-case scenario.

 On a positive note, major central banks remain accommodative in their monetary policies. This should provide a first line of defense to slow sales and earnings growth and may partially explain the significant price-to-earnings multiple expansion in 2019.

 Analysts continue to project positive earnings growth of about 11.3% over the next twelve months for the MSCI ACWI ex USA index. Multiples have expanded 13.0% since February 2019 but were off a low price-to-earnings starting number. Investors are paying a forward price-to-earnings of about 14.5x and trailing 16.1x.

 Go-forward annualized returns for the MSCI ACWI ex USA index are estimated at 8.7%. This rate is based on the current price and actual fundamentals over multiple periods to remove fundamental variability, better estimating the earnings power of the index.

 A ten-year blended international government yield of 1.3% implies an international equity risk premium of 7.5%. The equity risk premium decreased primarily due to a decrease in forward looking stock returns. The decrease in returns was a direct result of rising stock prices and no change in normalized earnings projections.

Conclusion

International economic fundamentals continued to decline in 2019, however, global government bond yields fell as major central banks’ monetary policies remained accommodative. The policies in Japan, Europe, and now the U.S. are an open-ended inflation targeting processes. International stock markets trade at approximately a 26.0% discount relative to their twenty-three-year history and a wide spread relative to global risk- free rates. To capture this upside, international stock investors will need a long investment horizon as the short-term environment could experience increased volatility and a higher probability of a significant drawdown in equity markets should central bank policy not off-set continued macro-economic weakness.

3 SMRS International Equity Strategies 12/31/19

Markets Amount Total % of Total

Active ($ in Millions)

BlackRock MSCI $2,114 Wellington 1,074 Martin Currie 401 Marathon-London 330 SSGA 271 Lazard 265 Effissimo Capital Management 91

Total Active $5,047 38.4%

Stock Plus

Internal $2,813 PIMCO 1,949

Total Stock Plus $4,762 36.3%

Indexed SSGA $1,884 BlackRock 1,436

Total Indexed $3,320 25.3%

TOTAL $13,129 100.0%

4 SMRS International Equities 12/31/19

Date: 12/31/19 9/30/19 6/30/19 3/31/19

Assets ($ in Millions): $13,129 $11,929 $12,131 $12,264 Number of Securities: 2,982 2,711 2,705 2,636 Active Share: 33% 32% 31% 26%

Benchmark: MSCI ACWI ex USA

Description: The International Equities Composite represents all International Equity Division investments.

Portfolio Characteristics: SMRS MSCI ACWI ex USA LTM Normalized LTM Normalized Return: Annualized Total Return 9.0% 9.5% 8.2% 8.7% Sustainable Growth Rate 5.6% 6.8% 5.0% 6.3% Dividend Yield 2.4% 2.1% 2.7% 2.3% Buyback Yield 0.5% 0.1% 0.5% 0.0% Collateral Yield 0.5% 0.5% 0.0% 0.0% Risk: Beta 0.95 -- 1.00 -- Volatility 11.2% -- 11.8% -- Tracking Error 1.1% -- 0.0% -- Information Ratio 0.7 0.7 -- -- Fundamental: Average Capitalization ($ in Billions) 79.3 -- 77.1 -- Price/Earnings 16.6 18.7 16.6 18.6 Price/Book 1.8 2.1 1.8 2.1 ROE 10.8% 11.3% 10.7% 11.1%

TOP TEN HOLDINGS ($ in Billions* - $ in Millions**)

Portfolio Market FY1 Market Weight Capitalization* P/E Value**

Tencent Holdings Ltd. 2.7% $460.5 34.1 $354.5 Taiwan Semiconductor Manufacturing Co., Ltd. 1.9% 286.3 25.1 249.9 Roche Holding AG 1.7% 278.4 15.8 221.0 Samsung Electronics Co., Ltd. 1.2% 320.4 17.3 154.3 Nestle S.A. 1.1% 321.8 23.8 142.1 ASML Holding NV 1.0% 126.0 42.8 133.8 AstraZeneca PLC 1.0% 132.2 28.1 127.6 CSL Limited 1.0% 88.0 41.3 125.6 LVMH Moet Hennessy Louis Vuitton SE 1.0% 235.0 28.3 124.8 Alibaba Group Holding. Ltd. 0.9% 570.7 28.9 119.1

TOTAL 13.3% $2,819.2 $1,752.6

5 SMRS International Equity By Sector 12/31/19

Cash/ RE Utilities Other 2.4% 0.3% Energy 2.7% Financials 4.2% 15.5% Materials 6.6%

Communication Services 7.6% Industrials 13.8%

Information Technology 10.9% Consumer Discretionary Consumer 12.9% Staples 11.0% Health Care 12.1%

Market Value in Millions 12/31/19

Assets Percent Benchmark Difference Financials $2,034 15.5% 21.3% -5.8% Industrials 1,806 13.8% 11.9% 1.9% Consumer Discretionary 1,694 12.9% 11.9% 1.0% Health Care 1,590 12.1% 8.9% 3.2% Consumer Staples 1,441 11.0% 9.4% 1.6% Information Technology 1,431 10.9% 9.5% 1.4% Communication Services 1,002 7.6% 6.7% 0.9% Materials 868 6.6% 7.3% -0.7% Energy 543 4.2% 6.6% -2.4% Utilities 358 2.7% 3.4% -0.7% Real Estate 318 2.4% 3.1% -0.7% Total Investments $13,085 99.7% 100.0% Cash/Other 44 0.3% 0.0% 0.3% Total $13,129 100.0% 100.0%

Benchmark: MSCI ACWI ex USA

6 International Equity Performance - Net of Fees 12/31/19

Inception Fund Name Market Value 1-Year 3-Years 5-Years 7-Years Inception Date

Total International Equity $13,129,204,239 22.9% 10.5% 6.5% 6.4% 6.0% 1/1/04 MSCI ACWI ex USA 21.5% 9.9% 5.5% 5.6% 6.2% Lipper International Multi-Cap Core 20.8% 8.8% 5.2% 5.8% 5.5% Excess Return 1.3% 0.6% 1.0% 0.7% -0.2% Pct Rank vs. Lipper International Multi-Cap Core 18 4 10 22 22

Total International Active Strategy $5,047,199,069 21.3% 9.4% 5.8% 6.1% 5.2% 5/1/05 MSCI ACWI ex USA 21.5% 9.9% 5.5% 5.6% 5.5% Lipper International Multi-Cap Core 20.8% 8.8% 5.2% 5.8% 4.9% Excess Return -0.2% -0.4% 0.3% 0.5% -0.3% Pct Rank vs. Lipper International Multi-Cap Core 51 45 33 48 51 BlackRock MSCI Systematic Return 2,113,605,693 23.3% ------17.8% 12/1/18 MSCI ACWI ex USA 21.5% ------14.7% Lipper International Multi-Cap Core 20.8% ------13.5% Excess Return 1.7% ------3.1% Pct Rank vs. Lipper International Multi-Cap Core 17 ------2 Wellington IRE 643,275,094 23.2% 10.7% 6.3% 7.1% 4.9% 12/1/05 MSCI World ex USA 22.5% 9.3% 5.4% 6.0% 5.2% Lipper International Multi-Cap Core 20.8% 8.8% 5.2% 5.8% 4.2% Excess Return 0.7% 1.4% 0.8% 1.1% -0.3% Pct Rank vs. Lipper International Multi-Cap Core 17 2 14 10 16 Martin Currie International Long-Term 400,413,772 34.1% ------13.4% 2/1/17 MSCI ACWI ex USA 21.5% ------8.9% Lipper International Multi-Cap Core 20.8% ------7.8% Excess Return 12.6% ------4.5% Pct Rank vs. Lipper International Multi-Cap Core 1 ------1 Marathon-London International Fund 329,558,410 23.2% 9.4% 7.1% 8.2% 8.6% 2/1/12 MSCI World ex USA 22.5% 9.3% 5.4% 6.0% 6.7% Lipper International Multi-Cap Core 20.8% 8.8% 5.2% 5.8% 6.5% Excess Return 0.7% 0.1% 1.7% 2.1% 2.0% Pct Rank vs. Lipper International Multi-Cap Core 17 45 7 3 6 Wellington Emerging Markets Local Equity 305,313,904 18.6% 12.3% 6.2% 5.2% 7.0% 12/1/11 MSCI Emerging Market Index 18.4% 11.6% 5.6% 3.3% 4.8% Lipper Emerging Markets 19.5% 10.5% 4.9% 3.1% 4.6% Excess Return 0.2% 0.7% 0.6% 1.9% 2.1% Pct Rank vs. Lipper Emerging Markets 57 30 33 16 12 SSGA International Alpha Small Cap 270,494,148 24.0% 9.1% 7.4% 8.6% 4.1% 5/1/07 MSCI World ex USA Small Cap 25.4% 10.4% 8.2% 8.4% 3.7% Lipper International Small/Mid-Cap Core 19.1% 8.0% 6.0% 6.4% 3.4% Excess Return -1.4% -1.3% -0.8% 0.2% 0.5% Pct Rank vs. Lipper International Small/Mid-Cap Core 21 34 36 121 Lazard/Wilmington International Equity 264,600,000 21.4% 8.9% 4.8% -- 2.9% 6/1/14 MSCI World ex USA 22.5% 9.3% 5.4% -- 3.3% Lipper International Large-Cap Core 20.8% 8.8% 5.2% -- 3.3% Excess Return -1.1% -0.4% -0.6% -- -0.4% Pct Rank vs. Lipper International Large-Cap Core 50 57 73 -- 73 Wellington Select China Equity 125,613,000 ------4.7% 9/1/19 MSCI All China Index ------3.2% Lipper Emerging Markets ------12.2% Excess Return ------1.5% Pct Rand vs. Lipper Emerging Markets ------96 Effissimo Capital Management Japan 91,323,562 15.0% 5.9% -- -- 5.8% 12/1/15 MSCI Japan 19.6% 8.9% -- -- 7.2% Lipper International Small/Mid-Cap value 17.1% 6.6% -- -- 7.1% Excess Return -4.7% -3.0% -- -- -1.4% Pct Rank vs. Lipper International Small/Mid-Cap Value 81 78 -- -- 89

7 Inception Fund Name Market Value 1-Year 3-Years 5-Years 7-Years Inception Date

Total International Stock Plus Strategy $4,761,868,499 25.6% 11.5% 7.1% 7.3% 7.9% 1/1/09 MSCI ACWI ex USA 21.5% 9.9% 5.5% 5.6% 7.9% Lipper International Multi-Cap Core 20.8% 8.8% 5.2% 5.8% 7.6% Excess Return 4.1% 1.7% 1.6% 1.6% 0.1% Pct Rank vs. Lipper International Multi-Cap Core 3 171026 Internal Stock Plus 2,812,997,518 27.0% 11.3% 6.5% 8.2% 6.5% 9/1/11 MSCI ACWI ex USA 21.5% 9.9% 5.5% 5.6% 5.5% Lipper International Multi-Cap Core 20.8% 8.8% 5.2% 5.8% 5.9% Excess Return 5.5% 1.4% 1.0% 2.5% 1.1% Pct Rank vs. Lipper International Multi-Cap Core 2 111 3 27 PIMCO StocksPLUS 1,948,870,981 ------12.5% 4/1/19 MSCI ACWI ex USA ------10.2% Lipper International Multi-Cap Core ------9.8% Excess Return ------2.3% Pct Rank vs. Lipper International Multi-Cap Core ------9

Total International Index Strategy $3,320,136,671 21.5% 11.2% 7.0% 6.1% 8.1% 7/1/09 MSCI ACWI ex USA 21.5% 9.9% 5.5% 5.6% 6.9% Lipper International Multi-Cap Core 20.8% 8.8% 5.2% 5.8% 7.0% Excess Return 0.0% 1.3% 1.5% 0.5% 1.2% Pct Rank vs. Lipper International Multi-Cap Core 44 1 8 42 9 SSGA MSCI ACWI ex USA Index 1,883,926,963 21.4% ------3.5% 11/1/17 MSCI ACWI ex USA 21.5% ------3.4% Lipper International Multi-Cap Core 20.8% ------2.5% Excess Return -0.2%------0.1% Pct Rank vs. Lipper International Multi-Cap Core 50 ------31 Blackrock ACWI ex USA Index 1,436,209,708 21.8% ------2.3% 3/1/18 MSCI ACWI ex USA 21.5% ------2.0% Lipper International Multi-Cap Core 20.8% ------1.8% Excess Return 0.3% ------0.3% Pct Rank vs. Lipper International Multi-Cap Core 38 ------47

8 State of Michigan Retirement System DOMESTIC EQUITY REVIEW State of Michigan Investment Board Meeting March 19, 2020

Jack A. Behar, CFA Senior Investment Manager Domestic Equity Division

EXECUTIVE SUMMARY

Performance

MPSERS Plan (12/31/19) 1-Year 3-Years 5-Years 7-Years 10-Years Annualized Returns 31.8% 15.7% 11.5% 14.8% 13.4% S&P 1500 30.9% 14.7% 11.5% 14.5% 13.5% Peer Median Return 24.7% 12.3% 8.8% 10.9% 11.6% Percentile Rank vs. Peers * 3 13 11 11 29 *State Street Universe greater than $1 billion

 Total Domestic Equity outperformed its peer group over all time periods and the S&P 1500 over one, three and seven-year periods.

 During the past year performance was 70 basis points (bps) ahead of the benchmark net of fees, with incurred tracking error of 2.0%.

 Outperformance was led by Mellon Capital, which strategically combines high beta S&P 500 exposure with long dated treasuries, both of which significantly outperformed on the year.

 SMRS’ internal Large Cap Consistent Growth Fund had another banner year, returning 39% while taking less risk than the S&P 500 index. Large Cap Consistent Growth’s performance remains in the top 1% of managers on an inception to date basis.

 Ark Investments outperformed on the year as well and continues to rank in the top 1% of its Lipper peer group on an inception to date basis.

 Individual contributors to division performance included General Electric, Conagra, Ally Financial, Safehold, Worldpay, Crisper Therapeutics, Home Depot and long dated treasuries.

 The division also benefitted from having very little oil and gas exposure in the portfolio.

Asset Class Goal

To provide the SMRS with long-term domestic equity market returns or better, by investing in a diversified and attractively valued portfolio of companies at an index fund-like cost.

1 Strategy Update

 In response to the large upward move in the markets, the Domestic Equity Portfolio has shifted its allocation to a slightly more defensive posture than it had in place during 2019, adding to defensive stocks such as utilities and reits, reducing technology exposure and reducing division beta exposure.

 The division is overweight the financial sector, defensive stocks and health care and underweight consumer discretionary, technology and commodity related sectors.

 Total Domestic Equity’s portfolio trades at 17x earnings, a 15% discount to the S&P 1500 at 20x, generates over $400M of dividend income per year ($100M more than if the entire portfolio were indexed), and is growing its earnings faster than the S&P 1500.

 With an estimated portfolio beta of 1.04, a significant market correction would present a very modest headwind to performance.

Market Environment and Outlook  At ~20x forward earnings, equity markets trade at a premium to both their historical average of 15.7x and their twenty-five-year historical average of 18x.

 However, factoring in the existing level of low interest rates, stocks remain reasonably priced for an environment where long-term bond yields are 4% or lower.

 The market is currently paying out 1.8% of its earnings in dividends and reducing shares outstanding by 2.5% through share buybacks, for a 4.3% total shareholder yield.

 The market is also growing shareholders’ equity at a rate of 2.2% by reinvesting a little more than 10% of its earnings back into its underlying businesses. Growth has likely been impacted by trade tensions in 2019 and should increase in a more normalized environment.

 The market is thus poised to earn roughly 6.5% (shareholder yield of 4.3% + reinvestment rate of 2.2%) in an environment where stock multiples, growth and returns on equity are stable.

 Prospective market returns compare favorably to the 30-year U.S. Treasury at 2.4%, and unfavorably to the historical compound annual return for the S&P 500 from 1928-2018 of 9.5%.

2 SMRS Domestic Equity Strategies 12/31/19

Markets Amount Total % of Total

Internal Indexed ($ in Millions)

Indexed Portfolios $7,413

Total Indexed $7,413 42.0%

Internal Active

Active Portfolios $5,774

Total Internal Active $5,774 32.7%

External Active

Los Angeles Capital $1,343 Mellon Capital 1,122 Seizert Capital Partners 599 Clarkston Capital Partners 514 ARK Investments 483 Attucks Asset Management 148 Bivium Capital 144 Ancora 105

Total External Active $4,458 25.3%

Total Domestic Equity $17,645 100.0%

3 SMRS Domestic Equities Composite 12/31/19

Date: 12/31/19 9/30/19 6/30/19 3/31/19

Assets ($ in Millions): $17,645 $16,789 $16,636 $17,963 Number of Securities: 1,354 1,316 1,296 1,314 Active Share: 41% 43% 49% 47%

Description: The Domestic Equities Composite combines both the SMRS’ Actively Managed Composite and its index funds.

S&P 1500 Characteristics SMRS S&P 1500 Value Market Capitalization ($ in Billions) $233.4 $277.2 $130.1 P/E FY1 17.2x 20.2x 16.0x P/E upside to S&P 1500 17.7% 0.0 25.9% Price/Book 3.3x 3.4x 2.2x Return on Equity 18.5% 17.1% 13.9%

Risk Metrics Beta 1.04 1.00 0.88 Tracking Error 1.4% 0.0% 3.6%

Projected Returns Dividend Yield 2.4% 1.8% 2.6% Buyback Yield 2.5% 2.5% 2.8% Reinvestment Rate 3.0% 2.2% 2.0% Projected Investment Return 7.9% 6.5% 7.4%

TOP TEN EXPOSURES – Domestic Equities vs S&P 1500 12/31/19

Domestic Equity Portfolio S&P 1500

Portfolio FY1 Market FY1 Company Name Weight P/E Company Name Weight P/E SPDR S&P 500 ETF Trust 13.2% 20.3 Apple, Inc. 4.2% 24.3 SPDR Port. LT Treasury ETF 4.1% 41.6 Microsoft Corp. 4.1% 30.3 Microsoft Corp. 2.9% 30.3 Amazon.com, Inc. 2.6% 91.5 Apple, Inc. 2.6% 24.3 Facebook, Inc. Class A 1.7% 34.8 Berkshire Hathaway, Inc. B 2.1% 15.5 Berkshire Hathaway, Inc. B 1.5% 15.5 AGNC Investment Corp. 2.1% 8.4 JPMorgan Chase & Co. 1.5% 12.9 Amazon.com, Inc. 1.6% 91.5 Alphabet, Inc., Class A 1.4% 30.9 Facebook, Inc. Class A 1.6% 34.8 Alphabet, Inc., Class C 1.4% 30.9 Wells Fargo & Company 1.5% 11.5 Johnson & Johnson 1.3% 16.8 Athene Holding Ltd., Class A 1.1% 7.4 Visa, Inc., Class A 1.1% 31.5 TOTAL 32.8% 19.5 TOTAL 20.8% 26.1

4 SMRS Domestic Equity By Sector 12/31/19

Materials Energy RE 2.6% 2.2% 2.8% Utilities 3.7% Consumer Financials Staples 22.6% 6.4%

Consumer Discretionary 7.8%

Industrials 8.3% Information Technology 20.7%

Communication Services 8.9% Health Care 14.0%

Market Value in Millions 12/31/19

Assets Percent Benchmark Difference Financials $3,983 22.6% 13.3% 9.3% Information Technology 3,660 20.7% 22.5% -1.8% Health Care 2,475 14.0% 13.9% 0.1% Communication Services 1,566 8.9% 9.6% -0.7% Industrials 1,464 8.3% 9.7% -1.4% Consumer Discretionary 1,370 7.8% 10.1% -2.3% Consumer Staples 1,137 6.4% 6.8% -0.4% Utilities 659 3.7% 3.4% 0.3% Real Estate 488 2.8% 3.6% -0.8% Materials 449 2.6% 2.9% -0.3% Energy 394 2.2% 4.2% -2.0% Total $17,645 100.0% 100.0%

Benchmark: S&P 1500

5 SMRS Actively Managed Composite 12/31/19

Date: 12/31/19 9/30/19 6/30/19 3/31/19

Assets ($ in Millions): $10,232 $9,969 $9,911 $10,005 Number of Securities: 1,069 1,052 1,036 1,086 Active Share: 70% 72% 82% 83%

Description: The Actively Managed Composite is designed to add consistent alpha by investing in managers with value-added, but diverse strategies. While the expectation is that most will outperform over time, the composite is designed such that they do so during differing parts of the business cycle.

S&P 1500 Characteristics SMRS S&P 1500 Value Market Capitalization ($ in Billions) $182.4 $277.2 $130.1 P/E FY1 15.4x 20.2x 16.0x P/E upside to S&P 1500 31.4% 0.0 25.9% Price/Book 3.1x 3.4x 2.2x Return on Equity 19.0% 17.1% 13.9%

Risk Metrics Beta 1.07 1.00 0.88 Tracking Error 2.4% 0.0% 3.6%

Projected Returns Dividend Yield 2.9% 1.8% 2.6% Buyback Yield 2.4% 2.5% 2.8% Reinvestment Rate 3.4% 2.2% 2.0% Projected Investment Return 8.7% 6.5% 7.4%

TOP TEN EXPOSURES – Actively Managed Equities vs S&P 1500 12/31/19

Actively Managed Equity Portfolio S&P 1500

Portfolio FY1 Market FY1 Company Name Weight P/E Company Name Weight P/E SPDR S&P 500 ETF Trust 19.2% 20.3 Apple, Inc. 4.2% 24.3 SPDR Port. LT Treasury ETF 7.1% 41.6 Microsoft Corp. 4.1% 30.3 AGNC Investment Corp. 3.7% 8.4 Amazon.com, Inc. 2.6% 91.5 Berkshire Hathaway, Inc. B 3.0% 15.5 Facebook, Inc. Class A 1.7% 34.8 Wells Fargo & Company 2.1% 11.5 Berkshire Hathaway, Inc. B 1.5% 15.5 Microsoft Corp. 2.0% 30.3 JPMorgan Chase & Co. 1.5% 12.9 Athene Holding Ltd. Class A 1.8% 7.4 Alphabet, Inc., Class A 1.4% 30.9 Two Harbors Investment Corp. 1.6% 10.1 Alphabet, Inc., Class C 1.4% 30.9 Exelon Corp. 1.6% 14.8 Johnson & Johnson 1.3% 16.8 Annaly Capital Management, Inc. 1.6% 9.7 Visa, Inc. Class A 1.1% 31.5 TOTAL 43.7% 16.3 TOTAL 20.8% 26.1

6 SMRS Active Equity By Sector 12/31/19

Materials RE Energy 2.1% 2.1% 0.7% Utilities 4.0% Consumer Discretionary 5.8% Financials 30.2% Consumer Staples 6.2%

Industrials 7.4%

Communication Services 8.1%

Information Health Care Technology 14.4% 19.0%

Market Value in Millions 12/31/19

Assets Percent Benchmark Difference Financials $3,087 30.2% 13.3% 16.9% Information Technology 1,949 19.0% 22.5% -3.5% Health Care 1,471 14.4% 13.9% 0.5% Communication Services 824 8.1% 9.6% -1.5% Industrials 757 7.4% 9.7% -2.3% Consumer Staples 634 6.2% 6.8% -0.6% Consumer Discretionary 595 5.8% 10.1% -4.3% Utilities 409 4.0% 3.4% 0.6% Materials 219 2.1% 2.9% -0.8% Real Estate 213 2.1% 3.6% -1.5% Energy 74 0.7% 4.2% -3.5% Total $10,232 100.0% 100.0%

Benchmark: S&P 1500

7 Manager Performance - Net of Fees 12/31/19

Inception Fund Name Market Value 1-Year 3-Years 5-Years 7-Years Inception Date

SMRS S&P 500 Index $6,843,164,200 31.3% 15.3% 11.8% 14.9% -- N/A S&P 500 31.5% 15.3% 11.7% 14.7% -- Style & Risk Adjusted Benchmark 31.3% 15.2% 11.7% 14.7% -- Lipper Large-Cap Core 29.7% 14.2% 10.5% 13.5% -- Excess Return -0.2% 0.0% 0.1% 0.1% -- Alpha 0.1% 0.1% 0.1% 0.1% -- Pct. Rank vs. Lipper Large-Cap Core 37 31 16 11 --

SMRS Large-Cap Core 2,529,067,691 29.9% 16.7% 10.3% 15.2% 9.2% 8/31/07 S&P 500 31.5% 15.3% 11.7% 14.7% 8.9% Style & Risk Adjusted Benchmark 44.8% 19.7% 13.3% 16.4% 9.6% Lipper Large-Cap Core 29.7% 14.2% 10.5% 13.5% 8.2% Excess Return -1.5% 1.4% -1.4% 0.5% 0.3% Alpha -14.9% -3.0% -3.0% -1.2% -0.4% Pct Rank vs Lipper Large-Cap Core 54 7 58 6 15

SMRS All-Cap Garp 1,811,008,356 26.6% 12.3% 9.1% 13.1% 13.1% 4/30/11 S&P 1500 Super Composite 30.9% 14.6% 11.5% 14.5% 12.8% Style & Risk Adjusted Benchmark 29.5% 16.1% 11.6% 15.0% 13.1% Lipper Multi-Cap Core 28.3% 12.3% 9.0% 12.4% 10.6% Excess Return -4.3% -2.3% -2.4% -1.4% 0.3% Alpha -2.9% -3.8% -2.6% -1.9% 0.0% Pct. Rank vs. Lipper Multi-Cap Core 72 55 59 44 4

Mellon US Equity Enhanced 1,122,381,184 66.8% ------30.0% 3/1/17 S&P 500 31.5% ------13.9% Style & Risk Adjusted Benchmark 34.5% ------22.0% Lipper Large-Cap Core 29.7% ------12.8% Excess Return 35.3% ------16.1% Alpha 32.3% ------8.0% Pct. Rank vs. Lipper Large-Cap Core 1 ------1

SMRS Large-Cap Growth 756,596,328 30.8% 20.4% 12.4% 16.0% 10.5% 5/31/05 S&P 500 Growth 31.1% 18.7% 13.5% 16.3% 10.7% Style & Risk Adjusted Benchmark 36.6% 19.3% 14.5% 17.5% 10.9% Lipper Large-Cap Growth 33.0% 19.5% 13.1% 15.7% 10.4% Excess Return -0.3% 1.7% -1.1% -0.3% -0.2% Alpha -5.9% 1.1% -2.1% -1.5% -0.5% Pct Rank vs Lipper Large-Cap Growth 79 39 68 43 42

LA Capital Deep Value 678,270,860 29.9% 9.9% -- -- 8.7% 4/1/15 S&P 1500 Value 31.3% 11.1% -- -- 10.0% Style & Risk Adjusted Benchmark 24.7% 7.2% -- -- 10.6% Lipper Multi-Cap Value 25.0% 8.6% -- -- 7.4% Excess Return -1.4% -1.2% -- -- -1.2% Alpha 5.2% 2.7% -- -- -1.9% Pct. Rank vs. Lipper Multi-Cap Value 12 26 -- -- 24

LA Capital All-Cap Growth 665,235,811 27.7% 15.9% 13.2% 16.8% 12.2% 5/31/05 S&P 1500 Growth 30.6% 17.9% 13.2% 16.0% 10.7% Style & Risk Adjusted Benchmark 26.0% 16.0% 11.2% 14.2% 9.7% Lipper Multi-Cap Growth 31.5% 17.7% 11.4% 14.3% 10.1% Excess Return -2.9% -2.0% 0.0% 0.8% 1.5% Alpha 1.7% -0.1% 2.0% 2.5% 2.5% Pct. Rank vs. Lipper Multi-Cap Growth 80 68 23 14 9

8 Inception Fund Name Market Value 1-Year 3-Years 5-Years 7-Years Inception Date

Seizert Capital Partners 598,936,176 27.2% 10.5% 8.9% 12.5% 13.5% 11/30/09 S&P 1500 Value 31.3% 11.1% 9.4% 12.8% 12.9% Style & Risk Adjusted Benchmark 19.5% 10.6% 9.5% 12.8% 13.0% Lipper Multi-Cap Value 25.0% 8.6% 7.2% 11.0% 11.1% Excess Return -4.1% -0.5% -0.5% -0.3% 0.6% Alpha 5.3% 0.0% -1.1% 0.2% 0.5% Pct. Rank vs. Lipper Multi-Cap Value 59 22 32 12 7

Large-Cap Consistent Growth 569,633,745 39.2% 21.9% -- -- 14.4% 3/1/15 S&P 500 31.5% 15.3% -- -- 11.5% Style & Risk Adjusted Benchmark 19.3% 16.3% -- -- 11.8% Lipper Large-Cap Core 29.7% 14.2% -- -- 10.3% Excess Return 7.7% 6.6% -- -- 2.9% Alpha 19.9% 5.5% -- -- 2.7% Pct. Rank vs. Lipper Large-Cap Core 1 1 -- -- 1

SMRS Mid-Cap Index 569,490,610 26.0% 9.6% 9.6% 12.9% -- N/A S&P 400 26.2% 9.3% 9.0% 12.3% -- Style & Risk Adjusted Benchmark 26.0% 9.2% 9.0% 12.3% -- Lipper Mid-Cap Core 27.1% 9.3% 7.4% 11.3% -- Excess Return -0.2% 0.4% 0.5% 0.5% -- Alpha 0.0% 0.4% 0.6% 0.6% -- Pct. Rank vs. Lipper Mid-Cap Core 69 47 21 22 --

Ark Investments 482,822,912 31.4% 32.1% -- -- 28.0% 3/1/16 S&P 1500 Growth 30.6% 17.9% -- -- 17.8% Style & Risk Adjusted Benchmark 51.4% 31.8% -- -- 31.4% Lipper Multi-Cap Growth 31.5% 17.7% -- -- 17.2% Excess Return 0.8% 14.3% -- -- 10.2% Alpha -20.0% 0.3% -- -- -3.3% Pct. Rank vs. Lipper Multi-Cap Growth 52 1 -- -- 1

Clarkston Capital Large-Cap 294,107,835 29.4% 10.9% -- -- 10.4% 4/1/15 S&P 500 Value 31.9% 11.5% -- -- 10.2% Style & Risk Adjusted Benchmark 22.3% 9.0% -- -- 8.0% Lipper Large-Cap Value 26.4% 10.8% -- -- 9.1% Excess Return -2.5% -0.6% -- -- 0.2% Alpha 7.2% 1.9% -- -- 2.4% Pct. Rank vs. Lipper Large-Cap Value 20 43 -- -- 13

Clarkston Capital Small/Mid-Cap 219,577,822 26.0% 10.0% 10.5% -- 11.5% 1/1/14 S&P 400 25.1% 9.0% 9.2% -- 9.1% Style & Risk Adjusted Benchmark 14.7% 6.4% 6.7% -- 6.7% Lipper Mid-Cap Core 27.1% 9.3% 7.4% -- 7.5% Excess Return 0.8% 1.0% 1.3% -- 2.4% Alpha 11.2% 3.7% 3.8% -- 4.8% Pct. Rank vs. Lipper Mid-Cap Core 69 43 11 -- 1

Attucks Asset Management 148,121,353 28.9% 11.9% 9.0% 12.1% 7.3% 11/30/07 S&P 1500 30.9% 14.6% 11.5% 14.5% 8.6% Style & Risk Adjusted Benchmark 28.1% 10.2% 11.4% 14.6% 8.6% Lipper Multi-Cap Core 28.3% 12.3% 9.0% 12.4% 6.9% Excess Return -2.0% -2.8% -2.5% -2.4% -1.3% Alpha 0.8% 1.6% -2.5% -2.5% -1.3% Pct. Rank vs. Lipper Multi-Cap Core 49 62 60 67 49

9 Inception Fund Name Market Value 1-Year 3-Years 5-Years 7-Years Inception Date

Bivium Capital Partners 144,345,578 30.4% 10.9% 8.2% 11.4% 6.8% 11/30/07 S&P 1500 Value 31.3% 11.1% 9.4% 12.8% 6.8% Style & Risk Adjusted Benchmark 31.8% 11.4% 9.7% 13.2% 8.9% Lipper Multi-Cap Value 25.0% 8.6% 7.2% 11.0% 5.9% Excess Return -0.9% -0.1% -1.2% -1.4% 0.1% Alpha -1.3% -0.5% -1.5% -1.8% -2.1% Pct. Rank vs. Lipper Multi-Cap Value 8 16 26 42 25

Ancora 104,540,989 27.2% ------6.6% 10/1/17 S&P 1000 25.1% ------7.8% Style & Risk Adjusted Benchmark 25.7% ------7.4% Lipper Mid-Cap Core 27.1% ------7.9% Excess Return 2.0% ------1.2% Alpha 1.5% ------0.8% Pct. Rank vs. Lipper Mid-Cap Core 59 ------68

10 State of Michigan Retirement System FIXED INCOME REVIEW State of Michigan Investment Board Meeting March 19, 2020

Daniel J. Quigley Senior Investment Manager Fixed Income Division

EXECUTIVE SUMMARY

Performance

MPSERS Plan (12/31/19) 1-Year 3-Years 5-Years 7-Years 10-Years Annualized Returns 9.7% 5.4% 4.6% 4.0% 4.9% Bloomberg Barclays US Agg 8.7% 4.0% 3.1% 2.7% 3.8% Peer Median Returns 8.5% 4.4% 3.6% 3.0% 4.5% Percentile Rank vs. Peers* 35 14 19 15 38

*State Street Universe greater than $1 billion  The fixed income portfolio outperformed its benchmark and peer group for all time periods. This outperformance was driven by strong returns in the credit portfolio as well as outperformance in the core internal bond fund. The absolute performance was strong during the year for both rates-based and credit-based fixed income strategies.  The duration positioning of the internal portfolio helped performance as an overweight to longer duration securities outperformed intermediate duration bonds.  Investment Grade and High Yield credit experienced strong returns for the year. The Structured Fixed Income portion of the portfolio has underperformed the core fixed income benchmark over the previous year but has outperformed over longer time horizons.

Strategy Update  The objective of the Fixed Income Division portfolio is to meet or exceed the returns of the Bloomberg U.S. Aggregate Bond Index while satisfying the overall characteristics of a core fixed income portfolio. These characteristics are: income, liquidity, principal preservation, and diversification from equity market risk. The portfolio has a higher yield than the benchmark without having meaningfully more risk than the U.S. Aggregate Index. The yield-to-maturity of the portfolio is currently 3.4% versus a benchmark yield of 2.3%. In addition to this, the portfolio has an equity beta of 0.0, in line with the U.S. Aggregate Index.  The Core-plus strategy implemented to achieve this goal includes: o Core: As of December 31, 2019, the portfolio’s allocation to U.S. Treasuries, Investment Grade corporate bonds, government-guaranteed U.S. Agency Debentures, RMBS, and Commercial Mortgage Backed Securities (CMBS) was 62.1%. This includes a 23.9% allocation to U.S. Treasuries, TIPS, and cash. o Plus: The portfolio maintains a strategic out-of-benchmark allocation to high-yield corporate debt, securitized credit, and global fixed income strategies as market opportunities allow. This allocation increases the portfolio yield and total return potential, but will result in lower liquidity and higher volatility. The allocation to the Plus portfolio was 37.9% as of December 31, 2019.

Tactical Update  The allocation to securitized credit, primarily in CMBS, ABS, non-agency RMBS, and CLO securities, was 27.4% of the portfolio at the end of the quarter. The combination of low interest rate duration and high coupon income (often floating rate) offers attractive characteristics for the overall fixed income portfolio. This portion of the portfolio had a return of 7.0% on a one-year basis, underperforming the benchmark on a relative basis by 2.7%.

1  The allocation to high-yield strategies was 5.6% at the end of the quarter. This out-of-benchmark position has benefitted portfolio performance on a long-term basis and was a key driver to the strong one-year portfolio performance. The high yield portion of the portfolio had a return of 16.5% on a one-year basis, beating the core index by 7.8%.  The portfolio has a meaningful allocation to floating rate securities, including AAA CLO investments and investment-grade floating rate corporate bonds. This allocation accounts for approximately 20% of portfolio assets. This allocation will underperform in a falling interest rate environment, but should exhibit strong risk-adjusted return characteristics in many market environments.  The allocation to U.S. TIPS was flat for the quarter at 3.2% of the fixed income portfolio. The TIPS allocation has underperformed nominal U.S. Treasuries on a one-year basis as inflation expectations have declined. We believe that this allocation offers an attractive hedge to the portfolio should inflation expectations increase in the future.

Market Environment and Outlook

 The yield curve for U.S. Treasury securities steepened for the quarter and the three-month to ten-year portion of the yield curve is no longer inverted with three-month U.S. Treasury Bills ending the quarter down 27 bp to 1.55%. Ten-year U.S. Treasury Bond yields increased by 25 bp to 1.92%.  Inflation expectations increased during the quarter with ten-year breakeven inflation expectations ending December at 1.79%. This was a 27 bp increase for the quarter.  Credit markets continued their recovery with high-yield spreads ending December at 336 bp. This represented a 190 bp decrease for spread for the year. These spread levels are roughly 100 bp tighter than their five-year average. Investment grade credit spreads tightened by 60 bp for the year to 93 bp, 34 bp tighter than the five-year average. The annual performance of the Investment Grade index is 14.5% and the High Yield index return is 14.3%.  Emerging Markets debt outperformed during the quarter with EM spreads tightening by 42 bp for the year. The EM USD index has returned 13.1% for the year.

Conclusion  The portfolio maintains a defensive position for rising interest rates. The duration remains short of the benchmark and the portfolio maintains an underweight to long-term debt. This position is offset through a larger allocation to structured and corporate debt securities which increases the income of the portfolio. The portfolio has also reduced corporate credit exposure due to poor valuations in various credit markets. The portfolio will continue to look for attractive risk-adjusted opportunities within the fixed income opportunity set.

2 SMRS Fixed Income by Strategy 12/31/19

Amount Total % of Total

Core ($ in Millions)

FID Internal $5,225 PIMCO Mortgage Fund 471 PGIM Investment Grade Credit 261 Total Core $5,957 57.8%

Tactical

Pyramis $586 Total Tactical $586 5.7%

Securitized Debt

Met West Securitized Ops $485 Napier Park CLO Debt 479 Napier Park ABS Income 437 Principal CMBS 427 TICP CLO Debt 375 Fortress Credit ABI 354 Putnam DMS 156 Napier Park Strategic Loan 112 Total Securitized Debt $2,825 27.4%

High Yield

PGIM High Yield $272 Columbia Management 257 Crescent Direct Lending 49 Total High Yield $578 5.6%

Global

T. Rowe Global Multi-Sector $252 PGIM Global Liquid Relative Value 106 Total Global $358 3.5%

TOTAL $10,305 100.0%

NOTE: Totals may not be exact due to rounding.

3 SMRS Fixed Income Holdings Portfolio Characteristics Benchmark: Barclays Aggregate

12/31/19

Characteristic Portfolio Benchmark Average Maturity (Yrs) 7.7 7.8 Duration (Yrs) 4.5 5.8 Spread Duration (Yrs) 5.6 6.1 Coupon (%) 3.5 3.2 Yield to Maturity (%) 3.4 2.3 Credit Rating A AA VaR (%) 4.1 5.2 Tracking Error 1.3 NA Beta (vs S&P 500) 0.01 -0.04

Commentary Objectives Highlights Income: The coupon of the portfolio is approximately 30 bps higher than the benchmark. Price appreciation has been the main driver of U.S. bond market returns YTD but Income is the primary driver of long-term performance.

Liquidity: 23.9% of the portfolio is invested in cash, U.S. Treasuries, and TIPS. These investments can be liquidated via same- day trading. Principal Preservation: The portfolio has a large allocation to U.S. Treasuries and carries an investment-grade credit rating. Diversification: The equity beta of the portfolio is roughly 0.0 meaning that the portfolio returns are uncorrelated with equity market movements, and in line with the benchmark bond index.

4 SMRS Fixed Income By Rating 12/31/19

Not Rated 5.0% AA 7.6%

Below Investment Grade 10.0% AAA 46.0%

A 14.7%

BBB 16.7%

Market Value in Millions 12/31/19

Assets Percent Benchmark Difference

AAA $4,747 46.0% 71.2% -25.2% AA 782 7.6% 3.2% 4.4% A 1,512 14.7% 10.8% 3.9% BBB 1,719 16.7% 12.4% 4.3% * Below Investment Grade 1,031 10.0% 0.7% 9.3% Not Rated 514 5.0% 1.7% 3.3%

Total Investments $10,305 100.0% 100.0%

* Comprised of approximately 8.0% High Yield Credit and 2.0% High Yield RMBS/ABS Benchmark: Barclays US Aggregate

5 SMRS Fixed Income By Asset Type 12/31/19

Unassigned Cash Government 2.5% Related 1.3% 2.6% U.S. TIPS 3.2%

U.S. Treasuries Securitized 19.4% 41.5%

Corporate 29.5%

Market Value in Millions 12/31/19

Assets Percent Benchmark Difference

Securitized $4,275 41.5% 29.5% 12.0% Corporate 3,037 29.5% 25.2% 4.3% U.S. Treasuries 1,996 19.4% 39.5% -20.1% U.S. TIPS 327 3.2% 0.0% 3.2% Government Related 274 2.6% 5.8% -3.2% Unassigned 260 2.5% 0.0% 2.5% Cash 136 1.3% 0.0% 1.3%

Total Investments $10,305 100.0% 100.0%

Benchmark: Barclays US Aggregate

6 SMRS Duration Distribution Fixed Income Composite Versus Benchmark 12/31/19

40% Portfolio % Benchmark

33.0% 31.2% 30% 25.3%

20.8% 20% 16.7% 15.7% 14.6%

11.2% 11.8% 10% 8.3% 6.7%

3.5% 1.2% 0.0% 0% <1 1 to 3 3 to 5 5 to 7 7 to 10 >10 NA # of Years

Source: Factset Market Value in Millions Portfolio Benchmark Portfolio Benchmark Duration Assets Weight Weight Duration* Duration* <1 $2,608 25.3% 1.2% 0.2 0.9 1 to 3 1,615 15.7% 33.0% 2.1 2.1 3 to 5 2,147 20.8% 31.2% 4.0 3.9 5 to 7 1,502 14.6% 11.2% 6.0 6.0 7 to 10 1,220 11.8% 6.7% 8.0 7.9 >10 857 8.3% 16.7% 18.3 16.3 NA 356 3.5% 0.0% 0.0 0.0 Total $10,305 100.0% 100.0% 5.0 5.8

* Effective Duration Benchmark: Barclays US Aggregate

7 Total Fixed Income Performance - Net of Fees (MPSERS)

12/31/19

Market Value 1-Year 3-Years 5-Years 7-Years 10-Years Total Fixed Income $10,304,592,948 9.41% 5.16% 4.45% 3.87% 4.77% Bloomberg/Barclays Agg. Bond Index N/A 8.72% 4.03% 3.05% 2.72% 3.75%

Internal Core Fixed Income 5,225,231,026.38 9.47% 4.95% 4.21% 3.64% 4.42%

Externally Managed Core Fixed Income $471,099,345 9.27% 5.47% 4.77% 4.10% 5.27%

PIMCO Mortgage Fund 471,099,345 6.79% Bloomberg/Barclays Agg. Bond Index N/A 8.72% 4.03% 3.05% 2.72% 3.75% Investment Grade Credit $260,869,152 14.43% 5.97% 4.83% 4.31% 5.78% PGIM Investment Grade 260,869,152 14.43% 5.97% 4.83% 4.39% 5.85% Bloomberg/Barclays Credit Index N/A 13.80% 5.75% 4.39% 3.89% 5.32% Tactical Fixed Income $585,796,936 11.71% 5.53% 4.54% 5.35% 11.28% Loomis Sayles CorePlus 1,260,599 Fidelity Tactical Bond Fund 584,536,337 12.94% 5.95% 5.28% Bloomberg/Barclays Agg. Bond Index N/A 8.72% 4.03% 3.05% 2.72% 3.75% High Yield Fixed Income $577,922,349 16.49% 6.69% 6.33% Columbia Management High Yield 256,843,203 16.48% 6.42% 6.15% PGIM High Yield 272,284,491 16.84% 7.13% 6.60% Crescent Direct Lending 48,794,655 6.67% Bloomberg/Barclays US HY BA/B 2% Cap N/A 15.18% 6.51% 6.05% Structured Fixed Income $2,825,292,348 7.01% 5.49% Principal CMBS 427,311,956 8.74% 6.19% 4.73% 5.94% 11.72% MetWest Securitized Opportunities 484,802,774 4.96% 4.92% 3.99% Napier Park ABS Income 437,365,141 10.02% 10.09% Napier Park Strategic Loan LP 112,483,744 6.08% 5.95% Napier Park CLO Debt 478,611,101 5.51% TICP CLO Debt 374,861,522 6.42% Fortress ABI 353,716,587 Putnam DMS 156,139,523 Bloomberg/Barclays Agg. Bond Index N/A 8.72% 4.03% 3.05% 2.72% 3.75% Blended CMBS Benchmark N/A 10.40% 2.62% 4.51% 3.56% 6.25% Global Fixed Income $358,381,792 8.96% 5.11% T. Rowe Global Multi-Sector 252,042,492 10.65% 5.55% PGIM GLRV 106,339,300 5.14% Custom GMS Benchmark N/A 8.72% 5.51%

8 State of Michigan Retirement System PRIVATE EQUITY REVIEW State of Michigan Investment Board Meeting March 19, 2020

Peter A. Woodford Senior Investment Manager Private Equity Division

EXECUTIVE SUMMARY

Performance

MPSERS Plan (12/31/19) 1-Year 3-Years 5-Years 7-Years 10-Years Annualized Returns 8.8% 14.8% 12.8% 14.1% 14.7% PE Benchmark Returns 7.4% 16.8% 14.1% 16.6% 16.6% Peer Median Returns 7.9% 9.9% 8.5% 9.9% 10.5% Percentile Rank vs. Peers* 32 9 10 7 7 *State Street Universe greater than $1 billion

 Private Equity returns have been strong relative to peer median returns, ranking in the top 7% of peers over the past ten years. Outperformance to peers is attributable to fund selectivity and strategy.

 It is not unusual for private equity returns to lag the public benchmark returns during periods of expansion and lead the public benchmark during periods of contraction. The past ten years have been no exception due to the longest expansion in U.S. history. Over this period, the Private Equity Division has outperformed the S&P by 1.1% (ten-year S&P 500 return 13.6%) and underperformed the benchmark by 1.9%.

 For the twelve months ending December 31, 2019, the Private Equity Division made contributions of approximately $275 million, net of distributions. Although the pace of distributions continues to slow, distribution activity should remain healthy for as long as the economic expansion continues with General Partners incentivized to exit investments at current valuations. This, however, is offset by newly raised funds continuing to deploy capital at the valuations.

 Commitments closed during the quarter include: o $250 million to Green Equity Investors VIII, an upper-middle-market buyout fund focused on North America. o $100 million to Jade Equity Investors, a middle-market buyout fund focused on North America. o $60 million to Advent International LAPEF VII, a buyout fund focused on Latin America. o $35 million to FirstMark Capital V, an early-stage venture capital fund. o $35 million to FirstMark Capital OF III, a late-stage venture capital fund. o $35 million to SKCP Catalyst Fund I-A, a lower-middle-market buyout fund.

Strategy Update

The strategy for the next twelve months will focus on new sponsors raising capital and existing sponsors raising successor funds. This may be a combination of buyout, venture capital, secondary, and growth equity funds seeking new commitments. The Private Equity Division continues to tilt slightly toward the middle and lower-middle market to diversify its exposure to large funds. Co-investments continue to play an important role in both averaging down costs and targeting specific investments with attractive risk/return characteristics.

1 SMRS Private Equity 12/31/19

Mezzanine Cash/ Funds Other Liquidation 2.2% 1.5% Portfolio 6.8%

Venture Capital Funds 10.8%

Buyout Funds 46.3%

Special Situation Funds 13.5%

Fund of Funds 18.9%

Market Value in Millions

12/31/19 12/31/18 Buyout Funds $6,391 46.3% $5,662 45.1% Fund of Funds 2,610 18.9% 1,939 15.5% Special Situation Funds 1,862 13.5% 1,850 14.8% Venture Capital Funds 1,490 10.8% 1,511 12.0% Liquidation Portfolio 938 6.8% 1,136 9.1% Mezzanine Funds 297 2.2% 238 1.9% Cash/Other 213 1.5% 204 1.6% Total $13,801 100.0% $12,540 100.0%

2 SMRS Private Equity 12/31/19

($ in Millions) $13,893 $736 $13,801 $206

($209) ($179) ($646)

9/30/19 Capital Cash Stock Reported Cash 12/31/19 Reported Calls Dist. Dist. Value Balance Reported Value Received Received Change Change Value

($ in Millions)

$8,029 $7,994 $515 $11 $72 $173

($736) 9/30/19 New Capital FX Recallable Other 12/31/19 Outstanding Deals Calls Change Returned Outstanding Commitments Capital Commitments

3 SMRS Private Equity 12/31/19

Investments by Industry

Telecom Services Utilities 2.6% 1.3% Real Estate Consumer Staples 1.0% 3.3% Materials 3.5%

Energy 5.3% Information Technology 25.2%

Financials 7.0%

Other 10.4% Health Care 16.8%

Consumer Discretionary 10.4% Industrials 13.2%

These numbers are based on the most recent available General Partner Data; primarily 9/30/19 and are subject to change.

4 SMRS Private Equity 12/31/19

Investments by Region

Western Europe Asia/Africa 10.4% 7.1% Eastern Canada Europe 1.6% 0.3% United Kingdom 4.6% 5 U.S. Northwest 13.7% U.S. Mid- U.S. New Atlantic England 3.7% 20.5%

U.S. North Central 11.4%

U.S. U.S. Southeast Southwest Latin 8.5% 17.1% America 0.5% U.S. Offshore 0.4% Represents Companies with 0.2% Untrackable Regions, i.e.; Fund of Funds

Geographic Report: North America 75%, Europe 15%, Asia 7%, Other 3% SMRS Private Equity 12/31/19

Portfolio by Vintage Year

($ in Millions) Reported Outstanding Total Asset Vintage Value Commitment Exposure 1986-2005 $ 342 $ 127 $ 469 2006* 374 171 545 2007 266 126 392 2008 461 89 550 2009 16 1 17 2010 194 4 198 2011 650 88 738 2012 1,175 82 1,257 2013 321 109 430 2014 1,447 317 1,764 2015 4,842 891 5,733 2016 1,860 647 2,507 2017 767 968 1,735 2018 692 2,188 2,880 2019 181 2,221 2,402 Income Accruals 1 0 1 Cash 187 0 187 Act. Small Cap - Stock Dist 25 0 25 Total $ 13,801 $ 8,029 $ 21,830

*Liquidation portfolio is 2006 vintage

FX Exposure

($ in Millions) Reported Outstanding Total Total Value Commitment Exposure (USD) Euro ($1.12/ €) € 389 € 329 € 718 $806

6 SMRS Private Equity 12/31/19

Top 10 Sponsors

($ in Millions) Reported Outstanding Asset Type Value Commitment Total HarbourVest Partners $ 3,122 $ 946 $ 4,068 Blackstone Capital Partners 555 425 980 Warburg, Pincus Capital 579 316 895 KKR 614 265 879 The Carlyle Group 410 451 861 Advent International 489 335 824 Grosvenor Capital Management 400 411 811 Leonard Green & Partners, L.P. 549 126 675 Flagship Ventures 292 212 504 The Riverside Company 355 129 484 Top 10 Total Value $ 7,365 $ 3,616 $ 10,981

Cash Weighted Rates of Return*

(Net IRR) Current Qtr. 1-Year 3-Year 5-Year 10-Year Buyout 0.2% 13.1% 15.9% 14.0% 15.6% Fund of Funds 0.1% 5.7% 12.8% 11.8% 11.9% Mezzanine 0.7% 10.1% 12.5% 8.5% 10.4% Special Situations 0.2% 10.8% 10.6% 9.5% 12.1% Venture Capital 0.0% 12.6% 15.7% 11.6% 20.7%

*These numbers are based on most recent available General Partner reported data; primarily 9/30/19 and are subject to change.

7 SMRS Private Equity 12/31/19

Net Market Values by Ownership Entity

Adjusted Unfunded Reported Value Commitment 5AM Opportunities I, L.P. $ 5,063,662 $ 24,750,000 5AM Ventures VI, L.P. 2,787,343 16,700,000 Accel Europe I, L.P. 3,038,360 1 Accel Europe II 21,027,971 3,300,000 Accel Growth Fund II, L.P. 16,507,945 0 Accel Growth Fund III, L.P. 15,836,393 1,120,000 Accel Growth Fund IV L.P. 24,723,994 990,000 Accel Growth Fund V L.P 9,981,538 17,718,750 Accel IX, L.P. 3,650,074 3,000,000 Accel Leaders Fund II L.P. 4,029,780 5,343,750 Accel Leaders Fund L.P. 10,554,267 0 Accel London V L.P. 17,368,438 2,400,000 Accel London VI, L.P. 1,397,677 11,000,000 Accel VI-S 2,138,029 652,611 Accel VI, L.P. 873,318 0 Accel VIII, L.P. 45,058 4,782,499 Accel X, L.P. 16,053,305 0 Accel XI, L.P. 10,638,901 1,440,000 Accel XII, L.P. 10,384,362 1,190,000 Accel XIII, L.P. 6,858,236 3,900,000 Accel XIV L.P. 1,918,272 7,950,000 Advent Global Private Equity V 6,504,151 8,700,000 Advent International GPE IX, L.P. 28,750,000 221,250,000 Advent International GPE VI-A LP 30,829,059 0 Advent International GPE VII-B, L.P. 147,818,971 12,000,000 Advent International GPE VIII-B, L.P. 248,793,409 24,862,501 ** Advent International LAPEF VII 0 60,000,000 Advent Latin American Private Equity Fund VI, L.P. 26,823,105 8,505,000 Affinity Asia Pacific Fund III, L.P. 24,773,775 9,592,941 Affinity Asia Pacific Fund IV, L.P. 65,847,109 19,875,697 Affinity Asia Pacific Fund V L.P. 32,014,519 140,396,722 AIP VII, L.P. 1,123,216 73,876,784 Apax Digital, L.P. 11,630,525 37,935,642 Apax Europe Fund VI 20,719,323 2,373,861 Apax Europe VII, L.P. 5,636,562 1,671,830 Apax IX, L.P. 175,916,030 15,247,386 Apax US VII 4,802,521 417,509

8 Adjusted Unfunded Reported Value Commitment Apax VIII - B, L.P. 73,467,182 4,584,180 Apax X USD L.P. 0 150,000,000 Apollo Investment Fund IX, L.P. 16,383,434 81,297,627 Apollo Investment Fund VIII L.P. 81,334,751 16,031,253 Arboretum Ventures II 1,056,014 0 Arboretum Ventures III, L.P. 16,327,482 0 Arboretum Ventures IV, L.P. 24,195,182 10,770,000 Arboretum Ventures V, L.P. 397,071 34,335,000 Ares Corporate Opportunities Fund II 176,937 11,423,773 Ares Corporate Opportunities Fund III, LP 22,467,889 7,048,927 Ares Corporate Opportunities Fund IV, L.P. 90,532,729 14,790,645 ASF VIII B 11,235,308 139,964,803 AXA ASF Miller Co-Investment 400,327 6,656,684 Axiom Asia Co-Investment Fund I, L.P. 3,674,605 46,248,591 Axiom Asia IV, L.P. 47,844,605 13,565,886 Axiom Asia Private Capital Fund III, L.P. 50,643,116 5,729,639 Axiom Asia V, L.P. 11,413,857 38,750,000 BC European Capital IX 58,458,219 1,201,732 BC European Capital VII, L.P. 591,816 0 BC European Capital VIII, L.P. 5,868,177 8,751,510 Berkshire Fund IX Coinvestment Fund, L.P. 16,929,985 27,421,161 Berkshire Fund IX, L.P. 92,402,514 78,258,212 Berkshire Fund VI, L.P. 13,716,928 7,600,677 Berkshire Fund VII, L.P. 4,899,395 2,444,220 Berkshire Fund VIII, L.P. 86,376,794 3,583,545 Blackstone Capital Partners IV 4,287,573 4,580,765 Blackstone Capital Partners V 9,218,175 13,069,148 Blackstone Capital Partners V-S 1,121,807 712,476 Blackstone Capital Partners VI, LP 227,064,842 36,775,575 Blackstone Capital Partners VII, L.P. 229,858,037 86,859,230 Blackstone Capital Partners VIII L.P. 0 200,000,000 Bridgepoint Europe IV 11,860,909 5,993,356 Carlyle Europe Partners II 559,852 4,150,943 Carlyle Europe Partners III 11,556,558 5,133,793 Carlyle Europe Partners IV, L.P. 108,771,337 12,561,347 Carlyle Europe Partners V, S.C.SP. 18,071,734 119,226,446 Carlyle Partners IV, L.P. 5,171,394 16,009,296 Carlyle Partners V L.P. 40,781,388 54,261,025 Carlyle Partners VI, L.P. 161,326,928 11,787,259 Carlyle Partners VII, L.P. 53,949,395 187,940,522 Centerbridge Capital Partners III, LP 56,129,884 33,963,161 Cerberus SMRS Partners, L.P. 36,169,873 23,304,657 Charlesbank Equity Fund IX, L.P. 31,122,201 66,934,491 Charlesbank Fund IX Overage Allocation Program 15,974,281 33,799,569 CircleUp Credit Fund I, LP 19,193,231 6,249,525 Clearlake Opportunities Partners II, LP 8,901,740 65,999,887 CM Liquidity Fund, L.P. 0 25,000,000

9 Adjusted Unfunded Reported Value Commitment Coller International Partners V, L.P. 13,124,617 43,600,000 Coller International Partners VI, L.P. 32,772,250 29,723,267 Coller International Partners VII, L.P. 123,037,906 38,264,915 Crescent Mezzanine Partners VI, L.P. 26,744,284 5,681,254 Crescent Mezzanine Partners VII 58,760,061 88,288,570 CVC Capital Partners VII, L.P. 92,999,041 83,832,119 Dover Street IX, L.P. 73,852,793 28,000,000 Dover Street X, L.P. 0 150,000,000 EnCap Energy Capital Fund X, L.P. 39,955,195 7,474,420 FIMI Opportunity 6, L.P. 24,387,636 27,727,275 FirstMark Capital I, L.P. 74,928,863 196,596 FirstMark Capital IV, L.P. 21,243,429 15,225,000 FirstMark Capital OF I, L.P. 24,505,009 0 FirstMark Capital OF II, L.P. 28,781,193 7,875,000 ** FirstMark Capital OF III 0 35,000,000 FirstMark Capital P2, L.P. 127,645,475 0 ** FirstMark Capital V, L.P. 0 35,000,000 Flagship Pioneering Special Opportunities Fund II, L.P. 17,353,596 82,000,000 Flagship Pioneering VI 73,424,150 37,500,000 Flagship Ventures Fund 2004 32,207 0 Flagship Ventures Fund 2007, L.P. 5,592,650 0 Flagship Ventures Fund IV, L.P. 106,332,455 0 Flagship Ventures Fund V 108,732,470 0 Flagship Ventures Opportunities Fund I, L.P. 42,971,354 9,250,000 Fox Paine Capital Fund II, LP 21,112,198 15,382,699 FS Equity Partners VII, L.P. 96,389,036 14,387,164 FS Equity Partners VIII, L.P. 7,041,538 67,258,683 G-IV Acquisition Holdings, LLC 9,121,776 0 GCM Grosvenor Fund Investment Program I, L.P. 6,844,912 1,288,800 GCM Grosvenor Fund Investment Program II, L.P. 22,441,447 13,767,284 GCM Grosvenor Fund Investment Program III - 2004 37,333,726 4,469,827 GCM Grosvenor Fund Investment Program III - 2006 36,437,522 6,870,459 GCM Grosvenor Fund Investment Program V, L.P. 45,424,018 9,582,489 GCM Grosvenor Fund Investment Program VI, L.P. 24,675,475 5,326,985 GCM Grosvenor Fund Investment Program VIII, L.P. 79,860,892 24,987,370 GCM Grosvenor SeasPriFIP LP (PIS06-10) 42,971,199 16,686,939 GCM Grosvenor SeasPriFIP LP (PIS14) 227,965,151 26,503,616 GCM Grosvenor SeasPriFIP LP (Seed) 25,255,307 16,556,088 Genstar Capital Partners IX, L.P. 17,123,231 57,639,739 Genstar Capital Partners VIII, L.P. 63,405,316 1,566,312 Genstar IX Opportunities Fund I, LP 14,931,774 35,052,957 Genstar VIII Opportunities Fund I, L.P. 59,250,657 4,541,834 Green Equity Investors V 113,867,953 25,966,435 Green Equity Investors VI, L.P. 137,039,254 12,751,237 Green Equity Investors VII, L.P. 159,424,124 62,245,687 ** Green Equity Investors VIII, L.P. 0 250,000,000 Greenspring Master G, L.P. 45,478,382 104,500,000

10 Adjusted Unfunded Reported Value Commitment Greenspring Micro II, L.P. 7,795,208 17,216,263 GSO Capital Opportunities Fund II, L.P. 12,778,292 8,095,124 GSO Capital Opportunities Fund III, L.P. 50,981,184 42,833,908 GSO COF III Co-Investment Fund, L.P. 19,245,102 31,726,358 HarbourVest Credit Opportunities Fund II, LP 0 75,000,000 HarbourVest Dover Street VIII, L.P. 24,967,020 6,075,000 HarbourVest Int'l III Partnership 158,655 1,200,000 Harbourvest Partners Co-Investment Fund IV L.P 91,758,054 19,107,835 HarbourVest Partners Co-Investment Fund V L.P 27,372,677 170,000,000 HarbourVest Partners Mezzanine Income Fund 77,414,431 16,310,000 HarbourVest V Partnership 153,787 300,000 HarbourVest VI - Direct Fund LP 2,207,283 750,000 HarbourVest VI Partnership 563,004 2,000,000 Harvest Partners VII, L.P. 70,045,676 10,120,372 Harvest Partners VIII 9,729,879 90,267,118 HPS Mezzanine Partners III, L.P. 45,096,246 8,372,976 Insight Venture Partners GBC Fund, L.P. 90,552,106 7,578,566 Insight Venture Partners IX, L.P. 190,322,343 2,828,363 Insight Venture Partners X, L.P. 95,118,068 17,500,000 ** Jade Equity Investors, L.P. 0 100,000,000 Kelso Investment Associates IX, L.P. 85,238,263 11,676,803 Kelso Investment Associates VII 1,952,956 0 Kelso Investment Associates VIII 30,450,930 22,039,494 Kelso Investment Associates X, L.P. 18,132,027 82,226,354 Khosla Ventures III, L.P. 13,857,814 750,000 Khosla Ventures IV, L.P. 73,334,582 950,000 Khosla Ventures Seed D, L.P. 3,743,485 6,150,000 Khosla Ventures V, L.P. 61,143,686 2,750,000 Khosla Ventures VI, L.P. 28,357,181 46,650,000 KKR 2006 Fund, L.P. 94,870,046 4,751,870 KKR Americas Fund XII, L.P. 103,176,287 104,334,027 KKR Asian 2,481,591 0 KKR Asian Fund II, L.P. 52,998,717 2,346,005 KKR Asian Fund III 58,031,517 55,283,534 KKR China Growth Fund 23,281,780 3,383,656 KKR European Fund II 981,802 0 KKR European Fund III 10,404,006 5,747,264 KKR European Fund IV L.P. 115,324,933 7,839,437 KKR European Fund V (USD) SCSp 0 125,000,000 KKR Millennium Fund 256,392 0 KKR North America Fund XI, L.P. 117,670,994 7,525,249 Lead Edge Capital IV, L.P. 16,752,889 8,916,224 Lightspeed Opportunity Fund, L.P. 6,375,000 18,625,000 Lightspeed Venture Partners VII, L.P. 12,286,621 0 Menlo Special Opportunities Fund II, L.P. 4,934,649 24,900,000 Menlo Ventures IX, L.P. 1,479,946 0 Menlo Ventures X, L.P. 12,160,492 0

11 Adjusted Unfunded Reported Value Commitment Menlo Ventures XI, L.P. 35,636,324 0 Menlo Ventures XIV, L.P. 4,017,990 2,800,000 Meritech Capital Partners III, L.P. 322,675 0 Meritech Capital Partners IV, L.P. 16,041,550 600,000 Meritech Capital Partners V, L.P. 30,131,027 1,450,000 Meritech Capital Partners VI, L.P. 23,343,535 17,156,250 Michigan Growth Capital Partners II, L.P. 165,256,417 4,345,808 Michigan Growth Capital Partners III, L.P. 69,801,111 53,364,370 Michigan Growth Capital Partners, LP 52,667,355 10,292,319 Midtown Fund III, L.P. 0 0 New Leaf Biopharma Opportunities II, L.P. 94,665,702 12,000,000 New Leaf Growth Fund I, L.P. 94,150,723 0 New Leaf Ventures II, L.P. 9,312,333 0 New Leaf Ventures III, L.P. 35,785,796 1,875,000 New Leaf Ventures IV, L.P. 21,564,812 26,937,500 Nordic Capital VI, L.P. 217,379 1 Nordic Capital VII 621,181 3,139,239 Nordic Capital VIII, L.P. (Alpha) 42,382,244 6,622,432 Oak Investment Partners X, L.P. 457,574 0 Oak Investments Partners IX, L.P. 251,654 0 Oaktree Opportunities Fund X, L.P. 28,268,616 5,100,000 Oaktree Opportunities Fund Xb, L.P. 16,299,715 52,500,000 OCM Opportunities Fund IX, L.P. 53,012,489 0 OCM Opportunities Fund VII (B), L.P. 878,023 5,000,000 OCM Opportunities Fund VII, L.P. 2,142,251 0 OCM Opportunities Fund VIII B, L.P. 12,309,205 0 OCM Opportunities Fund VIII, L.P. 1,613,794 0 OCM Principal Opportunities Fund IV 683,554 4,998,467 Ocqueoc Holdings, LLC 10,116,919 49,029,369 Parthenon Investors II 530,970 3,186,779 Parthenon Investors III 26,107,274 2,682,182 Parthenon Investors IV, L.P. 51,876,160 3,592,740 Peninsula Capital Fund IV 119,272 2,201,026 Peninsula Fund VI, L.P. 35,201,959 6,124,373 Permira Growth Opportunities I, L.P.1 10,528,387 39,880,918 Permira VII L.P. 1 0 84,187,496 PPC Fund II 41,034,773 38,789,236 Public Pension Capital, LLC 62,176,671 51,921,746 Rhone Partners V, L.P. 74,814,812 30,739,665 Riverside Capital Appreciation Fund VI, LP 47,437,330 7,189,562 Riverside Capital Appreciation Fund VII, L.P. 40,803,774 58,655,964 Riverside Micro Cap Fund I, LP 17,814,558 5,782,975 Riverside Micro-Cap Fund II, L.P. 27,585,944 2,735,834 Riverside Micro-Cap Fund III, L.P. 67,878,784 1,212,404 Riverside Micro-Cap Fund IV 59,455,549 3,890,438 Riverside Micro-Cap Fund IV B, L.P. 9,669,556 5,330,444 Riverside Micro-Cap Fund V, L.P. 17,805,364 79,793,444

12 Adjusted Unfunded Reported Value Commitment Science Ventures Fund II, L.P. 21,494,217 5,400,000 Science Ventures Fund III, LP 0 25,000,000 Shamrock Capital Content Fund I, L.P 30,011,919 18,383,125 Shamrock Growth Capital Fund IV, L.P. 25,429,394 24,386,137 Silver Lake Partners II 194,530 3,531,586 Silver Lake Partners III 23,185,203 13,199,137 Silver Lake Partners IV, L.P. 64,139,740 2,615,731 Silver Lake Partners V, L.P. 34,308,965 36,885,234 Silver Lake SL SPV-2 35,714,867 13,847,947 SK Capital Partners V, L.P. 13,493,257 35,980,344 ** SKCP Catalyst Fund I-A, L.P. 0 35,000,000 SM/TCP L.P. 23,581,823 15,316,740 SMRS - TOPE LLC 2,142,982,986 235,491,815 SMRS-CAPP LLC 39,262,404 61,300,000 SMRS-NCRP LLC 641,583,904 180,958,521 Summit Partners Growth Equity Fund X, L.P. 0 100,000,000 Sycamore Partners III, L.P. 9,785,586 86,442,202 TCW/Crescent Mezzanine Partners IV, L.P. 0 13,660,773 TCW/Crescent Mezzanine Partners IVB Secondary 0 0 TCW/Crescent Mezzanine Partners V, LLC 4,799,849 12,395,466 TCW/Crescent Mezzanine Partners VC Secondary 1,549,203 0 The Huron Fund III, L.P. 7,076,479 4,207,756 The Huron Fund IV, L.P. 34,049,587 1,503,225 The Huron Fund V, L.P. 10,406,975 25,952,500 The Shansby Group 5 (TSG5) 492,506 4,261,291 Thoma Bravo Discover Fund II, L.P. 36,634,094 36,946,928 Thoma Bravo Fund XII, L.P. 185,936,948 8,058,089 Thoma Bravo Fund XIII, L.P. 44,522,663 79,882,572 TI Platform BOV, L.P. 3,949,060 10,882,507 TI Platform Fund II, L.P. 3,765,087 11,120,048 TI Platform SMRS SMA, L.P. 14,746,362 45,329,687 TPG Healthcare Partners, L.P. 594,878 24,405,122 TPG IV (Texas Pacific Group IV) 1,513,346 211,725 TPG Partners III, LP 465,784 2,087,002 TPG Partners VI, L.P. 62,504,384 10,239,556 TPG Partners VIII, L.P. 1,016,983 123,983,017 TPG Partners, VII, L.P. 148,347,162 21,352,664 TPG V (Texas Pacific Group V) 16,252,963 5,841,509 Trilantic Capital Partners V (North America) Fund A, L.P. 31,118,854 3,594,193 Trilantic Capital Partners VI (North America) L.P. 16,405,929 57,276,813 TSG6, L.P. 105,039,034 23,221,103 TSG7 A L.P. 110,661,091 31,910,736 TSG8, L.P. 3,930,899 146,069,101 Turnbridge Capital Partners I , LP 79,076,249 37,927,757 Veritas Capital Fund V, L.P. 150,708,046 11,358,273 Veritas Capital Fund VI, L.P. 130,062,646 23,772,543 Veritas Capital Fund VII, LP 0 100,000,000

13 Adjusted Unfunded Reported Value Commitment Veritas V Co-Investors, L.P. 49,104,113 4,990,000 Vista Equity Endeavor Fund I, L.P. 42,311,195 12,097,349 Vista Equity Endeavor Fund II, LP 4,378,079 60,101,767 Vista Equity Partners Fund V, L.P. 48,424,420 14,544,149 Vista Equity Partners Fund VI, L.P. 90,216,091 11,596,399 Vista Equity Partners VII, L.P. 17,871,104 59,742,359 Vista Foundation Fund III, L.P. 23,099,485 4,709,389 Warburg Pincus China-Southeast Asia II, L.P. 2,515,581 72,375,000 Warburg Pincus China, L.P. 46,853,245 4,477,500 Warburg Pincus Energy MCIP, L.P. 0 10,396,887 Warburg Pincus Energy, L.P. 82,589,738 16,900,000 Warburg Pincus Equity Partners, L.P. 1,171,920 0 Warburg Pincus Financial Sector, L.P. 22,505,721 22,365,000 Warburg Pincus Global Growth, L.P. 22,106,602 125,925,000 Warburg Pincus International Partners 582,105 0 Warburg Pincus Private Equity IX 9,355,910 0 Warburg Pincus Private Equity VIII, L.P 273,467 0 Warburg Pincus Private Equity X, L.P. 87,601,198 0 Warburg Pincus Private Equity XI, L.P. 125,749,794 0 Warburg Pincus Private Equity XII Secondary, L.P. 26,529,497 1,487,500 Warburg Pincus Private Equity XII, L.P. 185,931,507 10,412,500 WestAm COREplus Private Equity QP 393,130 2,086,719 Total Private Equity $ 13,588,406,620 $ 8,029,317,814

Cash 148,356,607 0 Active Small Cap Cash 38,335,955 Active Small Cap 25,062,251 0 Income Accruals 1,255,782 0 Grand Total $ 13,801,417,215 $ 8,029,317,814

Total Private Equity amounts do not include Cash and Active Small Cap ** New Commitments made during quarter reported

14 State of Michigan Retirement System REAL ESTATE AND INFRASTRUCTURE REVIEW State of Michigan Investment Board Meeting March 19, 2020

Todd A. Warstler Senior Investment Manager Real Estate and Infrastructure Division

EXECUTIVE SUMMARY

Performance

MPSERS Plan (12-31-19) 1-Year 3-Years 5-Years 7-Years 10-Years Annualized Returns 7.0% 9.3% 9.5% 11.2% 10.4% NCREIF NPI 5.1% 5.3% 6.9% 7.8% 8.8% Peer Median Returns 7.3% 8.5% 9.0% 10.5% 10.8% Percentile Rank vs. Peers* 52 36 44 39 60 *State Street Universe greater than $1 billion

 Outperformance relative to the one-year benchmark resulted from the Real Estate and Infrastructure Division’s (REID) strategy of being underweight in retail, performance of credit strategies, and appreciation and gains across the entire portfolio.

 The portfolio occupancy was at or above the national average for the hotel, industrial and apartment sectors where the portfolio is weighted to core properties and below the national average for the office and retail sectors where the portfolio is weighted to value-add/opportunistic properties.

Strategy Update  The REID is focusing on sourcing off-market opportunities through its extensive network and reducing risk in the portfolio through early income-generating investments including credit strategies that are higher in the capital stack with a shorter projected hold period. The REID has selectively acquired properties where it can add value through management and leasing and has continued to develop properties at attractive risk-adjusted returns. The REID will continue its strategy of assembling portfolios in both traditional and non-traditional real estate sectors that we believe will become institutional property types, providing above market appreciation and total returns.  The REID has been actively managing the portfolio with dispositions in excess of $1.0 billion, and funding for new or existing investments of nearly $807 million over the past 12 months. The REID was a net seller and is working with its advisors in executing the disposition of properties and realizing gains from the sale of assets at historically low capitalization rates where these opportunities exist.  The REID has approximately $1.5 billion in unfunded commitments. New commitments during the quarter include:

o $100 million in DM2501, LLC, a separately managed account that will focus on investments in smaller sized real estate investment opportunities, managed by Domain Capital Advisors, LLC.

o $35 million in Avanath Affordable Housing IV, LLC, a closed-end commingled fund specializing in investments in the affordable/workforce multifamily housing sector in the U.S., managed by Avanath Capital Management, LLC.

1 Market Environment  Fund flows to the real estate sector set a new 12-month record for the period ending December 31, 2019 at $151 billion, above the previous peak of $148 billion. The dry powder in the system did decline slightly from $331 billion at the end of 2018 to $319 billion at the end of 2019. This high level of dry power should continue to act as a support for pricing. Fund sizes continue to increase with the three largest funds raising $43.5 billion between them. Retail properties continue to be less attractive to investors as e-commerce sales continue to grow, with investors instead favoring warehouse/logistics (as a retail substitute in some cases) and the apartment sector. Senior housing, student housing, data centers and medical office once considered niche sectors are attracting more investor attention. Supply of new buildings in all property types, except retail, has increased in many markets and is beginning to raise concern from investors. However, a strong economy has so far kept demand for space high enough to absorb new supply. Additionally, lenders have become more selective in quality and location of the collateral and have been disciplined in their underwriting standards for construction lending. The cost of new construction in land, labor and materials has steadily increased, making it more difficult for developers to meet return thresholds.

 Capital flows into the infrastructure sector remain strong, as the asset class matures, and investor interest continues to grow. Opportunities include power generation, decarbonization efforts, the rising need for data, and emerging market fundamental infrastructure projects. Much of the capital raised in 2018/2019 is in very large fund format and this may impact (lower) returns as there is a limited opportunity set at the largest investment sizes. The REID believes there may be more opportunities for outperformance for regional and/or midsize funds or those with niche strategies. The industry has gained attention from the Federal Administration’s intent on rebuilding U.S. infrastructure; however, details on legal and financial framework of Public Private Partnerships (P3) are limited and will take time to develop. A tight labor market for construction workers, rising wage and materials cost, budget considerations and political gridlock in Washington could inhibit timing of funding and completions.

 Tightening lending standards combined with heightened bank regulations after the global financial crisis have worked to constrain lending activity in many instances. Demand for private credit from non-traditional capital providers, particularly when a financial sponsor requires speed and certainty of execution is expected to continue to grow. Real estate credit in the U.S., Europe and Asia in various forms should continue to present opportunities.

2 SMRS Real Estate and Infrastructure 12/31/19

Cash/ Land SFR Other 1.2% 2.8% 2.0% Retail 4.6%

Industrial 10.8%

Apartment 42.4%

Office 11.6%

Infrastructure 11.7%

Hotel 12.9%

Market Value in Millions

12/31/19 12/31/18 Apartment $3,003 42.4% $2,747 39.0% Hotel 910 12.9% 927 13.2% Infrastructure 830 11.7% 826 11.7% Office 819 11.6% 857 12.2% Industrial 767 10.8% 610 8.7% Retail 329 4.6% 346 4.9% Single Family Residential (SFR) 195 2.8% 564 8.0% Land 86 1.2% 108 1.5% $6,939 98.0% $6,985 99.2% Cash/Other 145 2.0% 60 0.8% Total Investments $7,084 100.0% $7,045 100.0%

3 SMRS Real Estate by Region Based on Market Value (excludes cash & cash equivalents) 12/31/19

Pacific 20.1% Northeast West N. Central 13.9% East N. Central Mountain 2.0% 7.5% 4 10.7%

Mideast 12.8%

Southeast Southwest 10.4% 14.2%

International comprises 8.4%

Geographic regions defined by NCREIF, whose property index composition is: Pacific 33.7%, Mountain 6.4%, West N. Central 1.2%, Southwest 10.5%, East N. Central 7.0%, Southeast 9.7%, Northeast 20.4%, Mideast 11.1% SMRS Real Estate and Infrastructure 12/31/19

Top Ten Advisors or Entity

($ in millions) Advisor or Entity Market Value MWT Holdings LLC $ 2,278 Clarion Partners 679 Principal Real Estate Investors 457 Five Star Realty Partners LLC 345 Domain Capital Advisors Inc 278 Blackstone Group 256 Rialto Capital Management LLC 251 CIM Investment Advisors LLC 212 Transwestern Investment Management 176 L&B Realty Advisors 173 $ 5,105

Occupancy by Property Type

Apartment Office Industrial Retail Hotel SMRS Portfolio 93.2% 81.3% 95.8% 91.1% 72.7% National Average 93.6% 87.9% 92.8% 95.4% 70.1%

5 SMRS Market Values by Ownership Entity 12/31/19 REAL ESTATE Unfunded Market Value Commitment 801 Grand Avenue Capital, LLC$ 70,460,752 $ 0 AEW Senior Housing III 4,019,526 790,989 AEW Senior Housing Investors IV 1,863,841 47,853,618 Apollo Asia Real Estate Fund 46,292,164 30,234,574 Asana Partners Fund I 27,374,445 5,416,828 Asana Partners Fund II 3,191,773 45,967,905 Avanath Affordable Housing II, LLC 31,455,288 0 Avanath II SMRS Co-Investment Fund LLC 14,045,132 0 Avanath Affordable Housing III 44,033,787 5,516,898 * Avanath Affordable Housing IV 2,106,712 32,436,349 Blackstone R/E Partners V, LP 3,437,231 0 Blackstone R/E Partners VI, LP 5,908,040 3,680,930 Blackstone R/E Partners VIII, LP 74,126,571 14,872,368 Blackstone R/E Partners IX, LP 34,022,526 165,951,099 Capri Urban Investors, LLC 8,302,930 0 CIM Commercial Trust Corp 8,521,853 0 CIM Fund III, LP 38,752,975 0 CIM Fund VIII, L.P. 112,041,028 1,487,563 CIM VI (Urban REIT), LLC 32,574,706 0 Clarion Gables Multifamily Trust, LP 32,621,974 0 Columbus Circle Holdings, LLC 169,478,895 176,964,029 Crown Small Cap Real Estate 16,848,830 8,375,000 * DM2501, LLC 00 Domain GVA-1, LLC 39,654,891 2,387,761 Domain Hotel Properties, LLC 402,512,654 0 Gateway Capital Real Estate Fund II, LP 4,219,442 0 Great Lakes Property Group Trust 8,094,277 9,565,475 Heitman Credit 50,769,961 0 IDR Core Property Index Fund LLC 25,417,274 0 India Property Fund II, LLC 22,387,689 2,212,118 Invesco Mortgage Recovery Feeder Fund 3,809,037 0 Invesco Mortgage Recovery Fund II, L.P. 23,215,805 34,249,727 Invesco Strategic Opportunities III, L.P. 18,789,323 82,461,385 IPF II Co-Invest LP 22,779,651 1,720,897 JBC Funds North LaSalle LLC 18,718,445 0 JBC Opportunity Fund III, LP 495,673 0 KBS/SM Fund III, LP 50,386,419 0 KBS/SM Fund IV 143,775 0 L-A Saturn Acquisition 36,462,939 0 Landmark Real Estate Partners V, LP 6,721,477 0 LaSalle Asia Opportunity Fund II, LP 282,964 0 LaSalle Asia Opportunity Fund III, LP 1,206,584 0 Lion Industrial Trust 238,326,003 0 6 Unfunded Market Value Commitment Lion Mexico Fund, LP 5,166,298 0 Lombard GVA0016 (former AGL Annuity) 344,556,924 0 Lone Star Fund X LP 167,319,326 30,483,414 Lone Star Fund XI LP 5,374,097 187,254,621 Lubert-Adler Real Estate Fund VII, LP 61,854,016 6,538,662 M1 Westgate CoInvest LLC 17,284,259 0 M301W CoInvest LLC 3,294,882 0 MERS Acquisitions Ltd. 173,145,570 24,344,500 MG Alliance, LLC 50,994 0 MIP Holdco LLC 138,617,687 14,446,169 MSREF V - International 2,317,631 0 MSRESS Fund III Institutional LP 6,498,537 0 MWT Holdings, LLC 2,278,005,194 0 Northpark Land Associates 33,535,596 7,744,171 Orange Investors LLC 432,703 0 Paladin Realty Brazil Investors III (USA), LP 10,595,207 0 Paladin Realty Latin America Investors IV-CI, LP 39,235,134 0 Paladin Realty TB COINV V LP 11,693,291 0 Penmain Office LLC 35,458,260 0 Principal Separate Account 386,682,931 168,699,881 Proprium RE Spec. Situations Fund, LP 83,376,059 16,143,656 Rialto Absolute Partnership I 68,744,928 0 Rialto Credit Partshp LP 38,698,385 1,374,858 Rialto Real Estate Fund, LP 21,631,048 0 Rialto Real Estate Fund II, LP 34,390,382 0 Rialto Real Estate Fund III-Debt, LP 49,655,827 0 Rialto Real Estate Fund III-Property, LP 34,932,855 14,931,507 Rialto Mezzanine Partners Fund 3,068,657 0 SM Brell II LP 21,134,278 0 Stockbridge RE Fund II-C, LP 24,328,914 0 Strategic LP 720,814 0 Strategic II LLC 38,802,494 49,205,779 TPG RE Finance Trust Inc. (TRTX) 97,690,901 0 TPG Real Estate Partners II 30,901,717 13,317,190 TPG Real Estate Partners III 4,482,510 48,517,490 TSP Spartan C-I LLC 7,154 0 TSP Spartan C-II LLC 19,088,645 0 TSP Value & Income Fund II, LP 18,568,276 32,197,172 True North High Yield Invest. Fund II, LLC 3,293,346 0 True North Real Estate Fund III, LLC 37,921,679 5,000,000 Venture Center, LLC 16,140 0 $ 6,108,448,805 $ 1,292,344,583 Short-Term Investments and Other 128,211,313 0

Total Real Estate Investments $ 6,236,660,118 $ 1,292,344,583

* New or additional commitment made during the quarter reported

7 SMRS Market Values by Ownership Entity 12/31/19 INFRASTRUCTURE Unfunded Market Value Commitment Arclight Energy Partners VI, LP $ 45,941,274 $ 6,953,820 ASF VI Infrastructure B LP 21,532,292 9,689,503 ASF VII Infrastructure Fund B L.P. 12,079,033 19,200,123 ASF Como Co-Investment LP 5,463,006 2,405,051 Basalt Infrastructure Partners, LP 37,968,325 2,219,045 Blackstone Energy Partners, LP 34,243,923 4,728,291 Blackstone Energy Partners II, LP 75,282,817 23,154,571 Brookfield Infrastructure Fund II-B, L.P. 53,639,630 5,001,882 Customized Infrastructure Strategies, LP 36,562,448 4,712,903 Dalmore Capital Fund 61,707,810 0 GCM Grosvenor Infrastructure Investment Program, L.P. 77,925,129 0 GCM Grosvenor Customized Infrastructure Strategies II, L.P. 46,697,749 14,106,005 Global E&P Infrastructure Fund II L.P. 56,394,638 6,206,202 GSO Energy Select Opportunities Fund LP 25,853,767 25,250,151 GSO Energy Select Opportunities Fund II, LP 3,522,063 46,638,959 JPMorgan AIRRO India SideCar Fund US, LLC 82,233,259 3,187,421 JPMorgan AIRRO Fund II 10,450,734 7,440,094 KKR Eagle CoInvest L.P. 36,528,945 1,853,268 KKR Global Infrastructure Investors, LP 40,126,805 4,182,224 Ridgewood Water & Strategic Infrastructure Fund LP 7,607,732 45,137,013 RPEP SMRS Infra II, LLC 6,300,718 500,000 StonePeak Infrastructure Fund LP 51,974,325 10,232,593 $ 830,036,423 $ 242,799,119 Short-Term Investments and Other 17,156,365 0 Total Infrastructure Investments$ 847,192,789 $ 242,799,119 TOTAL INVESTMENTS$ 7,083,852,907 $ 1,535,143,702 * New or additional commitment made during the quarter reported

8 State of Michigan Ret irement System REAL & OPPORTUNISTIC RETURN REVIEW State of Michigan Investment Board Meeting March 19, 2020

Jennifer Yeung Senior Investment Manager Real & Opportunistic Division

EXECUTIVE SUMMARY

Performance

MPSERS Plan (12/31/19) 1-Year 3-Years 5-Years 7-Years 10-Years Real & Opportunistic 8.2% 13.1% 10.3% 12.1% N/A Custom Benchmark 6.7% 7.2% 7.2% 7.2% N/A

• The portfolio value is $8.4 billion with a one-year return of 8.2%. Performance for the year was driven by current income from credit investments, natural resource production-linked and lending strategies and music royalties, as well as capital appreciation of transportation and media and entertainment assets.

Strategy Update

• The objective of the Real Return & Opportunistic portfolio is to provide an inflation hedge and/or to gain exposure to attractive opportunities that may not fit in another plan portfolio.

• The Real Return & Opportunistic portfolio has approximately $4.2 billion of unfunded commitments. Three new commitments closed during the quarter.

o $100 million to TSSP Agriculture Partners (A), L.P. (Sixth Street Partners), a comingled fund that invests in niche agriculture opportunities. Target investments are expected to generate steady current income resulting in a mid-single digit percentage cash yield.

o $100 million to TSSP Institutional Credit Partners III, L.P. (Sixth Street Partners), a comingled fund that will retain an equity investment in a series of collateralized loan obligations managed by Sixth Street Partners.

o $100 million to Abernathy Fund II, LLC (Domain Capital Advisors), a separately managed account allowing SMRS to partner with Domain Capital Advisors on niche investment opportunities.

• We remain focused on finding differentiated strategies that are additive to the current portfolio mix.

o We continue to like private credit opportunities, niche strategies with some scalability, and contractual cash flow. Specifically, we like opportunities that have defensible cash flows and offer structural downside protection. We continue to be selective and favor investment teams that are disciplined and have experience investing over multiple cycles.

1 SMRS Real Return and Opportunistic 12/31/19

Top Ten Advisors or Entities

($ in Millions)

Advisor or Entity Market Value Barings Alternative Investments $ 2,761 Apollo Global Management 1,084 Domain Capital Advisors 771 ICG Advisors 696 Sixth Street Partners 324 Kayne Anderson Capital Partners 308 Fortress Investment Group 237 Ridgewood Energy 222 Orion Resource Partners 221 Czech Management 219

Total Market Value $ 6,843

2 SMRS Real Return and Opportunistic 12/31/19

Investments By Strategy

Short Term Investments 2.9% Opportunistic 13.7% Real Assets 62.7%

Credit 20.7%

Market Value in Millions 12/31/19 Real Assets $5,424 Credit 1,795 Opportunistic 1,182 Short Term Investments 250

Total Investments $8,651

3 SMRS Real Return and Opportunistic 12/31/19

$ Millions Invested Commitmentsaa

$312 $8,651 $250 $250 $7,955

($116 )

9/30/19 Capital Calls Cash Dist. Reported Value Short Term 12/31/19 Reported Value Received Change Investments Reported Value

$ Millions Outstanding Commitments

$300 $32 $4,206 $4,186

($312)

9/30/19 New Deals Capital Calls Recallable Returned 12/31/19 Outstanding Capital and Other Outstanding Commitments Commitments

4 SMRS Real Return and Opportunistic 12/31/19 Net Market Value by Entity Unfunded Net Market Value Commitment * Abernathy $ 280,393,562 $ 44,036,974 ** Abernathy Fund II, LLC 0 100,000,000 Altus Midstream 10,010,000 0 Angelo Gordon Credit Solutions Fund 18,953,334 81,500,000 Apollo European Principal Finance Fund II 13,712,087 8,183,358 Apollo HK TMS Investments Holdings LP 1 0 Apollo Offshore Credit Fund 14,127,338 0 Axton Holdings 1,852,074,992 0 Barings Asset Based Income Fund I 164,263,769 135,675,627 Barings Global Real Asset Fund I 61,690,664 40,158,269 Blackstone Strategic Capital Holdings, LP 62,500,308 67,481,268 Blue Peninsula Fund LP 146,568,871 58,838,113 Broadriver III 34,131,937 191,210,169 BSCH Parallel (MLG) I LP 154,484,485 0 BSCH II 0 250,000,000 BSCH II Co-Invest 0 100,000,000 Carlyle Energy Mezzanine Opportunity Fund II 22,888,404 23,543,234 Carlyle IEP Co-Invest (Varo) 18,195,655 861,225 Carlyle International Energy Partners 46,354,635 24,008,247 Carlyle International Energy Partners II 0 150,000,000 Castle Credit SMRS Holdings LLC 46,128,421 146,783,562 Centerbridge SCP III 22,020,606 12,532,213 Content Holdings, LLC 371,419,082 32,818,918 Credit Opportunity Fund III 27,188,939 20,261,207 Energy Recap and Restructuring 23,895,453 7,085,025 ERR MI Holdings LP 3,009,818 2,269,933 FCO MA MI LP 162,638,693 36,730,025 Financial Credit Investment II 244,859,131 184,797,353 Financial Credit Investment III 223,564,496 136,804,737 Flywheel Energy Co-Invest 27,986,663 7,000,000 Fortress Transportation & Infrastructure 73,801,075 0 Greatrock LLC 59,783,362 0 Global Maritime 76,235,555 3,414,854 GSO Credit Alpha Fund 45,188,694 37,910,063 Hopen Life Science Fund II 4,072,673 640,000 HPS Red Cedar Fund 180,485,613 121,724,330 Kayne Anderson Energy Fund VII, LP 52,431,536 19,407,908 Kayne Anderson Private Energy Income Fund 119,663,388 26,110,234 Kayne Anderson Private Energy Income Fund II 24,787,703 124,035,141 Kayne Solutions Fund 53,476,324 195,050,317 KKR Energy Income & Growth Fund 41,759,613 1,953,202 KKR Lending Partners 10,656,064 11,930,723 KKR Lending Partners II 29,902,653 11,737,239 Lakewater 105,243,305 76,518,504

5 Unfunded Net Market Value Commitment Lakewater II 76,400,576 22,022,365 Lakewater III 291,471,405 89,179,025 Lakewater IV 32,526,275 16,108,084 Lakewater V 117,100,855 23,323,672 Marathon CLO Equity Fund 15,333,803 7,029,470 Merit Energy Partners I LP 35,512,912 0 MidCap Finco Holdings LTD 304,316,457 0 Mortgage Servicing Rights 74,236,058 0 Napier Park Aircraft Leasing Vehicle I, LLC 46,256,633 18,394,243 Napier Park AL Rollover Fund I 13,370,541 63,069,512 Nash Co-Investment 13,427,080 94,259 New Fortress Energy HLDGS 649,463,625 0 New Fortress Energy LLC 6,786,771 0 NGP Natural Resources XII 68,423,317 113,917,155 Orion Co-Investments III, LP 4,398,382 0 Orion Mine Finance 62,873,833 2,982,344 Orion Mine Finance 1A 38,411,019 1,550,660 Orion Mine Finance Co-Fund II LP 20,075,369 35,000,000 Orion Mine Finance II 85,290,044 26,846,836 Orion Mine Finance III LP 10,290,399 63,815,181 Redding Ridge Holdings, LP 65,345,134 37,443,359 * Ren Venture Fund II 28,327,052 1,500,000 * Ren Venture Fund III 6,878,988 18,000,000 Ridgewood Energy Oil & Gas II 79,898,622 15,438,077 Ridgewood Energy Oil & Gas III 94,629,060 144,208,979 Ridgewood Fund II Co-Invest (REOG) 23,456,460 5,575,415 Riverside Credit Solutions FD I LP 28,458,476 20,771,187 RPEP Energy Opportunistic Institutional Partners 23,928,060 13,892,572 SJC Direct Lending Fund II 4,924,578 38,261,315 SJC Direct Lending Fund III 194,463,461 37,895,307 SJC Direct Lending Fund III Co-Invest G-III 20,000,000 0 * Social Network Holdings 119,584,141 5,590,289 Specialty Loan Fund III 8,956,614 6,113,323 Sprott Private Resource Lending (US), LP 31,577,075 71,491,830 Sprott PRL(M) LP 2,638,663 22,526,888 Sprott PRL(M-Co-Invest) LP 7,486,858 17,687,500 Structured Credit Recovery Fund IV 191,253,814 59,115,789 Terra Co-Investment 29,599,750 14,000,000 TICP CLO Partners II 44,386,648 1,751,293 ** TSSP Institutional Credit Partners III, L.P. 0 100,000,000 ** TSSP Agriculture Partners (A), L.P. 0 100,000,000 TSSP Adjacent Opportunties Partners 182,641,797 132,435,377 TSSP Capital Solutions 79,837,072 221,959,699 TSSP Opportunities Partners IV 16,996,478 83,817,654 Turning Rock Fund I, LP 27,428,131 47,571,869 Vida Insurance Credit Opportunity Fund II 97,810,975 6,181,404 Warwick (SMRS) Co-Invest, L.P. 35,378,815 2,089,081 Warwick Partners III 58,908,170 4,511,027 Total Real Return and Opportunistic $ 8,401,309,149 $ 4,206,174,012 Short-Term Investments & Other 250,155,464 0 Grand Total $ 8,651,464,612 $ 4,206,174,012 * Fund of Funds ** New Commitment

6 State of Michigan Retirement System ABSOLUTE RETURN REVIEW State of Michigan Investment Board Meeting March 19, 2020

Daniel J. Quigley Senior Investment Manager Absolute Return Strategy

EXECUTIVE SUMMARY

Performance

MPSERS Plan (12/31/19) 1-Year 3-Years 5-Years 7-Years 10-Years Absolute Return 4.5% 6.0% 3.7% 5.1% 4.8% HFRI FOF Conservative 4.4% 3.1% 2.2% 3.2% 2.7%

 The value of the Absolute Return portfolio is $3.9 billion with a one-year return of 4.5%. Manager selection and exposure to multi-strategy/event-driven and credit strategies contributed to positive fourth quarter performance. There were no strategy level detractors during the quarter.

 Multi-Strategy/Event managers were the top contributor to performance during the quarter. Performance was materially driven by a position in GP stakes, with returns coming from underlying GP management fees and carry. Event-driven managers had a strong quarter driven by positive returns from opportunistic strategies and a few activist equity positions. A hedge fund seeding portfolio also generated returns given strong underlying manager performance.

 Credit strategies were the second largest contributor to performance for the quarter, primarily driven by residential mortgages exposure. Mortgage Servicing Rights (MSR) exposure was positive due to cash flows from underlying MSR investments and carry generation. Managers also remain active in issuing Reperforming Loan (RPL) mortgage securitizations while capital markets remain open and the managers are able to issue liabilities at attractive spreads. In addition to mortgage strategies, structured credit performance was broadly positive and driven by direct sourcing of distressed senior secured investments.

Strategy Update

 The objective of the Absolute Return portfolio is to diversify the total plans’ holdings, targeting returns above investment-grade fixed income with lower volatility than the equity portfolio. The portfolio utilizes a diverse mix of managers that invest both long and short to target specific exposures and seek to hedge out unwanted risk.

 No new commitments for the quarter.

 In terms of allocation priorities, we continue to be focused on high quality diversifiers and targeted opportunities in niche credit. Due to lower alpha expectations, we are continuing to reduce our exposure to fundamental equity strategies. We have slightly increased our exposure to multi-strategy, macro and emerging markets managers.

Overall, we will continue to focus on opportunities that seek to provide diversification, protect the downside and deliver absolute return.

1 SMRS Absolute Return 12/31/19

Net Market Values by Entity

Net Market Value

* Tahquamenon Fund, LP $ 3,678,019,708 JM IV, LP 73,044,084 MP Securitized Credit Master Fund, LP 52,856,245 SJC Direct Lending Revolver Fund III, LP 62,610,072

* EnTrust White Pine Partners, LP 14,271,514 Visium Balanced Fund, LP 299,801 Total Absolute Return $ 3,881,101,423 Short-Term Investments & Other 26,404,402

Grand Total $ 3,907,505,825

* Fund of Funds

2 SMRS Absolute Return 12/31/19

Investments By Strategy

Diversifying 13.2%

Multi-Strategy / Event 34.8%

Equity 16.6%

Credit 35.4%

Strategy Breakdown

Underlying Funds: 71 Median Position Size: 0.6%

Strategies: 4 Average Position Size: 1.4%

Relationships: 6 Largest Position Size: 7.3%

3 SMRS Absolute Return 12/31/19

Liquidity Analysis Redeemable Marginal Allocation Aggregate Allocation (% each period) (% since Analysis Date) By 4/1/20 27.85% 27.85% By 7/1/20 24.41% 52.26% By 1/1/21 25.08% 77.34% By 7/1/21 4.84% 82.18% By 7/1/22 6.34% 88.52% After 7/1/22 9.55% 98.07% Illiquid 1.93% 100.00% Total 100.00% N/A

Monthly % Period 120% 100% 82.18% 88.52% 80% 77.34% 60% 52.26% 40% 27.85% 20% 0% Apr Jan Oct Jul Jan Apr Oct Jul Jan Apr Oct Jul Jan Apr Oct Jul Jan Apr Oct Jul Jan Apr Oct Jul

2020 2021 2022 2023 2024 2025

2020 2021 2022 2023 2024 2025 2020 2021 2022 2023 2024 2025 2020 2021 2022 2023 2024 2025

4 State of Michigan Retirement System BASKET CLAUSE REVIEW State of Michigan Investment Board Meeting March 19, 2020

Karen M. Stout, CPA, CGFM Administrator Trust Accounting Division

SMRS Basket Clause Investments 12/31/19

Asset Class Value

Total Absolute Return $ 3,881,101,423

Total Real Return and Opportunistic 590,918,961

Total International Equity 91,323,575

Total Fixed Income 79,352,036

Total Basket Clause Investments $ 4,642,695,995

The basket clause investments on December 31, 2019, were $4.6 billion or 6.0% of the total portfolio value of $77.7 billion.

The Public Employees Retirement System Investment Act, 1965, PA 314, MCL 38.1132 et seq , authorizes the State Treasurer to invest up to 30% of the system's assets in investments "not otherwise qualified under the act." MCL 38.1140d (1) commonly referred to as Section 20d (after the authorizing section of PA 314) or Basket Clause investments, gives the State Treasurer the flexibility to take advantage of market opportunities not specifically authorized in PA 314 while conserving protections against imprudent investment.

Disclaimer 

This presentation was given solely for the purpose of explaining the structure, investment process, and returns for the State of Michigan Retirement System. It should not be interpreted in any way as financial advice.