SAN DIEGO CITY EMPLOYEES’ RETIREMENT SYSTEM STAFF REPORT INVESTMENT DIVISION

DATE : February 5, 2007

TO : SDCERS' Investment Committee

FROM : Doug McCalla, Chief Investment Officer

SUBJECT : Status Report - Investment Division

I Trust Fund Status and Transactions On January 30th, a wire totaling $14.0 million was sent from the custodial bank to SDCERS’ operating trust fund on deposit with the City Treasurer’s investment pool. These funds were used to pay retirees and beneficiaries, to process withdrawals, and to fund SDCERS' operating expenses. Additionally, the following investments and expenses were funded directly from available cash held at State Street bank: a real estate fund investment wire of $1.13 million on February 6th; and, 4th quarter 2006 manager fee invoices totaling $2.88 million.

To fund the above, cash was raised from the following managers: Dodge & Cox (domestic equity large cap value) $11.0 million RREEF REITs (real estate securities) $ 2.0 million Nicholas-Applegate (domestic fixed income-convertibles) $ 1.0 million Globeflex Capital (domestic equity mid cap growth) $ 0.3 million Total $14.3 million

Despite these larger than average withdrawals for the month, the market value of invested assets as reported by the custodial bank reached the $4.7 billion level at the end of January.

There have been no other rebalancing activities since last month’s report.

II Status of Realized and Unrealized Gains / Losses The chart of realized and unrealized gains / losses through December 2006 is included in the Status Reports section of the Investment Committee Board materials. The realized gains for the first six months of FY 2007 totaled $202.0 million. The level of unrealized gains at December 31, 2006, totaled $709.3 million. These values are unaudited.

III Corporate Governance Operations

A. Monthly Proxy Voting During the month of January, 53 proxies were voted by SDCERS’ voting agent, including nine referred proxies that were voted by staff. Eight of these referred Investment Division - Status Report February 5, 2006 Page 2 of 3

proxies were voted in accordance with SDCERS’ proxy voting policy and guidelines as the vote recommendations of ISS and the investment managers were in agreement. One of these proxies required further analysis, as ISS and the investment managers were not in agreement in their vote recommendations. A vote record summary report documenting all of the proxy voting activity for the month of January is on file with SDCERS’ Investment staff.

IV Investment Operations

A. Portfolio Review and Monitoring Staff has reviewed investment manager monthly and quarterly reports and investment activity appears to be in compliance with investment guidelines. Attached is a letter from Dodge and Cox regarding organizational changes due to succession planning from the Chairman’s retirement. Three letters from RREEF are also attached regarding organizational structure changes. RREEF has been placed on the SDCERS’ Manager Watch List for a period of one year as a result of a change to the REIT portfolio management team. Also placed on the Watch List for significant organizational change is Putnam due to the announced pending sale of the firm to Powers Financial Corporation. Communications from Callan and Putnam are attached detailing the terms of the transaction.

B. Real Estate 1. Cornerstone Apartment Venture III (CAV III) – Commingled Fund At the December meeting, SDCERS’ Board approved a $20 million investment in CAV III, an apartment only commingled real estate fund. Subscription agreements and related fund documents are being reviewed by outside legal counsel. The fund closing will take place February 15th with the first capital call to follow shortly thereafter.

2. California Smart Growth Fund IV – Commingled Fund On February 6th, SDCERS will make its third capital contribution to CSGF IV totaling $1.13 million. This brings SDCERS total equity investment to just over $4 million. These three equity contributions represent approximately 28% of SDCERS’ $15 million total commitment to this fund. SDCERS has a 2% equity ownership share in this $746.15 million (total equity capital) fund.

C. Research Activities Investment staff met with or engaged in discussions with the following firms to review products, processes, operations and services: Pacific Coast Capital Partners (CA Smart Growth Fund IV), Capmark, Fisher Investments, Turner Investment Partners, and Rogge Global Partners.

D. Consultant RFP Process A comparative matrix of the three firms (Callan Associates, R.V. Kuhns and Associates and Ennis Knupp + Associates) responding to the RFP will be provided to the Board in March. Interviews and consultant firm selection will be scheduled for the March Investment Committee and Board meetings. Investment Division - Status Report February 5, 2006 Page 3 of 3

E. International Equity Large Cap Growth Manager Search Process The CIO will conduct an on-site due diligence visit at McKinley Capital’s office in Anchorage, Alaska on February 14th. Contract documents are in the process of being prepared and reviewed by SDCERS and will be executed if McKinley passes inspection. Putnam was notified on January 19th of SDCERS’ intent to terminate their international asset management responsibilities within 30 days. SDCERS has received securities buy lists from McKinley and Globeflex. These lists have been compared to Putnam’s International Equity portfolio holdings and staff has directed Putnam not to sell any of the particular holdings desired by the new managers.

The balance of the Putnam portfolio will be liquidated and repositioned using State Street Global Advisors as a transition manager. Cash raised in the Putnam account will be used to simultaneously purchase securities for the McKinley portfolio in an amount sufficient so that the market value of the new portfolio equals the 7% target allocation to this strategy. A good portion of the remaining cash from the Putnam- McKinley transition will be used for an initial funding of the new Globeflex International Equity Small Cap Core portfolio. The balance of the cash needed to complete the funding of the Globeflex portfolio will be allocated from the July 1st annual plan sponsor contributions.

F. Approval to add Private Equity as an Eligible Asset Class to SDCERS’ Investment Program Included in this month’s Board reports are additional materials from Callan Associates regarding Private Equity investing. Gary Robertson of Callan Associates will present these materials for discussion and Board review.

G. SDCERS’ FY 2005 Audit Investment staff has been working with the Finance and Administration staff to provide Macias Gini & O’Connell with information related to their FY 2005 audit field work concerning investments, portfolio accounting, and internal controls.

H. Training and Related Activities None.

Attachments: 1. Proxies Referred to Staff (9) – January 2007 2. Proxy Analysis Document (1) 3. Letter from Dodge & Cox dated January 25, 2007 4. Letters, Biographies and New Organizational Chart from RREEF 5. Announcements on Putnam’s Sale

W:\INVEST\BOARD Reports\Status Reports\CY 2007\Feb 2007 Status Report.doc Proxies Referred to Staff January 2007

Company Name Country Meeting Date Analysis Required * 1 Symbol Technologies, Inc. USA 1/9/2007 2 American Power Conversion Corp. USA 1/16/2007 3 Monsanto Co. USA 1/17/2007 4 Investools, Inc USA 1/17/2007 5 BankUnited Financial Corp. USA 1/23/2007 6 RRSat Global Communications Network Ltd Israel 1/24/2007 7 Jacobs Engineering Group Inc. USA 1/25/2007 X 8 Illumina, Inc USA 1/26/2007 9 Angiodynamics, Inc. USA 1/29/2007

* X in this column indicated staff conducted analysis and made a vote decision.

W:\INVEST\PROXY\Reports - Current\2007\2007 Referred Proxies JACOBS Annual Meeting: January 25, 2007 CUSIP 469814107 ENGINEERING GROUP INC.

SDCERS ISS MGMT Salus 4,429 recommends recommends 4,429 Item 2 Increase Authorized FOR FOR AGT Common Stock FOR

This proposal seeks shareholder approval to amend the company’s certificate of incorporation to increase the number of authorized shares of common stock by 140.0 percent to 240 million shares from 100 million shares. ISS quantifies requests for increases in authorized common stock by evaluating the current number of authorized shares versus the number of shares authorized post increase. The number of shares available post increase is then compared to their peer companies from the same Global Industry Classification Standards (GICS) group.

In this case, ISS has determined that Jacobs’ request of 140 million shares is below the allowable increase threshold of 145 million shares as compared to their peer companies in the Capital Goods group. Given this favorable comparison, ISS believes that this proposal warrants shareholder support.

Salus recommends voting AGAINST this proposal in agreement with the firm's proxy voting guidelines. Salus believes that the potential dilution is too high in the interests of shareholders.

Although the potential dilution arising from this increase in shares is approximately 140% (80 million current authorized shares as compared to the requested increase of 70 million), staff is in agreement with ISS’ quantitative analysis of this proposal. The proposed increase of 140 million shares is within the allowable limit of authorized shares of 145 million as compared to Jacobs’ peer companies. Therefore, Staff voted SDCERS’ shares FOR the increase in accordance with ISS’ recommendation.

Attachment to Investment Division Status Report Dated February 5, 2007, A-1 page 1 of 1 W:\INVEST\PROXY\Reports - Current\2007\Proxy Analysis Documents\Jacobs Engineering Group.ics.doc

CONTACT: Laura McNamara Sinead Martin 617-760-1108 617-760-8515 [email protected] [email protected]

PUTNAM INVESTMENTS TO BE ACQUIRED BY CORPORATION SUBSIDIARY

President and CEO Charles E. Haldeman, Jr. and executive team continue to lead Putnam

Putnam Funds Chairman John A. Hill says new owner good for investors

BOSTON, Mass – February 1, 2007 – announced today that it will be acquired from Marsh & McLennan Companies (MMC) by Great-West Lifeco Inc., a subsidiary of Power Financial Corporation, for an agreed upon purchase price of USD $3.9 billion, based on a definitive agreement. The transaction is expected to close by the middle of the year.

Putnam remains headquartered in and retains its brand, operations, personnel, and offices. Putnam’s senior team, including investment and business professionals, remains in place and continues to be led by Putnam President and Chief Executive Officer Charles E. Haldeman, Jr.

“With Power Financial, we become part of a long-established and successful organization that is deeply committed to and financial services,” said Mr. Haldeman. “Putnam was fortunate to have a number of interested purchasers. We are joining the Power Financial group because it is in the best long-term interests of our investors, clients, financial advisors, strategic partners, and employees. This new relationship provides for the greatest degree of continuity, enabling us to continue our mission of taking care of other people’s money by providing consistent, dependable, and superior investment performance over time,” said Mr. Haldeman.

Mr. R. Jeffrey Orr, President and Chief Executive Officer of Power Financial Corporation said: “The fundamental strength of the Putnam franchise is evident in the quality of its people and its improving investment performance and asset flows. Putnam’s leadership team will continue to manage Putnam as a separate business, as is the practice with other companies in our group. We place a high value on retaining Putnam professionals and staff to assure the ongoing stability of the organization and the confidence of its clients and consultants. We greatly value the continuing relationship with, and oversight by, the Trustees of The Putnam Funds. We are also mindful of Putnam’s role in the greater community.”

Mr. Raymond L. McFeetors, President and Chief Executive Officer of Great-West Lifeco Inc. said, “This transaction gives us a strong presence in the growing U.S. retail and institutional investment management markets and substantially strengthens our competitive position in international markets including Europe and Japan. It complements our strong and growing presence in the U.S. retirement savings market.”

Mr. John A. Hill, Chairman of The Board of Trustees of Putnam Funds, said: “The Board of Trustees is prepared to recommend approval of the transaction pending review of the final agreements because we believe that it is good for investors. We have been actively involved in the process every step of the way. The Board is impressed with the acquirer’s management team, its business philosophy and culture, and its strong commitment to Putnam’s employees, investment processes, service, and the Putnam brand name.”

Mr. Hill continued: “Any questions about Putnam’s future as a free-standing, leading provider of investment management services to and institutional investors have now been resolved in a highly favorable manner.”

Mercer HR Services, a global leader in trusted HR and related financial services and a subsidiary of Marsh & McLennan, will continue to provide services for Putnam’s 401(k) business. The acquisition

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includes Putnam’s interest in PanAgora Asset Management, which will continue to operate as a separate Putnam subsidiary.

About Putnam Investments:

Founded in 1937, Putnam Investments is one of the nation's oldest and largest money management firms. At the end of December 2006, Putnam had $192 billion in assets under management. Mutual fund assets were $124 billion and institutional assets were $68 billion. Putnam has offices in Boston, , and Tokyo. For more information, go to www.putnam.com. -30-

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