San Joaquin County Employees Retirement Association A G E N D A

FINANCIAL MEETING SAN JOAQUIN COUNTY EMPLOYEES RETIREMENT ASSOCIATION BOARD OF RETIREMENT FRIDAY, MARCH 25, 2016 AT 9:00 AM Location: SJCERA Board Room 6 S. El Dorado Street, Suite 400, Stockton, California

1.0 ROLL CALL 2.0 PLEDGE OF ALLEGIANCE 3.0 APPROVAL OF MINUTES 3.01 Approval of the minutes for the Financial Quarterly Meeting of February 26, 2016 3 3.02 Board to approve minutes 4.0 CONSENT ITEMS 4.01 Report of Closed Sessions 01 On January 22, 2016, the Board unanimously approved Resolution 2016-01-03 titled "White Oak Summit Peer Fund" and authorized the Chair to sign the necessary documents to invest $50 million in the Fund. 4.02 Northern Trust Custody Fee Schedule and Re-Registration of Bank Loans 8 4.03 Board to act on consent items 5.0 CRO ALTERNATIVE RISK PREMIA MANAGER INTERVIEWS 5.01 PCA Book on Alternative Risk Premia Manager Search 34 5.02 AQR Capital Management, LLC 01 Presentation of AQR Style Premia strategy by Mr. Scott Metchick, Managing 41 Director and Global Alternative Premia Portfolio Manager, and Ms. Joey Lee, Managing Director of Client Strategies 5.03 P/E Global, LLC 01 Presentation of P/E Diversified Global Macro strategy by Warren Naphtal, Co- 78 founder and Chief Investment Officer, and Bruce George, CFA, CAIA 5.04 Board to make a selection and/or give direction to staff and consultant as necessary 6.0 POTENTIAL REVISION TO BOARD CALENDAR FOR 2016 6.01 Chair to propose, based on survey responses from Board members, revising the scheduled date(s) for convening either or both the Regular and Financial Meetings of the Board in April 2016 to ensure a quorum will be achieved for the April Financial Meeting 6.02 Board to act on Chair’s recommendation

6 South El Dorado Street, Suite 400 • Stockton, CA 95202 SJCERA Financial Meeting • 3/25/2016 • Page 1 (209) 468-2163 • (209) 468-0480 • www.sjcera.org 7.0 REPORTS 7.01 Monthly Investment Performance Updates 01 Manager Performance Flash Report - February 2016 (to be provided at the meeting) 02 PCA Investment Market Risk Metrics - March 2016 106 7.02 PIOS Guidelines Update 124 7.03 CIO Report 130 7.04 Trustee and Executive Staff Travel 01 Conferences and Events Summary for 2016 132 a 2016 Walton Street Capital Annual Investor Meeting 133 02 Summary of Pending Trustee and Executive Staff Travel 135 03 Summary of Completed Trustee and Executive Staff Travel 136 7.05 Board to accept and file reports 8.0 CORRESPONDENCE 8.01 Letters Received 8.02 Letters Sent 8.03 Market Commentary/Newsletters 01 Research Affiliates Fundamentals March 2016 137 9.0 COMMENTS 9.01 Comments from the Board of Retirement 9.02 Comments from the Public 9.03 Comments from the Chief Executive Officer 10.0 CLOSED SESSION - CONSIDERATION OF INVESTMENT TRANSACTIONS, PURCHASES, SALES; GOVERNMENT CODE SECTION 54956.81 (2) 11.0 CALENDAR 11.01 Regular Meeting, April 8, 2016 at 9:00 AM 11.02 Financial Meeting, April 22, 2016 at 9:00 AM 12.0 ADJOURNMENT

SJCERA Financial Meeting • 3/25/2016 • Page 2 San Joaquin County Employees Retirement Association M I N U T E S

FINANCIAL QUARTERLY MEETING SAN JOAQUIN COUNTY EMPLOYEES RETIREMENT ASSOCIATION BOARD OF RETIREMENT FRIDAY, FEBRUARY 26, 2016 AT 9:00 AM Location: SJCERA Board Room 6 S. El Dorado Street, Suite 400, Stockton, California

1.0 ROLL CALL 1.01 MEMBERS PRESENT: Shabbir Khan, J.C. Weydert, Cindy Garman, Michael Restuccia, Katherine Miller, Dave Souza, Adrian Van Houten, Margo Praus and Raymond McCray presiding MEMBERS ABSENT: Michael Duffy STAFF PRESENT: Chief Executive Officer Annette St. Urbain, Assistant Chief Executive Officer Patricia Pabst, Chief Investment Officer Nancy Calkins, Financial Officer Lily Cherng, Information Systems Manager Tallie Claypool, Management Analyst III Greg Frank, Department Information Systems Specialist II Jordan Regevig, and Office Secretary Andrea Ireland OTHERS PRESENT: Deputy County Counsel Andrew Eshoo, David Sancewich and Ryan Lobdell of PCA, and Ted Cwiek and Jennifer Goodman from San Joaquin County Human Resources. 2.0 PLEDGE OF ALLEGIANCE 2.01 Led by Katherine Miller 3.0 APPROVAL OF MINUTES 3.01 Approval of the Minutes for the Financial Meeting of January 22, 2016 3.02 Board unanimously approved the minutes of the Financial Meeting of January 22, 2016 4.0 CONSENT ITEMS 4.01 Report of Closed Sessions 01 Funding of Dodge & Cox Long Duration 02 Redemption of Bridgewater Associates Real Assets and KBI global equity Water/Agriculture portfolios 4.02 Proposed 2016 Real Estate Implementation Plan 01 Memo from Courtland Partners regarding Real Estate Implementation Plan 02 Summary of 2016 Real Estate Implementation Plan 03 2016 Proposed Real Estate Implementation Plan 04 Presentation (slides) to Real Estate Committee on Strategy and Proposed Implementation Plan 4.03 Board unanimously approved the consent items

6 South El Dorado Street, Suite 400 • Stockton, CA 95202 SJCERA Financial Quarterly Meeting • 2/26/2016 • Page 1 (209) 468-2163 • (209) 468-0480 • www.sjcera.org 5.0 QUARTERLY REPORTS FROM INVESTMENT CONSULTANT FOR PERIOD ENDING DECEMBER 31, 2015 5.01 PCA Quarterly Investment Performance Analysis 5.02 PCA Manager Compliance Report 5.03 Investment Management Fees Reports 01 Calendar Year 2015 02 Calendar Year 2014 (for reference) 03 Trustee Garman asked why Mesa West fees appear high on a percentage basis. David Sancewich of PCA responded that Mesa West is being reclassified out of Fixed Income and into the Credit class. In addition, Mesa West III is in the early stages of the J curve in which there are few assets in the portfolio (the denominator) and yet fees (the numerator) have been expensed. With the reclassification to the Credit class, Mesa West will be categorized with other managers (currently in the Global Opps class and reclassified to Credit) with similar structures. Compared to these managers, Mesa West’s fees are not out of line. 5.04 Messrs. Sancewich and Lobdell reviewed and discussed the reports in relation to the Board’s investment policies. The Total Portfolio outperformed the policy benchmark over the quarter by 1.5%, but underperformed over the one-year period ending December 31, 2015, by (50) basis points, gross of fees. Over the three- and five-year periods, the total portfolio return exceeded the policy benchmark by 30 and 50 basis points, per annum, respectively. Trailing ten-year results underperformed the policy benchmark and SJCERA’s 7.50% return assumption, while Since Inception results exceeded both measures. The total portfolio underperformed the median public fund over all time periods measured. 5.05 Board accepted and filed the reports. 6.0 UPDATE ON CRO MANAGER SEARCH 6.01 Informational memo from PCA on status of process 7.0 REPORTS 7.01 Monthly Investment Performance Updates 01 Manager Performance Flash Report - January 2016 (provided at the meeting) 02 PCA Investment Market Risk Metrics - February 2016 7.02 PCA 2016 Ten-Year Capital Market Assumptions 7.03 PCA Manager Due Diligence Meetings and Reports 01 Manager Due Diligence Schedule 02 PCA Memo on meeting with PanAgora - January 2016 03 PCA Memo on meeting with Prima Capital - January 2016 04 PCA Memo on meeting with Stone Harbor - January 2016 7.04 CIO Report 7.05 Trustee and Executive Staff Travel 01 Conferences and Events Summary for 2016

SJCERA Financial Quarterly Meeting • 2/26/2016 • Page 2 a CRCEA Spring Conference 02 Summary of Pending Trustee and Executive Staff Travel a Travel Requiring Approval (2) 03 Summary of Completed Trustee and Executive Staff Travel a Conference/Travel Reports (3) - see agenda item 7.03 7.06 Report from Real Estate Committee 01 Committee Chair provided a brief summary of the outcome of the Real Estate Committee meeting and investments. 7.07 Report from Ad Hoc Transition Committee 01 Chair recognized CEO St. Urbain who advised the Board that, after further consideration, she has decided to change her plans and intends to remain in her current position as Chief Executive Officer of SJCERA.

The Committee Chair then introduced Ted Cwiek and Jennifer Goodman from San Joaquin County Human Resources. Ms. Goodman presented to the Board three documents that were approved by the Ad Hoc Transition Committee: The recruitment plan, schedule, and brochure for the CEO position. 7.08 Board accepted and filed reports and approved 2 pending travel requests. 8.0 CORRESPONDENCE 8.01 Letters Received 8.02 Letters Sent 8.03 Market Commentary/Newsletters/Articles 01 Dodge & Cox Fixed Income Investment Commentary - Fourth Quarter 02 Stone Harbor CIO Letter 2016 03 Research Affiliates Fundamentals January 2016 04 Pensions & Investments CA Secure Choice Article February 2016 9.0 COMMENTS 9.01 Comments from the Board of Retirement 01 Trustee Praus commented that she was pleased to hear CEO St. Urbain’s announcement that she is staying in her current position at SJCERA. 9.02 Comments from the Chief Executive Officer

SJCERA Financial Quarterly Meeting • 2/26/2016 • Page 3 01 Legislation - AB 1853 (Cooper) is a SACRS-sponsored bill that authorizes optional independent district status for county employee retirement associations as determined by a board of retirement. AB 1812 (Wagner) - Limits annual benefits payble from public retirement systems for new hires effective 1/1/2017 to $100 ,000 for members without Social Security, and $80,000 for members with Social Security. AB 2348 (Levine) - Establishes the “Reinvestng in California Special Fund” which would be used to pay a guaranteed rate of return on infrastructure projects identified by the State Department of Finance in which CalPERS, CalSTRS, or county retirement systems invest. AB 2490 (Gatto) and AB 2833 (Cooley) - Requires private equity firms to provide pension fund investors specific disclosures regarding fees and clear accounting of clawbacks owed to limited partners. 02 Federal Form 1095-C - Employer-Provided Health Insurance Offer and Coverage for 2015 - HR Benefits notified SJCERA that the mandatory distribution had been postponed to March 31, 2016, and it is not required for filing personal income taxes. 03 Retiree Open Enrollment - The Open Enrollment period is set for March 1-25, 2016 and the meetings will be held on March 18th. Due to last minute changes beyond SJCERA’s control, packets were delayed in being mailed out to retirees. 04 About to Retire Seminars - Approximately 65 plan participants attended the sessions that were held on February 25th. Assistant CAO Rosa Lee attended the afternoon session and contacted SJCERA’s CEO to say that the SJCERA staff did a great job . 05 SACRS Officer Elections - SJCERA recently received the SACRS Nominating Committee’s Recommended Ballot for Board of Directors Elections for 2016-2017. This will be submitted to the Board at an upcoming meeting to give direction to its voting delegate for the next SACRS Business Meeting. 06 Recognition - CEO St. Urbain acknowledged SJCERA’s Finance Group for doing a terrific job in meeting the needs for the various portfolio activities. She also stated that Mr. Ankcorn relayed to her that he was grateful to the Board and staff for the plant he received in memory of his father. 07 Sympathy - Former SJCERA employee Nieves Atterberry’s mother recently passed away. 9.03 Comments from the Public - None 10.0 CLOSED SESSION - CONSIDERATION OF INVESTMENT TRANSACTIONS, PURCHASES, SALES; GOVERNMENT CODE SECTION 54956.81 (2) 10.01 The Chair convened a Closed Session at 10:17 a.m. The Chair adjourned the Closed Session and reconvened the Open Session at 10:38 a.m.

Counsel noted there was nothing to report from closed session regarding this subject. 11.0 CALENDAR 11.01 Regular Meeting, March 11, 2016 at 9:00 AM 11.02 Financial Meeting, March 25, 2016 at 9:00 AM 12.0 ADJOURNMENT

SJCERA Financial Quarterly Meeting • 2/26/2016 • Page 4 12.01 There being no further business the meeting was adjourned at 10:40 a.m.

Respectfully Submitted:

______Raymond McCray, Chair

Attest:

______Michael Restuccia, Secretary

SJCERA Financial Quarterly Meeting • 2/26/2016 • Page 5 Board of Retirement Financial Meeting San Joaquin County Employees’ Retirement Association

Agenda Item 4.02 March 25, 2016

SUBJECT: Northern Trust Custody Fee Schedule and Re-registration of Bank Loans

SUBMITTED FOR: _X_ CONSENT l___l ACTION ___ INFORMATION

RECOMMENDATION

Staff recommends the Board: 1. Extend the current Northern Trust fee schedule through June 30, 2016; 2. Approve the modified Northern Trust fee schedule effective July 1, 2016 to June 30, 2021; and 3. Direct Stone Harbor Investment Partners and Northern Trust to re-register and convert bank loans held in SJCERA’s name for the Absolute Return fixed income portfolio to instead be held by Stone Harbor’s comingled Bank Loan Fund Staff further recommends that the Board authorize the Chair to sign related documents on behalf of SJCERA to implement the Board’s actions.

PURPOSE

The purpose of this agenda item is to comply with the terms of SJCERA’s master custody agreement with The Northern Trust Company, and mutually agree in writing to a modified fee schedule, Schedule A of the agreement, for the period July 1, 2016 through June 30, 2021, and to change the way bank loans are held on behalf of SJCERA for its Absolute Return fixed income portfolio managed by Stone Harbor to reduce or eliminate substantial custody service fees related to individually-held bank loans.

DISCUSSION

Paragraph 19 of the Master Custody Agreement provides that Northern shall receive such reasonable compensation for its services as agreed upon from time to time between it and SJCERA. The fees for Northern’s custodial services are set forth in Schedule A, which may be modified by mutual agreement of the parties in a separate writing. The original term of the current Fee Schedule A was five years through September 30, 2015.

In January 2016, Northern Trust proposed a revised Fee Schedule A to apply for the next five years of the Master Custody Agreement. Northern’s rationale for the proposed modifications is presented in the attached fee review letter dated January 19, 2016. March 25, 2016 Page 2 of 4 Agenda Item 4.03

The revised Fee Schedule A proposed by Northern Trust provides a decrease in certain fees (e.g. account fees and asset-based fees), and adds fees for other services that were not part of the current fee schedule (e.g., fees for one-line assets and bank loans). Overall the modified fee schedule will be more in line with the market and structured in a way that, going forward, better aligns the fees with the actual services SJCERA uses.

FISCAL IMPACT

The master custody fees incurred by SJCERA in 2015 totaled just over $282,000. Based on the September 2015 market value of SJCERA’s portfolio, Northern Trust provided the attached comparison of SJCERA’s estimated annual fees under the current and revised fee schedules, using SJCERA’s portfolio market values as of September 30, 2015. This analysis takes into consideration the various increases/decreases of the revised fee schedule proposed by Northern Trust, and shows an estimated net annual increase of $33,000.

In the analysis of the revised fee schedule, staff focused on the largest increase: A new $500 annual service fee that would apply to individually held bank loans. Northern has advised that these securities are expensive from a processing and reconciliation perspective for the custodian. Based on the September 2015 holdings in the Bank Loan portion of Stone Harbor’s Absolute Return portfolio (approximately 150 loans), Northern Trust estimated the cost for servicing these loans to be $75,000 annually under the revised fee schedule. If this $75,000 bank loan servicing fee could be eliminated, SJCERA’s estimated annual custody fees would decrease by $42,000 when when compared to the current fee schedule.

Re-registration of Bank Loans Managed by Stone Harbor

SJCERA hired Stone Harbor in 2007 to manage the Absolute Return fixed income strategy, which includes investment grade and high yield bonds, emerging markets debt, and bank loans. At that time and until mid-2013, Stone Harbor did not offer a bank loan commingled fund in which to invest. Therefore, the Absolute Return portfolio holds individual bank loans. In comparison, in April 2014, SJCERA hired Stone Harbor to manage a portfolio 100% invested in bank loans and had the option to invest in the commingled Bank Loan Fund.

In 2013, when Stone Harbor opened the Bank Loan Fund, it was prohibitively expensive to re-register individually held loans (~$3,000+ per loan). Because SJCERA’s current fee schedule for custody services does not apply a separate charge to service individual bank loans, there was no direct fiscal impact to SJCERA for Stone Harbor to continue to hold the bank loans in SJCERA’s name.

With the introduction of the bank loan servicing fee in the revised Northern Trust fee schedule, SJCERA began exploring options to reduce or eliminate this new fee. Fortunately, the industry costs to re-register the individual bank loans held in the Absolute Return portfolio (from SJCERA’s name to the Stone Harbor commingled Bank Loan Fund) has decreased significantly over the past three years. Stone Harbor believes it can complete the re- registration by June 30, 2016.

March 25, 2016 Page 3 of 4 Agenda Item 4.03

However, there are costs to complete the re-registration. Stone Harbor has negotiated with its Administrative Agents (AAs), many of which will transfer the assets with no re-registration fees. As of February 18, 2016, the number of loans held in the portfolio totaled 137. Stone Harbor has contacted 124 of the AAs and estimated the re-registration costs to be ~$14,000. The majority of the costs on Stone Harbor’s side (approximately $21,000) are related to the Clearpar fees, which would be incurred. Clearpar is the system that the market uses to post trades and create the assignment agreements to effect the change in ownership. Stone Harbor has offered to split the cost of conversion with SJCERA, with each of us bearing approximately $17,500.

Northern Trust will charge $10 per loan for the conversion. In addition, under the revised fee schedule, Northern Trust will charge $500 per year for the Stone Harbor commingled Bank Loan Fund, one-line item asset held in the Absolute Return fixed income portfolio.

The total one-time costs to SJCERA for re-registration of the individually held bank loans are ~$19,000; $17,500 for SJCERA’s half of the re-registration fees (the other half borne by Stone Harbor), plus $1,500 for Northern Trust’s conversion fees. Going forward, under the revised fee schedule, Northern Trust will apply an annual fee of $500 for the commingled fund, compared to an annual charge of approximately $75,000 if we continue to hold all of the individual bank loans.

The attached Options Related to Northern Trust’s Revised Fee Schedule and Bank Loans summarizes the fiscal impact of implementing the revised master custody fee schedule both without (Option 1) and with (Option 2) re-registration and conversion of the bank loans held in SJCERA’s Absolute Return fixed income portfolio managed by Stone Harbor. The conversion saves SJCERA over $50,000 in the first year, and more than $350,000 for the five-year duration of the revised fee schedule.

With Northern Trust’s offer to extend the current fee schedule one more quarter, coupled with the decreased re-registration fees for the bank loans and Stone Harbor’s offer to split those costs with SJCERA, now is an opportune time to convert the bank loan holdings in the Absolute Return portfolio to shares of Stone Harbor’s comingled Bank Loan Fund.

BACKGROUND

In July 2015, with the Board’s asset/liability study in progress, staff requested that Northern Trust extend the current fee schedule for three months to December 31, 2015. This was to provide staff sufficient time to analyze the net cost impact of the modified fee schedule, given the anticipated changes in SJCERA’s asset allocation and manager structure. Northern agreed and the Board approved the first extension of the current Fee Schedule A on August 19, 2015.

In November 2015, a second extension through March 31, 2016, was requested and granted, to provide SJCERA additional time to address the potentially significant increase in custody fees for the individually held bank loans in the Stone Harbor absolute return fixed income portfolio. The Board approved the second extension of the current Fee Schedule A on Decemberl11, 2015.

March 25, 2016 Page 4 of 4 Agenda Item 4.03

In March 2016, as a good strategic partner, Northern Trust suggested that the current Fee Schedule A be extended one additional quarter through June 30, 2016, to allow Stone Harbor to re-register the individually held bank loans from SJCERA’s name into the Stone Harbor Bank Loan Fund. Staff estimates the value to SJCERA of the multiple extensions of the current Fee Schedule A for a total of three calendar quarters is ~$18,600.

ATTACHMENT(S)

• Northern Trust Fee Review Letter dated January 19, 2016 • SJCERA Custody Fee Comparison prepared by Northern Trust • Options Related to Northern Trust’s Revised Fee Schedule and SJCERA’s Bank Loans • Letter Agreement to extend the Current Fee Schedule A through June 30, 2016 • Current Fee Schedule A • Letter Agreement to effect the Revised Fee Schedule A July 1, 2016 • Revised Fee Schedule A

______NANCY CALKINS ANNETTE ST. URBAIN Chief Investment Officer Chief Executive Officer

50 South LaSalle Street Chicago, IL 60603 USA (312) 630-6000

January 19, 2016

Ms. Annette St. Urbain Chief Executive Officer San Joaquin County Employees’ Retirement Association 6 S. El Dorado Street, Suite 400 Stockton, CA 95202

Dear Annette:

Financial strength, stability and integrity are key hallmarks of Northern Trust. As our client, you’ve made the choice to partner with a safe, secure firm. And throughout our history, this strength has allowed us to invest in the Corporate & Institutional business to maintain a leadership position in the industry.

At our core, we have a very strong commitment to providing excellent service and expertise in the segments we choose to compete. This is even more important in today’s exceedingly complex business environment. You have a team committed to delivering excellent service to you, at a level unmatched in the industry. We innovate to bring new value, particularly for alternative assets, derivatives and regulatory reporting that is a core part of your strategy.

In recognition of our long-term partnership, and as part of our commitment to your fund, we periodically review your fee schedule to ensure we are assessing a fair, market competitive fee for the products and services we provide. We last reviewed your fees in 2010 and guaranteed those fees for 5 years. We have again reviewed the overall relationship and the associated fees.

Since the last review, the structure of your fund has changed. For example:

• The market value of SJCERA has increased from $1.7 billion to nearly $over 2.4 billion as of 9/30/15 • The total number of accounts has increased from 45 to 60; and the overall number of asset holdings also increased from 1779 to 1981 (the number of US assets increased while the number of non-US assets dramatically decreased) • The number of one-line assets held in the portfolio has nearly doubled from 23 to 44, and the holdings for syndicated bank loans increased dramatically from 93 to 151 • Transactions within your portfolio have also continued to increase from just over 29,000 in 2010 to nearly 41,000 in 2015

NTAC:2SE-18

While the mix of products used is an important factor in developing the fee schedule for each individual service and the relationship as a whole, we did not see any major changes in service since the last review.

Notwithstanding the increased activity and number of assets in your portfolio, our continually improving technology capabilities, combined with the efficiencies of operations that come with increased product utilization, enable us to continue to share the cost benefits with you.

Our analysis identified that the current fee schedule does not account for the various, complex asset types (eg. derivatives, bank loans, alternative investments) held within the portfolio, which continue to increase. There is a substantial amount of effort and resources used to process the activity for these investments and work with external vendors, fund companies and partnerships to monitor and audit the portfolios.

For the majority of clients we are including a provision in their fee schedules for the value added processing of both derivatives and bank loans, given the global growth and cost of processing these complex instruments. While you have historically had derivatives fees included in your fee schedule, we are modifying the position and transaction charges for these and adding a significantly discounted fee for the processing of the syndicated bank loans held within your portfolio. We have also added discounted fees for the multiple one-line assets held within your portfolio, which are also expensive to service and have continued to increase over the years.

We are proposing to restructure the fee schedule to better align the fees with the services being used. Therefore, as the portfolio changes, the fees will change along with it. While we are proposing an increase to the overall fees, we feel that the schedule provides SJCERA with a very competitive overall custody fee arrangement for the level of services provided, and we are happy to commit to these fees for the next five years, provided the assets and structure of the fund and services do not materially change. We will review the fees again at that time to ensure the fee arrangement remains competitive.

It is also important to note that as a result of our long term partnership, various other services are currently being performed and will continue to be provided at no additional cost to SJCERA including the following:

• Custom Reporting … NT has created various custom templates over the years which has saved SJCERA numerous processing hours … Estimated development and annual maintenance costs for these templates is over $40,000 • Class Action Services … Class Action processing fees are currently being waived for SJCERA … approximately $5,000 annually • Manager Signoff … NT currently performs manager sign off for several of your investment managers at no charge to SJCERA … $42,000 annually

We propose to implement the attached fee schedule effective April 1, 2016. I have highlighted the major changes:

Ø Reduced the Account based fees for both Global and Domestic accounts Ø Added fees for the one line assets and syndicated bank loans Ø Revised the asset based fees for Separately managed Global accounts to better align the fees with the markets in which they are invested Ø Removed asset based fees for one line assets Ø Added transaction based fees

NTAC:2SE-18

In addition, we have some suggestions that we would like to discuss with you that will offer further fee efficiencies, one being consolidating your alternative accounts into fewer accounts by type (eg. Global Public Equities, Stable Fixed Income, Credit, Private Appreciation, Risk Parity, CRO, or other groupings which might be more applicable), which could reduce the number of accounts significantly from 40 to 6 depending upon the chosen groupings, which could further reduce your account fees by over $30,000.

Finally, as part of this review process, we wanted to take this opportunity to reintroduce you to additional expertise and capabilities of Northern Trust, namely our Asset Management and Investment Risk and Analytical Services. To the extent that SJCERA would have interest in either or both service enhancements, we would further reduce the custody fees. Such reductions would be determined upon service scope refinement.

I’ve included a copy of the proposed fee schedule for your review. I’ve also attached a Fee Amendment letter to acknowledge and agree to the new fee schedule. Once you’ve had a chance to review the documentation, please give me a call so we can discuss next steps.

Clearly, San Joaquin County Employees’ Retirement Association is an important relationship to Northern Trust. We value the partnership we have established over the years, truly appreciate your business, and look forward to continuing to enhance our relationship in the future.

Regards,

Kathryn M. Stevenson Senior Vice President

/Attachments

NTAC:2SE-18 San Joaquin County Employees' Retirement Association Custody Fee Schedule Comparison Market values as of Sept 30, 2015

Current Fee Annual Fee New Fee Annual Fee Increase or Assumptions Schedule Estimate Schedule Estimate (Decrease) Comments Account Based / Asset Fees Domestic separate account fees 14 $5,000 $70,000 $1,000 $14,000 ($56,000) Reduced from $5,000 to $1,000 per acct. Global separate account fees 5 $5,000 $25,000 $1,000 $5,000 ($20,000) Reduced from $5,000 to $1,000 per acct. Single line item account fees 40 $1,000 $40,000 $1,000 $40,000 $0 No changes Single line item fee 49 n/c $0 $500 $24,500 $24,500 $500 per line item holding (standard fee is $1500) Syndicated Bank Loan fee 151 n/c $0 $500 $75,500 $75,500 $500 per asset (standard fee is $1500) Cash account fees 1 $1,000 $1,000 $1,000 $1,000 $0 No changes Total account based fees: $136,000 $160,000 $24,000

Asset Based Fees Domestic asset based fees (sep. accts.) $423,483,022 n/c $0 0.30 bps $12,704 $12,704 .30 bps for U.S. Single line item asset based fees n/c $0 n/c $0 $0 No changes Global asset based fees (line items) $31,348,086 5 bps $15,674 n/c $0 ($15,674) No charge under new schedule Global asset based fees (sep. accts.) $196,832,598 5 bps $98,416 Global Schedule $15,687 ($82,729) Tiered global fees under new schedule (Tab 2) OTC position maintenance (simple) 6 $200 $1,200 $250 $1,500 $300 Increased from $200 to $250 OTC position maintenance (moderate) 0 $500 $0 $400 $0 $0 Reduced from $500 to $400 Total asset based fees: $115,290 $29,892 ($85,399)

Transaction Fees Domestic transaction fees (sep. accts.) 10,072 n/c $0 $6.00 $60,432 $60,432 $6.00 per transaction Global transaction fees (sep. accts.) 2,690 n/c $0 Global Schedule $18,334 $18,334 Tiered global fees under new schedule Principal paydowns 2,152 n/c $0 $5.00 $10,760 $10,760 $5.00 per paydown Single line item transactions 191 n/c $0 $10.00 $1,910 $1,910 $10 per LP, CF, MF & Insurance contract transaction Outoing wires 58 n/c $0 $20.00 $1,160 $1,160 $20 per outgoing wire Exchange traded futures/options 1,953 $20 $39,060 $20 $39,060 $0 No changes Margin/collateral movements 900 $20 $18,000 $20 $18,000 $0 No changes OTC derivative transactions (simple) 36 $75 $2,700 $125 $4,500 $1,800 Increased from $75 to $125 OTC derivative transactions (moderate) - $125 $0 $175 $0 $0 Increased from $125 to $175 Total transaction fees: $59,760 $154,156 $94,396

Total custody fees: $311,050 $344,048 $32,997

Other fees Cash management (STIF) for approx. $43 million 7 bps 7 bps $32,251 STANCERA at 10bps - 3bps discount Third-party foreign exchange transaction fee $50 $20 reduced from $50 to $20 Securities lending revenue split % 75/25 75/25 $30,828 STANCERA at 70/30 - 5% discount

Derivative Charges

NTAC:2SE-18 The Northern Trust Company Confidential 3/18/16 Page 1 Transaction Processing Exchange traded (per buy and sale) $20 $20 no changes Over-the-counter simple (per buy and sell transaction) $75 $125 increased from $75 to $125 Over-the-counter moderate (per buy and sell transaction) $125 $175 increased from $125 to $175

Derivative Position Maintenance Over-the-counter simple $200 $250 per position p.a. increased from $200 to $250 Over-the-counter moderate $500 $400 per position p.a. reduced from $500 to $400 OTC w/ Investment manager supplied prices $100 $100 per position p.a. no changes Swap reset $20 $20 per cash movement no changes Margin / collateral movements $20 $20 per cash/security movement no changes

Approximate costs No charges for transfers between accounts Custom Reporting Development per report $7,000 - $10,000 3 custom reports completed; one being finalized Ongoing annual maintenance costs $2,000 Class action Processing $5,000 Manager Signoff - 14 accounts $3,000 annually per account $42,000

NTAC:2SE-18 The Northern Trust Company Confidential 3/18/16 Page 2 Options Related to Northern Trust's Revised Fee Schedule and SJCERA's Bank Loans

OPTION 1 OPTION 2a New NT Fee Schedule New NT Fee Schedule Re-Register Bank No Change to Bank Loans in SH Absolute Loans in SH Absolute Return Portfolio Return Portfolio ONE-TIME CONVERSION FEES: NT $10/loan fee for conversion; ~150 loans N/A $1,500.00 One-Half of Admin Agents Re-registation fees N/A $17,500.00 (As estimated by SH 2/18/2016) Estimated Total One-Time Fees: N/A $19,000.00

RECURRING NT ANNUAL FEES: Bank Loan processing ($500/loan for ~150 loans) $75,000.00 $0.00 b Single line item Account (Commingled Fund) Fee $0.00 $500.00

Total Annual Fees: $75,000.00 $500.00

Total Fees First Year of New NT Fee Schedule: $75,000.00 $19,500.00

SAVINGS WITH OPTION 2: One-year savings ~ $ 55,500 Five-year savings ~ $353,500

One-time savings due to extension of current NT Fee schedule for three calendar quarters $18,600.00 a Stone Harbor also analyzed selling the individual loans and buying the Bank Loan Fund instead of re- registration and conversion. At an estimated bid/ask spread of 1%, the cost on the about $20 million portfolio would be $200,000. The sell/buy method was considered, but not proposed due to significant costs. b Stone Harbor anticipates completing the conversion by 6/30/2016. However, it is possible that a few residual individual bank loans remain in the portfolio after that date. The Northern Trust bank loan servicing fee will be $125 per loan per quarter on any loans not re-registered and converted by June 30, 2016 until the process is completed for all individually-held bank loans.

Kathryn M. Stevenson Senior Vice President Public Funds [email protected]

March 17, 2016

Mrs. Annette St. Urbain Chief Executive Officer San Joaquin Employees Retirement Association 6 S. El Dorado Street, Suite 400 Stockton, CA 95202

Dear Annette:

Pursuant to our earlier discussion, Northern Trust would like to offer an extension of the existing fee schedule for the custody services under the San Joaquin County Employees Retirement Association Master Custody Agreement between San Joaquin County Employees Retirement Association and The Northern Trust Company, effective as of September 1, 2010. Our initial fee schedule, effective October 1, 2010 through September 30, 2015 was previously extended and guaranteed under the same conditions through March 31, 2016, and we would like to offer to further extend and guarantee the fee schedule under the same conditions for an additional period to expire June 30, 2016.

I am attaching the current fee schedule for your review. If you agree with this proposal, please sign this letter below and return it to me at your earliest convenience. Northern Trust is pleased to be the custodian of the San Joaquin County Employees Retirement Association investment assets, and we hope to continue our relationship for a long time to come.

If you have any questions, please contact me at 312-557-0124.

Regards,

Kathryn M. Stevenson Senior Vice President

* * * * * * * * * * * * * * * * * * * * * *

Unanimously approved by the Board of Retirement of SJCERA on March 25, 2016.

______Raymond McCray, Chair – Board of Retirement San Joaquin Employees’ Retirement Association

The Northern Trust Company

50 South La Salle Street Chicago, Illinois 60603 312-630-6000

Kathryn M. Stevenson Senior Vice President Public Funds [email protected]

March 17, 2016

Ms. Annette St. Urbain Chief Executive Officer San Joaquin County Employees’ Retirement Association 6 S. El Dorado Street, Suite 400 Stockton, CA 95202

Re: San Joaquin County Employees’ Retirement Association Master Custody Agreement – Revised Schedule A / Fees [Effective July 1, 2016]

Dear Annette:

Pursuant to Section 19 of the San Joaquin County Employees Retirement Association Master Custody Agreement between San Joaquin County Employees Retirement Association (“SJCERA”) and The Northern Trust Company (“Northern”), effective as of September 1, 2010, the parties to the Agreement may modify Northern’s compensation by means of a separate writing as agreed upon from time to time. Accordingly, per our earlier communications, Northern’s compensation, effective July 1, 2016, shall be as set forth in the attached revised Schedule A.

Please arrange for SJCERA to indicate its acceptance of the new compensation arrangement as set forth above by having a person authorized to act for SJCERA sign in the space provided below. Please return an executed copy of this letter to my attention.

Sincerely,

______Kathryn M. Stevenson Senior Vice President The Northern Trust Company

* * * * * * * * * * * * * * * * * * * * Agreed to and Accepted:

SAN JOAQUIN COUNTY EMPLOYEES’ RETIREMENT ASSOCIATION

By: ______Raymond McCray, Chair Board of Retirement

The Northern Trust Company

50 South La Salle Street Chicago, Illinois 60603 312-630-6000 FEE SCHEDULE

Schedule A

San Joaquin County Employees’ Retirement Association

Effective 7/1/16 through 6/30/2021

TABLE OF CONTENTS

GLOBAL CUSTODY SERVICES ...... 2 FOREIGN EXCHANGE SERVICES ...... 4 DERIVATIVES SERVICES ...... 5 MANAGER SIGNOFF SERVICES ...... 6 SECURITIES LENDING SERVICES ...... 7 INVESTMENT SERVICES ...... 8 TRANSITION RELATED SERVICES ...... 9 OTHER FEES AND EXPENSES ...... 10

1

FEE SCHEDULE

G LOBAL C USTODY S ERVICES

Global Custody fees include: Safekeeping of assets Corporate action processing Settlement of direct trades Proxy voting Collection of income Consolidated monthly investment accounting and portfolio valuations delivered via Passport® Tax reclamation and relief at source services Daily and intraday information delivered via web portal, Passport®

Northern Trust has three components to its custody fee structure: account based fees, asset based fees and transaction based fees. Details of each are as follows:

Account based Fees (annual, unless otherwise noted) Separately Managed Account $ 1,000 per account Cash Account $ 1,000 per account Single Line Asset Account $ 1,000 per account Single Line Asset / Non Marketable Asset Holdings $ 500 per asset Syndicated Bank Loan Asset Holdings $ 500 per asset

Country Tiering (Asset based and Transaction Fees) Asset-Based Transaction Fees (p.a.) Fees Tier Country Safekeeping Fee I U.S., Canada, Euroclear, Ireland, U.K. .30 $6

Australia, Austria, Belgium, Denmark, Finland, France, Germany, Italy, II 2.50 $15 Japan, Luxembourg, Netherlands, Norway, Spain, Sweden, Switzerland

III Hong Kong, Iceland, Malaysia, New Zealand, Portugal, Singapore, Thailand 7.00 $20

Argentina, Brazil, China, Czech Republic, Egypt, Estonia, Greece, Hungary, IV India, Indonesia, Israel, Mexico, Philippines, Poland, South Africa, South 18.00 $25 Korea, Sri Lanka, Taiwan, Turkey

Bulgaria, Chile, Croatia, Kazakhstan, Latvia, Lithuania, Malta, Morocco, V Namibia, Nigeria, Pakistan, Peru, Romania, Russia, Slovak Republic, 35.00 $30 Slovenia, Swaziland, Trinidad, Tunisia, Uruguay, Venezuela, Vietnam

Bahrain, Bangladesh, Bermuda, Bosnia/Herzegovina, Botswana, Colombia, Cyprus, Ghana, Ivory Coast, Jordan, Kenya, Kuwait, Lebanon, Mauritius, VI 50.00 $60 Oman, Palestine, Qatar, Saudi Arabia, Serbia, Uganda, Ukraine, United Arab Emirates, Zambia, Zimbabwe

2

FEE SCHEDULE

The transaction charges detailed below will apply to all transactions that occur for the transaction category, including transactions associated with Special Assignments.

Equities $6 Pass Through $6 Fixed Income $6 Maturities $6 Short Settlements $6 Outgoing Wires / ACH Transfers $20 Paydowns $5 Mutual Funds/Commingled $10 Funds/LP/Insurance Contracts

• Trade Order Entry (TOE) and Web Cash Movement (WCM) are default methods of automated communication for trade initiation and cash movement provided to our clients at no additional cost. • An account that receives proceeds from securities class actions in US dollars will be assessed a charge of 2% of the proceeds up to $1000 per distribution (per account) with a minimum charge of $5. Proceeds in other currencies are subject to higher charges – 2% of the proceeds up to approximately $2000 per distribution (per account) with a minimum charge of approximately $10. These charges, which may change over time in response to market conditions or processing complexity, will be deducted from the class action proceeds in the same currency as the proceeds are paid. All charges are reported in your statement of account. If payments for a closed account are sent to another bank via wire or check, an additional $25 processing charge will be deducted from US dollar payments and a processing charge of approximately $50 will be deducted for other currencies. - WAIVED • Deminimus value - $200 (or foreign currency equivalent) per tax accrual item. In accordance with general accepted market practice, Northern Trust plans to adopt a de-minimus tax reclaim value for withholding tax reclaim events that it undertakes on behalf of clients. Northern Trust reserves the right to amend the de- minimus value from time to time and will make notification to clients in the event that this changes. The de- minimus value will be applied to each dividend event where there is a tax reclaim entitlement. • US dollar Overdrafts will be charged at the Prime rate. Note the full disclosure notice under the Other Fee and Expense schedule..

3

FEE SCHEDULE

FOREIGN EXCHANGE SERVICES

Foreign Exchange

For foreign exchange transacted with Northern, as principal, Northern will provide such service at exchange rates established in its discretion, having regard to exchange rates available in the foreign exchange market on the global trading day, and Northern retains any profit derived from such service.

All foreign exchange transacted with an entity outside of Northern Trust will be assessed a minimum charge of $20 per transaction will be debited from the account the following month and will appear on your statement of account. Certain currency markets may incur higher charges and indicative fees for those currencies will be disclosed prior to providing a service.

4

FEE SCHEDULE

DERIVATIVES SERVICES

Derivatives Processing and Collateral Margin Movements

DERIVATIVES SERVICES 1. Transaction Processing (applies to ETD & OTC)

For ETD derivatives a charge applies to both buy and sell transactions.

All instruments $20 per transaction

For OTC derivatives a charge applies to both buy and sell transactions.

Simple $125 per transaction Moderate $175 per transaction Exotic Fees based on product complexity and agreed on a case by case basis

This includes initial trade capture, set up and settlement of initial cash movement.

2. Position Maintenance (applies to OTC only)

Simple $250 per position per annum Moderate $400 per position per annum Exotic Fees based on product complexity and agreed on a case by case basis

Where prices are supplied by the manager, the charge is $100 per position per annum regardless of instrument. Daily independent valuations Periodic position reconciliations Lifecycle events, such as processing rate resets Standard accounting and reporting

3. Collateral

Passive Collateral Processing ETD margin /OTC collateral movement $20 per movement

5

FEE SCHEDULE

MANAGER SIGNOFF - WAIVED

Manager Signoff

Manager Signoff - $3,000 per account annually.

Manager Signoff service provides a preliminary review of Investment Manager (IM) information to ensure IM market values are in line with the market values provided on custody reporting. This service includes analysis of any discrepancies and agreed upon corrective actions before the final reporting is sent.

6

FEE SCHEDULE

SECURITIES LENDING

Securities Lending Services

Securities lending services are provided by the Northern Trust Company pursuant to a contract separate from the custody agreement. Fees for these services are included in Schedule C of the Securities Lending Authorization Agreement.

As of 1/1/16, the agreed upon fees were:

25% Loans of U.S. Government and Agency Securities 25% Loans of U.S. Corporate Equity and Fixed Income Securities 25% Loans of non- U.S. Sovereign Fixed Income and non- U.S. Corporate Fixed Income Securities 25% Loans of non- U.S. Equity Securities

7

FEE SCHEDULE

INVESTMENT SERVICES

Investment Services

Cash Sweep 7 basis points p.a.

Northern Trust Collective Government Short Term Investment Fund

Cash sweep fees include short term investment of cash reserves. Cash sweep fees will be deducted from the account on a monthly basis and will appear on your statement of account.

8

FEE SCHEDULE

TRANSITION RELATED SERVICES

Transition Related Services

There is no event or non-trade related transaction charge where Northern Trust is hired as transition manager.

Where Northern Trust is not acting as transition manager, the following schedule applies:

Transaction Charge

$10 per asset movement by line item for TBA’s (for free delivery) $10 per line item for reverse conversion/conversion activity (for delivery and receipt)

Event Charge There is currently no event charge for day to day transition activity; however we reserve the right to charge for more complex events. Your Relationship Manager will relay any event charges prior to execution of a complex event.

Transition Related Services include activities such as, but not limited to, manager terminations, account restructures, mergers, spin-offs, fund conversions, parebacks/reductions, transfers between accounts (TBA’s), conversions, reverse conversions. Event charges are related to the number of events/components involved and the reconciliations necessary when the asset movement crosses a change in investment fiduciary responsibility and/or change in legal entity. Transaction charges are related to the number of line items involved in the overall asset movement. In addition, Northern Trust will, if applicable, pass through to the client legal, evaluation, and/or consulting charges incurred for an event. Charges will vary depending on the nature and scope of services to be provided for each event. In advance of an assignment, Northern Trust will provide estimated charges based on data elements provided by the client.

Additional charges may be assessed for more complex events.

9

FEE SCHEDULE

OTHER FEES AND EXPENSES

The Fee Schedule reflects the accounts established at the time this schedule was prepared. The Schedule will be applicable to all accounts that may be added from time to time and without modification of the Schedule, unless warranted by the nature of the new accounts.

Other Fees and Expenses

Where applicable, indicative fees will be disclosed prior to providing a service.

Additional charges may be applied for:

Services or special procedures required in respect of any directly held property or venture capital/private equity portfolios will be evaluated and priced on a case by case business, according to the level of work involved. Services associated with special events the client, its investment managers, or other service providers initiate, to the extent those events are not specifically described by the fees detailed in the Transition Related Fee Schedule Customized services including, but not limited to, reporting for non-custodied assets, developing custom downloads, custom programming, special accounting or project work for any client or third party organization, class action filing services with prior custodial records, client specific data requirements Demand account services to support pension payment or collection activities Fund subscriptions and redemptions Services to support in-house managed accounts Manager fee payments Supporting/facilitating on-site visits by your auditors

If you maintain deposits with Northern Trust in markets for which prevailing money market rates fall to a level at or below zero, Northern Trust may, in its discretion, charge a fee on such balances. The amount of the fee, which may vary by market and circumstance and may change over time, will be the spread in excess of the prevailing over night or central bank rate in an affected market and will not exceed 100 basis points. In order to determine the interest rates you are receiving, you can review your report from Institutional Investor Passport (IIP) entitled: “Positions/Accrued Income/Interest Rates”, where all such rates are disclosed.

OVERDRAFT DISCLOSURE Northern Trust generally covers overdrafts as a service to its institutional trust and custody clients in order to assist in the timely processing of transactions. It is Northern Trust’s policy to discourage the incidence of overdrafts and to prohibit their excessive use. Northern Trust promptly notifies clients or their investment managers of all overdrafts that occur in client accounts, and the associated fees are reflected in client cash statements. Northern Trust monitors accounts for any pattern or practice or routine overdraft use, and takes active steps to address any perceived abuse of overdraft privileges. Thus, this service is an accommodation granted entirely at the discretion of Northern Trust and can be discontinued at any time.

Northern Trust’s charge for U.S. dollar overdrafts is the Northern Trust Prime Rate of interest. Northern Trust intends to assess overdraft fees on all overdrawn accounts, including separately managed and commingled funds managed by Northern Trust and its affiliates, except in cases where it is determined that Northern Trust or its affiliate was at fault in causing the overdraft. Unless otherwise agreed, overdraft charges will be determined on a daily basis and assessed monthly against client accounts.

For non-U.S. dollar overdrafts, Northern Trust assesses overdraft recovery charges based upon prevailing local market rates.

10

FEE SCHEDULE

Expenses to be passed through to clients include, but are not limited to:

§ Commissions and placement or surrender fees. § Execution attributable to settlement and associated activities in specific markets, including but not limited to market opening charges, stamp duty, securities re-registration fees, ADR/GDR agent pass through charges (including tax relief assistance), transfer agent pass through charges, proxy voting physical representation/ad hoc expenses, Legal Entity Identifier registration charges, Deposit/Withdrawal at Custodian (DWAC) charges (Such charges will be passed through to the account where applicable.) § Delivery and Receipt charges, which the markets’ subcustodian charges Northern, will be passed through to the client and debited from client accounts where applicable. § Out of pocket expenses including, but not limited to, fees for external legal and tax advice and legal document processing will be passed through to the client. § Other security-related charges passed through by depositories. § Vendor charges which are passed through to clients and are dictated by markets or other third parties are subject to change without notice.

Note: all fees are subject to direct debit. Fees are due upon receipt of invoice. Northern Trust reserves the right to modify any client fee schedule should there be a meaningful change in the account structure or services provided. In such event, a revised fee schedule will be provided to the client.

BILLING / INVOICING § Unless otherwise noted, fees for services will be billed in arrears following the close of the measurement period. Transaction-based fees for a period will be calculated on the transactions occurring during the period but will be billed after the close of that period. For example, the fees for transactions occurring in the first quarter will be billed on the invoice issued in the second quarter. Market value-based fees for a period will be calculated using the market value of the assets at the end of the period and billed after the close of that period. For example, fees for the first quarter of 2016 would be based on the market value as of March 31, 2016, and billed on the invoice issued in the second quarter.

11

Alternative Risk Premia (ARP) Manager Search – Overview of Finalist Candidates

San Joaquin County Employees Retirement System (SJCERA)

ARP Manager Search

Interview Schedule

Friday, March 25, 2015

Candidates in presentation order

AQR

P/E Investments

2

ARP Manager Search

Executive Summary

In October 2015, the Board approved a new strategic asset class; the Crisis Risk Offset (CRO) class. The CRO class is intended to have 20% weight within the total SJCERA portfolio. As a part of this restructuring, PCA initiated a search to find suitable candidate investment firms to manage a portion of the alternative risk premia (ARP) allocation within CRO. As the ARP manager universe is much smaller and more difficult to define than when evaluating the other components of CRO, PCA released an ARP strategy Request for Information (RFI) to the institutional marketplace in order to best define the universe of ARP providers that would best fit SJCERA. Twenty-four (24) firms initially responded to the RFI and following a detailed review of the RFI submissions, PCA identified two candidates that best fit the unique needs of SJCERA.

Candidate managers were evaluated on a wide array of factors, which included, but were not limited to, ownership, experience, investment-style and decision-making process, performance, assets under management, client type, and any other considerations believed to be pertinent to SJCERA. After an initial review, 17 of the 24 firms were removed from consideration due to a broad range of factors. Of the remaining seven firms, AQR and P/E Investments were selected as the two candidates that best fit the unique needs of SJCERA. The purpose of these interviews is to approve an ARP investment with one of the identified managers. Following these interviews and subsequent discussions with the Board, PCA will move forward with additional final due diligence on the selected manager.

This document serves as a means to further implement the Board’s decision to move forward in hiring an ARP manager and to provide an overview of the candidates and their proposed strategies. The two ARP manager finalist candidates and their abbreviations used throughout this report are presented below in order of their interview times:

Manager: Fund Abbreviation AQR: Style Premia AQR P/E Investments: Diversified Global Macro P/E Investments

AQR has approximately $141.5 billion in assets under management. The firm has been managing alternative strategies since inception in 1998 and offered their first standalone alternative risk premia strategy in 2001. The AQR Style Premia strategy provides efficient, diversified exposure to classic investment styles (value, momentum, carry, and defensive) across a broad asset universe through a transparent and highly liquid vehicle with low correlation to traditional portfolios. Utilizing a long/short format, the style premia strategy seeks to hedge away market exposures. A systematic drawdown control process is designed to decrease risk and minimize drawdowns at the portfolio level while maintaining diversification in extreme left tail events.

P/E Investments was founded in 1995 with a principal mission of providing uncorrelated return streams across markets for its clients. The firm has approximately $4.6 billion in assets under management. The strategy is an absolute return product utilizing a broad asset universe. The strategy uses a Bayesian statistical modeling process, which seeks to adapt the model to the current market environment and optimize the model’s predictive efficacy. This approach 3

ARP Manager Search

stochastically predicts returns and volatilities to produce returns from several specific fundamental (non-price) drivers predictive of market premia movements. Each of the premia are then weighted in the portfolio depending on relative expected performance and the model’s accuracy in prediction of premia movements in the recent past.

Alternative Risk Premia Overview Alternative Risk Premia (ARP) strategies are designed to be liquid and produce positive long-term returns that have low correlation to equities, fixed income, and systematic trend following. These strategies invest by going long and short securities and markets either in a market neutral fashion, to isolate returns from alternative risk premia (such as value, carry, momentum1, and low-volatility), or by positioning the portfolio based on fundamental signals that have been shown to be predictive of macro level market movements. ARP strategies use transparent rules in liquid markets across various asset groups (equities, fixed income, currencies, and commodities).

1 Momentum in ARP strategies is different from trend following. ARP momentum focuses on the acceleration of trends, whereas trend following focuses on the direction of a trend. ARP momentum is captured in an asset group by going long those assets that are exhibiting the most momentum and shorting those assets that are exhibiting the least momentum. Trend followers make trades based on the direction of a trend by shorting those assets that are falling in price and going long those assets that are rising in price. 4

ARP Manager Search

Manager Comparison Manager AQR P/E Investments

Company Name AQR Capital Management, LLC P/E Global LLC Headquarters Greenwich, CT Boston, MA AQR Capital Management Holdings, Parent Company P/E Investments LLC Year Founded 1998 1995 Total Employees / Investment Professionals 617 / 218 41 / 13 Name of Product AQR Style Premia Diversified Global Macro Inception Date of Product 9/2012 1/2014 Client Base: AUM ($m) /# accounts Firm Total Assets $141,447 $4,615 $121 in DGM, Product Total Assets $11,675 $4,300 in FX

Candidate Manager Performance, as of 02/29/2015, net of fees SI1 Product SI1 Manager 3-mo 1-Year 3-Year 5-Year SI1 StDev Return / Inception Return Risk AQR 9/2012 2.9% 14.4% 12.3% --- 12.1% 9.8% 1.24 P/E Inv. DGM 1/2014 -2.2% 5.2% ------27.5% 17.3% 1.60 BC Aggregate (‘90) --- 1.8% 1.5% 2.2% 3.6% 6.3% 3.6% 1.73 MSCI ACWI (‘90) --- -8.4% -12.3% 3.7% 3.7% 5.9% 15.4% 0.38 SG Trend Index2 (‘00) --- 3.9% 1.3% 8.7% 2.9% 6.8% 14.4% 0.47 BC Long Treasuries(‘90) --- 8.1% 4.0% 6.1% 9.7% 8.3% 9.8% 0.85 1 SI = Since Inception 2 Formerly Newedge Trend Index, The Index is equal-weighted and reconstituted annually calculating the net daily rate of return for a pool of trend following based managers. The index is designed to track the 10 largest trend following managers. The 2016 index constituents are: AQR, P/E Investments, Aspect Capital, Campbell & Company, Graham Capital Management, Lynx Asset Management, Man Investments, SEB Asset Management, Systematic Investments, and Trans Trend BV.

5

ARP Manager Search - Appendix

Glossary

Alpha – The difference between a fund’s (expected return) benchmark and its actual return.

Beta – The beta coefficient measures the anticipated sensitivity of a portfolio to general movements in the broad market. A portfolio whose beta is equal to 1.0 has an expected return, subject to random movements, equal to that of the broad market. A portfolio whose beta is greater than 1.0 would be expected to advance more rapidly than the broad market index in rising markets and decline more rapidly in falling markets. A portfolio having a beta less than 1.0 would usually gain less than the market in rising markets and lose less in falling markets.

Correlation – A statistical measure of how two securities move in relation to each other. Correlation is computed into what is known as a correlation coefficient, which ranges from -1 and +1. Perfect positive (+1) implies that as one security moves, either up or down, the other security will move in the same direction. Perfect negative (-1) implies that as one security moves, either up or down, the other security will move in the opposite direction. A correlation of 0 means that the securities are said to have no correlation and their relation is completely random.

Downside Deviation – A measure of downside risk that focuses on returns that fall below a minimum threshold or minimum acceptable return.

Kurtosis – A statistical measure used to describe the distribution of observed data around the mean. A high kurtosis portrays a chart with fat tails and a low, even distribution. A low kurtosis portrays a chart with skinny tails and a distribution that is concentrated around the mean.

Max Drawdown – The maximum loss from a peak to trough for a manager before a new peak is attained.

R-Squared (R2) – A numerical measure of portfolio diversification. R-squared indicates the degree to which a portfolio’s investment return is related to changes in the value of the benchmark. The R-squared statistic ranges from 0.0 to 1.0. An R2 of 1.00 indicates that the portfolio movements are identical to market movements. An R-squared of 0.0 means there is no relationship between the portfolio and the benchmark.

Sharpe Ratio – A measure for calculated risk-adjusted return calculated by the average return earned in excess of the risk-free rate divided by the total risk (standard deviation).

Skewness – A measure that describes the asymmetry from a normal distribution of returns. A negative skewness indicates the distribution has more outlying returns on the downside, while a positive skewness indicates the distribution has more outlying returns on the upside.

Sortino Ratio – A modification of the Sharpe Ratio measure that differentiates downside deviation from (total) standard deviation. This measure is calculated as the average return earned in excess of the risk-free rate divided by the downside risk (downside deviation).

Standard Deviation – A statistical measure of risk which quantifies the variability of investment returns during a specific period of time. It measures the dispersion of returns around the mean of the series; the greater the spread of numbers in a series, the greater the standard deviation or risk. 6

DISCLOSURES: This document is provided for informational purposes only. It does not constitute an offer of securities of any of the issuers that may be described herein. Information contained herein may have been provided by third parties, including investment firms providing information on returns and assets under management, and may not have been independently verified. The past performance information contained in this report is not necessarily indicative of future results and there is no assurance that the investment in question will achieve comparable results or that the Firm will be able to implement its investment strategy or achieve its investment objectives. The actual realized value of currently unrealized investments (if any) will depend on a variety of factors, including future operating results, the value of the assets and market conditions at the time of disposition, any related transaction costs and the timing and manner of sale, all of which may differ from the assumptions and circumstances on which any current unrealized valuations are based.

Neither PCA nor PCA’s officers, employees or agents, make any representation or warranty, express or implied, in relation to the accuracy or completeness of the information contained in this document or any oral information provided in connection herewith, or any data subsequently generated herefrom, and accept no responsibility, obligation or liability (whether direct or indirect, in contract, tort or otherwise) in relation to any of such information. PCA and PCA’s officers, employees and agents expressly disclaim any and all liability that may be based on this document and any errors therein or omissions therefrom. Neither PCA nor any of PCA’s officers, employees or agents, make any representation of warranty, express or implied, that any transaction has been or may be effected on the terms or in the manner stated in this document, or as to the achievement or reasonableness of future projections, management targets, estimates, prospects or returns, if any. Any views or terms contained herein are preliminary only, and are based on financial, economic, market and other conditions prevailing as of the date of this document and are therefore subject to change.

The information contained in this report may include forward-looking statements. Forward-looking statements include a number of risks, uncertainties and other factors beyond the control of the Firm, which may result in material differences in actual results, performance or other expectations. The opinions, estimates and analyses reflect PCA’s current judgment, which may change in the future.

Any tables, graphs or charts relating to past performance included in this report are intended only to illustrate investment performance for the historical periods shown. Such tables, graphs and charts are not intended to predict future performance and should not be used as the basis for an investment decision.

All trademarks or product names mentioned herein are the property of their respective owners. Indices are unmanaged and one cannot invest directly in an index. The index data provided is on an “as is” basis. In no event shall the index providers or its affiliates have any liability of any kind in connection with the index data or the portfolio described herein. Copying or redistributing the index data is strictly prohibited.

The Russell indices are either registered trademarks or tradenames of Frank Russell Company in the U.S. and/or other countries.

The MSCI indices are trademarks and service marks of MSCI or its subsidiaries.

Standard and Poor’s (S&P) is a division of The McGraw-Hill Companies, Inc. S&P indices, including the S&P 500, are a registered trademark of The McGraw-Hill Companies, Inc.

CBOE, not S&P, calculates and disseminates the BXM Index. The CBOE has a business relationship with Standard & Poor's on the BXM. CBOE and Chicago Board Options Exchange are registered trademarks of the CBOE, and SPX, and CBOE S&P 500 BuyWrite Index BXM are servicemarks of the CBOE. The methodology of the CBOE S&P 500 BuyWrite Index is owned by CBOE and may be covered by one or more patents or pending patent applications.

The Barclays Capital indices (formerly known as the Lehman indices) are trademarks of Barclays Capital, Inc.

The Citigroup indices are trademarks of Citicorp or its affiliates.

The Merrill Lynch indices are trademarks of Merrill Lynch & Co. or its affiliates.

FTSE is a trademark of the London Stock Exchange Group companies and is used by FTSE under license. All rights in the FTSE indices and/or FTSE ratings vest in FTSE and/or its licensors. No further distribution of FTSE data is permitted with FTSE’s express written consent.

While PCA has reviewed the terms of the Fund referred to in this document and other accompanying financial information on predecessor partnerships, this document does not constitute a formal legal review of the partnership terms and other legal documents pertaining to the Fund. PCA recommends that its clients retain separate legal and tax counsel to review the legal and tax aspects and risks of investing in the Fund. Information presented in this report was gathered from documents provided by third party sources, including but not limited to, the private placement memorandum and related updates, due diligence responses, marketing presentations, limited partnership agreement and other supplemental materials. Analysis of information was performed by PCA.

An investment in the Fund is speculative and involves a degree of risk and no assurance can be provided that the investment objectives of the Fund will be achieved. Investment in the Fund is suitable only for sophisticated investors who are in a position to tolerate such risk and satisfy themselves that such investment is appropriate for them. The Fund may lack diversification, thereby increasing the risk of loss, and the Fund’s performance may be volatile. As a result, an investor could lose all or a substantial amount of its investment. The Fund’s governing documents will contain descriptions of certain of the risks associated with an investment in the Fund. In addition, the Fund’s fees and expenses may offset its profits. It is unlikely that there will be a secondary market for the shares. There are restrictions on redeeming and transferring shares of the Fund. In making an investment decision, you must rely on your own examination of the Fund and the terms of the offering.

AQR Style Premia Strategy Prepared for San Joaquin County Employees Retirement Association

March 25, 2016

FOR INVESTMENT PROFESSIONAL USE ONLY

AQR Capital Management, LLC Two Greenwich Plaza Greenwich, CT 06830 p: +1.203.742.3600 | w: aqr.com Disclosures

The information set forth herein has been obtained or derived from sources believed by AQR Capital Management, LLC (“AQR”) to be reliable. However, AQR does not make any representation or warranty, express or implied, as to the information’s accuracy or completeness, nor does AQR recommend that the attached information serve as the basis of any investment decision. This document has been provided to you solely for information purposes and does not constitute an offer or solicitation of an offer, or any advice or recommendation, to purchase any securities or other financial instruments, and may not be construed as such. This document is intended exclusively for the use of the person to whom it has been delivered by AQR and it is not to be reproduced or redistributed to any other person. Please refer to the Appendix for more information on risks and fees. Past performance is not a guarantee of future performance.

This presentation is not research and should not be treated as research. This presentation does not represent valuation judgments with respect to any financial instrument, issuer, security or sector that may be described or referenced herein and does not represent a formal or official view of AQR. The views expressed reflect the current views as of the date hereof and neither the speaker nor AQR undertakes to advise you of any changes in the views expressed herein. It should not be assumed that the speaker will make investment recommendations in the future that are consistent with the views expressed herein, or use any or all of the techniques or methods of analysis described herein in managing client accounts. AQR and its affiliates may have positions (long or short) or engage in securities transactions that are not consistent with the information and views expressed in this presentation. The information contained herein is only as current as of the date indicated, and may be superseded by subsequent market events or for other reasons. Charts and graphs provided herein are for illustrative purposes only. The information in this presentation has been developed internally and/or obtained from sources believed to be reliable; however, neither AQR nor the speaker guarantees the accuracy, adequacy or completeness of such information. Nothing contained herein constitutes investment, legal, tax or other advice nor is it to be relied on in making an investment or other decision. There can be no assurance that an investment strategy will be successful. Historic market trends are not reliable indicators of actual future market behavior or future performance of any particular investment which may differ materially, and should not be relied upon as such. Target allocations contained herein are subject to change. There is no assurance that the target allocations will be achieved, and actual allocations may be significantly different than that shown here. This presentation should not be viewed as a current or past recommendation or a solicitation of an offer to buy or sell any securities or to adopt any investment strategy. The information in this presentation may contain projections or other forward‐looking statements regarding future events, targets, forecasts or expectations regarding the strategies described herein, and is only current as of the date indicated. There is no assurance that such events or targets will be achieved, and may be significantly different from that shown here. The information in this presentation, including statements concerning financial market trends, is based on current market conditions, which will fluctuate and may be superseded by subsequent market events or for other reasons. Performance of all cited indices is calculated on a total return basis with dividends reinvested. The investment strategy and themes discussed herein may be unsuitable for investors depending on their specific investment objectives and financial situation. Please note that changes in the rate of exchange of a currency may affect the value, price or income of an investment adversely. Neither AQR nor the speaker assumes any duty to, nor undertakes to update forward looking statements. No representation or warranty, express or implied, is made or given by or on behalf of AQR, the speaker or any other person as to the accuracy and completeness or fairness of the information contained in this presentation, and no responsibility or liability is accepted for any such information. By accepting this presentation in its entirety, the recipient acknowledges its understanding and acceptance of the foregoing statement.

2 Today’s Presenters

Scott Metchick Managing Director, Global Alternative Premia Portfolio Manager Scott is portfolio manager on AQR’s Global Alternative Premia team. He has nearly three decades of experience in alternative investments, having held senior positions at three fund-of-hedge-funds firms. Prior to AQR, he managed S.R. Metchick Associates, a hedge-fund consulting firm. Before that, Scott was chief investment officer at Tremont Capital Management, Twin Lights Capital and the EIM Group. Earlier, he analyzed alternative-investment funds for Evaluation Associates Capital Markets (now EACM Advisors). He began his career at Chase Manhattan Bank. Scott earned a B.S. in finance from Lehigh University.

Joey Lee Managing Director, Client Strategies Joey works with institutional investors in the western and southwestern U.S., communicating AQR’s investment strategies, portfolio construction and performance. Prior to AQR, she worked in the White House as an aide in the Executive Office of the President, helping senior officials with communications and strategic planning. She earned a B.A., with distinction, in political science from Yale University, where she was a recipient of the Yale University–New Asia College Undergraduate Exchange fellowship and the Academic All-Ivy award, and was a four-year starter on the women’s volleyball team; she earned an M.B.A. with concentrations in analytic finance and economics from the University of Chicago’s Graduate School of Business, where she received the Lehman Brothers Fellowship.

3 AQR Overview Our Firm

AQR is a global investment management firm built at the intersection of financial theory and practical application. We strive to deliver superior, long-term results for our clients by looking past market noise to identify and isolate what matters most, and by developing ideas that stand up to rigorous testing. Our focus on practical insights and analysis has made us leaders in alternative and traditional strategies since 1998.

At a Glance • AQR takes a systematic, research-driven approach to managing alternative and traditional strategies • We apply quantitative tools to process fundamental information and manage risk • Our clients include institutional investors, such as pension funds, insurance companies, endowments, foundations and sovereign wealth funds, as well as financial advisors • The firm has 26 principals and 617 employees; nearly half of employees hold advanced degrees • AQR is based in Greenwich, Connecticut, with offices in Boston, Chicago, Los Angeles, London and Sydney • $141.4 billion in assets under management as of December 31, 2015*

* Approximate as of 12/31/2015, includes assets managed by CNH Partners, an affiliate of AQR.

5 Assets Under Management

Alternative Investment Strategies $76.0B Total Assets Alternative Investment Assets Total Assets$141.4B* $141.4B* $76.0B*

Equity-Related Real Assets Total Return $0.6B $2.4B

Alternative: Multi-Strategy $26.8B Total Return $28.8B Risk Parity $25.8B Traditional: Equities $65.4B

Alternative: Absolute Return $47.2B

Event Driven $1.8B

Global Asset Equity Market Allocation Neutral $1.3B Managed Futures $1.5B $15.9B

* Approximate as of 12/31/15, includes assets managed by CNH Partners, an affiliate of AQR. The methodology used for allocating alternative investments to buckets has been updated as of 12/31/15. 6 AQR Who We Are Color Palette

Cliff Asness, Ph.D.* Managing and Founding Principal

Portfolio Management, Research, Business Corporate Compliance Risk Management and Trading Development Infrastructure And Legal (Total Team: 220) (Total Team: 112) (Total Team: 249) (Total Team: 46) John Liew, Ph.D.* David Kabiller, CFA* Founding Principal Founding Principal Portfolio Management and Research Risk Management Client Solutions Portfolio Solutions Finance Compliance

Michele Aghassi, Ph.D. Tobias Moskowitz, Ph.D. Aaron Brown Gregor Andrade, Ph.D.* Antti Ilmanen, Ph.D. John Howard* H.J. Willcox Principal Principal Managing Director Principal Principal Principal Managing Director Chief Finance Officer and Chief Compliance Andrea Frazzini, Ph.D. Lars Nielsen* Jeff Dunn Counterparty Risk Marketing Chief Operating Officer Officer Principal Principal Principal Lauralyn Pestritto Suzanne Escousse Accounting, Operations Legal Jacques Friedman* Yao Hua Ooi Managing Director Jeremy Getson, CFA* Managing Director AQR and Client Administration Principal Principal Principal Chief Marketing Bradley Asness Cyan Trading Officer Steve Mellas Principal Brian Hurst* Lasse Pedersen, Ph.D. Marco Hanig, Ph.D. Principal Chief Legal Officer Principal Principal Brian Hurst* Principal Business Strategy Principal Brendan Kalb Ronen Israel* Mark Mitchell, Ph.D. Chris Palazzolo, CFA Systems Development Ted Pyne Managing Director Principal Principal (CNH) Principal and IT Managing Director General Counsel Neal Pawar Michael Katz, Ph.D. Todd Pulvino, Ph.D. Robert Capone Chief Strategy Officer Principal Auxiliary Principal Principal (CNH) Managing Director Palette Eric Levy Chief Technology Officer Hoon Kim, Ph.D., CFA Rocky Bryant Matthew Chilewich Vice President Sudhir Anantharaman Principal Principal (CNH) Managing Director Business Development Vice President Chief Operating Oktay Kurbanov William Latimer, CFA Chief Information Security Officer Principal Managing Director Officer Michael Mendelson* Principal

Personnel as of 2/15/2016 = 627 *Member of Strategic Planning Committee (SPC) 7 AQR Style Premia Strategy Management Color Palette

Portfolio Management and Research

Ronen Israel Principal

Andrea Frazzini, Ph.D. Antti Ilmanen, Ph.D. Michael Katz, Ph.D. Principal Principal Principal

Tobias Moskowitz, Ph.D. Scott Metchick Scott Richardson, Ph.D. Principal Managing Director Managing Director

Total Global Alternative Premia Team: 19 AQR Cyan Asset Allocation Research Equity Research

John Liew, Ph.D. Lasse Pedersen, Ph.D. Andrea Frazzini, Ph.D. Ronen Israel Founding Principal Principal Principal Principal

Michael Katz, Ph.D. Lars Nielsen Jacques Friedman Lars Nielsen Auxiliary Principal Principal Principal Principal Palette Total Global Asset Allocation Team: 78 Total Global Stock Selection Team: 52

Risk Management Trading Systems Development & IT (Total Team: 7) (Total Team: 38) (Total Team: 116)

Aaron Brown Lauralyn Pestritto Brian Hurst Neal Pawar Managing Director Managing Director Principal Principal

Personnel as of 1/1/2016

8 Introduction to Style Premia Introduction to Styles Evolution of Risk Premia

Time

Alpha Cost Alpha Alternative Risk Premia Alpha

Traditional Traditional Risk Premia Risk Premia Capacity

Prior to Cap-Weighted Traditional Risk Premia Alternative Risk Premia Equity Indices Introduced Introduced

– Returns as “alpha” Examples Examples – S&P 500 Index – Classic hedge fund strategies – MSCI World (hedge fund risk premia) – Classic styles – BarCap Aggregate (style premia)

Source: AQR. For illustrative purposes only. Alternative risk premia are also sometimes referred to as exotic or smart beta premia. BarCap Aggregate is the Barclays Capital Aggregate Bond Index.

10 The Style Premia Perspective Focusing on Four Broad Styles

These four styles have historically generated positive long-run returns across a variety of asset groups*

Value The tendency for relatively cheap assets to outperform relatively expensive ones

Momentum The tendency for an asset’s recent relative performance to continue in the near future

Carry The tendency for higher-yielding assets to provide higher returns than lower-yielding assets

Defensive The tendency for lower-risk and higher-quality assets to generate higher risk-adjusted returns

Source: AQR. *See the AQR Style Premia Strategy section of this presentation. Past performance is not a guarantee of future performance. Please read important disclosures in the Appendix.

11 Characteristics of Style Premia

Persistent Long-term in- and out-of-sample evidence Intuition and theory, who is on the other side?

Pervasive Exist broadly across regions and asset groups

Liquid Can be captured by trading liquid instruments

Dynamic Limited static exposure to any asset or market

Transparent Clearly defined process and strategy

Source: AQR. Past performance is not a guarantee of future performance. Please read important disclosures at the back.

12 Accessing Style Premia More Efficiently Capturing Styles

Style investing exists along a spectrum

Value Momentum Carry Defensive Stocks & Equity Fixed Currencies Commodities Industries Indices Income

ValueValueValue (Cheap)(Cheap)(Cheap) Value Out- (Cheap) High Cheap Cheap

GrowthGrowthGrowth Yielding Low Risk Low Long Long (Expensive)(Expensive)(Expensive) performers Low Low Under- Yielding Yielding Expensive High Risk High performers Short Short

Market Add Style Tilt Go Long/Short Go Multi-Asset Go Multi-Style

Increasing Efficiency/Diversification

• Improved portfolio with • More active, less constrained • Even more diversified more favorable exposure to styles • Higher risk-adjusted return characteristics • Uncorrelated to traditional markets • Even greater improvement from • Returns largely driven • More diversified than single style tilt implementation choices by market beta

13

Source: AQR. For illustrative purposes only. Diversification does not eliminate the risk of experiencing investment losses. Value

• Value securities are “beaten up,” distressed, “unglamorous” or less-favored by investors • Investors may overextrapolate growth prospects, resulting in overpricing of Intuition growth/glamour stocks • Value strategies tend to perform poorly when liquidity dries up and are short a structural break, and value assets may have greater default risk and tend to co-move

• Within U.S. stocks (1926), international stocks (1984), across equity country indices (1975) • Across country bonds (1975) and interest rates (1992) Evidence • Across currencies (1975) • Across commodities (1975)

Source: AQR. Dates referenced relate to generally available data or evidence. Please read important disclosures in the Appendix.

14 Momentum

• Securities or investments that have performed relatively well (or poorly) over the past year tend to continue to perform well (or poorly) over the short term Intuition • May be explained by investor initial underreaction to news and subsequent herding/continued overreaction, and other behavioral biases like the disposition effect • Momentum securities tend to move together, which may denote a common risk

• Within U.S. stocks (1927), international stocks (1984), across equity country indices (1975) • Across country bonds (1975) and interest rates (1990) Evidence • Across currencies (1975) • Across commodities (1975)

Source: AQR. Dates referenced relate to generally available data or evidence. Please read important disclosures in the Appendix.

15 Carry

• High (or low) yields may indicate excess demand for (or supply of) capital • In currencies, for example, expected capital offsets (appreciation/depreciation) have not Intuition materialized, possibly due to inefficiencies of non-profit-seeking participants such as central banks • May be compensation for negative skewness and losses in “bad times,” especially currencies

• Across country bonds (1991) and interest rates (1990) • Across currencies (1983) Evidence • Across commodities (1980)

Source: AQR. Dates referenced relate to generally available data or evidence. Please read important disclosures in the Appendix.

16 Defensive

• Leverage aversion may explain why low-risk assets offer higher risk-adjusted returns • Unlevered investors typically seek high-beta assets for more “bang for the buck” Intuition • Investors tend to overpay for “lottery” characteristics

• Within U.S. stocks (1926), international stocks (1984), across equity country indices (1984) • Within U.S. Treasuries (1952), across country bonds (1965) Evidence

Source: AQR. Dates referenced relate to generally available data or evidence. Please read important disclosures in the Appendix.

17 AQR Style Premia Strategy Objectives of the AQR Style Premia Strategy

The AQR Style Premia Strategy seeks to deliver efficient, well-diversified exposure to four long/short styles implemented in a market neutral fashion across five asset groups

Objectives

Achieve a long-term net Sharpe ratio of 0.7 over a full market cycle Combining multiple uncorrelated sources of return brings diversification benefits

Target annualized volatility at various levels (ranging up to 12%) Moderately levered, capital-efficient exposure

Target low correlation to traditional asset class returns All strategies are long/short and designed to be market neutral

Maintain attractive liquidity characteristics We omit illiquidity premia and less-liquid assets

Offer meaningful transparency and investor-friendly terms

Objectives may be subject to change and there is no guarantee, express or implied, that long-term return and/or volatility targets will be achieved. Please read important disclosures in the Appendix.

19

Overview of Styles and Asset Groups Harvest Style Premia Across Multiple Asset Groups

Value Momentum Carry Defensive

• Stocks & Industries • Stocks & Industries • Stocks & Industries • Stocks & Industries

• Equity Indices • Equity Indices • Equity Indices • Equity Indices

• Fixed Income* • Fixed Income* • Fixed Income* • Fixed Income*

• Currencies • Currencies • Currencies • Currencies

• Commodities • Commodities • Commodities • Commodities

Instruments Used Stocks, Futures, Swaps, and Currency Forwards

*Fixed Income includes bond, interest rate, and yield curve strategies. Specific exposures are subject to change and not all styles are applicable in all contexts.

20 Diversification Across Asset Groups and Styles Target Strategic Risk Allocation

Target Asset Group Risk Allocation Resulting Style Exposure

Asset Groups Styles 15% 18% Stocks & Industries 30% 34% Value Equity Indices Momentum 15% Fixed Income 14% Carry

Currencies Defensive

Commodities 20% 20% 34%

• Risk is first allocated to asset groups to take advantage • Within each asset group, risk is allocated in a balanced of natural netting and style interaction manner to available styles • Asset group allocation seeks to balance maximum • Resulting overall style exposure is balanced and diversification with breadth, liquidity and leverage diversified considerations

Source: AQR. Risk allocation is complex and subject to change. The allocations above are representative of a theoretical AQR Style Premia strategy and do not represent actual allocations of any AQR client portfolio or strategy; actual allocations for a client portfolio may vary from this example. The risk allocation represents the ratio of strategy/style volatility allocations relative to the total sum of volatilities. Variance contributions are an alternative and also useful way of viewing risk allocations. Information is supplemental to the GIPS® compliant presentation for the Style Premia Composite included in the Appendix. Diversification does not eliminate the risk of experiencing investment 21 losses. Evidence Across Many Asset Groups and Styles Single Long/Short and Composites

Hypothetical Gross Sharpe Ratios of Long/Short Style Components Across Asset Groups January 1990–December 2015

Single long/short strategies Composites may be even better performed well… 2.5

2.0

1.5

1.0

SharpeRatio

0.5

Stocks & & Industries Stocks Currencies

Fixed Fixed Income Commodities 0.0 N/A N/A N/A N/A Indices EQ

-0.5 Stocks & Equity Indices Fixed Income Currencies Commodities Style Composite Asset Group Industries Composite

Value Momentum Carry Defensive

Source: AQR. Above analysis reflects a backtest of theoretical long/short style components based on AQR definitions across identified asset groups, and is for illustrative purposes only and not based on an actual portfolio AQR manages. The results shown do not include advisory fees or transaction costs; if such fees and expenses were deducted the Sharpe ratios would be lower. Please read performance disclosures in the Appendix for a description of the investment universe and the allocation methodology used to construct the backtest and composites. Hypothetical data has inherent limitations, some of which are disclosed in the Appendix. The data presented herein is supplemental to the 22 GIPS® compliant presentation for the Style Premia Composite included in the Appendix. Low Correlations Between Styles and Assets

Hypothetical Correlations Between Long/Short Style Premia January 1990–December 2015

Value Momentum Carry Defensive

Value 1.00

Momentum -0.62 1.00

Carry -0.06 0.18 1.00

Defensive -0.07 0.11 0.00 1.00

Hypothetical Correlations Between Long/Short Style-Asset Portfolios January 1990–December 2015

Stocks & Industries Equity Indices Fixed Income Currencies Commodities

Stocks & Industries 1.00

Equity Indices 0.03 1.00

Fixed Income 0.07 -0.02 1.00

Currencies 0.07 0.03 0.04 1.00

Commodities 0.03 0.12 -0.05 0.10 1.00

Source: AQR. Above analysis reflects a heavily discounted backtest of the AQR Style Premia Strategy and underlying theoretical long/short style components based on AQR definitions across identified asset groups. Charts provided for illustrative purposes only and is not based on an actual portfolio AQR manages. Please see the Appendix for further details on the investment universe and the allocation methodology used to construct the backtests. Hypothetical data has certain inherent limitations, some of which are disclosed in the Appendix. Broad-based securities indices are unmanaged and are not subject to fees and expenses typically associated with managed accounts or investment funds. Investments cannot be made 23 directly in an index. All correlations based on monthly data, excess of cash. The data presented herein is supplemental to the GIPS® compliant presentation for the Style Premia Composite included in the Appendix. Cumulative Hypothetical Performance Benefits From Diversification Across Styles and Asset Groups

Cumulative Hypothetical Excess Returns of AQR Style Premia Strategy Across Economic Periods January 1990–December 2015

SR 0.9

1000

Financial Crisis Tech Bubble

Recession/ S&L Crisis Cumulative Cumulative ExcessReturn

80 1990 1995 2000 2005 2010 2015

Hypothetical Correlations Between Traditional Long-Only Markets and Long/Short Style Premia

Global 60/40* HFRI* Equities* Bonds* Commodities*

0.04 0.04 0.03 0.12 0.04

* ‘Global 60/40’ is 60% MSCI World Index, 40% Barclays Capital Global Aggregate Bond Index (hedged); ‘Equities’ is MSCI World Index; ‘Bonds’ is Barclays Capital Global Aggregate Bond Index (hedged); ‘Commodities’ is S&P GSCI; and ‘HFRI’ is HFRI Macro (Total) Index. Source: AQR. Above analysis reflects a heavily discounted backtest of the AQR Style Premia Strategy, gross of fees, excess of cash and net of estimated transaction costs, targeting 12% annualized volatility. This analysis is for illustrative purposes only and is not based on an actual portfolio AQR manages. Please read performance disclosures in the Appendix for a description of the investment universe and the allocation methodology used to construct the backtests. Hypothetical data has inherent limitations, some of which are disclosed in the Appendix. Broad-based securities indices are unmanaged and are not subject to fees and expenses typically associated with managed accounts or investment funds. Investments cannot be made directly in an index. All correlations based on monthly data, excess of 24 cash. The data presented herein is supplemental to the GIPS® compliant presentation for the Style Premia Composite included in the Appendix. Past performance is not a guarantee of future performance. Performance AQR Style Premia Composite Performance

Annual Net of Fee Returns September 1, 2012 – December 31, 2015

AQR Style Premia Composite (Net) AQR Style Premia Composite (Net) 0.75% Fixed Fee and 1.5% Fixed Fee 10% Performance Fee 2012 (starting 9/1) -1.4% -1.7% 2013 26.2% 27.9% 2014 11.3% 11.7% 2015 6.9% 6.9%

Summary (Since 9/1/2012) 1 Year 6.9% 6.9% 3 Year (Annualized) 14.5% 15.2%

Since Inception (Annualized) 12.5% 13.0% Annualized Volatility 9.3% 9.9% Sharpe Ratio 1.3 1.3 Beta to MSCI World 0.1

Source: AQR. Performance from September 1, 2012, through December 31, 2015 of the AQR Style Premia Composite in USD. Performance for the month ending December 31, 2015, is estimated and subject to change. Risk-free rate is the Merrill Lynch 3 Month T-Bill. This performance data is supplemental to the GIPS® compliant presentation for the Style Premia Composite included in the Appendix. Beta to MSCI World above is calculated using cumulative overlapping 3-day returns. Past performance is not a guarantee of future performance. Please read important disclosures in the Appendix. 25 Appendix Cumulative Hypothetical Performance Benefits From Diversification Across Styles

Cumulative Hypothetical Excess Returns of AQR Style Premia Strategy Components January 1990–December 2015

10000

Cumulative Cumulative ExcessReturn

100 1990 1995 2000 2005 2010 2015

Value Momentum Carry Defensive

Source: AQR. The underlying style composites are heavily discounted backtests, gross of fees, excess of cash and gross of transaction costs, targeting comparable volatility to each other and the Style Premia Strategy. This analysis is for illustrative purposes only and is not based on an actual portfolio AQR manages. Please read performance disclosures in the Appendix for a description of the investment universe and the allocation methodology used to construct the backtests. Hypothetical data has inherent limitations, some of which are disclosed in the Appendix. This information is supplemental to the GIPS® compliant presentation for the Style Premia Composite included in the Appendix. Past 27 performance is not a guarantee of future performance. Low Correlations To Traditional Assets

Hypothetical Returns of a Portfolio of Stocks, Bonds, and Style Premia January 1990–December 2015

10% 10% 20% Stocks 20%

40% 36% 32% Bonds 36% 32% 60% 54%54% 48% Styles 48%

60/40 Stocks & Bonds* With 10% Styles* With 20% Styles* Portfolio Allocation Allocation Annualized Return 6.8% 7.5% 8.3% Annualized Volatility 9.2% 8.5% 7.9% Sharpe Ratio 0.4 0.5 0.7 Beta to Equities 0.61 0.55 0.49

Worst Month -11.6% -10.0% -8.5% Worst Drawdown -34.9% -31.9% -28.8%

* ‘Global 60/40’ is 60% MSCI World Index, 40% Barclays Capital Global Aggregate Bond Index (hedged). Source: AQR. All portfolio statistics calculated using monthly returns from January 1990 to December 2015. Risk-free rate is the Merrill Lynch 3 Month T-Bill. Above analysis reflects a heavily discounted backtest of the AQR Style Premia Strategy and underlying theoretical long/short style components based on AQR definitions across identified asset groups. Chart is provided for illustrative purposes only and is not based on an actual portfolio AQR manages. Please see the Appendix for further details on the investment universe and the allocation methodology used to construct the backtests. Hypothetical data has certain inherent limitations, some of which are disclosed in the Appendix. Broad-based securities indices are unmanaged and are not subject to fees and expenses typically associated with managed 28 accounts or investment funds. Investments cannot be made directly in an index. The data presented herein is supplemental to the GIPS® compliant presentation for the Style Premia Composite included in the Appendix.

Preservation of Capital

The AQR Style Premia Strategy employs a drawdown-control policy to help preserve capital and also uses an exposure-management plan to help manage risk and maintain the Strategy’s correlation characteristics

Cumulative Drawdown January 1990 – December 2015

1990 1995 2000 2005 2010 2015 0%

-10%

-20%

-30%

-40%

-50% Cumulative Cumulative Drawdown (total ret)

-60% Hypothetical Style Premia MSCI World

Source: AQR. * The discounting methodology applied is intended to normalize overall average returns and Sharpe ratios; however, such discounting can give distorted results for extreme values, such as maximum drawdowns. Hypothetical performance of the AQR Style Premia Fund targeting 12% annualized volatility, gross, discounted. Our transaction cost assumptions are based on AQR’s historical realized transaction costs and market data. If the advisory fees were reflected, the performance shown would be lower. Risk overlays and drawdown control will not always be successful at controlling a fund’s risk or limiting losses. Please read important disclosures relating to hypothetical results in the Appendix. This 29 information is supplemental to the GIPS® compliant presentation for the Style Premia Composite in the Appendix. Performance Across Macro Environments Long/Short Styles Versus Long-Only Asset Classes

Market Risk Premia 1972-2014

Hypothetical Long/Short Style Premia 1972-2014

Hypothetical Simple Portfolios 1972-2014

Sources: Bloomberg, AQR. Data from January 1972–December 2014. Global Equities is the MSCI World Index. Global Bonds is a GDP weighted composite of Australian, German, Canadian, Japanese, U.K. and U.S. 10-year government bonds. Commodities is an equal dollar- weighted index of 24 commodities. Long-Short Style Premia are backtests of style premia as described herein. Global 60/40 takes 60% Global Equities and 40% Global Bonds. Simple Style Strategy is an equal dollar-weighted composite of the four long/short style premia. Please see Appendix for more details on the construction of the return series and macroeconomic environmental indicators. The analysis is based on 30 hypothetical returns gross of trading costs and fees. Hypothetical performance results have certain inherent limitations, some of which are disclosed in the Appendix. Past performance is not a guarantee of future performance. Multifaceted Risk Management Process

• Broad diversification seeks to limit risk from any one position, strategy or style Risk Management • Position sizes based on long-term and short-term risk assessment, allowing quick Built Into adjustments as market conditions change Investment • Portfolio managers actively assess and target the risk of the strategy and Process substyles

• Independent monitoring and risk measurement; risk manager reports directly to Managing Principal Dedicated Risk • Oversees a systematic drawdown process that seeks to reduce notional Management Staff exposures as a function of tail risk estimates and portfolio losses • Firm-wide Risk Committee reviews portfolio risks, liquidity and trading instruments

• Team dedicated to the management of counterparty exposures and credit Dedicated relationships Counterparty Risk • Collateral management program manages exposures to counterparties Management Staff • Firm-wide Counterparty Credit Committee reviews counterparty quality and exposure

AQR’s risk management process is subject to change without notification. The drawdown control process referred to above will not always be successful at controlling a portfolio’s risk or limiting portfolio losses. Please read important disclosures in the Appendix.

31 Performance Disclosures Building Macro Indicators / Investment Return Series

Macro Indicators We choose to construct macro indicators, or risk factors, mainly based on fundamental economic data, and not based on asset market returns (which are “too close” to the patterns we try to explain). For example, potential market–based proxies of economic growth include equity market returns, the relative performance of cyclical industries, dividend swaps, and estimates from cross–sectional regressions of asset returns on growth surprises. This choice brings its own problems, notably timing challenges as macroeconomic data are backward-–looking, published with lags and later revised, while asset prices are clearly forward–looking. The impact of publication lags and the mismatch between backward– and forward–looking perspectives can be mitigated by using longer windows. Thus, we use contemporaneous annual economic data and asset returns through our analysis (past–year data with quarterly overlapping observations). Arguably composite growth surprise indices are the best proxies of economic growth news, but such composites are available at best going back to 1990s. Forecast changes in economist surveys as well as business and consumer confidence surveys may be the next best choices because they are reasonably forward-looking and timely. In a globalized world, it is not clear whether we should focus only on domestic macro developments, but data constraints make us focus on U.S. data. Finally, it is not clear how real economic growth ties to expected corporate cash flow growth (e.g., earnings per share) that influence stock prices or to real yields that influence all asset prices but especially those of bonds. Each of our macro indicators combines two series, which are first normalized to Z–scores: that is, we subtract a historical mean from each observation and divide by a historical volatility. When we classify our quarterly 12–month periods into, say, ‘growth up’ and ‘growth down’ periods, we compare actual observations to the median so as to have an equal number of up and down observations (because we are not trying to create an investable strategy where data should be available for investors in real time, we use the full sample median). The underlying series for our growth indicator are the Chicago Fed National Activity Index (CFNAI) and the “surprise” in industrial production growth over the past year. Since there is no uniquely correct proxy way to capture “growth”; averaging may make the results more robust and signals appropriate humility. CFNAI takes this averaging idea to extremes as it combines 85 monthly indicators of U.S. economic activity. The other series – the difference between actual annual growth in industrial production and the consensus economist forecast a year earlier – is narrower but more directly captures the surprise effect in economic developments. We use median forecasts from the Survey of Professional Forecasters data as published by the Philadelphia Fed. While data surprises a priori have a zero mean, this series has exhibited a downward trend in recent decades, reflecting the (partly unexpected) relative decline of the U.S. manufacturing sector. Our inflation indicator is also an average of two normalized series. One series measures the de–trended level of inflation (CPIYOY minus its mean, divided by volatility), while the other measures the surprise element in realized inflation (CPIYOY minus consensus economist forecast a year earlier).

Investment Return Series The investment return series we study include both asset class premia and style premia. The former are long-only returns but expressed in excess returns over the Treasury bill rate. The latter are long- short returns and scaled to target or realize 10% annual volatility. We subtract no trading costs or fees, which makes a bigger difference for the long-short strategies. The asset class premia are global equities (MSCI World), global bonds (GDP-weighted average of 10-year government bonds in six countries), and an equal-weighted composite of 24 commodity futures. The market-neutral style premia (Value, Momentum, Carry and Defensive) are hypothetical long/short strategies applied in multiple asset classes: stock selection, industry allocation, country allocation in equity, fixed income and currency markets, and commodities. Each style premia strategy allocates 50/50 risk weights to stock and industry selection (SS) and asset allocation (AA) strategies. For SS we use 50/50 risk weights between stock selection within industries and across industries (to be in line with the common but arguably inefficient practice of letting across-industry positions matter as much as within-industry positions). For AA we use the same relative risk weights for asset classes as “Investing With Style” (AQR white paper, 2012, available upon request): 33% equity country allocation, 25% fixed income, 25% currencies, 17% commodities. We combine several data sources to produce a dataset long enough to capture many different macroeconomic environments: • Since 1990, we use value, momentum, carry and defensive style premia strategies as described in “Investing With Style” (AQR white paper, 2012, available upon request), except for SS carry, for which we use the dividend yield strategy returns in Ken French’s data library. • For 1972-1989, we source value and momentum style returns from “Value and Momentum Everywhere” (Journal of Finance, 2013), defensive style returns from “Betting Against Beta” (Journal of Financial Economics, 2013), and SS carry from the dividend yield strategy returns in Ken French’s data library. We construct the AA carry style premia before 1990 as well as some early histories of AA value, momentum and defensive styles using AQR in-house backtests. These backtests are similar to those described above, but over a narrower universe. While the SS style premia proxies we use since 1990 are market (beta) neutral, the value and momentum premia before 1990, and the carry premium throughout, are ‘only’ dollar-neutral and may contain moderate empirical beta exposures. The defensive style premia are beta-neutral through the whole sample (we buy larger amounts of low-risk investments than we sell high-risk investments), which means that they are actually not as defensive as the dollar-neutral quality style. (The general lesson is that we need to be precise in understanding strategy designs. Just as corporate bond positions will have very different market exposures depending on whether they are duration-hedged with Treasuries, market exposures of style premia will depend on the degree of hedging).

32 Performance Disclosures

This document has been provided to you solely for information purposes and does not constitute an offer or solicitation of an offer or any advice or recommendation to purchase any securities or other financial instruments and may not be construed as such. The factual information set forth herein has been obtained or derived from sources believed to be reliable but it is not necessarily all-inclusive and is not guaranteed as to its accuracy and is not to be regarded as a representation or warranty, express or implied, as to the information’s accuracy or completeness, nor should the attached information serve as the basis of any investment decision. This document is intended exclusively for the use of the person to whom it has been delivered and it is not to be reproduced or redistributed to any other person. This document is subject to further review and revision.

Actual performance figures contained herein reflect the reinvestment of dividends and all other earnings and represent unaudited estimates of realized and unrealized gains and losses prepared by AQR Capital Management, LLC (“AQR”). There is no guarantee as to the above information's accuracy or completeness. PAST PERFORMANCE IS NOT A GUARANTEE OF FUTURE PERFORMANCE. There is no guarantee, express or implied, that long-term return and/or volatility targets will be achieved. Realized returns and/or volatility may come in higher or lower than expected. Diversification does not eliminate the risk of experiencing investment losses.

The Drawdown Control System described herein will not always be successful at controlling a fund’s risk or limiting fund losses.

Hypothetical performance results (e.g., quantitative backtests) have many inherent limitations, some of which, but not all, are described herein. No representation is being made that any fund or account will or is likely to achieve profits or losses similar to those shown herein. In fact, there are frequently sharp differences between hypothetical performance results and the actual results subsequently realized by any particular trading program. One of the limitations of hypothetical performance results is that they are generally prepared with the benefit of hindsight. In addition, hypothetical trading does not involve financial risk, and no hypothetical trading record can completely account for the impact of financial risk in actual trading. For example, the ability to withstand losses or adhere to a particular trading program in spite of trading losses are material points which can adversely affect actual trading results. The hypothetical performance results contained herein represent the application of the quantitative models as currently in effect on the date first written above and there can be no assurance that the models will remain the same in the future or that an application of the current models in the future will produce similar results because the relevant market and economic conditions that prevailed during the hypothetical performance period will not necessarily recur. There are numerous other factors related to the markets in general or to the implementation of any specific trading program which cannot be fully accounted for in the preparation of hypothetical performance results, all of which can adversely affect actual trading results. Discounting factors may be applied to reduce suspected anomalies. This backtest’s return, for this period, may vary depending on the date it is run. Hypothetical performance results are presented for illustrative purposes only. In addition, our transaction cost assumptions utilized in backtests , where noted, are based on AQR's historical realized transaction costs and market data. Certain of the assumptions have been made for modeling purposes and are unlikely to be realized. No representation or warranty is made as to the reasonableness of the assumptions made or that all assumptions used in achieving the returns have been stated or fully considered. Changes in the assumptions may have a material impact on the hypothetical returns presented. Hypothetical performance is gross of advisory fees, net of transaction costs, and includes the reinvestment of dividends. If the expenses were reflected, the performance shown would be lower. Where noted, the hypothetical net performance data presented reflects the deduction of a model advisory fee and does not account for administrative expenses a fund or managed account may incur. Actual advisory fees for products offering this strategy may vary.

There is a risk of substantial loss associated with trading commodities, futures, options, derivatives and other financial instruments. Before trading, investors should carefully consider their financial position and risk tolerance to determine if the proposed trading style is appropriate. Investors should realize that when trading futures, commodities, options, derivatives and other financial instruments one could lose the full balance of their account. It is also possible to lose more than the initial deposit when trading derivatives or using leverage. All funds committed to such a trading strategy should be purely risk capital.

33 Performance Disclosures

AQR backtests of Value, Momentum, Carry and Defensive theoretical long/short style components are based on monthly returns, undiscounted, gross of fees and transaction costs, excess of a cash rate proxied by the Merrill Lynch 3-Month T-Bill Index, and scaled to 12% annualized volatility. Each strategy is designed to take long positions in the assets with the strongest style attributes and short positions in the assets with the weakest style attributes, while seeking to ensure the portfolio is market-neutral. The Style Premia Strategy portfolio is based on the target asset group allocations included herein, roughly equally risk weighting styles within the asset group, resulting in a style allocation of approximately 34% to Value, 34% to Momentum, 18% to Defensive and 14% to Carry. The AQR backtest of the Style Premia Strategy is based on monthly returns, excess of a cash rate proxied by the Merrill Lynch 3-Month T-Bill Index and heavily discounted to reflect uncertainty in historical costs and opportunities; targeting 12% annualized volatility. The Style and Asset Group Composites, are based on an allocation to the style components and asset group components based on their liquidity and breadth. The components are then allocated with roughly equal weighting to each of the styles within an asset group (as not all four styles are present in each asset group). Please see below for a description of the Universe selection.

Stock and Industry Selection: approximately 2,000 stocks across Europe, Japan, and U.S. Country Equity Indices: Developed Markets: Australia, Canada, Eurozone, Hong Kong, Japan, Sweden, Switzerland, U.K., U.S. Within Europe: Italy, France, Germany, Netherlands, Spain. Emerging Markets: Brazil, China, India, Israel, Malaysia, Mexico, Poland, Singapore, South Africa, South Korea, Taiwan, Thailand, Turkey. Bond Futures: Australia, Canada, Germany, Japan, U.K., U.S. Yield Curve: Australia Germany, United States. Interest Rate Futures: Australia, Canada, Europe (Euribor), U.K. and U.S. (Eurodollar). Currencies: Developed Markets: Australia, Canada, Euro, Japan, New Zealand, Norway, Sweden, Switzerland, U.K., U.S. Emerging Markets: Brazil, Hungary, India, Israel, Mexico, Poland, Singapore, South Africa, South Korea, Taiwan, Turkey. Commodity Selection: Silver, copper, gold, crude, Brent oil, natural gas, corn, soybeans.

Broad-based securities indices are unmanaged and are not subject to fees and expenses typically associated with managed accounts or investment funds. Investments cannot be made directly in an index.

The Morgan Stanley Capital International World Index is a market-capitalization-weighted index composed of company’s representative of the market structure of 23 developed market countries in North America, Europe and the Asia/Pacific Region. There are material differences between an index and the strategy. The Barclays Global Aggregate Index is a flagship measure of global investment grade debt from 23 different local currency markets. This multicurrency benchmark includes fixed-rate Treasury, government-related, corporate and securitized bonds from both developed and emerging markets issuers. There are material differences between an index and the strategy. One significant difference between the indices and the performance presented is that the index performance is weighted on the basis of capitalization whereas the strategy performance reflects a risk-weighted calculation. This difference may have a material affect on the comparison of the indices with the performance of the strategy. The S&P GSCI® is a composite index of commodity sector returns representing an unleveraged, long-only investment in commodity futures that is broadly diversified across the spectrum of commodities.

AQR Capital Management (Europe) LLP, a U.K. limited liability partnership, is authorized by the U.K. Financial Conduct Authority (“FCA”) for advising on investments (except on Pension Transfers and Pension Opt Outs), arranging (bringing about) deals in investments, dealing in investments as agent, managing a UCITS, managing an unauthorized AIF and managing investments. This material has been approved to satisfy UK FCA COBS 4.

AQR Capital Management, LLC is exempt from the requirement to hold an Australian Financial Services License under the Corporations Act 2001 (Cth). AQR Capital Management, LLC is regulated by the Securities and Exchange Commission ("SEC") under United States of America laws, which differ from Australian laws. Please note that this document has been prepared in accordance with SEC requirements and not Australian laws.

34 Performance Disclosures

AQR Capital Management, LLC Style Premia Composite 8/31/12–12/31/14 Gross return Net Return Benchmark* Number of Composite Total Firm Year % % Return % Portfolios Assets ($ M) Assets ($ M) 2012 -1.20 -1.69 0.05 1 6.76 71,122.42 2013 29.84 27.95 0.07 1 1,041.75 98,302.69 2014 13.36 11.69 0.03 1 3,038.15 122,655.99 * Merrill Lynch 3-Month Treasury Bill Index

This presentation cannot be used in a general solicitation or general advertising to offer or sell interest in its Funds. As such, this information cannot be included in any advertisement, article, notice or other communication published in any newspaper, magazine, or similar media or broadcast over television or radio; and cannot be used in any seminar or meeting whose attendees have been invited by any general solicitation or general advertising.

Firm Information:

AQR is a Connecticut based investment advisor registered with the Securities and Exchange Commission under the Investment Advisors Act of 1940. AQR conducts trading and investment activities, specializing in global asset allocation and global stock selection involving a broad range of instruments, including, but not limited to, individual equity and debt securities, currencies, futures, commodities, fixed income products and other derivative securities. For purposes of Firm wide compliance and Firm wide total assets, AQR defines the “Firm” as entities controlled by or under common control with AQR (including voting power). The Firm is comprised of AQR, CNH Partners, LLC (“CNH”), AQR Re Ltd. (AQR Re) and AQR Funds.

Upon request AQR will make available a complete list and description of all of Firm composites, as well as additional information regarding the policies for valuing portfolios, calculating performance, and preparing compliant presentations.

Past performance is not an indication of future performance.

Fees: Returns are calculated net of all withholding taxes on foreign dividends. Accruals for fixed income and equity securities are included in calculations. Gross of fees returns are calculated net of transaction costs and gross of operating expenses. Operating expenses may include, but are not limited to Management, Custodial, Administrative, and legal fees. Additional information regarding fees and the calculation of Gross and Net performance is available upon request. AQR’s management or advisory fees are described in Part 2A of its Form ADV. In addition, AQR funds may have a redemption charge of 2% based on gross redemption proceeds that may be charged upon early withdrawals. Consultants supplied with gross results are to use this data in accordance with SEC, CFTC and NFA guidelines.

AQR’s asset based fees for portfolios within the composite may range up to 1.50% of assets under management, and are generally billed monthly or quarterly at the commencement of the calendar month or quarter during which AQR will perform the services to which the fees relate.

35 Performance Disclosures

Composite Characteristics: The Style Premia Composite (The Composite) was created September 1st, 2012. The Composite's strategy seeks to deliver efficient exposure to a well-diversified portfolio of long-short style strategies across six asset group contexts including Stock and Industry Selection, Equity Indices, Bonds, Interest Rates, Currencies, and Commodities. AQR pursues these goals by investing in instruments not limited to Stocks, Futures, Swaps, and Currency Forwards. The Composite's strategy targets the highest ex ante volatility relative to all of the Firm's Style Premia Composites. The Composite is denominated in USD. The composite benchmark is the Merrill Lynch 3 Month Treasury Bill Index. The index measures the rate of return an investor would realize when purchasing a single US 3 month treasury bill, holding it for one month, selling it, and rolling it into a newly selected issue at the beginning of the next month. The investments in the Composite vary substantially from those in the Benchmark. The index has not been selected to represent an appropriate benchmark to compare an investor’s performance, but rather is disclosed to allow for comparison of the investor’s performance to that of a certain well-known and widely recognized index. Where applicable, the Master account is considered in lieu of its full volatility feeders because said feeders are one hundred percent invested in the Master Account.

Composite Net of fee performance results are calculated by deducting from the gross Composite monthly return the maximum management or advisory fee charged by AQR to a new portfolio in the composite. The standard model management fee per annum for this Composite is 1.50%. Composite assets may have been exposed to the impact of performance fees.

Composites will exclude terminated portfolios after the last full calendar month performance measurement period that the assets were under management. The Composite will continue to include the performance results for all periods prior to termination. New accounts that fit the composite definition are added at the start of the first full calendar month after the assets come under management, or after it is deemed that the investment decisions made by the investment advisor fully reflect the intended investment strategy of the portfolio.

In March of 2015 AQR removed its significant cash flow policy. Additional information on this decision is available upon request.

Calculation Methodology: Individual portfolios are revalued monthly or intra-month when cash flows occur. Gross of fees returns are calculated gross of management, administrative and custodial fees and net of transaction costs. Composite returns are asset-weighted based on the constituents’ month beginning asset value. The firm links returns geometrically to produce an accurate time-weighted rate of return. The dispersion measure is the equal-weighted standard deviation of accounts in the composite for the entire year. Dispersion is not considered meaningful for periods shorter than one year or for periods during which the composite contains five or fewer accounts for the full period. The three-year annualized ex-post standard deviation measure is inapplicable when 36 monthly returns are not available.

Other Disclosures: AQR claims compliance with the Global Investment Performance Standards (GIPS) and has prepared and presented this report in compliance with the GIPS standards. AQR has been independently verified for the period August 1998 through December 2014. Verification assesses whether (1) the firm has complied with all the composite construction requirements of the GIPS standards on a firm-wide basis and (2) the firm’s policies and procedures are designed to calculate and present performance in compliance with the GIPS standards. The Style Premia Composite has been examined for the periods from its inception through December 31, 2014. The Verification and performance examination reports are available upon request.

Benchmark returns are not covered by the report of independent verifiers.

AQR may engage in leveraged, derivative, and short positions in order to meet its performance objectives. The use of these positions may have a material impact on performance results. Additionally, there may be subjective unobservable inputs used in the valuation of certain financial instruments utilized by certain AQR managed investment vehicles. The risks inherent to the strategies employed by accounts included are set forth in the applicable offering documents and other information provided to potential subscribers, from where more detailed information regarding the extent to which leverage, derivatives, and short positions can be obtained. These are available on request, if not provided along with this presentation itself.

36

P/E Investments Presentation to San Joaquin County Employees Retirement Association

March 25, 2016 For Investment Professional Use Only P/E Investments 75 State Street, 31st Floor, Boston, MA 02109 Tel (617) 933-4500 Fax (617) 933-4505 [email protected] PURSUANT TO AN EXEMPTION FROM THE COMMODITY FUTURES TRADING COMMISSION IN CONNECTION WITH ACCOUNTS OF QUALIFIED ELIGIBLE PERSONS, THIS BROCHURE OR ACCOUNT DOCUMENT IS NOT REQUIRED TO BE, AND HAS NOT BEEN, FILED WITH THE COMMISSION. THE COMMODITY FUTURES TRADING COMMISSION DOES NOT PASS UPON THE MERITS OF PARTICIPATING IN A TRADING PROGRAM OR UPON THE ADEQUACY OR ACCURACY OF COMMODITY TRADING ADVISOR DISCLOSURE. CONSEQUENTLY, THE COMMODITY FUTURES TRADING COMMISSION HAS NOT REVIEWED OR APPROVED THIS TRADING PROGRAM OR THIS BROCHURE OR ACCOUNT DOCUMENT. Prepared and issued by P/E Investments, LLC (P/E Investments), a commodity trading advisor registered pursuant to the US Commodity Exchange Act and a member of the National Futures Association in such capacities. All opinions and estimates included in this report constitute P/E Investments' judgment as of the date of publication and are subject to change without notice. While the information in this report has been obtained from sources, which we believe to be reliable, we do not guarantee its accuracy and, as such, the information may be incomplete or condensed. Any reliance you may place on this information or the validity of our opinion is at your own risk.

P/E Investments Under no circumstances is this report to be used or considered as an offer to sell, or a solicitation of any offer to buy any security. Any such offering may be made only by means of an offering memorandum and subscription agreement or an advisory agreement that will be furnished to prospective investors who express further interest in the FX Strategy or the Diversified Global Macro Strategy (“The Strategies”). Each potential investor is advised to review the offering memorandum and subscription agreement of the relevant investment product, and consult with his/her own advisors regarding the suitability of an investment in the relevant investment product by such potential investor. The material presented herein is in summary form, is incomplete and should not be relied upon as being complete. An investment in The Strategies is speculative and involves a high degree of risk. The Strategies’ performance can be volatile, and there can be no assurance that The Strategies will achieve its investment objectives. While an investment in The Strategies may result in profits, it may also result in losses-investors may lose all or a substantial amount of their investment. The Strategies’ investment adviser has total trading authority over The Strategies and the use of a single adviser could result in a lack of diversification and thus higher risk. There is no secondary market for investors' interest in an investment product using The Strategies, and none is expected to develop. Even though The Strategies generally provides daily liquidity, there are restrictions on transferring interests in an investment product using The Strategies, and the investment product using The Strategies may suspend the right of redemption under certain circumstances. While an investment product using The Strategies provides periodic performance reports and annual audited financial statements, the investment product using The Strategies is not otherwise required to provide periodic pricing or valuation information to investors. An investment in The Strategies may involve complex tax structures and delays in distributing important tax information. An investment product using The Strategies charges higher fees than many mutual funds but is not subject to the same regulatory requirements. Fees and expenses may offset The Strategies’ trading profits.

PAST RESULTS ARE NOT NECESSARILY INDICATIVE OF FUTURE RESULTS. PURSUANT TO AN EXEMPTION FROM THE COMMODITY FUTURES TRADING COMMISSION IN CONNECTION WITH ACCOUNTS OF QUALIFIED ELIGIBLE PERSONS, THIS BROCHURE OR ACCOUNT DOCUMENT IS NOT REQUIRED TO BE, AND HAS NOT BEEN, FILED WITH THE COMMISSION. THE COMMODITY FUTURES TRADING COMMISSION DOES NOT PASS UPON THE MERITS OF PARTICIPATING IN A TRADING PROGRAM OR UPON THE ADEQUACY OR ACCURACY OF COMMODITY TRADING ADVISOR DISCLOSURE. CONSEQUENTLY, THE COMMODITY FUTURES TRADING COMMISSION HAS NOT REVIEWED OR APPROVED THIS TRADING PROGRAM OR THIS BROCHURE OR ACCOUNT DOCUMENT.

Performance of the FX Strategy for the period from October 1, 2003 to present is calculated based on the gross performance of an asset weighted composite of futures based U.S. Dollar denominated accounts invested in this strategy and managed by P/E Investments. Conservative accounts of less than $1.5 million are excluded from multiple account composites. Conservative positions are calculated by multiplying the standard positions of such strategy by 50%. Aggressive positions are calculated by multiplying the standard positions of such strategy by 150%. FX Standard data included herein (i) include 1 month LIBOR interest (calculated based on a 30 day period for each month, 360 days each year and the London Interbank setting), (ii) are net of a 2% per annum (i.e., 0.17% per month) management fee and 20% performance fee (calculated based on net income which is net of the 2% per annum management fee and the elimination of any net income and the carry forward of any net loss at the end of the preceding crystallization period; accrued monthly and crystallized annually) and (iii) represent reinvestment of income. FX Conservative data included herein (i) include 1 month LIBOR interest (calculated based on a 30 day period for each month, 360 days each year and the London Interbank setting), (ii) are net of a 1% per annum (i.e., 0.083% per month) management fee and 20% performance fee (calculated based on net income which is net of the 1% per annum management fee and the elimination of any net income and the carry forward of any net loss at the end of the preceding crystallization period; accrued monthly and crystallized annually) and (iii) represent reinvestment of income. FX Aggressive data included herein (i) include 1 month LIBOR interest (calculated based on a 30 day period for each month, 360 days each year and the London Interbank setting), (ii) are net of a 2.25% per annum (i.e., 0.1875% per month) management fee and 20% performance fee (calculated based on net income which is net of the 2.25% per annum management fee and the elimination of any net income and the carry forward of any net loss at the end of the preceding crystallization period; accrued monthly and crystallized annually) and (iii) represent reinvestment of income. FX Low Volatility data included herein (i) include 1 month LIBOR interest (calculated based on a 30 day period for each month, 360 days each year and the London Interbank setting), (ii) are net of a 0.50% per annum (i.e., 0.0416% per month) management fee and 20% performance fee (calculated based on net income which is net of the 0.50% per annum management fee and the elimination of any net income and the carry forward of any net loss at the end of the preceding crystallization period; accrued monthly and crystallized annually) and (iii) represent reinvestment of income. Fees will differ among investors because the “high water mark” used to calculate each investor’s performance fees may differ depending upon time of investment. For fund investments, additional fees for administration, audit and legal expenses are applicable. As a result of the PFG bankruptcy proceeding and related actions in July of 2012, seven client managed accounts were not fully under the control of the CTA and therefore were excluded in whole or in part from the monthly performance calculation. The notional trading value of these accounts was $13.25 million or 0.4% of the total AUM of the FX Strategy as of July 9, 2012.

Performance of the Diversified Global Macro Strategy for the period from January 1, 2014 to present is calculated based on the gross performance of an asset weighted composite of futures based U.S. Dollar denominated accounts invested in this strategy and managed by P/E Investments. Standard positions are caculated by multiplying Conservative positions of such strategy by 200%. Diversified Global Macro Standard data included herein (i) include 1 month LIBOR interest (calculated based on a 30 day period for each month, 360 days each year and the London Interbank setting), (ii) are net of a 2% per annum (i.e., 0.17% per month) management fee and 20% performance fee (calculated based on net income which is net of the 2% per annum management fee and the elimination of any net income and the carry forward of any net loss at the end of the preceding crystallization period; accrued monthly and crystallized annually) and (iii) represent reinvestment of income. Diversified Global Macro Conservative data included herein (i) include 1 month LIBOR interest (calculated based on a 30 day period for each month, 360 days each year and the London Interbank setting), (ii) are net of a 1% per annum (i.e., 0.083% per month) management fee and 20% performance fee (calculated based on net income which is net of the 1% per annum management fee and the elimination of any net income and the carry forward of any net loss at the end of the preceding crystallization period; accrued monthly and crystallized annually) and (iii) represent reinvestment of income. Fees will differ among investors because the “high water mark” used to calculate each investor’s performance fees may differ depending upon time of investment. For fund investments, additional fees for administration, audit and legal expenses are applicable. Accompanying notes continue on following page. Comparison with Indices: S&P 500 - The S&P 500 Index, as adjusted to reflect reinvestment of dividends, is an unmanaged index of 500 stocks and sets forth the performance of a well-known, broad-based stock market index. The statistical data regarding the S&P 500 Index has been obtained from Bloomberg. The investment advisor believes that the comparison of the FX Strategy's performance to the S&P 500 Index or any other market indices is inappropriate. The S&P 500 Index contains 500 industrial, transportation, utility and financial companies and is generally representative of the large capitalization U.S. Stock market. The investment advisor believes that the comparison of the FX Strategy's performance to a single market index like the S&P 500 is inappropriate because such indices represent only unmanaged results of long investment in equities. By contrast, the FX Strategy's portfolio may contain futures on foreign exchange investments. The portfolios that comprise the S&P 500 Index, or any other market indices, are broadly diversified and engage in a variety of investment strategies, while the FX Strategy's portfolio is not as diversified and pursues an investment strategy that may be substantially different from many or most of the portfolios comprising any of the indices. Accordingly, the investment advisor cautions potential investors that none of these indices, nor any other index of which the investment advisor is aware, are directly comparable to the results of the FX Strategy. Credit Suisse Hedge Fund Index - an asset-weighted hedge fund index which tracks approximately 9,000 funds with a minimum of US$50 million under management, a 12-month track record, and audited financial statements and reflects performance net of all hedge fund component performance fees and expenses. Credit Suisse Global Macro Hedge Fund Index - a subset of the Credit Suisse Hedge Fund Index that measures the aggregate performance of global macro funds. Global macro funds employ a top-down global approach to concentrate on forecasting how political trends and global macroeconomic events affect the valuation of financial instruments. Credit Suisse Managed Futures Hedge Fund Index - a subset of the Credit Suisse Hedge Fund Index that measures the aggregate performance of managed futures funds. MSCI Total Return All Country Ex-U.S. Index - The MSCI ACWI Index is a free float-adjusted market capitalization weighted index that is designed to measure the equity market performance of developed and emerging markets, excluding the United States. The MSCI Total Return Indexes measure the price performance of markets with the income from constituent dividend payments. Barclay’s Global Aggregate Bond Index - The Barclays Global Aggregate Bond Index is a flagship measure of global investment grade debt from twenty-four different local currency markets. This multi-currency benchmark includes fixed-rate treasury, government-related, corporate and securitized bonds from both developed and emerging markets issuers. The Global Aggregate Bond Index is largely comprised of three major regional aggregate components: the US Aggregate (USD300mn), the Pan-European Aggregate, and the Asian-Pacific Aggregate Index. In addition to securities from these three benchmarks, the Global Aggregate Bond Index also includes investment grade Eurodollar, Euro-Yen, Canadian, and 144A Index-eligible securities not already in the three regional aggregate indices. A component of the Multiverse Index, the Global Aggregate Bond Index was created in 2000, with index history backfilled to January 1, 1990.

Comparison with Funds: Bridgewater Pure Alpha Strategy Net Performance Disclosure: The performance history provided is based on actual Bridgewater Pure Alpha accounts. Returns since the strategy's inception in Dec. 1991 through Apr. 1999 are based on the actual performance of a partially funded account (where interest income has been removed to arrive at the excess returns), and are adjusted to include the imputed interest return on the full notional value using the US repo rate. Net of fee returns have been calculated using the standard Pure Alpha fee schedule, which is higher than the fees actually charged to the account. Returns after April 1999 are the actual net returns of the longest running fully funded Pure Alpha account with a target tracking error of 12%, a United States cash benchmark, and fully unconstrained active management guidelines. These returns reflect all fees (which are at the Pure Alpha standard rates), expenses, and interest actually charged or credited to the account. Bridgewater manages additional Pure Alpha portfolios not included in this performance history. The performance provided includes the reinvestment of all interest, gains, and losses.

Information Ratio - a measure of risk adjusted active return. The information ratio is similar to the Sharpe Ratio but, whereas the Sharpe ratio is the 'excess' return of an asset over the return of a risk free asset divided by the variability or standard deviation of returns, the information ratio is the 'active' return divided by the standard deviation of the 'active' return.

Prepared and issued by P/E Investments, LLC, a commodity trading advisor registered pursuant to the U.S. Commodity Exchange Act and a member of the National Futures Association in such capacities. All opinions and estimates included in this report constitute P/E Investments' judgment as of the date of publication and are subject to change without notice. While the information in this report has been obtained from sources, which we believe to be reliable, we do not guarantee its accuracy and, as such, the information may be incomplete or condensed. Any reliance you may place on this information or the validity of our opinion is at your own risk. P/E Investments is remunerated for its services by the funds it manages or by the investors in its strategies. These fee arrangements may differ from fund to fund or account to account.

P/E Investments claims GIPS Compliance for the period 1/1/2011 - 12/31/2015. All other information should be considered supplemental to the GIPS-Compliant Presentation. Introduction to P/E Investments Agenda This document serves as an introduction to P/E Investments and provides an overview of our core strategies.

P/E Investments - Who are we?

Our team of professionals offers extensive experience in portfolio management, asset allocation, market analysis, and risk management. Founded in 1995, we manage assets for individual and institutional investors worldwide.

The Diversi ed Global Macro Strategy overview

The Diversified Global Macro Strategy offers the opportunity to generate strong risk-adjusted returns by investing globally on a long/short basis. More specifically, the DGM Standard Strategy seeks to generate 16% annualized net returns, over a rolling three year period, with risk similar to U.S. equities. The DGM Strategy stands on the foundation of our flagship FX Strategy, which was launched in 2003.

Strategy performance

Since inception in 2014, the DGM Strategy has earned average annual net returns of over 28%, with low correlations to a variety of asset classes. With a longer-term track record, the FX Strategy has also delivered strong returns and exhibited very low correlations to equities, fixed income, and trend-following strategies.

2 P/E Investments P/E Investments - Who Are We? Founded in 1995 and headquartered in Boston, MA, P/E Investments serves individual and institutional investors worldwide.

Assets Under Management

As of February 1, 2016, the firm managed approximately $4.7 Billion.

Assets under management have increased by approximately $1.7 Billion since January 1, 2014, and by approximately $2.7 Billion since January 1, 2011.

Client Mix Offering both fund vehicles and tailored managed accounts, we serve a variety of institutional investors.

100% = $4.7B

Fund of Funds 5% Pensions, Foundations, & Endowments 65% 30% Private Wealth

3 P/E Investments P/E Investments - Who Are We? P/E Investments leverages extensive investment experience. Mr. Naphtal serves as Chief Investment Officer; while, Dr. Zecher was a founding partner, and currently serves as Chairman of the firm’s Advisory Board.

Warren S. Naphtal

• Co-founded P/E Investments in 1995 and currently serves as Chief Investment Officer. • Served as Senior Vice President and Head of Derivative Strategies at Putnam Investments, managing $3.5 Billion, 1993-1995. • Lead Global Risk Management, Foreign Exchange Trading, and Proprietary Trading areas, as a Managing Director at Continental Bank, managing over $2.5 Billion of alternative products, 1987-1993. • Managed options portfolios at O'Connor & Associates, a pioneer in options trading and risk management, 1985-1986. • Earned B.S., University of California, Berkeley, and S.M., Sloan School, Massachusetts Institute of Technology.

J. Richard Zecher, Ph.D.

• Co-founded P/E Investments in 1995 and currently serves as Chairman of the firm’s Advisory Board. • Served as President and CEO of UBS Asset Management, Inc., and of its predecessor, Chase Investors Management Corporation, managing $35 Billion, 1988-1996. • Held various positions at Chase Manhattan Bank, N.A., including Treasurer, Global Risk Manager, and Chief Economist, 1981-1988. • Served as Director of the Chicago Board Options Exchange, 1979-1997. • Past academic positions held: Dean of the Business College at the University of Iowa, Chairman of Economics at Tulane University and Professor at the University of Chicago. • Policy positions held: Chief Economist at the U.S. Securities & Exchange Commission, and Senior Economist at the Council of Economic Advisors to the President. • Earned B.A., Ohio State University, M.A., University of Delaware, and Ph.D., Ohio State University.

4 P/E Investments P/E Investments - Who Are We? Ms. Stephens Naphtal serves as Chief Operating Officer; while Mr. Biner directs Marketing and Client Service.

Mary Stephens Naphtal

• Co-founded P/E Investments in 1995 and currently serves as Chief Operating Officer, as well as Manager of P/E Strategic. • Provided strategic and operational advice to major corporations from 1991 - 1995. • Served as management consultant at McKinsey & Company from 1986 - 1991. Advised U.S. and European clients in multiple industries including Financial Institutions, Electronics, Media, Consumer Goods and Industrial Manufacturing. • Participated in corporate finance and M&A transactions as an associate at Morgan Stanley & Co. in 1985. • Served as Client Manager at Harper and Schuman, a financial software concern, from 1981 - 1984. • Earned B.A., magna cum laude, The Colorado College, and S.M., Sloan School, Massachusetts Institute of Technology.

Henry Biner

• Joined P/E Investments in 2004 and currently leads marketing and client service. • Gained expertise in U.S. markets with Thornton Capital and Merrill Lynch, 1999 - 2004. • Served as CEO of CreInvest AG, a publicly traded fund of hedge funds, affiliated with Julius Baer. Responsible for product management, regulatory reporting, and public relations. • Developed the Alternative Fund-Growth Programme for UBS Fund Management Company, 1998. • Launched the Leu Prima Global Fund for Bank Leu, a subsidiary of Credit Suisse, in 1997. • Earned B.A., Webster University in Geneva, and MBA, University of Southern California.

5 P/E Investments Agenda:

Who are we? Diversified Global Macro Strategy overview Strategy performance

6 P/E Investments Diversi ed Global Macro Strategy Overview Approach At P/E Investments we believe that effective diversification, thorough analysis, and consistent risk management lead to superior investment performance.

Key Elements of the P/E Investments Approach

Diversi cation +Analysis + Risk Management Performance

Invest globally Conduct extensive Quantify and monitor across liquid quantitative analysis. market risk. markets. - Macroeconomic - Value at Risk fundamentals - Margin/Equity Incorporate multiple - Technical trends investment styles. - Stochastic models Minimize liquidity and credit risk by trading Include qualitative highly liquid securities. perspectives based on significant Ensure transparency experience in global to investors via com- markets. prehensive and timely reporting.

7 P/E Investments Diversi ed Global Macro Strategy Overview Approach The Diversified Global Macro Strategy is based on stochastic analysis of macroeconomic, financial, and technical factors. The Strategy employs drivers specific to foreign exchange, bond, and equity markets to predict returns and volatilities for each asset. Then, it optimizes potential investments based on risk/return tradeoffs in each asset class. Overview of the Diversi ed Global Macro Strategy

Track Macroeconomic, Financial, Predict Returns and Volatilities Optimize Based on Risk/Return and Technical Factors in Liquid Markets Tradeoff, Produce Target Positions

FX Strategy FX Strategy Yield Returns Customized mean-variance - Bayesian forecast system optimization based on predicted Risk estimates sensitivity to returns/volatilities. each factor at each time Capital flows step. Portfolio exposures to 14 - Expected returns are foreign exchange futures. equal to the posterior factor sensitivity multiplied by the current factor level. Global Bond Strategy Global Bond Strategy

Yield Volatilities Customized mean-variance - Forecasted returns are optimization based on predicted Risk compared to actual returns/volatilities. returns at each time step Capital flows to determine forecast Portfolio exposures to 4 error. sovereign bond futures. - Garch process is applied to forecast error, Global Equity Strategy generating volatility Global Equity Strategy predictions Yield Customized mean-variance optimization based on predicted Risk returns/volatilities.

Capital flows Portfolio exposures to 6 global equity index futures.

8 P/E Investments Diversi ed Global Macro Strategy Overview Approach Specific factors are tailored for each asset class. Overview of Macroeconomic, Financial, and Technical Factors

FX Strategy Global Bond Strategy Global Equity Strategy

Short-term rates Short-term rates Short-term rates Yield Long-term rates Long-term rates Long-term rates Yield curve characteristics Yield curve characteristics Yield curve characteristics

Liquidity conditions Liquidity conditions Equity valuations - Corporate credit spreads - Corporate credit spreads Corporate bond behavior - Emerging market spreads - Emerging market spreads - EU sovereign bond spreads - Volatility of currencies Relative performance of - Volatility of currencies stocks Long rate movement and Risk Long rate movement and acceleration Investor sentiment acceleration Investor sentiment Inflation, commodity price changes Investor sentiment

Cross border investments Cross market price Advance/Decline relationships Speculative positions High/Low Capital ows Momentum Volume

9 P/E Investments Diversi ed Global Macro Strategy Overview Approach Investor focus changes over time. The Bayesian approach allows us to update what we used to know with what we just learned. As a result, the weightings of specific factors change over time.

Relative Importance of Key Factors Illustrative Focus on FX

Inflation Rate acceleration

Rate movement Liquidity conditions

Yield curve characteristics

Rates

Period A Period B Period C

10 P/E Investments Diversi ed Global Macro Strategy Overview Approach Specifically, we note periods of dominance for each FX Strategy factor over the past twenty years.

Factor Signi cance Currency Weights Latest 20 Years

11 P/E Investments Diversi ed Global Macro Strategy Overview Approach The relative significance of Global Bond factors evolves over time.

Factor Signi cance Global Bond Weights Latest 20 Years

12 P/E Investments Diversi ed Global Macro Strategy Overview Approach In the Global Equity space, we note periods of dominance for yield, risk, and market dynamics factors.

Factor Signi cance Global Equity Weights Latest 20 Years

13 P/E Investments Diversi ed Global Macro Strategy Overview Approach The Bayesian approach also facilitates risk allocation across asset classes based on relative opportunity over time.

Marginal Contribution to Risk Across Asset Classes Over Time

Illustrative

Global Equities

Global Bonds

FX

Period A Period B Period C

14 P/E Investments Diversi ed Global Macro Strategy Overview Approach As illustrated in the bottom left chart, we use these factors to forecast returns. We then compare our forecasts to actual returns to generate standard deviations. Finally, we construct an optimized portfolio, as illustrated in the top left chart.

Target Allocation

Allocation and Risk Analysis Pred. Return 23.6% Diversified Global Macro Strategy Pred. Volatility 14.2% Illustrative Date Illustrative Pred. Information Ratio 1.66

Allocations Marginal Contribution to Return Marginal Contribution to Risk FX Bond Equity Total FX Bond Equity Total FX Bond Equity Total AUD -20.7% -20.7% AUD 2.2% 2.2% AUD 1.2% 1.2% CAD -7.3% -7.3% CAD 0.4% 0.4% CAD 0.2% 0.2% CHF 0.0% 0.0% CHF 0.0% 0.0% CHF 0.0% 0.0% CZK -1.7% -1.7% CZK 0.2% 0.2% CZK 0.1% 0.1% EUR -82.0% -82.0% EUR 8.5% 8.5% EUR 6.1% 6.1% GBP -3.3% -3.3% GBP 0.2% 0.2% GBP 0.1% 0.1% JPY -1.0% -1.0% JPY 0.0% 0.0% JPY 0.1% 0.1% MXN -1.0% -1.0% MXN 0.0% 0.0% MXN 0.0% 0.0% NOK -3.9% -3.9% NOK 0.4% 0.4% NOK 0.3% 0.3% PLN -1.0% -1.0% PLN 0.1% 0.1% PLN 0.1% 0.1% SEK -0.8% -0.8% SEK 0.1% 0.1% SEK 0.1% 0.1% NZD -3.0% -3.0% NZD 0.3% 0.3% NZD 0.2% 0.2% ZAR -0.4% -0.4% ZAR 0.0% 0.0% ZAR 0.0% 0.0% BRL -0.7% -0.7% BRL 0.1% 0.1% BRL 0.0% 0.0% US10YR 0.7% 0.7% US10YR 0.0% 0.0% US10YR 0.0% 0.0% CAN10YR -66.7% -66.7% CAN10YR 3.4% 3.4% CAN10YR 2.4% 2.4% BUND -63.3% -63.3% BUND 3.7% 3.7% BUND 2.0% 2.0% GILT 1.3% 1.3% GILT 0.0% 0.0% GILT -0.1% -0.1% UKX -0.3% -0.3% UKX 0.0% 0.0% UKX 0.0% 0.0% SPX -4.0% -4.0% SPX 0.1% 0.1% SPX 0.0% 0.0% DAX -0.2% -0.2% DAX 0.0% 0.0% DAX 0.0% 0.0% SHASHR -16.7% -16.7% SHASHR 3.4% 3.4% SHASHR 1.1% 1.1% AS51 -0.2% -0.2% AS51 0.0% 0.0% AS51 0.0% 0.0% NKY 6.7% 6.7% NKY 0.5% 0.5% NKY 0.3% 0.3% Europe -92.6% -62.0% -0.6% -155.2% Europe 9.5% 3.7% 0.0% 13.3% Europe 6.8% 1.9% 0.0% 8.7% Americas -9.0% -66.0% -4.0% -79.0% Americas 0.5% 3.4% 0.1% 4.0% Americas 0.2% 2.3% 0.0% 2.6% Asia|Pac -24.7% 0.0% -10.2% -34.8% Asia|Pac 2.5% 0.0% 3.8% 6.3% Asia|Pac 1.4% 0.0% 1.4% 2.9% Total -126.7% -128.0% -14.8% -269.4% Total 12.5% 7.1% 4.0% 23.6% Total 8.5% 4.3% 1.4% 14.2%

Expected Return Forecast Volatility Forecast FX Bond Equity FX Bond Equity AUD -10.5% AUD 10.0% CAD -5.6% CAD 8.4% CHF 0.0% CHF 12.0% CZK -10.2% CZK 13.5% EUR -10.4% EUR 8.0% GBP -6.9% GBP 9.6% JPY -4.3% JPY 8.3% MXN -1.9% MXN 13.1% NOK -11.2% NOK 10.7% PLN -9.8% PLN 10.3% SEK -9.8% SEK 10.9% NZD -8.4% NZD 12.6% ZAR -7.7% ZAR 13.7% BRL -7.8% BRL 17.7% US10YR -3.5% US10YR 7.3% CAN10YR -5.1% CAN10YR 6.8% BUND -5.9% BUND 8.4% GILT 0.2% GILT 7.9% UKX -1.1% UKX 24.4% SPX -3.2% SPX 26.0% DAX -0.1% DAX 28.6% SHASHR -20.1% SHASHR 39.5% AS51 -0.1% AS51 26.7% NKY 7.4% NKY 36.3% 15 P/E Investments Diversi ed Global Macro Strategy Overview Risk Management At P/E Investments, we take a systematic approach to risk management. We manage market risk with sophisticated statistical analyses, employing proprietary software. We limit credit risk by investing in liquid investments.

Overview of Risk Analysis and Standards

Market risk - conduct value-at-risk analyses daily.

Credit risk - invest in liquid investments.

Liquidity risk - seek to provide one day liquidity.

Operational risk - daily third-party review.

16 P/E Investments Agenda:

Who are we? Diversified Global Macro Strategy overview Strategy performance

17 P/E Investments Strategy Performance DGM Strategy Objectives and Performance The Diversified Global Macro Strategy was launched on January 1, 2014, with an objective of average annual net returns of 16% over a rolling three year period. As of January 31, 2016, the Strategy has earned average annual net returns of 28.79%.

Diversi ed Global Macro Strategic Objectives

Returns targeted at 16% annualized over a rolling three year period.

Risk managed to a target 16% annual standard deviation.

Diversification across major global government fixed income, equity index, and foreign exchange markets.

Low credit and liquidity risk.

Transparency available to investors.

Diversi ed Global Macro Strategy Performance* (Net of fees, 1/1/14 - 1/31/16) Monthly Returns Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec 2016 6.97% 2015 1.58% 2.19% 4.92% -2.75% 2.09% -1.79% 3.49% -3.53% -1.38% 1.31% 5.43% -8.57% 2014 10.54% -7.27% -1.08% -0.31% 5.03% -1.88% 7.57% 3.34% 8.67% 3.93% 7.51% 10.29% Quarterly Returns Q1 Q2 Q3 Q4 Annual Returns QTD 2016 6.97% 2016 6.97%YTD 2015 8.91% -2.49% -1.54% -2.35% 2015 2.11% 2014 1.41% 2.74% 20.81% 23.24% 2014 55.11%

* Net of fees. See accompanying notes at the beginning of the presentation. P/E Investments began trading the Diversified Global Macro Strategy 1/1/2014. Past results are not necessarily indicative of future results. 18 P/E Investments Strategy Performance FX Strategy Performance The Diversified Global Macro Strategy stands on the foundation of P/E Investments’ core product, the FX Strategy. Launched in October of 2003, the FX Strategy has an annual average net return of 9.36% as of January 31, 2016. FX Strategy Performance* (Net of fees, 10/1/03 - 1/31/16) Monthly Returns Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec 2016 1.70% 2015 4.82% 1.78% 8.19% -8.51% 3.63% -2.20% 3.80% -3.63% 0.60% 1.75% 7.03% -6.43% 2014 5.23% -7.06% -0.98% -1.55% 3.08% -2.01% 6.18% 4.24% 11.16% 0.96% 3.32% 5.87% 2013 -3.41% 6.96% 0.28% -5.10% 7.78% 1.81% -5.29% 1.03% -6.00% -2.29% 0.79% -2.82% 2012 -3.33% 2.43% 2.82% -1.85% 7.22% -4.85% -0.57% -0.03% -3.68% -1.37% -1.89% -2.32% 2011 -2.25% 2.24% -0.42% 0.96% -1.23% -4.01% -4.39% 1.04% 10.39% -4.97% 1.16% 2.67% 2010 -2.15% 0.87% 5.40% 1.60% -3.46% -1.37% 2.35% -4.33% 4.02% 1.85% -2.62% 4.50% 2009 -2.20% 1.11% 3.83% 1.66% 4.06% -1.44% 2.48% -1.08% 1.06% -0.20% -0.73% 4.21% 2008 -0.45% 1.61% -1.51% 5.20% 2.13% 0.32% 3.02% 4.77% 1.52% 2.14% -2.27% 0.57% 2007 4.17% -1.36% -4.73% 2.15% -1.34% 2.85% 1.32% -1.80% -0.18% 2.59% -2.22% -0.71% 2006 0.30% -0.83% -2.67% -4.47% -4.07% 0.94% 1.55% 5.08% -0.89% 6.12% 1.87% 6.75% 2005 1.98% 3.52% -1.64% 3.82% 0.62% 4.55% -0.54% -3.85% 7.49% 3.63% 2.34% -4.20% 2004 5.00% 2.64% 1.01% -4.49% 1.48% -2.87% 3.08% -4.31% 2.89% -0.55% 3.18% 2.06% 2003 Quarterly Returns 10.26% 3.12% 5.09% Q1 Q2 Q3 Q4 Annual Returns 2016 1.70%QTD 2016 1.70%YTD 2015 15.43% -7.27% 0.63% 1.90% 2015 9.76% 2014 -3.16% -0.56% 23.03% 10.43% 2014 30.84% 2013 3.60% 4.14% -10.06% -4.29% 2013 -7.13% 2012 1.81% 0.13% -4.25% -5.48% 2012 -7.74% 2011 -0.48% -4.28% 6.64% -1.30% 2011 0.27% 2010 4.03% -3.27% 1.85% 3.64% 2010 6.23% 2009 2.67% 4.26% 2.45% 3.24% 2009 13.22% 2008 -0.38% 7.79% 9.57% 0.40% 2008 18.12% 2007 -2.11% 3.66% -0.68% -0.40% 2007 0.38% 2006 -3.18% -7.49% 5.76% 15.39% 2006 9.30% 2005 3.84% 9.21% 2.80% 1.60% 2005 18.45% 2004 8.87% -5.86% 1.48% 4.73% 2004 8.93% 2003 19.48%** 2003 19.48%** * Net of Fees. See accompanying notes at the beginning of the presentation. P/E Investments ** P/E Investments began trading the FX Strategy 10/1/2003. 19 Past results are not necessarily indicative of future results. Strategy Performance Relative FX Strategy Performance The FX Strategy has performed well relative to, and exhibited low correlations to, a variety of investment alternatives.

Relative Performance of the FX Strategy (Net of Fees)* (10/1/03 - 1/31/16)

Average Annual Annualized Return Volatility Information Ratio Correlation

FX Strategy 9.36% 12.78% 0.73 1.00

10 Year US Government 6.95% 11.03% 0.63 0.05 Note

Credit Suisse Managed Futures 4.46% 11.09% 0.40 0.23 Hedge Fund Index**

S&P 500 7.74% 14.09% 0.55 0.06

* See accompanying notes at the beginning of the presentation. ** Correlation to Credit Suisse Managed Futures Hedge Fund Index is as of the end of the prior month. Past results are not necessarily indicative of future returns. Source: Bloomberg; Credit Suisse 20 P/E Investments Strategy Performance FX Strategy in Comparison to the Bridgewater Pure Alpha Fund An allocation to the FX Strategy could enhance the performance of a portfolio which also contained the Bridgewater Pure Alpha Fund; since, both strategies have performed well, and have demonstrated a low, -0.01, correlation to each other. For example, for a U.S. Dollar-based investor, over the past 148 months, a portfolio with a 50% allocation to the FX Strategy Standard and a 50% allocation to the Bridgewater Pure Alpha Fund would have generated higher returns, lowered risk and enhanced the information ratio compared to a 100% allocation to the Bridgewater Pure Alpha Fund alone.

Comparative Performance of Futures Portfolios Containing Bridgewater Pure Alpha Fund, FX Strategy Standard and Both Strategies (10/1/2003 - 1/31/2016)

Return Risk (STD) Information Ratio

Bridgewater Pure 7.83% 8.08% 0.97 Alpha Fund

FX Strategy Standard 9.36% 12.78% 0.73

Bridgewater Pure Alpha Fund & 8.90% 7.53% 1.18 FX Strategy Standard

Legend Bridgewater Pure Alpha Fund FX Strategy Standard Bridgewater Pure Alpha Fund + FX Strategy Standard Past results are not necessarily indicative of future results. Source: Bloomberg; BarclayHedge; P/E Investments analysis. 21 P/E Investments P/E Investments Summary In conclusion, we welcome the opportunity to apply our expertise to meet your investment needs.

Dedicated to providing superior, risk-managed products to sophisticated clients.

Solid record of achievement.

Proven approach.

Transparency to investors.

Tailored programs to meet your specific needs.

22 P/E Investments Appendix A - Comparative Performance

A-1 P/E Investments A-2 P/E Investments A-3 P/E Investments P/E Investments - Attendees P/E Investments attendees for the presentation to San Joaquin County Employees Retirement Association include Warren S. Naphtal, Chief Investment Officer, and Bruce D. George, CFA, CAIA.

Warren S. Naphtal

• Co-founded P/E Investments in 1995 and currently serves as Chief Investment Officer. • Served as Senior Vice President and Head of Derivative Strategies at Putnam Investments, managing $3.5 Billion, 1993-1995. • Lead Global Risk Management, Foreign Exchange Trading, and Proprietary Trading areas, as a Managing Director at Continental Bank, managing over $2.5 Billion of alternative products, 1987-1993. • Managed options portfolios at O'Connor & Associates, a pioneer in options trading and risk management, 1985-1986. • Earned B.S., University of California, Berkeley, and S.M., Sloan School, Massachusetts Institute of Technology.

Bruce D. George, CFA, CAIA

• Currently focuses on marketing to U.S. Institutional Investors. • Served as Executive Vice President at Smith Affiliated Capital, 2013-2014; Senior Vice President - Director of Institutional Business at Anchor Capital, 2012-2013; Senior Vice President at M.D. Sass Group, 2005-2012; Executive Director at UBS Global Asset Management, 2003-2005; Senior Vice President at Putnam Investments, 1994-1998; First Vice President and Chief Investment Offficer at Comerica, Inc., 1983-1994. • Earned B.S.B.A., Central Michigan University, and M.B.A., Wayne State University.

P/E Investments PCA INVESTMENT MARKET RISK METRICS

Monthly Report

March 2016 Takeaways

• After a rough February, U.S. equity markets ended the month approximately where they began it.

• Prices of U.S. public equity, private equity, and real estate equity remain expensive relative to U.S. credit and non-U.S. equities. (page 3)

• Commodity prices continued their five-year decline.

• The PCA Market Sentiment Indicator remained red in February. Two consecutive negative monthly readings on this indicator were last seen during the financial crisis. (page 4).

• Breakeven inflation (page 10) remained below 1.5%, a level not seen since the financial crisis.

• The 10-year Treasury yield hit a multi-year low of 1.6% in February, still well above the levels of European and Japanese rates, but indicative of low levels of growth and inflation expectations worldwide.

1See Appendix for the rationale for selection and calculation methodology used for the risk metrics.

PENSION CONSULTING ALLIANCE, LLC.• Investment Market Risk Metrics 2 Monthly Report - March 2016 Risk Overview

Valuation Metrics versus Historical Range A Measure of Risk

Unfavorable Top Decile Pricing

Average Neutral

Bottom Decile Favorable Pricing US Equity Dev ex‐US EM Equity Private Private Private US IG Corp US High (page 5) Equity Relative to Equity Real Real Debt Yield Debt (page 5) DM Equity (page 6) Estate Estate Spread Spread (page 6) Cap Rate Spread (page 8) (page 8) (page 7) (page 7)

Other Important Metrics within their Historical Ranges Pay Attention to Extreme Readings

Top Decile Attention!

Average Neutral

Bottom Decile Attention!

Equity Volatility Yield Curve Slope Breakeven Inflation Interest Rate Risk (page 9) (page 9) (page 10) (page 11)

PENSION CONSULTING ALLIANCE, LLC. • Investment Market Risk Metrics 3 Monthly Report - March 2016 Market Sentiment PCA Market Sentiment Indicator (1995‐Present)

Positive Positive

Neutral Neutral

Negative Negative

Avoid Growth Risk Growth Risk Neutral Embrace Growth Risk PCA Sentiment Indicator

PCA Market Sentiment Indicator ‐ Most Recent 3‐Year Period

Positive Positive

Neutral Neutral

Negative Negative

Information Behind Current Sentiment Reading Avoid Growth Risk Growth Risk Neutral Embrace Growth Risk PCA Sentiment Indicator

Bond Spread Momentum Trailing‐Twelve Months Negative Equity Return Momentum Trailing‐Twelve Months Negative Agreement Between Bond Spread and Equity Spread Momentum Measures? Agree -1

PENSION CONSULTING ALLIANCE, LLC. • Investment Market Risk Metrics 4 Monthly Report - March 2016 Developed Public Equity Markets U.S. Equity Market P/E Ratio1 versus Long‐Term Historical Average 50 45 2000 US Markets 40 Current P/E as of 35 1929 2/2016 = 24.4x 30 1901 25 1966 20 P/E Ratio 15 10 2009 US Markets 5 1981 1921 Long‐term Average 0 (since 1880) P/E = 16.6x

1 P/E ratio is a Shiller P/E‐10 based on 10 year real S&P 500 earnings over S&P 500 index level.

(Please note the different time scales) Developed ex‐US Equity Market P/E Ratio1 versus Long‐Term Historical Average2 45 40 35 Average 1982‐ 2/2016 EAFE 30 Only P/E = 23.7x

25 Long‐Term Average 20 Historical 2

P/E Ratio P/E = 16.9x 15 10

5 Intl Developed Markets Current 0 P/E as of 2/2016 = 12.8x

1 P/E ratio is a Shiller P/E‐10 based on 10 year real 2 To calculate the LT historical average, from 1881 to 1982 U.S. data is used as developed market MSCI EAFE earnings over EAFE index level. proxy. From 1982 to present, actual developed ex‐US market data (MSCI EAFE) is used.

PENSION CONSULTING ALLIANCE, LLC. • Investment Market Risk Metrics 5 Monthly Report - March 2016 Emerging Market Public Equity Markets Emerging Markets PE / Developed Markets PE (100% = Parity between PE Ratios) 275% 250% Russian Crisis, LTCM implosion, 225% currency devaluations Mexican 200% Peso Technology 175% Crisis World and Telecom Financial EM/DM relative PE 150% Crash Crisis ratio is slightly below 125% the historical average 100% 75% 50% Asian Commodity 25% Crisis price runup 0%

Source: Bloomberg, MSCI World, MSCI EMF EM/DM PE Average EM/DM PE Parity

US Private Equity Quarterly Data, Updated to Dec. 31st

Price to EBITDA Multiples Disclosed U.S. Quarterly Paid in LBOs Deal Volume* 250 11.0 (updated to Jan 31st)

10.0 200

9.0 Average since 1997. 150 Deal volume remains in an 8.0 upward trend. 100

7.0 Multiples have risen above Billions ($) the pre‐crisis highs. 50 6.0

5.0 0

Source: Thomson Reuters Buyouts Source: S&P LCD study, data presented is on 1‐month lag * quarterly total deal size (both equity and debt)

PENSION CONSULTING ALLIANCE, LLC. • Investment Market Risk Metrics 6 Monthly Report - March 2016 Private Real Estate Markets Quarterly Data, Updated to Dec. 31st Core Real Estate Current Value Cap Rates1 10.0% Core real estate cap rates remain low 9.0% by historical standards (expensive). 8.0% 7.0% 6.0% 5.0% 4.0%

3.0% Core Cap Rate

Cap Rate 2.0% LT Average Cap Rate 1.0% 10 Year Treasury Rate 0.0%

Sources: NCRIEF, www.ustreas.gov 1A cap rate is the current annual income of the property divided by an estimate of the current value of the property . It is the current yield of the property. Low cap rates indicate high valuations.

Core Cap Rate Spread over 10‐Year Treasury Interest Rate 5.0% Spread to the 10‐year Treasury is in‐line with the long‐term average level.

4.0%

3.0%

2.0%

1.0% Core Cap Rate Spread to Treasuries LT Average Spread

Cap Rate Spread 0.0%

Transactions as a % of Market Value Trailing‐Four Quarters (a measure of property turnover activity) 20.00%

Activity has plateaued over 15.00% the last 2‐year period.

10.00%

5.00%

0.00%

Source: NCREIF, PCA calculation

PENSION CONSULTING ALLIANCE, LLC. • Investment Market Risk Metrics 7 Monthly Report - March 2016 Credit Markets US Fixed Income

Investment Grade Corporate Bond Spreads

700

600

500 Investment grade spreads were effectively unchanged during February, ending the month 400 Investment moderately above the long‐term average level. Grade Bond Spreads 300

200 Average spread

Spread Over Treasuries (basis points) 100 since 1994 (IG Bonds) 0

Source: LehmanLive: Barclays Capital US Corporate Investment Grade Index Intermediate Component.

High Yield Corporate Bond Spreads 1800

1600

1400 Likewise, high yield spreads ended February in‐line with their January levels but remain 1200 meaningfully above the long‐term average level.

1000 High Yield Bond 800 Spreads

600 Average 400 spread

Spread Over Treasuries (basis points) since 1994 200 (HY Bonds)

0

Source: LehmanLive: Barclays Capital U.S. Corporate High Yield Index.

PENSION CONSULTING ALLIANCE, LLC. • Investment Market Risk Metrics 8 Monthly Report - March 2016 Other Market Metrics

VIX ‐ a measure of equity market fear / uncertainty

80

70 Equity market volatility (VIX) rose during 60 February but ended the month in‐line with the 50 long‐term average level (≈ 20) at 20.6.

40

30

20

10

0

Source: http://www.cboe.com/micro/vix/historical.aspx

Yield Curve Slope 5.0 The average 10‐year Treasury interest rate decreased in February. The average one‐year Treasury interest rate was effectively unchanged during the month. The change in slope for the 4.0 month was down and the yield curve remains upward sloping.

3.0

2.0

1.0

0.0

‐1.0 Yield curve slopes that ‐2.0 are negative (inverted) portend a recession. ‐3.0

Source: www.ustreas.gov (10 yr treasury yield minus 1 year treasury yield) Recession Dating: NBER http://www.nber.org/cycles.html

PENSION CONSULTING ALLIANCE, LLC. • Investment Market Risk Metrics 9 Monthly Report - March 2016 Measures of Inflation Expectations

10‐Year Breakeven Inflation (10‐year nominal Treasury yield minus 10‐year TIPS yield) 3.00%

2.50%

2.00%

1.50%

1.00% Breakeven inflation ended February at 1.42%, in‐line with January. The 10‐year TIPS real‐yield decreased to 0.32% and the nominal 10‐year Treasury yield decreased to 1.74%. 0.50%

0.00%

Source: www.ustreas.gov

(Please note the different time scales) Inflation Adjusted Dow Jones UBS Commodity Price Index (1991 = 100) 160

140

120

100

80

60 Broad commodity prices ticked down in February, ending the month at the 40 lowest levels (inflation adjusted) since the dataset began in 1991.

20

0

Source: Bloomberg Commodity Index, St. Louis Fed for US CPI all urban consumers.

PENSION CONSULTING ALLIANCE, LLC. • Investment Market Risk Metrics 10 Monthly Report - March 2016 Measures of U.S. Treasury Interest Rate Risk

Estimate of 10‐Year Treasury Forward‐Looking Real Yield 10.0

8.0 The forward‐looking annual real yield on 10‐year Treasuries is estimated at approximately ‐0.34% real, assuming 10‐year 6.0 annualized inflation of 2.12%* per year.

4.0

2.0

0.0 Expected Real Yield of 10‐Year Treasury

‐2.0

Sources: www.ustreas.gov for 10‐year constant maturity rates *Federal Reserve Bank of Philadelphia survey of professional forecasts for inflation estimates

10‐Year Treasury Duration (Change in Treasury price with a change in interest rates) 9.50 Interest rate risk is off the 30 year high but not by much. Higher Risk 9.00 8.50 8.00 7.50 7.00 If the 10‐year Treasury yield rises by 100 basis points 6.50 from today's levels, the capital loss from the change 6.00 in price is expected to be ‐9.1%. 5.50

10‐Year Treasury Bond Duration 5.00 4.50 Lower Risk 4.00

Source: www.ustreas.gov for 10‐year constant maturity rates, calculation of duration

PENSION CONSULTING ALLIANCE, LLC. • Investment Market Risk Metrics 11 Appendix

PENSION CONSULTING ALLIANCE, LLC • Investment Market Risk Metrics Appendix

METRIC DESCRIPTION, RATIONALE FOR SELECTION AND CALCULATION METHODOLOGY

US Equity Markets: Metric: P/E ratio = Price / “Normalized” earnings for the S&P 500 Index

To represent the price of US equity markets, we have chosen the S&P 500 index. This index has the longest published history of price, is well known, and also has reliable, long-term, published quarterly earnings. The price=P of the P/E ratio is the current price of the market index (the average daily price of the most recent full month for the S&P 500 index). Equity markets are very volatile. Prices fluctuate significantly during normal times and extremely during periods of market stress or euphoria. Therefore, developing a measure of earnings power (E) which is stable is vitally important, if the measure is to provide insight. While equity prices can and do double, or get cut in half, real earnings power does not change nearly as much. Therefore, we have selected a well known measure of real, stable earnings power developed by Yale Professor Robert Shiller known as the Shiller E-10. The calculation of E-10 is simply the average real annual earnings over the past 10 years. Over 10 years, the earnings shenanigans and boom and bust levels of earnings tend to even out (and often times get restated). Therefore, this earnings statistic gives a reasonably stable, slow-to-change estimate of average real earnings power for the index. Professor Shiller’s data and calculation of the E-10 are available on his website at http://www.econ.yale.edu/~shiller/data.htm. We have used his data as the base for our calculations. Details of the theoretical justification behind the measure can be found in his book Irrational Exuberance [Princeton University Press 2000, Broadway Books 2001, 2nd ed., 2005].

Developed Equity Markets Excluding the US: Metric: P/E ratio = Price / “Normalized” earnings for the MSCI EAFE Index

To represent the price of non-US developed equity markets, we have chosen the MSCI EAFE index. This index has the longest published history of price for non-US developed equities. The price=P of the P/E ratio is the current price of the market index (the average daily price of the most recent full month for the MSCI EAFE index). The price level of this index is available starting in December 1969. Again, for the reasons described above, we elected to use the Shiller E-10 as our measure of earnings (E). Since 12/1972, a monthly price earnings ratio is available from MSCI. Using this quoted ratio, we have backed out the implied trailing-twelve month earnings of the EAFE index for each month from 12/1972 to the present. These annualized earnings are then inflation adjusted using CPI-U to represent real earnings in US dollar terms for each time period. The Shiller E-10 for the EAFE index (10 year average real earnings) is calculated in the same manner as detailed above.

However, we do not believe that the pricing and earnings history of the EAFE markets are long enough to be a reliable representation of pricing history for developed market equities outside of the US. Therefore, in constructing the Long-Term Average Historical P/E for developed ex-US equities for comparison purposes, we have elected to use the US equity market as a developed market proxy, from 1881 to 1982. This lowers the Long-Term Average Historical P/E considerably. We believe this methodology provides a more realistic historical comparison for a market with a relatively short history.

PENSION CONSULTING ALLIANCE, LLC • Investment Market Risk Metrics Appendix

METRIC DESCRIPTION, RATIONALE FOR SELECTION AND CALCULATION METHODOLOGY

Emerging Market Equity Markets: Metric: Ratio of Emerging Market P/E Ratio to Developed Market P/E Ratio

To represent the Emerging Markets P/E Ratio, we have chosen the MSCI Emerging Market Free Index, which has P/E data back to January 1995 on Bloomberg. To represent the Developed Markets PE Ratio, we have chosen the MSCI World Index, which also has data back to January 1995 on Bloomberg. Although there are issues with published, single time period P/E ratios, in which the denominator effect can cause large movements, we feel that the information contained in such movements will alert investors to market activity that they will want to interpret.

US Private Equity Markets: Metrics: S&P LCD Average EBITDA Multiples Paid in LBOs and US Quarterly Deal Volume

The Average Purchase Price to EBITDA multiples paid in LBOs is published quarterly by S&P in their LCD study. This is the total price paid (both equity and debt) over the trailing-twelve month EBITDA (earnings before interest, taxes, depreciation and amortization) as calculated by S&P LCD. This is the relevant, high-level pricing metric that private equity managers use in assessing deals. Data is published monthly. US quarterly deal volume for private equity is the total deal volume in $ billions (both equity and debt) reported in the quarter by Thomson Reuters Buyouts. This metric gives a measure of the level of activity in the market. Data is published quarterly.

U.S Private Real Estate Markets: Metrics: US Cap Rates, Cap Rate Spreads, and Transactions as a % of Market Value

Real estate cap rates are a measure of the price paid in the market to acquire properties versus their annualized income generation before financing costs (NOI=net operating income). The data, published by NCREIF, describes completed and leased properties (core) on an unleveraged basis. We chose to use current value cap rates. These are capitalization rates from properties that were revalued during the quarter. This data relies on estimates of value and therefore tends to be lagging (estimated prices are slower to rise and slower to fall than transaction prices). The data is published quarterly. Spreads between the cap rate (described above) and the 10-year nominal Treasury yield, indicate a measure of the cost of properties versus a current measure of the cost of financing. Transactions as a % of Market Value Trailing-Four Quarters is a measure of property turnover activity in the NCREIF Universe. This quarterly metric is a measure of activity in the market.

Credit Markets US Fixed Income: Metric: Spreads

The absolute level of spreads over treasuries and spread trends (widening / narrowing) are good indicators of credit risk in the fixed income markets. Spreads incorporate estimates of future default, but can also be driven by technical dislocations in the fixed income markets. Abnormally narrow spreads (relative to historical levels) indicate higher levels of valuation risk, wide spreads indicate lower levels of valuation risk and / or elevated default fears. Investment grade bond spreads are represented by the Barclays Capital US Corporate Investment Grade Index Intermediate Component. The high yield corporate bond spreads are represented by the Barclays Capital US Corporate High Yield Index.

PENSION CONSULTING ALLIANCE, LLC • Investment Market Risk Metrics Appendix

METRIC DESCRIPTION, RATIONALE FOR SELECTION AND CALCULATION METHODOLOGY

Measure of Equity Market Fear / Uncertainty Metric: VIX – Measure of implied option volatility for U.S. equity markets

The VIX is a key measure of near-term volatility conveyed by implied volatility of S&P 500 index option prices. VIX increases with uncertainty and fear. Stocks and the VIX are negatively correlated. Volatility tends to spike when equity markets fall.

Measure of Monetary Policy Metric: Yield Curve Slope

We calculate the yield curve slope as the 10 year treasury yield minus the 1 year treasury yield. When the yield curve slope is zero or negative, this is a signal to pay attention. A negative yield curve slope signals lower rates in the future, caused by a contraction in economic activity. Recessions are typically preceded by an inverted (negatively sloped) yield curve. A very steep yield curve (2 or greater) indicates a large difference between shorter-term interest rates (the 1 year rate) and longer-term rates (the 10 year rate). This can signal expansion in economic activity in the future, or merely higher future interest rates.

Measures of US Inflation Expectations Metrics: Breakeven Inflation and Inflation Adjusted Commodity Prices

Inflation is a very important indicator impacting all assets and financial instruments. Breakeven inflation is calculated as the 10 year nominal treasury yield minus the 10 year real yield on US TIPS (treasury inflation protected securities). Abnormally low long-term inflation expectations are indicative of deflationary fears. A rapid rise in breakeven inflation indicates an acceleration in inflationary expectations as market participants sell nominal treasuries and buy TIPs. If breakeven inflation continues to rise quarter over quarter, this is a signal of inflationary worries rising, which may cause Fed action and / or dollar decline. Commodity price movement (above the rate of inflation) is an indication of anticipated inflation caused by real global economic activity putting pressure on resource prices. We calculate this metric by adjusted in the Dow Jones UBS Commodity Index (formerly Dow Jones AIG Commodity Index) by US CPI-U. While rising commodity prices will not necessarily translate to higher US inflation, higher US inflation will likely show up in higher commodity prices, particularly if world economic activity is robust. These two measures of anticipated inflation can, and often are, conflicting.

Measures of US Treasury Bond Interest Rate Risk Metrics: 10-Year Treasury Forward-Looking Real Yield and 10-Year Treasury Duration

The expected annualized real yield of the 10 year U.S. Treasury Bond is a measure of valuation risk for U.S. Treasuries. A low real yield means investors will accept a low rate of expected return for the certainly of receiving their nominal cash flows. PCA estimates the expected annualized real yield by subtracting an estimate of expected 10 year inflation (produced by the Survey of Professional Forecasters as collected by the Federal Reserve Bank of Philadelphia), from the 10 year Treasury constant maturity interest rate. Duration for the 10-Year Treasury Bond is calculated based on the current yield and a price of 100. This is a measure of expected percentage movements in the price of the bond based on small movements in percentage yield. We make no attempt to account for convexity.

Definition of “extreme” metric readings

A metric reading is defined as “extreme” if the metric reading is in the top or bottom decile of its historical readings. These “extreme” reading should cause the reader to pay attention. These metrics have reverted toward their mean values in the past.

PENSION CONSULTING ALLIANCE, LLC • Investment Market Risk Metrics PCA Market Sentiment Indicator

Explanation, Construction and Q&A

By:

Pension Consulting Alliance, LLC.

John Linder, CFA, CPA Neil Rue, CFA

PCA has created the PCA Market Sentiment Indicator (PMSI) to complement our valuation-focused PCA Investment Market Risk Metrics. This measure of sentiment is meant to capture significant and persistent shifts in long-lived market trends of economic growth risk, either towards a risk-seeking trend or a risk-aversion trend.

This paper explores:

 What is the PCA Market Sentiment Indicator (PMSI)?  How do I read the indicator graph?  How is the PCA Market Sentiment Indicator (PMSI) constructed?  What do changes in the indicator mean?

© 2012 Pension Consulting Alliance, LLC. Reproduction of all or any part of this report is permissible if reproduction contains notice of Pension Consulting Alliance’s copyright as follows: “Copyright © 2012 by Pension Consulting Alliance, LLC.” Information is considered to be reliable but not guaranteed. This report is not intended to be an offer, solicitation, or recommendation to purchase any security or a recommendation of the services supplied by any money management organization unless otherwise noted. PCA Market Sentiment Indicator

PCA has created a market sentiment indicator for monthly publication (the PMSI – see below) to complement PCA’s Investment Market Risk Metrics.

PCA’s Investment Market Risk Metrics, which rely significantly on standard market measures of relative valuation, often provide valid early signals of increasing long-term risk levels in the global investment markets. However, as is the case with numerous valuation measures, the Risk Metrics may convey such risk concerns long before a market corrections take place. The PMSI helps to address this early-warning bias by measuring whether the markets are beginning to acknowledge key Risk Metrics trends, and / or indicating non-valuation based concerns. Once the PMSI indicates that the market sentiment has shifted, it is our belief that investors should consider significant action, particularly if confirmed by the Risk Metrics. Importantly, PCA believes the Risk Metrics and PMSI should always be used in conjunction with one another and never in isolation. The questions and answers below highlight and discuss the basic underpinnings of the PCA PMSI:

What is the PCA Market Sentiment Indicator (PMSI)? The PMSI is a measure meant to gauge the market’s sentiment regarding economic growth risk. Growth risk cuts across most financial assets, and is the largest risk exposure that most portfolios bear. The PMSI takes into account the momentum (trend over time, positive or negative) of the economic growth risk exposure of publicly traded stocks and bonds, as a signal of the future direction of growth risk returns; either positive (risk seeking market sentiment), or negative (risk averse market sentiment).

How do I read the PCA Market Sentiment Indicator (PMSI) graph? Simply put, the PMSI is a color coded indicator that signals the market’s sentiment regarding economic growth risk. It is read left to right chronologically. A green indicator on the PMSI indicates that the market’s sentiment towards growth risk is positive. A gray indicator indicates that the market’s sentiment towards growth risk is neutral or inconclusive. A red indicator indicates that the market’s sentiment towards growth risk is negative. The black line on the graph is the level of the PMSI. The degree of the signal above or below the neutral reading is an indication the signal’s current strength.

Momentum as we are defining it is the use of the past behavior of a series as a predictor of its future behavior.

PCA Market Sentiment Indicator (1995 - Present)

Positive Positive

Neutral Neutral

Negative Negative

Avoid Growth Risk Growth Risk Neutral Embrace Growth Risk PCA Sentiment Indicator

PENSION CONSULTING ALLIANCE, LLC • Investment Market Risk Metrics PCA Market Sentiment Indicator

How is the PCA Market Sentiment Indicator (PMSI) Constructed?

The PMSI is constructed from two sub-elements representing investor sentiment in stocks and bonds: 1. Stock return momentum: Return momentum for the S&P 500 Equity Index (trailing 12-months) 2. Bond yield spread momentum: Momentum of bond yield spreads (excess of the measured bond yield over the identical duration U.S. Treasury bond yield) for corporate bonds (trailing 12-months) for both investment grade bonds (75% weight) and high yield bonds (25% weight). The scale of this measure is adjusted to match that of the stock return momentum measure.

The black line reading on the graph is calculated as the average of the stock return momentum measure and the bonds spread momentum measure. The color reading on the graph is determined as follows:

1. If both stock return momentum and bond spread momentum are positive = GREEN (positive) 2. If one of the momentum indicators is positive, and the other negative = GRAY (inconclusive) 3. If both stock return momentum and bond spread momentum are negative = RED (negative)

What does the PCA Market Sentiment Indicator (PMSI) mean? Why might it be useful?

There is strong evidence that time series momentum is significant and persistent. In particular, across an extensive array of asset classes, the sign of the trailing 12-month return (positive or negative) is indicative of future returns (positive or negative) over the next 12 month period. The PMSI is constructed to measure this momentum in stocks and corporate bond spreads. A reading of green or red is agreement of both the equity and bond measures, indicating that it is likely that this trend (positive or negative) will continue over the next 12 months. When the measures disagree, the indicator turns gray. A gray reading does not necessarily mean a new trend is occurring, as the indicator may move back to green, or into the red from there. The level of the reading (black line) and the number of months at the red or green reading, gives the user additional information on which to form an opinion, and potentially take action.

I Momentum as we are defining it is the use of the past behavior of a series as a predictor of its future behavior.

ii “Time Series Momentum” Moskowitz, Ooi, Pedersen, August 2010 http://pages.stern.nyu.edu/~lpederse/papers/TimeSeriesMomentum.pdf

PENSION CONSULTING ALLIANCE, LLC • Investment Market Risk Metrics Board of Retirement Financial Meeting San Joaquin County Employees’ Retirement Association

Agenda Item 7.02 March 25, 2016

SUBJECT: PIOS Guidelines Update

SUBMITTED FOR: ___ CONSENT l___ ACTION _X_ INFORMATION

PURPOSE:

The purpose of this item is to report to the Board that the PIOS Guidelines have been revised in order to parallel the transition of SJCERA’s portfolio to the new asset allocation targets adopted by the Board.

DISCUSSION:

Attached are the SJCERA PIOS Investment Guidelines displaying the targets for the asset classes and the associated benchmarks, explaining how unallocated cash will be synthetically invested, and outlining rebalancing bands and rules.

During 2015, SJCERA’s general investment consultant, Pension Consulting Alliance (PCA), conducted educational sessions and analysis on the latest concepts to asset allocation. In November of that year, the Board adopted a revised Strategic Asset Allocation Policy (INV 0100), which introduced new asset classes and incorporated changes to the asset allocation and performance benchmarks. The revised asset allocation will be phased in over time from the November 2015 targets, to intermediate targets as of 6/30/2016, then to the final targets as of 12/31/2016. The application of the new benchmark(s) was implemented on January 1, 2016, and will also be phased in according to the asset class weights of the asset allocation targets.

BACKGROUND:

The Board adopted Resolution 2008-11-14, titled Amendment to the Policy Implementation Overlay Service (POIS) Investment Management Agreement with the Clifton Group (now Parametric), which states:

,"…BE IT FURTHER RESOLVED that the Board authorizes the Chief Executive Officer to incorporate future changes to the Board's asset allocation policy into the PIOS IMA (investment management agreement) as the asset allocation policy is amended from time to time by the Board….."

Staff and consultant have been collaborating with Parametric, our cash overlay manager, to incorporate changes to the PIOS guidelines based on the Board’s new strategic asset policy adopted by Resolution 2015-11-04. March 25, 2016 Page 2 of 2 Agenda Item 7.02

ATTACHMENT:

• Exhibit A: PIOS Investment Guidelines (Addendums A and B)

______NANCY CALKINS ANNETTE ST. URBAIN Chief Investment Officer Chief Executive Officer SAN JOAQUIN COUNTY EMPLOYEES’ RETIREMENT ASSOCIATION EXHIBIT A: PIOS® INVESTMENT GUIDELINES

Addendum A

Client will select the assets to be overlaid by Investment Manager’s PIOS® program. Specifically, that portion shall consist of those funds designated by Client as cash reserves at its custodian as well as cash held from time to time by other investment managers for Client (the manager portfolio(s)).

The asset class allocation targets and associated benchmark indexes are as follows:

Intermediate Target % Final Target % Asset Class (6/30/2016) (12/31/2016) Benchmark Index Global Equities1 36.00% 30.00% MSCI ACWI Net Daily Stable Fixed Income1 10.00% 10.00% Barclays Capital Aggregate Credit2 14.00% 14.00% 50% BC High Yield/50% S&P/LTSA Lev. Loans Private Appreciation2 11.00% 12.00% MSCI ACWI + 2% Risk Parity2 14.00% 14.00% 90 Day TBills + 4% Crisis Risk Offset (CRO)1 15.00% 20.00% Custom Operating Cash 0.00% 0.00% Total 100.00% 100.00%

1Asset classes investable via overlay 2Asset classes uninvestable via overlay

In order to account for the uninvestable asset classes listed above in the overlay program, the uninvestable asset class targets will be set equal to actual levels, with the difference between the long term target allocation and the actual allocation for each asset class being allocated as follows, resulting in a new, Adjusted Target asset allocation:

Asset Class Allocation of Difference Credit Stable Fixed Income Private Appreciation Global Equities Risk Parity Proportional across investable asset classes

The allocation for uninvestable asset classes shown above is also used to calculate the Fund Cash allocation shown in below.

It is Client’s responsibility to establish and revise as necessary the asset class categories.

10 SAN JOAQUIN COUNTY EMPLOYEES’ RETIREMENT ASSOCIATION EXHIBIT A: PIOS® INVESTMENT GUIDELINES

INVEST UNALLOCATED CASH COMPONENT

Unallocated cash will be synthetically invested as follows:

Intermediate Final Target % Asset Class Target % Benchmark Index (12/31/2016) (6/30/2016) Global Equities (Equity + Private Apprec.) 55.26% 49.00% MSCI ACWI Net Daily Fixed Income (Stable + Credit) 26.30% 26.93% Barclays Capital Aggregate Crisis Risk Offset (CRO) 18.44% 24.67% BC Long Duration Treasury Total 100.00% 100.00%

11 SAN JOAQUIN COUNTY EMPLOYEES’ RETIREMENT ASSOCIATION EXHIBIT A: PIOS® INVESTMENT GUIDELINES

MAINTAIN TARGET ALLOCATION COMPONENT

Investment Manager will monitor fund asset allocation relative to the following variation bands: Proportional Rebalancing Asset Class Variation Band Approach Global Equities ±15.0% Futures Based Stable Fixed Income ±15.0% Futures Based Crisis Risk Offset (CRO) ±15.0% Futures Based

If an exposure band is exceeded, a full rebalancing move will be initiated to take fund level exposures back to target levels After the full rebalancing move the fund will be on policy targets.

When a rebalancing band has been exceeded, Investment Manager is authorized to rebalance market exposures back to target allocations.

In times of volatile markets, SJCERA staff and consultant may discuss the predetermined tolerance levels with the Cash Overlay Manager and may initiate changes to the tolerance levels not to exceed +/‐ 20% of the asset allocation targets.

12 SAN JOAQUIN COUNTY EMPLOYEES’ RETIREMENT ASSOCIATION EXHIBIT A: PIOS® INVESTMENT GUIDELINES

Addendum B

ALPHA POOL OR OTHER OVERLAID ASSETS

It will be the responsibility of Investment Manager to request regular updates on the value of the designated alpha pool or other overlaid assets for which values are not received from the Custodian. Because Investment Manager does not control these managers, it is possible that Investment Manager will not receive information in a timely manner from such managers. It is also possible that this information will not be accurate. Client agrees that Investment Manager may rely on such information as provided by the source without further investigation or confirmation.

Frequency Managers Method of Update** Index Used Index Btick * Manager Mix Report sent by BGI MSCI World ex. US M client BGI MSCI World ex. US NDDUWXUS MSCI Emerging PIMCO RAE Emerging M PIMCO Client Portal Markets NDUEEGF PIMCO RAE Int’l M PIMCO Client Portal MSCI EAFE NDDUEAFE

As more managers are added, it will be Client’s responsibility to contact Investment Manager and assist in developing a method for updating values for each new manager.

[*insert daily, weekly, monthly, whatever is applicable]

[**Unaudited value downloaded, Receive email, Unaudited NAV, Receive value from client, whatever is applicable]

13 SJCERA Chief Investment Officer Report

March 25, 2016 Financial Meeting

The Fed is Dialing Back

On Wednesday March 16, 2016, the Fed said it is not going to raise its key interest rate as expected. The Fed also cut its forecast for U.S. economic growth and inflation, and significantly lowered its estimate for the number of rate hikes in 2016.

In December 2015, the Fed's committee, led by Chair Janet Yellen, had estimated in December that the economy would grow 2.4% this year and it would raise rates four times. Then stock markets became volatile, oil prices fell and fears of a U.S. recession magnified.

Now the Fed is dialing back. Yellen and other Fed leaders are only calling for about two rate hikes this year. The Fed also reduced its economic growth outlook for the year to 2.2%.

"Since the turn of the year, concerns about global economic prospects have led to increased market volatility and tighter financial conditions in the United States," Yellen said.

In its statement, the Fed's committee noted the job market's continued improvement (unemployment fell in January to 4.9%), but noted that inflation remains well below the central bank's target of 2%. Inflation had recently inched up to 1.3%.

Since December, Wall Street has bet there would only be two rate hikes this year, and at one point in February in the midst of market turmoil, investors were calling for no rate hikes. Fed's plans now appear to be lining up with investors' expectations.

SJCERA will continue moving toward its risk mitigation strategy enabling us to be prepared as the markets and economy evolve in unexpected ways.

Excerpts from CNNMoney published March 16, 2016

From previous CIO Reports:

January 2016: Investing is a marathon, not a sprint. It is about endurance. Volatility has always been a part of investing. The Fed’s control of interest rates during the past nine years, made us forget how painful volatility can feel. What remains key to weathering volatility is being committed to a well-formulated plan, a long-term focus while ignoring the short-term noise.

February 2016: Markets can be emotional during the short term and investor behavior can be anything but rational. The new SJCERA asset allocation is moving us toward mitigating the risks of higher volatility and withstanding the irrational behavior of investors with an enduring long-term plan. SJCERA - CIO Report March 25, 2016 Calendar Year 2016 Proposed Topics and Meeting Schedule

January 22, 2016 February 26, 2016 March 25, 2016 1. Monthly Flash Report (Dec 2016) 1. Monthly Flash Report (January) 1. Monthly Flash Report (February) 2. CRO Systematic Trend Following Manager 2. Quarterly Reports (4Q15) 2. CRO: Alt. Risk Premia Manager Interviews Interviews: Man AHL, AlphaSimplex, Graham 3. CRO: Alt Risk Premia Search Memo AQR and P/E 3. 2016 Investment Program Plan 4. Real Estate Implementation Plan Approval 3. Continue rebalancing to the new AA targets 4. Risk Parity Investment Policy Revisions 5. Manager DD Memos and Review Schedule 6. Rebalancing to new AA targets; funded Long Duration portfolio 5. RE Committee Meeting 2016 RE Implementation Plan Recomm. 7. RE Committee Meeting Quarterly Report (3Q15)

8. CRO Investment Policy INV -1400 2/12/2016 April 22. 2016 May 20, 2016 June 24, 2016 1. Monthly Flash Report (March) 1. Monthly Flash Report (April) 1. Monthly Flash Report (May) 2. Global Equity Review (tentative) 2. Quarterly Reports (1Q16) 3. Policies: CRO: Alt. Premia and Cash Overlay 4. Manager DD Memos and Review Schedule

June 9, 2016 RE Committee Quarterly reports & Real Estate Roundtable

July 22, 2016 August 2016 September 23, 2016 1. Monthly Flash Report (June) August 17 & 18 1. Monthly Flash Report (August) Financial Board meeting (August 17) 2. Annual Roundtable Summary/Evaluation Monthly Flash Report (July) 3. Consultants and Actuary Evaluations Quarterly Reports (2Q16) Annual Actuarial Valuation

11th Annual Investment Roundtable Event

RE Committee Quarterly Report (1Q16)

October 28, 2016 November 18, 2016 December 16, 2016 1. Monthly Flash Report (September) 1. Monthly Flash Report (September) 1. Monthly Flash Report (October) 2. Quarterly Reports (3Q15)

Quarterly RE Committee meeting 1. Quarterly Reports (2Q16) 2. RE Delegation Policy Review 2016 CONFERENCES AND EVENTS SCHEDULE 2016

EVENT DATES 2016 REG. WEBLINK EVENT TITLE EVENT SPONSOR LOCATION BEGIN END FEE FOR MORE INFO Mar 30 Mar 31 PDI Investors' Council 2016 Private Debt Investor Half Moon Bay, CA N/A privatedebtinvestor.com

Apr 5 Apr 6 The Pension Bridge Annual Conference The Pension Bridge Inc San Francisco, CA N/A pensionbridge.com

Apr 5 Apr 6 Annual Investor Meeting Miller Global San Antonio, TX N/A millerglobal.com

Apr 11 Apr 13 CRCEA Spring Conference CRCEA Bakersfield, CA $45 crcea.org

Apr 12 Apr 14 IREI Editorial Board Meeting IREI Ojai, CA N/A irei.com Deutsche Asset Apr 19 Apr 21 Client Services Conference Dana Point, CA N/A deawm.com Management

Apr 27 Apr 29 2016 Public Funds Roundtable Institutional Investor Los Angeles, CA N/A institutionalinvestor.com

May 10 May 13 SACRS Spring Conference SACRS Costa Mesa, CA $120 sacrs.org

May 14 May 15 NCPERS Accredited Fiduciary Program NCPERS San Diego, CA $550 ncpers.org NCPERS Annual Conference & $800 May 15 May 19 NCPERS San Diego, CA ncpers.org Exhibition (TEDS ) ($400) Investment Strategies & Portfolio May 16 May 20 Wharton School of Business Philadelphia, PA $10,250 wharton.upenn.edu Management Jun 6 Jun 7 Annual Investor Meeting Walton Street Capital Chicago, IL N/A waltonst.com

Jun 16 Jun 16 Equilibrium's 5th Annual Forum Equilibrium San Francisco, CA N/A eq-grp.com Principles of Pension Management for Aug 9 Aug 12 CALAPRS Malibu, CA $3,100 calaprs.org Trustees at Pepperdine Loews Coronado Sep 21 Sep 23 Administrators Institute CALAPRS $2,500 calaprs.org Island, CA Invesco Real Estate US Client Nov 8 Nov 10 Invesco La Jolla, CA N/A invesco.com Conference Nov 8 Nov 11 SACRS Fall Conference SACRS Indian Wells, CA $120 sacrs.org

Printed 3/17/16 2:45 PM

WALTON STREET REAL ESTATE FUNDS V-VIII 2016 ANNUAL INVESTOR MEETING Dear Investor,

Walton Street Capital, L.L.C. is pleased to invite you to the 2016 Annual Investor Meeting for investors of Walton Street Real Estate Funds V-VIII, which will take place in Chicago on June 6 & 7, 2016. The current schedule anticipated for the meetings is below, along with additional information to help you make your plans. Audio access to the meetings will be available for those unable to attend.

LOCATION & SCHEDULE OF EVENTS

Four Seasons Hotel Chicago 120 East Delaware Place (at Michigan Avenue) • Chicago, IL 60611• (312) 280-8800 phone • (312) 280-1748 fax

Monday, June 6, 2016

Cocktail Reception & Dinner – Ballroom C (8th Floor)

Schedule Description 6:30 p.m. - 8:00 p.m. Cocktail Reception 8:00 p.m. - 9:30 p.m. Dinner

Tuesday, June 7, 2016

Funds V, VI, VII & VIII – Grand Ballroom A & B (8th Floor)

Schedule Description Speaker 7:30 a.m. - 8:00 a.m. Meeting Registration and Continental Breakfast 8:00 a.m. - 9:00 a.m. State of the Markets Ken Rosen 9:00 a.m. - 9:45 a.m. Walton Street Real Estate Fund V, L.P. 9:45 a.m. - 10:45 a.m. Walton Street Real Estate Fund VI, L.P. 10:45 a.m. - 11:00 a.m. Break 11:00 a.m. - 12:15 p.m. Walton Street Real Estate Fund VII, L.P. 12:15 p.m. - 1:00 p.m. Walton Street Real Estate Fund VIII, L.P.

FUNDS III-IV & MEXICO FUND I Please note, due to the limited number of remaining assets in Funds III-IV, the Annual Investor Meeting for Funds III-IV and Mexico Fund I will be held telephonically on Wednesday, June 15, 2016. Investors in Funds III-IV and Mexico Fund I will receive a separate invitation and registration link via GoToMeeting.com. Meeting materials will be distributed prior to the calls, and recordings of the meetings will be available for replay for those unable to participate.

Wednesday, June 15, 2016

Funds III-IV & Mexico - Webinar Schedule Description 11:00 a.m. - 12:00 p.m. Walton Street Mexico Fund I, L.P. 1:00 p.m. - 1:30 p.m. Walton Street Real Estate Fund III 1:45 p.m. - 2:15 p.m. Walton Street Real Estate Fund IV

Please register your attendance to the Funds V-VIII meetings by Tuesday, May 24, 2016 to Deanna DeVries at (312) 915-2905 or [email protected]. Please feel free to forward this invitation to anyone within your organization who may be interested in attending the meeting. If you have any questions regarding the content of the meetings or other information on the Funds, please contact Kate Kappas at (312) 915-2814 ([email protected]).

We look forward to meeting with you in June.

Walton Street Capital, L.L.C.

Walton Street Real Estate Funds V-VIII, L.P. 2016 Annual Investor Meeting Invitation 1 ADDITIONAL INFORMATION FOR YOUR CONVENIENCE:

Hotel Accommodations: For those requiring accommodations, we have reserved a block of rooms at discounted rates at the Four Seasons and Thompson Hotel in Chicago: Four Seasons Hotel Thompson Hotel 120 East Delaware Place 21 East Bellevue Place Chicago, Illinois 60611 Chicago, IL 60611 Phone: (312) 280-8800 Phone: (312) 266-2100 Deluxe King: $550.00/night $286/night, single/double occupancy Executive King Suite: $600/night

Parking: Self Park available in the 900 N. Michigan Avenue building parking lot for $34 or $50 (4-10 hours or 10-24 hours, respectively). Additionally, the garage offers an early bird rate of $16 (in by 10 a.m., out before 7 p.m.)

Valet Parking available, full access at all times. Enter eastbound on Delaware Place.

Note: Please make your hotel reservations by calling the hotel directly. To take advantage of our group rates, all reservations must be made by Friday, May 6. When calling, please mention that you are reserving a room held for Walton Street Capital. Other nearby hotels include Park Hyatt (312) 335-1234, The Westin (312) 943-7200, Sofitel (312) 324-4000, Double Tree (312) 787-6100, Millennium Knickerbocker (312) 751-8100, Whitehall Hotel (312) 944-6300, The Talbott (312) 944-4970, and The Drake (312) 787-2200. Please contact these hotels directly for availability and rates.

Transportation: The hotel is approximately 45 minutes from O’Hare International Airport and 25 minutes from Midway Airport.

All major car rental companies operate at the airports, and taxi services are available from the airport to the city. Public Transportation via CTA (Chicago Transit Authority) is also available for those who prefer to travel by train.

Taxicabs Taxicabs are available on a first come, first serve basis from the lower level curbfront of all terminals at O’Hare and from door M5 at Midway. Shared ride service is also available. There are no flat rates; all taxicabs run on meters. Typically, a taxicab ride to downtown Chicago from O’Hare is $40 to $45 and to downtown Chicago from Midway is $35.

CTA The Chicago Transit Authority's (CTA) Blue Line provides 24-hour access between downtown Chicago and O'Hare International Airport. Trains run every 10 minutes or less from 5 a.m. to 8 p.m. Monday through Friday. A one-way fare for the 45-minute ride to O’Hare is $2.25 while the ride from O’Hare to downtown is $5.00. The CTA requires the use of fare cards for the train lines, but you may pay with cash or fare card if riding a CTA bus. The fare cards can be purchased from vending machines at the boarding stations, however the fare card machines do not offer change, nor does the attendant on duty. The closest stop to the Four Seasons from O’Hare is CHICAGO. There you can board CTA Bus #66 for a $0.25 transfer fee, which drops off at Chicago Avenue & Michigan Avenue.

The CTA Orange Line serves the southwest side of Chicago and connects Midway Airport and downtown Chicago in about 30 minutes. A one-way fare is $2.25. The closest stop to the Four Seasons from Midway is STATE/VAN BUREN. There you can board CTA bus #146 for a $0.25 transfer fee, which drops off at Delaware Place & Michigan Avenue.

For more information, please visit the CTA’s website: www.transitchicago.com

Meals: Restaurants located in the 900 North Michigan Avenue building (attached to Four Seasons Hotel) include King Café (Level 1), Frankie’s Scallopine (Level 5), Potbelly’s Sandwiches (Level 5), Baisi Thai (Level 6), Forty Carrots (Level 6) and Oak Tree Restaurant (Level 6) and Allium Restaurant, located adjacent to the hotel lobby on Level 7.

Walton Street Real Estate Funds V-VIII, L.P. 2016 Annual Investor Meeting Invitation 2 SAN JOAQUIN COUNTY EMPLOYEES' RETIREMENT ASSOCIATION SUMMARY OF PENDING TRUSTEE AND EXECUTIVE STAFF TRAVEL

2016 Estimated BOR Approval Event Dates Sponsor / Event Description Location Traveler(s) Cost Date Apr 5 - 6 Pension Bridge Annual Conferernce San Francisco, CA McCray, Calkins $2,000 January 22 , 2016

Apr 5 - 6 Miller Global Annual Investor Meeting San Antonio, TX Weydert, St. Urbain $3,800 February 12, 2016 Apr 12 - 14 IREI Editorial Board Meeeting Ojai, CA Garman $1,750 February 26, 2016 Deutsche Asset Management Client Apr 19 - 21 Dana Point, CA McCray $1,950 February 26, 2016 Services Conference Apr 27 - 29 Public Funds Roundtable Los Angeles, CA Calkins $2,000 February 12, 2016 May 22 - 25 GFOA Annual Conference Toronto, Ontario Cherng $2,500 February 12, 2016

Printed 3/9/16 8:20 AM SAN JOAQUIN COUNTY EMPLOYEES' RETIREMENT ASSOCIATION

SUMMARY OF COMPLETED TRUSTEE AND EXECUTIVE STAFF TRAVEL

Event Estimated Actual Event Report Dates Sponsor / Event Description Location Traveler(s) Cost Cost Filed 2016 2/26/2016 New and existing manager due diligence Boston, MA; St. Urbain Jan 18 - 21 $2,620 $1,840 (PCA Reports on 3 meetings New York, NY (Sancewich, PCA) DD Mtgs - Item 7.03) Jan 27 - 29 2016 VIP Conference Carlsbad, CA St. Urbain, Calkins $5,500 $2,901 2/29/16 Garman, Miller, Van Houten, Weydert, Mar 5 - 8 CALAPRS General Assembly Indian Wells, CA $12,000 TBD N/A Eshoo, Pabst, Calkins

Printed 3/9/16 8:22 AM ™ March 2016 FUNDAMENTALS

Greetings from the Cold Charles Aram and Jonathan Treussard, Ph.D.

Both of us are European-born and have features of these cities. While their winters a particular appreciation for kitsch-y can be unforgivingly harsh and cruelly Americana and its sunny outlook, perhaps demoralizing, they are also home to glorious as a reaction to our more neutral (some springs, magical summers, and riotously might argue, existential and heavy) colourful autumns. The same is true in cultural heritage.1 High in the firmament of investing. Just as surely as summer follows Charles Aram traditional Americana are the “Greetings winter, so too do unpopular strategies and

from” postcards depicting cities and sights asset classes enjoy their day in the sun.

It’s been winter from around the United States—although we “everywhere for the“ have noted the enthusiastic adoption of this quaint piece of memorabilia by other locales value-oriented around the world. The one characteristic investor. shared by all such postcards is the absence of the gloom and grey of winter! KEY POINTS

1. Cyclicality is a feature of both atmospheric conditions and investment performance. The historical record promises that for value investors, summer will follow winter—the challenge Investing Seasons is in weathering the passing We at Research Affiliates are value investors blizzard of negative returns. with a long-term contrarian perspective. We 2. Both U.S. and developed- seek securities, asset classes, sectors, and market RAFI™-based strategies have outperformed their cap- regions that are unloved and undervalued, weighted value benchmarks investing in and overweighting them the over the long term and on a 1-, Investors, like all Earth’s creatures, 3-, 5-, and 10-year trailing basis. more unloved and undervalued they become. experience “winter”—sometimes as Our strategy has a seasonality all its own, 3. The largest and most persis- unseasonably long—in asset classes, tent investment opportunity is sectors, strategies, and regions that can stay just like most reliable sources of long-term long-horizon mean reversion, excess returns we’ve come across. Although which explains the historical out of favour for months, years, and even outperformance of RAFI and decades. After years of living in Boston, seasons in investing may not conform as supports our expectation that neatly to calendars as they do in the physical the dynamic value tilt of funda- New York City, Paris, and London we can mental-index-based strategies attest that, whereas all four are exciting world, they are undeniably real, with excess will generate future excess returns oscillating between harsh winters returns over the long term. places to work and live, perfect blue skies and warm sunny days are not permanent and balmy summers.

Media Contacts United States and Canada Europe Hewes Communications JPES Partners (London) + 1 (212) 207-9450 +44 (0) 20 7520 7620 [email protected] [email protected] FUNDAMENTALS March 2016

Starting from a broad vantage and flow of returns.Figure 2 plots the The same pattern is present in equity point, let’s compare the cumulative term premium in U.S. Treasuries (long market strategies, a prime example excess returns of U.S. stocks versus the 10-year rate and short T-bills) along being value-minded strategies whose U.S. bonds over the 215 years from with two credit spread strategies (long cyclicality we’ve described in the past 1801 to 2015, as shown in Figure 1. investment-grade credit and short as “unreliably reliable”; thus, in our Stocks underperformed bonds for 15 10-year Treasury, and long high-yield view, distinguishing between weather years or more in three instances over this credit and short investment-grade and climate is a worthy endeavour. lengthy horizon: a 78-year period com- credit). Admittedly crude, and only Weather is atmospheric conditions prising most of the 1800s, the 20 years approximating actual investment over a short period of time, whereas following the Stock Market Crash of strategies, they speak volumes about climate is atmospheric “behaviour” 1929, and the last 15 years from 2000 to the functioning of financial markets. over relatively long periods of time. the present day. Nevertheless, we don’t All three strategies made good sense Cyclicality is an inherent feature of believe most reasonable investors would over periods as long as multiple investing (climate), with sometimes argue that abandoning equities entirely decades, accruing returns throughout volatile swings in returns (weather) as an asset class makes a lot of sense for the entirety of the time series, in no over each cycle. But none of this, on the a diversified long-term portfolio. less than 60% of all monthly rolling face of it, suggests a strategy is good or one-year time windows. Yet notice bad. It just means staying the course will This same seasonality repeats in just the cyclicality in returns—even for the be more or less uncomfortable. Thus, about every strategy and sector of the innocuous term-premium strategy— to assess the intrinsic performance market. Three simple, straightforward with annual reads of plus and minus attributes of a strategy requires a long- spread strategies clearly show the ebb 10% not being out of the ordinary. range perspective.

Figure 1. U.S. Stocks vs. Bonds, Cumulative Relative Performance, 1801–2015

$1,000.0

$100.0 20-year span, 15-year span, 1929–1949, 2000–2015, Performance Performance Bonds beat Stocks Bonds beat Stocks $10.0 Relative

78-year span, 1801–1879, Bonds beat Stocks $1.0 Cumulative

$0.1 1801 1821 1841 1861 1881 1901 1921 1941 1961 1981 2001

U.S. Stock vs. Bond Relative Return Last High-Water Mark

Note: Equity data are an equally weighted composite of Schwert Equity Index (1800–1925), FQ Equity Return (1871–1925), and Ibbotson Equity Return (1926–2015). Bond data are an equally weighted composite calculated using the U.S. 10-yr. bond yield (1800–2015), 10-yr. yield Global Financial Data (1800–2015), and Ibbotson Bond Yield (1926–2015). Source: Research Affiliates, LLC, based on data from Bloomberg and Ibbotson.

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Figure 2. Returns to Three U.S. Spread Strategies, 1974–2015

25.0% 40.0% Investment Grade minus Intermediate Treasury Treasury Intermediate minus Grade Investment 20.0% 30.0% and 10 - 15.0% 20.0% Yr. Treasury minus 3 - minus Yr. Treasury 10.0% 10.0% 5.0%

0.0% 0.0%

-5.0% -10.0%

-10.0% T Mo. -20.0%

-15.0% - Bill High Yield Yield High minusInvestment Grade -30.0% -20.0%

-25.0% -40.0%

10-Yr. Treasury minus 3-Mo. T-Bill Credit Spread (IG minus 3–7 Yr. Treasury) Credit Spread (HY minus IG)

Note: Investment grade and high yield are intermediate duration. Source: Research Affiliates, LLC, using data from the Federal Reserve Bank of St. Louis FRED database and Barclays.

Using data from the Fama–French Over the shorter 1979–2015 period opportunity is long-horizon mean online library to examine the ubiqui- (1979 marking the launch of the reversion” (Brightman, Treussard, and tous HML series (long high book-to- Russell 1000 Value Index), “plain Masturzo, 2014), which explains why market stocks and short low book-to- vanilla” capitalization-weighted value the dynamic value tilt of the RAFI market stocks),2 we can illustrate just has faced massive headwinds, but in strategy outperformed over the last how long the value “winter” weather the same environment, fundamentally 36 years. Value strategies generate has been. But first let’s look at the weighted, value-tilted strategies, such substantial excess returns in the long value “climate.” The mean one-year as the RAFI™ Fundamental Index™ rolling return since inception of the run, at least for those who can commit series, have withstood the headwinds series in 1926 is nearly 5% and—to to the strategy despite ups and downs to generate long-term excess returns. be conservative in the face of several in performance. The costs to investors Table 1 compares the performance of extreme realizations to the upside of not eschewing performance chasing the FTSE RAFI™ US 1000 Index and the (!)—the median of the series is still are very real, as documented by Hsu, Russell 1000 Value to the cap-weighted an impressive 3.7%. Furthermore, of Myers, and Whitby (2016), who found Russell 1000 Index over the 1979–2015 the 1,063 monthly values for one-year fund investors’ average dollar-weighted rolling returns, 660 were positive (a period. FTSE RAFI earned an excess returns underperformed their funds’ “batting average” of more than 60%) return of 1.87% for the period compared buy-and-hold returns by 131 bps over the despite streaks of negative prints as to the 0.31% excess return produced by period 1991–2013. This negative margin is long as 29 consecutive months.3 In the Russell 1000 Value. other words, value as defined by HML the result of both buying and selling late, has been a reliable long-term winner, This track record supports our core falling prey to chasing performance in despite significant short-term disap- investment philosophy that “the largest lieu of investing in undervalued securities pointment along the way. and most persistent active investment over the long term.

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Table 1. FTSE RAFI US 1000 Index Value-Add, 1979–2015

Long-Term Standard Sharpe Start Index 1-Year 3-Year 5-Year 10-Year History Deviation Ratio Date

FTSE RAFI US 1000 Index -2.50% 14.21% 11.81% 8.22% 13.60% 15.31% 0.57 1/1/1979 Russell 1000 Value Index -3.83% 13.08% 11.27% 6.16% 12.05% 14.65% 0.49 — Russell 1000 Index 0.92% 15.01% 12.44% 7.40% 11.74% 15.25% 0.45 — FTSE RAFI Value Add -3.42% -0.80% -0.64% 0.81% 1.87% — — — Value Index Value Add -4.74% -1.93% -1.17% -1.25% 0.31% — — —

Source: Research Affiliates, LLC, based on data from FactSet.

Let us look more closely at the “sea- In response to the recurring underper- at −3.42%, which dragged down the sonality” of a U.S. equity value strategy. formance of value stocks over the last trailing 3- and 5-year excess returns In order for a value strategy to gener- several years, RAFI-based strategies, to near zero. ate excess returns, mean reversion in relying on a disciplined rebalancing valuations must take place. Simply put, approach, have increased their active The long-term tracking error (1962– enough “expensive” stocks must get weight to the two worst performing 2015) of FTSE RAFI US 1000 relative relatively cheaper and enough rela- developed-market sectors—energy to the S&P 500 Index was 4.2% tively “cheap” stocks must get at least and basic materials—the only two annualised,4 not exactly an “extreme” a little less cheap. But the requirement sectors to post negative returns. In concentrated deep-value strategy. is not that this happens uniformly and 2013, after rebalancing, the active And yet, pronounced cyclicality is a concurrently for every security, just for weight to these two sectors for the reality. In the warmest of summers, a sufficient fraction of the market; that FTSE RAFI Developed 1000 Index was FTSE RAFI US 1000 may outperform said, the last two years or so have been 2.29%, in 2014 the active weight rose by 20% or greater, as it did in the characterised by somewhat extraordi- to 3.60%, and in 2015 to 5.59%. aftermath of the tech bubble or nary circumstances in which value has after the darkest hours of the global been punished across virtually all sec- What Winter Looks Like financial crisis. Nonetheless, even a tors on a global scale. In others words, As if there is doubt in anyone’s mind, 4.2% tracking error allows for deep it’s been winter everywhere for the let us state unambiguously that we pain, as exemplified by the negative value-oriented investor. are writing this particular missive from return posted in 2015. the depths of a very painful winter in As Figure 3 shows, over the past two value-land. Table 1 shows this clearly. We must remember, however, that years as RAFI-based strategies began On a 1-, 3-, 5-, and 10-year trailing seasons come and seasons go. to experience significant performance basis, Russell 1000 Value generated Eventually long winter nights will give challenges, in nearly every sector of solidly negative excess returns, way to seemingly endless summer the developed equity market expensive −4.74%, −1.93%, −1.17%, and −1.25%, days in which we can enjoy the stocks—the top decile by price-to- respectively. In a parallel, though much ripened fruits of seeds planted much book (P/B) ratio—beat cheap stocks— milder manner, FTSE RAFI US 1000 earlier. Our notes then will be sun- the bottom decile. The sole exceptions posted negative excess returns on a 1-, filled postcards reporting stupendous were the healthcare and telecommuni- 3-, and 5-year trailing basis. Last year’s excess returns. But summer weeks, cations sectors. performance was very painful indeed like their preceding wintry months,

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Figure 3. Developed Equity Sector Performance, 2013–2015

60

50

40

30

20

10

0

-10

Difference in Returns (%) Returns in Difference -20

-30

-40

-50

Most Expensive Decile (P/B) Cheapest Decile (P/B)

Source: Research Affiliates, LLC, based on data from FactSet.

succumb to the passage of time—and Table 2. Shorter-term horizons, however, emerging markets, where value has anchoring on their lost splendour only reveal a different story. been most severely punished, the makes the next winter that much more RAFI strategy more pronouncedly difficult to tolerate. For the three years ending December underperformed, down −4.82% versus 2015, the FTSE RAFI Developed 1000 the MSCI Emerging Markets Value Global Winter—Not ex US Index underperformed the cap- Index underperformance of −3.08%, Just the Northern weighted MSCI World ex US Index by both relative to the cap-weighted Hemisphere a handful of basis points (−0.04%); benchmark. Indeed, the winter in value- The same performance pattern for value by comparison, the MSCI World ex land is being felt around the globe. relative to cap-weighted indices realised US Value Index underperformed by over the last decade in the United States −2.42%. Over the same period, in Last-Minute Winter also holds for similar strategies beyond Getaways The long and unforgiving winter in the United States. In the long term, Just as surely as summer

RAFI-based international strategies value-land has left many investors

produced meaningful value-add, “ follows winter, so too understandably craving a little sunshine. outpacing cap-weighted benchmarks do unpopular strategies and“ We’ve been there—caught in the grip of a steely grey winter—desperately by 1.94% (developed equities), 2.35% asset classes enjoy their (developed equities ex U.S.), and 3.43% jumping on the internet to book a last- (emerging markets), as reported in day in the sun. minute flight to an island paradise for a

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Table 2. FTSE RAFI International Strategies Value-Add, 1984−2015

Long-Term Standard Sharpe Start Index 1-Year 3-Year 5-Year 10-Year History Deviation Ratio Date

FTSE RAFI Developed 1000 Index -4.26% 8.63% 6.55% 5.59% 11.61% 15.27% 0.51 1/1/1984 MSCI World Value Index -4.82% 7.71% 6.38% 3.79% 9.45% 15.19% 0.37 — MSCI World Index -0.32% 10.23% 8.19% 5.56% 9.67% 15.20% 0.38 — FTSE RAFI Value Add -3.94% -1.60% -1.65% 0.02% 1.94% — — — Value Index Value Add -4.50% -2.52% -1.82% -1.77% -0.22% — — — FTSE RAFI Developed ex US 1000 Index -4.80% 4.37% 2.45% 3.79% 11.15% 17.74% 0.41 1/1/1984 MSCI World ex US Value Index -7.68% 1.99% 1.90% 1.95% 9.58% 17.50% 0.33 — MSCI World ex US Index -2.60% 4.41% 3.28% 3.41% 8.80% 17.37% 0.28 — FTSE RAFI Value Add -2.19% -0.04% -0.83% 0.38% 2.35% — — — Value Index Value Add -5.08% -2.42% -1.38% -1.45% 0.78% — — — FTSE RAFI Emerging Markets Index -21.31% -11.24% -7.87% 3.97% 12.30% 23.85% 0.45 1/1/2001 MSCI Emerging Markets Value Index -18.57% -9.50% -6.74% 3.39% 9.33% 22.86% 0.34 — MSCI Emerging Markets Index -14.60% -6.42% -4.47% 3.95% 8.87% 22.81% 0.32 — FTSE RAFI Value Add -6.71% -4.82% -3.40% 0.03% 3.43% — — — Value Index Value Add -3.98% -3.08% -2.27% -0.56% 0.46% — — —

Source: Research Affiliates, LLC, based on data from FactSet.

couple of days, only to return tired and their becoming more expensive, much that examines six common U.S. equity poorer. Much like last-minute tickets to like the cost of that last minute trip! The strategies—value, positive momentum, the Caribbean or Mediterranean have a rise in the FANG stocks’ collective P/E small cap, illiquid, low beta, and high nasty habit of being extremely expensive is of particular note when compared gross profitability—since 1967. A in the darkest days of February, the to the P/E of the S&P 500 at year- comparison of the relative valuation getaways available to investors seeking end—approximately 42 vs. 20. For a and subsequent relative performance relief from their recent experience in few days in early February 2016, Google for each indicates a strong link between value strategies may prove expensive overtook Apple in terms of market the two: the market’s performance- and disappointing. capitalization, a dubious honour and chasing behaviour has created much of not an encouraging sign for investors the factor’s return. This rise in relative Consider the market darlings known jumping into Google after such a run- valuation not only boosts past relative by their acronym FANG5 (Facebook, up. This move, of course, isn’t all that performance, it also opens the door Amazon, Netflix and Google, now has occurred in the early weeks of 2016. for subsequent lower returns when Alphabet). Collectively, as illustrated in The market has seriously corrected, valuations revert to historical norms. Figure 4, the stock prices of these four taking with it the prices of the FANG In fact, seeking a “return”-getaway in companies increased 200% from June stocks, very possibly an early crack in any of the five strategies (other than 2012 to year-end 2015. In addition, the growth stocks’ running the table. value) analysed in the study appears collective P/E of the four nearly doubled to invite an expensive one-way ticket over the same period, indicating their Another perspective on cyclicality is to underperformance when valuations stupendous returns are largely a result of a recent study by Arnott et al. (2016) inevitably adjust.

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Figure 4. Cumulative Return and P/E: FANG Stocks versus S&P 500 Index June 2012–February 2016 250.00% 50.0

45.0 200.00% 40.0

35.0 150.00% 30.0 P/E 100.00% 25.0

20.0 50.00% Cumlative Return 15.0

10.0 0.00% 5.0

-50.00% -

FANG Cumulative Return S&P 500 Cumulative Return FANG P/E S&P 500 P/E

Source: Research Affiliates, LLC, based on data from FactSet. FANG P/E calculated by summing the net income of all four FANG stocks and dividing by total market capitalization of all four stocks.

Restorative Summer significantly more than the losses they endured during the value winter. As Holidays The market has seri-

Similar to the angst experienced by time and experience has repeatedly

ously corrected,…very blizzard-trapped and drizzle-logged “ proven, disciplined value investors, such denizens of frozen and bitter climes, the possibly an early crack“ in as ourselves, will be rewarded—one day (we hope soon!) to be basking in long- pain felt by value investors is tangible. growth stocks’ running In the midst of the dreariest days, it’s all awaited summer breezes. too easy to overlook the fact that these the table. exact conditions presage a reversal We would like to believe that the first in seasons and will eventually usher signals? Of course, but past is not few weeks of 2016 are the beginning of in a possibly extended span of strong prologue. Rather, we are taking the winter thaw, as expensive, growth returns for disciplined value investors. shelter from the adverse elements in stocks come under pressure. Are we Mean reversion has shown itself to be a disciplined value-oriented strategy. experiencing an inflection point? Are a reliable and powerful force, and the A boon of fundamental index–based summer days just ahead? Only time most persistent investment opportunity strategies is their persistent ratchet- will tell. But we are confident enough for long-term investors. like moves to a deeper value posture in the coming warmer weather that whenever value rotates out of favour we are perusing the book stand to Could we attempt to assess the or further out of favour. Then, when the choose our beach reading list and “turn” in the weather by relying on inevitable snap-back in mean reversion searching the attic to locate our our observations of past and current occurs, these strategies should recover luggage under the eaves.

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Endnotes References 1. This positive outlook may very well be why we both work for an Ameri- Arnott, Robert D., Noah Beck, Vitali Kalesnik, and John West. 2016. “How can enterprise, and one of us made a home in the United States more Can ‘Smart Beta’ Go Horribly Wrong?” Research AffiliatesFundamentals than half a lifetime ago. (February). 2. http://mba.tuck.dartmouth.edu/pages/faculty/ken.french/data_library.html Brightman, Chris, Jonathan Treussard, and Jim Masturzo. 2014. “Our Invest- 3. This exceptionally long episode (29 months) of poor performance in value ment Beliefs.” Research AffiliatesFundamentals (October). stocks extended from September 1989 to January of 1992; the recent rut for value, according to the same data series, is in its 15th month. Hsu, Jason, Brett W. Myers, and Ryan Whitby. 2016. “Timing Poorly: A Guide 4. Other FTSE RAFI Index strategies have exhibited annualised tracking to Generating Poor Returns While Investing in Successful Strategies.” Journal error in the 4–6% range over the 1962−2015 period. of Portfolio Management, vol. 42, no. 2 (Winter):90–98. 5. Being included in an acronym seems to be a highly contrarian indicator, at least based on the appearance of the now disgraced BRIC countries: Brazil, Russia, India, and China. These four nations went from beacons of hope to toxic waste in the eyes of global investors shortly after reaching acronym status. Keenly aware of the exaggerated mood swings of market participants, we trust the truth is somewhere in the middle—neither beacons of hope nor toxic waste.

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