retirees, compared to actives, that will even be shorter. >> will that have an effect on us because our distribution is different than other plans on average? >> well, yes. so your 50th percentile is less, and other plans it would be 8% or 10%. so you're longer than probably the average plan in looking out and at how far out you should look at your assumption. >> i can't conceptualize in my mind why that is, why do we have a different profile? >> because you have more active compared to retirees than they do. >> more contributions. >> so the greater proportion of your benefit payments are further out in the future.

so just to give you a look at other sets of capital market assumptions we went out and we looked at well-known consultants who posted their assumptions on the internet so you could get them and had capital market assumptions that matched reasonably closely to your asset classes. but one of the issues is always getting the right assumption to match with the asset class. they weren't always perfect. the most difficult class for us to match up was private debt and when there was nothing close we used the nepc assumption. but -- so the ones that we're showing here are black rocks, j. perform morgan, northern trust and averas. and they define them over

different time periods and i put those there but i wanted to show you here you can see the green diamonds are the other consultants and the blue squares are nepcs. and so nepcs' 30-year assumption is the highest and the five to seven year fits very closely with some of the other assumptions. and just to give you a sense of what is -- what might be driving that, we looked at the assumptions by asset class and set them up here. so on the far left it reordered the class assets left to right, based on the weight in your portfolio. and so there's equity and return and you can see where the individual saw saw. are assumpt.

>> do you get a feel for how well -- i think that it was money managers and not consultants. >> well, there's a mix. >> what is the record for forecasting? >> well, that's very difficult to assess for any of them. >> (indiscernible). >> well, all of the firms are ones that we have seen have a fairly good reputation. we didn't just pick anybody who had anything out there. they have an established protocol. most of them put out a lengthy white paper and how they developed their assumptions so you know that they have a robust process to it. and so it's not just trying to grab any set of assumptions that is out there. but it's also not comprehensive list of consultants. the intent is to give you a sense of the landscape out there

for the different assumptions. there's obviously a lot of unknowns here and we are not qualified to say that any one assumption is better than the other. >> but they stand apart from nepc which i thought that we were simply using them but it didn't justify -- i wouldn't say right or wrong -- but there's a significant difference there? >> yeah, in some cases so we thought that the board should be aware of those differences, particularly with the 30-year assumption. >> perfect. >> in fairness though -- a lot of the others, their time horizon is shorter and the one that is up here above 7.5% on this is mikita's 20-year assumption. yeah, that one right there.

just looking within nepc's assumption there's a distribution of potential returns that is not unusual and it's fairly significant, right, to understand how those could vary based on the mathematical model. so there's a lot of information here and how do you put it together and it's very difficult. i think that we do believe that given this information that a range between 6.5% to 7.5%, would be considered reasonable and so while the current presumption of 7.5% is still reasonable we do think that the board should consider reducing the assumption going forward.

and so this just sums up our recommendations and at the bottom we gave sort of three proxies on expected returns and if you wanted to consider a change. >> a few questions. on page 38, the other consultant managers projection, did you use our asset mix, our proposed asset mix with their returns for the different classes? okay. and back to page 29 i wanted and you the bottom bullet, and risk and preference. what do you mean by risk? >> that it's different than expected. >> that's all of the different types of outcomes. >> so this assumption would be expected returns. so the actual returns are different than what you expect

expected. really what we're getting at there is how aggressive or conservative does the board want to be going back to the notion that we're essentially starting a budget exercise where we're anticipating how much we're going to get with investment returns versus how much is going to have to come from contributions. if we overestimate the investment returns now it will have the contribution lower now but we'll have to pay more later to make up for it and vice versa. and there's obviously a range that is reasonable. there's a range of investment consultant expectations. there's a lot of uncertainty in the markets going forward. and so there is no one -- we can't just plug everything into a formula and say this is the number that you should use. we need to assess kind of how

aggressive or conservative do you want to be. >> explain the contribution rates go up for an actuarial loss, when is somebody going to scream ouch? >> and you don't -- you know, one of the things that can get plans in trouble is if those accumulate, right? >> that's my two big questions. >> right. and, yeah, now is a good time to go back to this is a discussion item only. we're not asking for a decision today but we wanted to get the information in front of you so that you could have time to think about it and to ask questions and to raise any issues. yeah. >> i say that if someone wanted to lower the rate of return, they wouldn't be necessarily be limited to the three options that you provided?

>> no. >> right? there's a sort of litany of scenarios where people could have a sort of end result and work to get there. so if someone wanted to say reduce by five basis points a year over the next five years to get to 7.25%, i mean, is that reasonable? >> so what we're saying here is that we believe that for this year that anything between 6.5% and 7.5% we consider reasonable. and so doing something like that, the standard would require that each step be reasonable in the year that it is used. and so if we went 7.5% to 7.45%, we're saying, yes, that's reasonable this year. and next year we'd have to look and make sure that 7.4% would still be reasonable. but that's a reasonable approach. i would say that there's been a lot of discussion in the actuarial community that rather

than do that, that we -- if the reason for doing that is because you want to freeze the impact on contributions, just adopt the lower assumption and then have us directly phase in the impact on contributions. and we can do that -- we did that -- >> we did that with the 2015 demographic assumptions, assumption changes that we made. we actually are stepping into those in a five-year period i believe. >> in terms of the bottom line number -- >> in terms of the contribution that you can get about the same result. >> the downside or upside to one versus the other? >> the idea is that you're telling them what you really think that the target is. if you think that the target is 7.25%, you're giving that target

and we're showing that target of the liability target and then we're just addressing the phase in of the contributions as a stabilization impact. so that's why it's preferred is the basic measures are on the rate that you want to get to. >> now over what period of time are we currently phasing them in? >> we did five years on the -- on the demographic assumptions. i don't think that i'd want to go any further than that. >> and on any change in the assumed rate of return you probably would recommend a five-year period as well? of phasing in? >> so we amortize the impact over 20 years. but what we did is that we -- instead of paying the full amount of that 20-year a.m.orization in the first year we only paid one-fifth of it and then the second year two-fifths

and three-fifths and four-fifths and then got up to the full amount. now the full amount was larger because we accumulate with interest for those first few years. >> any questions from the board? >> in the amount of dollars it doesn't really matter and it has to do with the rate of return for our asset mix? >> right. so here's the allocation that is on slide 33. and that's the basis, the analysis, that's the basis for the nepc assumptions and that's what we have plugged into the other capital market assumptio assumptions. >> and we did an allocation mix and now it comes back to how the effect on contributions expect

for the rate of return? i remember the discussion when we were at 7.58% and the plan had been to go to 7.5% and we froze at 7.58% that year and i do remember that discussion very well. and there was no real facts given to why 7.58% but that's the way that the vote went. but there's other things that we're doing, it will come up -- we have an item a couple moments from now about whether or not we're able to improve our public equity performance or not. whether or not -- which is more justified and you say 6.5% to 7.5% and i can make the case for 7.5%, and i'm not trying to keep the rates up or down to help anybody, it's what we think that our investment team can do? >> yes. i guess that i'd say that these are -- these are essentially assumptions and, you know, our standards put a pretty high bar for including any above expenses

into the calculation. >> let's do that. i appreciate it. thank you. >> i want to open up for public comment. any members of the public that would like to address the commission on this item? >> i am john stenson, a member of a pension fund. when it comes to inflation there's only three asset classes that you need to outperform inflation and that's stock bonds and real estate. stock bonds and real estate, in the past 100 years have had returns of 7.5% to 11%. just as simple and best. and they rebalance every year and in the last 100 years of 8.4%. and the investment consultants will have you investing all over the world and high-risk investments like -- especially like phones and emerging markets. it's not necessary to do it.

you don't even have to go outside of the united states. in the next few years you'll have a big recession, maybe as big as the last recession. and the safest place in the world to have investments is in the united states. and if you don't believe me, ask warren buffet. >> president stansbury: any other members of the public that would like to address the commission? seeing none we close public comment. anything else before the next item? thank you both. sorry, you got pushed to this month. >> it's quite all right. >> president stansbury: thank you for the time. next item. >> clerk: july analysis of the protection strategies which was continued from the july 10, 2018, retirement board meeting.

>> we'll walk through the nepc analysis and then i'll have some comments on staff analysis. >> mr. president, commissioners, this analysis is an update and extension to the protection material reviewed several months ago. we analyzed historically what put the protection at a 20% level would have meant for this plan and we looked prospectively at what the costs of protecting against a 20% or more decline or a 10% or more decline in the equity portfolio would have resulted in. the top line conclusion is that protection is expensive. and protecting against extreme events is cheaper than protecting against every downside event but it's still quite expensive. if we had elected to try to protect the equity portion of this portfolio, in june of this

year for the next year and protect against a 10% or worse decline, it would have cost approximately 3.4% of the total portfolio. so you would have had to experienced a decline of 13.5% or worse in order to have any economic benefit from that protection. >> 3.4%, where would i look in the presentation for that? >> that is on page... -- one more page -- page 5 right there. so for the $10.2 billion portfolio of global public equities, the cost of the contract, line item d is $334 million for 12 months of protection. so if the plan -- if the equity fell 10% you'd lose the 10% that

the equity fell plus the $343 million in costs to put the protection in place. and you'd have to lose significantly more in order to have any benefit from this. and as we discussed before there's a lot of other ways to try to protect yourself from an equity draw down. that's the whole point of the many conversations that we've had about diversification. many of those other strategies, like the absolute return strategies that we have been adding to this portfolio for the last number of years have positive expected returns going forward. they're not insurance. you expect to make money in them. this is something where over long periods of time you'd expect to lose money. you're buying insurance and it's pretty expensive. we believe that it's extremely difficult to protect exactly when this protection will pay off. and it's much more important to

focus on getting that required rate of return to 7.5% or whatever it is. this is an expensive type of protection. >> can you just walk us through the table here on 5.5? >> sure. so we're looking at $10.2 billion of global public equity in the portfolio. and we priced how much it would cost to protect against a 10% -- or 90% draw down protection. so 10% -- the first 10% of losses you wouldn't be protected from but everything beyond that 10% you would be protected from. so if the markets fell by 15% or 20% or 30%, then the cost of this contract -- you'd have a benefit, you'd have a gain at the end. but you're not projected in the first 10% move. and the cost of this protection

in june of this year for the next 12 months was about 3.4% of the portfolio that you're trying to protect against. so you really are only protecting yourself against extreme downside returns and it's a pretty significant cost going forward. >> why is the cost the same for each scenario? >> well, we priced what it would cost to protect ourselves against this return in june 2018 for the next 12 months. and that cost is a known -- is a known price. so that price is -- you pay for it in june and that price you have already paid so it doesn't change no matter what scenario happens in the next 12 months. what does change is that you bought the insurance, now you're waiting to see whether the insurance pays off or not. >> so options that are further out in the money cost the same as -- >> well, this is only one option that we're showing you on this

page. if we go back two pages you can see the cost of only protecting yourself against a 20% or more decline. instead of being $340 million it's $191.5 million. >> okay, i'm misreading the table. >> we have one showing zero percent out of the money. >> so we ask them to look over a 10-year historical timeframe and what would have been the impact of protecting ourselves from this 20% decline. it's the page that you're looking at right here. and they found that -- your return, your -- your plan return over the past 10 years would have been about 1% worse. the cost here -- and we believe that looking prospectively and looking forward if we were to do a 20% protection like this every

single year that we think that your expected return would be along similar lines. it would be about three-quarters a percent. >> and that 1% is annualized so compounded over 10 years -- (indiscernible). >> so you're saying about 1% of planned assets per this? >> we can return to that in the presentation. >> sorry if i'm getting ahead of you here. >> no, no, that's fine. it's page 4 of the presentation. i don't know who is turning the pages here. oh, are you? >> (indiscernible). >> i think that it's all in one document.

right here. >> so this actually looked at historical performance of this plan from september 2007 to september 2017. and the portfolio here earned 5.51%. but if you had used the option strategy it would only earned 4.75%. so that's a 1% per year cost looking back over the last 10 years. this is not cheap and the impact is significant over a long period of time. if you have a crystal ball and you'd know exactly when to buy this protection you can obviously make money. but historically speaking most years this kind of a protection

is worthless. so you're buying insurance and in most years you don't get a benefit from it. >> so then what you're really hoping for is knowing when the market is going to crash and can you buy it at the right time, say, 12 months before there's a significant correction. i mean, reasonable markets like this, what do you think? >> well, we've been talking about these strategies the last couple of years. and it's been reasonable to think that they might happen. they haven't happened yet. so it really is -- i don't know whether it's going to be -- whether we're going to see a 25% or 30%, 35% market decline next year or the year after. i think that it's reasonable to think that it will happen eventually but i also think that it's reasonable to believe that over long periods of time that you're going to come out behind because you're buying this

insurance that's expensive. >> i'll be addressing that. >> okay. >> you want to jump right into that. >> so, commissioners, let's go to page 1 of staff memo. this is the -- >> i'm sorry, one last question before you get to that. we were talking about the parametric presentation and we're talking about the cost over 10 years and that was how much of a drawdown? 10%? what were we saying for the options? a 10% loss, 20% loss? >> that was for assuming a 20% loss. >> so the parametric analysis as assumes that the cost is based on a 20% loss? yes? okay. thank you. >> so, commissioners, turning to the staff's memo, page 1, this

highlights the percentage cost to just hedge only the public equity expert foa portfolio whis on a $10.2 billion would cost us $533 million. what that means is that -- and these are all based on one-year contracts. so say starting july 1 and ending june 30th, is that if we had a loss of more tha 5.2%,s would earn us positive returns. and at for a 10%, would be protected -- this is numbers that are slightly different -- a loss of more than 13.3%. this would be a positive -- positive strategy. and if it was 20% out, it would be more than 21.7% for the

strategy to turn a positive return. i did want to highlight a couple of things because getting the magnitude and the timing of this kind of strategy is critically important for it to be successful and even if you have a large loss, but the large loss doesn't happen inside of your contract period and it's not large enough and you still won't make money even though the market has declined a lot. for example, in the bursting of the internet bubble we had losses of 9 -- well, you see the numbers here, particularly in fiscal years ended june 30, 2001 and 2002. and the market fell 17% and 20%. but buying 20% would have added to your loss, okay? because the market didn't fall more than 20% in either period. so you would have had a compound

loss of almost 35%, plus the cost of putting another more than 3%. these are based on market valu values. market values. another event would have been, say, black monday in 1987 when the market fell 22% in one day. if you'd had bought on july 1 and sold them on june 30th is that you wouldn't have made money on that because the market recovered rapidly beginning in november and finished the year -- fiscal year, with the loss of only 4%. even though a lot of people were very scared of a depression-like scenario and even a week after black monday is the market fell

another 8% on one day. and so it wasn't clear to participants that a bull market started in november 1987 until way after the fact. just like in the current bull market, nobody probably recognized that we were in a major bull market until we were years into it. recently we've had since the end ever the g.f.c. we had six declines in the market that have approached between 10% and nearly 20%. and buying -- put options 20% out of the money would not have protected us from such a decli decline. so next -- so this just talks on page 3 a little bit about whether or not to buy it strategically which means buy and hold it for one year and then buy it again, okay? you can see the cost of this.

and you saw parametrics assessment of what the impact would be over a long period of time. and then another option would be to try to puts tactically, means to buy them for a year and sell them but not buy them again the next year. or buy them on, say, july 1, and sell them some time during the course of the year. to get that right you have to open up the markets decline by more than the cost of the puts, okay, and plus you have to get the sale of the puts correctly in terms of timing. again, we just saw an example in 1987 where if you had sold your puts at the end of october, 1987, you would have made a pretty nice profit because it

declined from july to october and it was about 30%. but if had waited even three or four more months, your puts would now have not been in the green. okay? your loss would have been less than 20%. and by the end of june it would have been a loss of just 4%. so an important thing in deciding, you know, whether to buy puts is to determine how often markets decline a lot and by how much they decline. and this estimates that a 10% decline on average is 16 to 17 months. but the way that the market declines 10% is that predictive of whether or not it will decline 20%? the answer is, no, okay? you see here that it estimates that only one-third of the time

when the markets have declined 10% do they go on to fall another 10% so that its total decline is 20% or more? how about if the markets decline 20%, is that predictive of whether or not markets go on to fall another 20% such that their total decline is 40%? and the answer here, again, is no. only 22% of the time or about one time in five when markets fall 20% is that predicted that the markets will go on to fall 40%. okay? on page 4, we look at different characteristics of different major bull markets. this list, the 10 largest bull markets which range from like negative 27% to the great depression, and you see that the characteristics vary widely.

our high valuations predictive of a major bear market? only five times out of 10 were high valuations present at the start of a major bear market. so half and half, a coin flip. the one factor that has been common among major bull markets is recession. they've been present in eight out of 10 major bear markets. but this is critically important, is oftentimes the recession began well after the bear market was already underway, okay? this happened in 1929. it happened in the bursting of the internet bubble. and in the g.f.c. the recession only began well after the bear market was

already well underway. so the bottom line here is that it's hard to point to -- i think that it's impossible to point to any single factor for any group of factors and say that we have a high level of confidence that there's going to be a bull market in our timeframe that we're buying the contract for. and what we looked at is from the period where regulations began which is 1940 and we looked at every fiscal year, from july 1940 to june 2018. and so there's 78 years during that period. and what we wanted to know is how many years in those 78 years

would buying puts at the start of the calendar year and letting them expire at the end of the year, how many years would buying puts have been a profitable trade. okay? and we looked at it in three ways. buying zero percent out of the money puts and buying 10 and buying 20% out of the money puts. so buying zero percent out of the money puts, the puts would have expired worthless in 66 out of 78 years. it would have been a profitable trade and the markets would have fallen more than 5.2% out of 12 out of those 78 years. but the cumulative effect of that, again, for a current $10.2 billion equity portfolio, assuming that there's a constant rate of $10.2 billion every year is that you see that it would have had aining negative impactn the portfolio of a large sum of

money. and the same for 10% out of the money puts is that it would have been a profitable trade only five out of 78 years. this seems remarkable of buying 20% out of the money puts will end them for one year if there was only one year where that proved to be a profitable trade and that was for the fiscal year ending june 30, 2009. it would not have been a profitable trade in 1987, when the market fell a lot and it would not have been a profitable trade during any three years of the bursting of the internet bubble and it was a profitable trade in only one year. go ahead. >> if i could add that profitable trade doesn't mean that you would have enjoyed the results of that. the unsmooth market value of the plan in that one fiscal year

went from 103% to 72%. it was a very painful year. if you had bought 20% out of the money puts you wouldn't have gone to 72%, you would have fallen to 74%. instead of falling from 103% of the -- of the -- of the fund status. and the market value -- instead of 103% to 72%, that 20% money put option would have protected you as much to fall from 103% to 74% so it's not much protection. >> what was the worst year that we had? >> that's only purchasing on a one-year basis? >> yes. yes. if you bought those puts and all of those previous years you wouldn't have been 103% to start with, you would have been lower because you wouldn't have had those returns. >> so say you let those puts then expire at june 2009 and you

didn't buy them again, you know. and instead of having a funded status now of 93% we would have 95%, is that right? >> probably pretty close, yeah. >> why was the effect so small? the market rebounded by the end of that time period? >> because the market falls from june-to-june by more than 20% plus the cost which was 1.7 -- it had to fall by more than 22%. >> the market did begin to recover rapidly on march ninth, okay? it had a really robust rally in the second half of march and april. i don't recall what the return was from march to june but it was considerable. i believe that the market by march ninth at the start of the fiscal year was down about 40 but i think that it finished at a loss of 26 or 27%. i think that it's like negative

27% or 28%. so you have to get your timing exactly right. because when the markets -- because bull markets, they tend to -- they tend to be not always, again, every bull market has its own characteristics and 73%, 74% was just a drip and every month was down. and whereas in the bursting of the internet bubble, the markets actually rose sharply for several months preceding the 2000 election. now the market gapped down quite a bit but then from about june to october it rose a lot and then when there was uncertainty about the presidential election it began to decline a lot. but my point is that in -- in every major bull market that there are often powerful cyclical short-term bull

markets. for example, when -- when the markets fell considerably in january of 2008, they rose sharply in february of 2008. and then they fell again and then they rose again. and the clarity of whether or not we were in a really deep bear market did not become clear until the collapse. so i'll finish up here real quick. so then on page six you can see the impact. if we had bought -- out of the money puts at various levels, if you would see that we would have had a very small decline if we had bought several percent out of the money puts but our current return out of the last 11 years would have been almost 2% less and as dan indicated for a 1% -- excuse me, 20% out of

the puts is our return would have been almost 1% last annualized over the last 11 years. and looking at some of the charts, i thought that this was very relevant. how often has our plan experienced a large loss? okay, what we care about is we care about our funded status. and our funded status is measured at the end of every fiscal year and that's our key sensitivity date, what is our funded status at june 30th. and our funded status at august 30th or march 31st is much less relevant, okay? it's june 30th. so that's why i wanted to look at how often do we experience a large loss? we only had one year where we have lost materially more than 10%. when we did lose, you know, more than 20%, okay? and that was in the g.f.c. and now remember that in the

g.f.c. is, you know, the volatility in the equity market was something like about 5 acts relative to its normal standard deviation. and the volatility in the high-yield bond market was such that if you used normal probability of distribution or returns it should happen once in the history of the world. it was a real anomaly. and i might point that over 10 years things were okay, okay. we did recover and the world didn't collapse, it felt that it was but the world didn't collapse. let's look at our fiscal year returns. so you will see here this now shows every year that we've only had one year where we materially lost more than 20% and we've only had two returns where we lost materially more than 15%. on the next slide this shows how punishing or generous markets

can be over short periods of time, one year. and you'll see that we've had five periods since the great depression where we lost more than 20% in any rolling one-year period of time and we've had two periods where we lost about 40%. and so if the bottom line of this message in the short term is that the markets can be generous or they can be punishing and we all know that. and how about over longer periods of time. even over five years, you looked at since regulation that losses more than five years are relatively rare. and you look out over 10 years and the losses essentially are non-existent in the equity market, okay? what this is beginning to tell us is that over -- the markets are punishing or generous in the short term and we see that

punishing element goes away. and let's look at how much it goes away and how much that punishing effect goes away. so over 20 years since regulation is we have earned a minimum of about 6% rate of return and annualized rate of return over a 20-year return in the equity market and how about a 30-year period. and the minimum 30-year return in the s&p 500 since its inception has been 8.5%. that's its lowest return. how about compound, what is that? that's an 11.5% return over 30 years. the bottom line between the three charts in the short term, the markets are generous or they're punishing. but in the long term they've been generous.

>> thank you. commissioner driscoll? >> commissioner driscoll: i'm not sure exactly what was the key question that you were trying to answer when you wrote all of this up, but i can make the case as well why puts on strategically almost doesn't make any sense. but that's why we diversify across many asset classes. i'm not sure exactly how you represented the great recession here in your tables. or even if you accurately reflect that but i'll just let that one go. in your conclusion it's about the strategic use of puts. but then you sort of talk about the tactical. at one point you talked about there were five markets where valuations were excessive, is that the time to put puts on?

it will be more expensive at that point in time, let alone netting it out. but i'm not trying to do this strategically or don't do it at all? >> we think that doing this strategically is a poor idea. we think that doing it tactically is an extremely difficult thing because you need to know the timing and the magnitude, you need to know how much a -- when it's going to happen, when it will end, and how much it will -- how much the magnitude will decline? for example, we have been encouraged by one person who has been present in many of our readings and urging us in really, really strong language to buy puts for 3.5 years. that the market -- that there's, quote, going to be a bear market some time in the next five years. well, how helpful is that? you still need to know the exact

time. it's not happened in the last 3.5 years. and so far buying 20% out of the money puts would have cost us a little over $600 million if we had done that. if we had bought zero percent out of the money puts it would have been devastating to the plan. so the message here on commissioner driscoll to do it tactically is that i just outlined how much it would have cost to try and do that tactically and if you were wrong about the timing and the magnitude it would have been very, very costly. >> insurance is never cheap. >> um-hmm. >> i think that most of our buildings that we have fire insurance, how many do we have earthquake insurance? >> there's huge differences between buying insurance for an individual and buying insurance for a plan, okay? you -- the concept of insurance

is to -- to insure against a loss that would be financially devastating for an individual should the small -- small probability of a loss -- a large loss -- actually occur, okay? that doesn't apply here because first of all we have a very long time horizon and, second, we don't have a single individual. our entire net worth can't be wiped out. >> we had the advantages of pooling, okay? keep going. >> okay, that's it. >> the question is if we see high valuations, extreme valuation periods. is that the time to tactically use puts, sort of rediversifying all of our assets? we can tell our managers to send us 20% of their money for cash, we can do that, right?

or we don't say anything to them and we put puts against all of their positions? there's all ways of managing risk tactically? >> right, right. so if we did see that environment and as a board, or a commission, as a staff, as a consultant, could we recommend or decide to buy puts for one short period of time we could. but we could also decide to change the asset allocation. to something more appealing. that's something that we do every few years already when we consider it. >> that's not tactical then? it does take a long period of time. and leaving with the discretion of staff to do things today -- >> it could be faster now that we've hired a manager.

>> there's all sorts of tools that know how to do it and all of that's otheof these other in. diversification is the number one way to do it but tactically there are things that we could do because we only have to lose money for one day. if it occurs on june 30th we have to recognize that loss. and if it happens one day, that's the day that we recognize and that drives the contributions and we don't try to smooth or amortize things but that's whatte we have to do her. the question is not buying puts based on what we think will happen on june 30th but what will happen over the immediate term. is it paying for the insurance

or not. maybe that did not come through here. you answered a question that some board member gave to you. >> i want to say thank you for the presentation and we'll probably lose a quorum very shortly so i'll ask the president if there's any more action items, we'd be happy to stay for an action item. >> clerk: i think that there's one more action item and we're happy to move on. >> i have a question on this. first off, thank you for putting this together. i asked you guys to take your analysis last time and plus flut further here and it gets us to the point that you can't just buy competitively year after year and that clearly answers that question. but i think that for me i still have a little bit of a question as to whether or not you can do it tactically.

and i understand that it's very difficult to do. are there any other plans out there that have done this or are doing it? >> tactically? >> or even just strategically but i assume that is not successful if it was strategic. >> i'm familiar with plans that have used overlays to change their overall exposure to equities and other asset classes tactically. i'm not familiar with -- >> have they been successful? >> the one that i'm thinking of has lowered their equity exposure in the face of the strong equity performance over the last several years so that has been unsuccessful. >> there's a prominent endowment that thought that we were in a

bear market in the mid 2000s and it was way under weight and that worked out very poorly. they were like 99%. and they terminated their c.i.o. who was making that call and then they went to a more normal equity orientation in 2007. so a key here really is -- is if you're going to do it tactically, you know, how willing are you to be wrong and again you have to get that timing right. you can be right that we'll have a bear market some time in the next five or 10 years but if you have a big bull market in the first four years how long can you endure that pain of that having been wrong? >> it affects your contributions

and whets our appetite for that kind of, you know -- >> so another approach then is to diversify your assets such that you're reducing your probability of a large loss along that -- along that time path strategically. >> let's do this -- i think that there's maybe a little bit more of a conversation to be had here but for the purposes of time today, why don't we go ahead and we'll wrap this up and follow up offline and we can see if there's other questions that are worth being asked and answered. >> can i just float out one more idea real quick? >> sure. >> so in a prior 10-year, a couple decades ago, you know, we were concerned about our payout ratio and it was an endowment of what we could pay out, you know,

at the end -- it was based on the fiscal year-end returns. so we did think about it because this was the internet bubble. we all knew that valuations were extremely high, it dominated every investment committee meeting. but we often thought of buying puts for like the last two months, you know, in july and august, just to lock in a 25% gain at fiscal year-end. we ended up not doing that but we thought about it a lot. if you had a really, really good return and you're two months away from locking in your funded status at the end of the year to go, it's worth it to us now to miss out on a couple months of a bubble market, to lock in what we know will be a strong funded status at june 30th. that could be one option.

>> interesting. okay. thank you very much. why don't we open it up for public comment? any members of the public -- did i call -- that would like to address the commission regarding this item? >> and one looking for protection in a down market, how many high-risk investments do you need? you decided that the edge phones are going to give us a down market protection. i think that now have invested in edge phones and you should stick with them. and you can find that any good edge phone salesman will tell you that you have to invest more than 25% of the assets in edge phones to protect the other 75%. in the last down market in 2008, one million dollar debt, the s&p 500 outperformed edge fund. and the point of interest, the edge fund that was picked, the edge funds are the average loss

of 21%. and if you would have invested one million dollars of your own money in those, after 10 years you'd have a gain of -- a net gain of $250,000. and if you had invested that one million dollars in the s&p 500 you would have had a gain of $850,000. nearly four times. so in a down market you should gravitate towards low-risk investments and not high-risk investments. >> thank you. any other members of the public that would like to address the commission? seeing none we'll close public comment. next item please. >> clerk: item number 9, recommendation to terminate the focused emerging markets equity strategy, or the focused strategy. >> president stansbury: very good, commissioners. as the team makes it up here, a manager that we've had for more

than a decade and we're recommending termination and ask kirk and alice to make a couple brief comments and dan is available as well. what was the reason for being handed another copy? >> there was a typo, my typo. in there we node that mod rirch on is under review list, incorrectly since the third quarter of 2006. the manager under review list is the quarter of 2016. that's reflected in your corrected copy. good afternoon, commissioners, and in support of the termination of our investment management agreement. and they currently manage $220 million in their focused emerging markets equity strate

strategy. and meeting a brief momento that has the -- memo that has rationale, i will turn it back to any comments that you may have. >> thank you for putting so many numbers on the page to include cardigan. we know that it's sometimes difficult for us to put a ma manager when we're terminating them. sometimes people like to see the names on papers and sometimes they do not. but this thing about whether any manager would like to work with our system, i think they should take heart in the fact that how long we stayed with them despite their performance.

and if you look at cardigan, why the heck did you hire them? we more than give people the chance, more than the risk they will take and this does not include the group that back tested data in order to hire them? but if staff believes that they're good people, it's not always numbers, it's the qualitative issues and we will invest with them and call it taking a chance. if we believe in what they will do, we will do that. so if anyone thinks that it gives them a fair chance to be hired they should see this as evidence that we will do that. whether they bid for our work, that's their decision. but, again, i don't like bad numbers more than anyone else does but we believe in people and we'll take a chance to them. and they just have to prove how good they are. and most of the time we get it right and sometimes we get it wrong. maybe this is one of those cases. we have a unique history with them like a few other money managers who we said that we knew them before we ins