46% in the next three years. so again, i would say is decide beforehand what your exposure to systematic risk would be. i think if you take a 20-year view, emerging markets are likely to outperform. >> yeah. i think we all as a board, we understand. we bought into that concept. i think just -- it's going to -- our expectations of watching our managers -- just like listening to you, d.f.a., because we have that kind of kilt to that manager, and now adding cartica, which is very different, but i didn't realize quite the lower value on d.f.a., the kind of low quality on d.f.a. >> yes. it's -- they believe that smaller companies and lower

quality companies screened, however, that they will avoid bankruptcy outperform, and they have a lot of data to support that. they are essentially in my view an enhanced index manager. >> commissioner driscoll, give me just half a second here. i just want to remind the board, we're running a little late in the day, so if we could try to charge through some of these things for time's sake, that would be great. >> the observation on page 59 and 60 on nepc's report, one, yes, we've already agreed to lower our asset allocation equity, that's another 2, almost $3 billion that'll be carved out of existing mers. the question is, we still plan on replacing them or taking away even more money to fund more of your other themes, correct? >> themes meaning some more specialized managers in different equity areas?

>> yes. we plan to reduce or eliminate, in many cases, it will be eliminate managers who are a lot like the benchmark and replace that with -- if we're going to invest in active, we want t have a high bar for expected excess returns. >> that is part of the plan you presented to us. i am just trying to show you we were listening and watching. it is ae not about being broken to do something, there's still a time to make improvements. >> yes. >> okay. >> okay. why don't we call for general public comment. are there any members of the public that would like to address the commission regarding the c.i.o. report. seeing none, we will close general public comment. mr. coker, thank you very much. shall we go back up to the top, to item number 9, it's an action item. >> clerk: number 9, action item, divestiture of tobacco

companies, number 3 of local divestiture procedures. >> i regret in the prior item, i would add one thing, emerging markets are quite cheap. they represent good investment value right now. >> to be clear, we're going to call -- or we'd like to do all four of these consecutively. >> gentlemen. >> we're pleased to provide the board with an update and a few recommendations on the four divestment initiatives that sfers has adopted over the last several years. as a reminder, these apply to domestic companies involved in tobacco production and distribution, companies involved with business activities in the sudan, companies involved in the

manufacturing and retail of civilian firearms and23 companies companies involved in coal production. >> i want to provide you a general update in all four of these investment restrictions and really discuss two things that we've done related to all of them. one is -- [inaudible] >> okay. >> yeah. we probably need to have darlene call all four. >> hold on a second. for purposes of sfgov tv and so people can get on and see these individual items, i'd like to keep them separate. let 'just speak about this one, go onto the second. i don't think we're going to lose any time. individual focus, and we'll move on. thank you. >> so i'll make a general statement that relates to the tobacco, tobacco restriction, is that we've expanded our

relationship with research with a leading third party research and data firm. previously we used this guide our sudan exclusion. we now are subscribing to data from them regarding our tobacco data, as well. second, we have really reviewed the criteria we use to guide or investment restrictions, and this relates in clarified and strengthened criteria to guide the way we approach investment restrictions. doing so is going to allow us year end to have a rules approach and objective process to maintain the investment restrictions. related to our tobacco restriction, we are recommending several things. first is the removal of two companies that no longer operate as tobacco companies.

second, we're recommending the addition of 15 companies to our list. two are involved in tobacco production. three are wholesale distributors of tobacco products, and ten are involved in the manufacture and/or distribution of electronic cigarettes or e cigarettes. as of june 30 of this year, we held no position in any of the companies that were recommending for addition to the restricted list, so i'll pause there for any questions about that recommendation. >> questions from the board? i have a couple questions about performance. so thank you for including performance. that's the one thing that i asked, and i think that we'll -- and the governance committee will work through a rule change that any divestiture requires a rule

change. i think it's just good practice, so thank you for putting that in there today. i see that the s&p 500 tobacco free has out performed over the one and five years and barely performed over 20. you know, if you look at -- there was a great article a couple years ago, pensions on-line, comparing warren buffet to tobacco, and tobacco did better than warren buffet over 20 years. i don't know what that was through, maybe 2012, 2013, something like that. is the s&p 500 for what it would better cost us or is there another -- >> i believe the s&p 500 is the best benchmark, given our u.s. focus of tobacco restriction and the fact that it does apply

to large compaap companies for most part. a few companies would fall out of the s&p 500. >> if you could -- allen, do you have any thoughts on that? >> no, i agree, currently, the s&p 500 makes sense. it was just said if you get into a predominance of companies, you could go into the russell iii. >> okay. questions? comments? you want to -- >> yeah, we have an action. we need you to adopt the recommendation of the standardized measurements or

determination, and also, the additions to the list and deletions from the list. >> i move that sfers maintain the current policy with respect to the divestment from the tobacco companies and approve the list of restricted companies as outlined. >> second. >> motion, there's a second. any discussion from the board? >> call public comment, please. >> do i have to call public comment? >> no, just before you add. >> okay. great. any discussion? do we -- any way to quantify what the cost might be? >> we don't have exposure to many of these -- or any of the additional ones, so it would be speculative. >> okay. why don't we call for general public comment. are there any members of the public wishing to address the commission regarding tobacco divestment. okay. seeing none, we'll close

general public comment. there's a motion and a second. can we take this without objection? item passes. okay. call item 10. >> item 10, sfers general procedures. >> so once again, for our investment restriction as it relates to sudan, we've reviewed the criteria that -- related to that divestment and investment restriction, and second we've visited the data that we use to arrive at the companies that we recommend for investment restriction. for the sudan restricted list, we're recommending the removal of 27 companies that we've determined likely no longer have restricted business activities in sudan. we're recommending the review of seven companies and their subsidiaries that may have restricts activities in sudan. letters have been sent perour

policy to each company to clarify the nature of their business in sudan, and we have direct investment in two of these companies. and lastly, we are recommending the addition of 26 subsidiaries of companies already on our sudan restricted list to be added to the restricted list. >> okay. thank you for the report. is there a motion or any questions? >> i make that motion. >> there's a motion. do i have a second? >> second. >> there's a motion, and we have a second. any discussion? okay. why don't we call for general public comment. are there any members of the public that would like to address the commission regarding sudan divestment? seeing none, we'll close general public comment. can we take this item without objection?

item passes. call the next item. >> item 11, targeting firearm companies and manufacturing and retailers sfers three, investment procedures. >> again for our investment restrictions as they relate to manufacturers of kwierm and ammunitions and retailers of firearms and ammunition, we have expanded the data that we access to determine the companies that meet our restricted criteria. we've retained the services of a research firm to guide that research. and second, we've reviewed the criteria that guides this investment restriction to ensure that that allows us a rules based and objective process to determine the investment restriction. for our firearms restriction, staff is recommending that we remove one company from our restricted list that's been ak required and is now -- acquired and is now a private company,

the two companies that do not meet the divestment criteria that staff is recommending, the addition of two retailers and three manufacturers to our restricted list, none of which we currently have direct investments in. and lastly, we're recommending that we undertake level two engagement with four retailers of firearms around their gun retail policies. any questions? >> for education, can you share with me what level iien gaejmegaej engagement would be? >> so that would be direct engagement with sfers employees or directors or joining collaboratives other peer, asset owners and other investors that may be engaging with these companies. there are several initiatives

that are either ongoing or are planned related to gun retail policies in the wake of events over the past many years, but highlighted against over the past year. so we would -- we would not engaging with company management around their policies around the retailing practices of firearms and ammunition. >> so who are we adding back and who are we removing? >> we're adding -- it's page 7 of attachment two. >> okay. i'm sorry. i missed that. >> on page 4 -- on page 4, sort of highlights the actions which are we're removing dick's sporting goods, and the reason why. dick's sporting goods, when we initially added them to the restrictive list, they were selling assault style firearms

and now they have stopped. they've phased out the sales, and they received less than 10% of their income. so -- and then, orbital is the one that is ak wired and no longer is a -- >> sports and warehouse and camping korld's holdings is two we didn't previously include on our list, we -- world's holdings is two we didn't previously include on our list, but they retail firearms. >> and then, level ii, we would do the engagement with walmart and dick's sporting goods. >> okay. >> just to clarify on that, on the engagement, we're removing dick's sporting good, for example, off of the list given that they no longer sell the assault weapons and they have less than 10% of their sales of these products.

so when we're doing a level ii engagement, is that to encourage them to do more or to sustain, what is the action that we're asking them to do? >> sure. that's something we need to determine sort of what these asks would be around strengthened policies that they can implement around the safe and responsible retailing of weapons. so we do feel that they have made steps over the past year to raise the age required to buy a weapon. they phased out assault weapons, but they can do more. their c.e.o. has actually made statements that they wish to do more and wish to engage more in public policy, so i think there's opportunity to -- to engage with them, help shape that. >> and what is the dollar value of these additional companies that we are dprk-

dprk- -- we do not currently have exposure. >> okay. so we have no exposure to companies that we're adding to the restricted list. >> but we're also adding the category of pawn shops which we did not consider when we originally did it. so there are two companies that we want to engage at level ii, and we do have $1.2 million of exposure in easy corp., so that's a new area that we're adding and that we're going to be engaging where there is a direct investment relationship that we would have. >> correct. and in walmart, we have a direct relationship as well. >> commissioner driscoll? >> just on the issue of engagement, does that mean you writing letters, calling, and/or visiting them. >> it could include any of those actions, we haven't developed an action plan yet. >> but that's what you're asking for the authority to do.

>> correct. >> all right. thank you very much. we'll call for public comment. are there any members of the public that would like to address the commission regarding firearm type assets. seeing none, we'll close public comment. is there a motion? [inaudible] >> there's a motion. do i have a second? >> second. >> seconded by commissioner driscoll. any discussion on the item? okay. can we take this item without objection? item 12 passes. thank you very much. -- or item 11 passes. item 12, please. >> item 12, action item, divestiture of thermal coal companies, level ii of sfers social investments procedures. >> so related to our investment restriction for thermal coal companies, we've expanded our relationship with research to obtain data and research related to companies, business practices, and involvement in thermal coal production. we've also reviewed our

restriction -- restricted criteria that guides our divestment from thermal coal companies. based on that review, we have two recommendations. one is following on analysis that was requested by the board coming out in may 2017 board meeting to look into non-u.s. thermal coal companies that derived a majority of their coal. sfers currently has direct investments in two companies which is listed in the board memo that amounts to a little over $1 million of net exposure. and then, we are also recommending the removal of one company from our restricted list that has filed from bankruptcy and since been taken private.

>> okay. great. thank you very much. why don't we call for -- excuse me. call for public comment. are there any members of the public that would like to address the commission regarding specifically thermal coal? seeing none, we'll close public comment. i have a question or a request. so as we -- i mentioned the performance and the tracking. i would ask that you go back, and you think about what is the best way to track our gains or losses for these companies from the point in time where we divested, and is it -- you know, what would be our gains or losses to date based upon when you present to us and, you know, obviously you're going to have to make some assumptions about what is the appropriate percentage of whatever, but would you please develop a methodology so that you can share that with the government's committee so we can find a way to put a rule in place that, you know, requires that tracking. >> certainly. >> okay. thank you so much. i'm happy to make the motion to accept staff's recommendation.

is there a second? >> second. >> second. >> commissioner paskin-jordan offered the second. any discussion? okay. can we take this item without objection? all right. item passes. thank you very much. item 13. >> very good, board members. >> call the number. >> go ahead. >> 13, discussion item, overview of active exemption strategies. >> very good. board members, i'm going to turn it over to hurd and, in addition, elon and allen are available for comments as well. active extension is simply allowing managers to short stacks while maintaining net 100% long. so for example a manager that's 130-30 to go 100% long and 30% short, so you have 100% of

alpha exposure and 30% of market exposure, this can be a really valuable tool for managers to increase access returns. for example if a manager thinks that apple is going to underperform, all they have to do is underperform. however saying the russell 3,000, when the thousands of stocks total really, really deminimous weights, if a manager expects those stocks to out perform, and he's right, he doesn't really add any value, so we're asking along, the only constraint can be a really powerful way to access returns. >> kirk, you said just about everything -- >> no, i did not. no you, i did not.

you have good stuff. >> can you also explain what hedge funds do when they're running? >> yeah. so i'll start by restating some of the things that bill said, but active strategies are long only strategies combined with a limited amount of short selling. typically, we're talking about 20 to 50% of account value is shorted. if you understand the mechanics of short selling, when you short sell a stock, you receive it, you borrow it, you receive it, you sell it. the person is further invested in the manager's long only portfolio. this extends the manager's opportunity set. so in the interest of time, i'll go through some examples very, very quickly. as bill described, long only investment strategies limit a manager's ability to express views about stocks. if you think about what managers do, it doesn't matter if they're fund amountal or quantitative value growth,

small cap, international or domestic, all managers are seeking to identify companies that they believe will out perform. it doesn't matter what type of style or strategy, but have you to accept along the way that they're going to discover companies along the way that they believe are going to under perform, but in a long only context, the only way they can add alpha to an index is to under weight it or simply not to own it. but as bill described, the maximum weight that any one security represents in an index is tiny. and i would note here in the s&p 500, the individual weight of a stock is 20 basis points. in the global index that we use, the average weight's three basis points. smart, there are only three companies that have weights greater than 1%: amazon,

microsoft, and alphabet. so by being a long only context, managers have limited ability to add alpha, again, the short proceeds are added only from the manager's portfolio, so the images that we have here on the right-hand side is managers buy call it 1 million long. they short $30 million worth of stocks, and they invest the procedures, $30 million long. so the sum of that is 130% long but 30% short. in our terms, we think about it the manager now has 60% more opportunity to add alpha, but the 130 less -- long less 30% short means that there's still 100% net long, they have 100% market exposure. i think you get this concept, but i'll kind of drive it home. any manager, it doesn't matter if they're quantitative or funt amount tall, all of them --

fundamental, all of them will risk their financial assets. a manager, that ranks stocks based on their expected out comes. long only managers is going to invest in the long quintile. to answer the question, how do you contract these strategies relative to hedge funds, what we try to do is just place them, active extension strategies within the spectrum of approaches for equity management. on the left-hand side of this chart, we have passive management. you know what that is. that's basically replicating an index. thousands of securities, typically, that we have no expectation for excess returns, no tracking error. you get what the index gives you. enhanced indexing are managers that take subtle bets, subtle

bets relative to an index, and often it is by owning fewer securities, but they expect ex-excess returns for these are small. i'll skip past active extensions for a moment. this example is managers that take some bets, but in our few look a lot like the index. our expected assets for them, maybe 1 to 2%. their tracking error tends to be 1 to 3%. further to the right are some of the manager that's we talked about, where we call them specialist managers, tend to be very, very concentrated, tend to be focused in one particular sector or geography. our expectation for them are high access returns, 3 to 5%, but high tracking error as well. to answer the question about

long-short strategies, they're unconstrained. they can be as much long or long one day and short the next day. in our absolute return program, we have ten managers embedded that are long short managers. their average market exposure is something around 40%. that's the key contrast is long-short managers, particularly in an absolute return context don't have a lot of market exposure. they're trying to add returns equally, both long and short. contrast all of this with long-term strategies, can be thousands. yet by virtue of having the ability to short, our expectation for ex-he cess is something more along the left-hand side of the chart.

we issued -- [inaudible] >> they're a combination of firms that run any p.c.'s focus list. we sought informal input from alborn and cambridge, and we'll be bringing these strategies to the board over the next couple of months. our sense of expectations is relative to similarly managed long only strategies. our expectations is that they have higher access returns, the same amount of volatility. again, they extend the manag manager's opportunity set, our information is higher ratios. having an ability to make money or returns by shorting give managers an opportunity to protect capital when equity markets decline. i won't go into the details of the graph, but it does

demonstrate that active extension managers, this is real databased on work that any p.c. has done for large company managers, i believe, have -- have earned high excess returns with a minimal amount of tracking error. if you think about information error -- [inaudible] >> i was advised not to include this 'cause it's kind of a scary graph, but just want to evidence that just because we think that short selling is easy, mechanically, it's very, very different and it takes a very different operational mindset, risk management mindset to effectively short stocks. you have to negotiate prime broefr relationships, there are -- broker relationships, there are costs associationed with transaction costs. shorting expose the the manager

to greater regulatory and scrutiny, and their investment capacity is constrained when you expand that opportunity set. that said, our consultant and staff have experience in evaluating these strategies, and again, we expect to bring a couple of these strategies over the next couple of months. >> does that mean we'll lower our peers long strategies. >> yes. >> what do we think we'll lower that? 5% or what do you think from the 40 that we have now? >> i don't know because i -- and i want to be careful -- and again, this is -- we're in the process of evaluating these r.f.i.'s. many of the managers that we have capital today are participating in it. i will say after we reviewed their returns, every one of them, every one of these strategies has produced better returns than the one we're in right now, so what we ultimately do and how we

reconstruct it, we have to sift through those recommendations. >> and i just wanted -- the theory of doing this is exactly as stated. the reality of doing it is actually much more challenging. you have to have a manager that's a good active manager in the first place, and there aren't a lot of those. two, they have to have a process whereas kurt described, they actually quantify the bad names because you can't just say it's bad and invest in it, you have to say how bad it is. you three, you have to do shorts. the tricky part is when you don't buy a stock when it goes up, it's a smaller part of your portfolio. if you are a short, and you make a mistake, it's a bigger part of your portfolio. i worked for a firm that tried to do a 1 # is -- a 130-30, you

have to do it very carefully. >> finding a long enough track record in doing this. >> there are plenty of us. >> yeah. >> commissioner driscoll? >> so then, the paragraph on -- these are real numbers. >> these are real numbers. this is based on -- this is a five-year look, i think with data through june 30 of 2018, so five years of returns, five years of tracking error. this is for u.s. cap large equity managers. >> the real number is five years. i would say i would prefer to look at even a much longer

period. and these are nepc's numbers. >> they are. >> the reason i included them is just to be illustrative of our managers. your expectations for return data will be something beyond this. >> i want to see how they then did in 2008. let's see how they did in the down market. obviously, there's the upside down capture and the capture ratios to each other. if you're the one with experience that's done it, you know exactly what i'm talking about. so we've already done some long short. the board's got some appetite to do this. the question is how to do it. it's not just the 12 you've already -- >> independent of the 12 we've identified. >> they took all long company

managers in the investment database. >> so the identification of the 12 are verified. the number 12 is here. someone put up a screen to come up with 12, or was it something other than just the number 12 was a nice number? >> 12 was a consequence or a result. i think there were three on your focus list. >> yeah. so it was a combination of managers who are doing this strategy that have money with san francisco and recommendations based on the nepc, and it also sounds like you drew from some informal conversations with other consultants. so it was not screened, it was informed on knowledge from previous relationships. >> on the last r.f.p., there became the hurdle that we wanted to get past. >> this is a different one. this is a different -- an r.f.i. where staff chose to given have itations to certain managers versus an r.f.p. where

you have to screen because you're letting anybody respond. >> if this come to see the board. there is a complementary piece inside the public equity. >> correct. >> so how you explain how that allocation or subout works, that'll be a question we ask that day. >> i have to make just one comment, is i remember 2008 -- actually, 2007, managers saying who are peer long who knew how to short, i wish i could short now or i wish i could short these stocks and i can't because i'm not allowed to because they're benchmark driven or their styles, and they could not do it. >> that affected a lot of long short managers. there were companies they wanted to short, and there were financial limitations on shorting financial stocks. >> we were lending our stock to those people. >> can i push through this? we still have quite a few

agenda items to get through. >> thank you. >> thank you. >> thank you for the report. >> interesting strategy. glad we have that. >> was 5:30 your stop? >> that sounds like a natural time. >> i was going to ask you, do you want to be here for seven or eight? >> we did seven already, though. >> bill covered many of the items. >> i'll let allen do seven. there is a good story to tell, and i'm hoping he can do a good story to the board. >> who's going to do 11. >> kirk will do that. >> thank you, bill. >> okay. >> come on down. >> i've got it right here. >> okay. >> hold on. jay, we have a couple small action items that i think we

can just finish those off at the very end. >> action items. >> okay. why don't we call item number 16 very briefly, and then, we'll jump to number 7, allen. item number 16. >> item number 16, action item. approval of president's committee assignments. this item was continued from the august 8, 2018 retirement board meeting. >> so in front of all of us, there should be a two-page print out from staff with committee assignments. the second page shows committee assignments as approved by the board in may. we're still working on trying to find -- at that time, we had designated a finance chair. we're still trying to work on trying to find a chair for that committee. but moving forward to the other piece of paper for september 12, it shows that we made a couple changes on finance in place of commissioner cohen.

we are putting in commissioner safai. and on the personnel committee, in place of commissioner cohen, we are putting in commissioner driscoll. and we're halfway through the year. we can revisit this in june. i still need a finance chair. hopefully one of the commissioners will step forward and take that assignment. i've asked a couple different people. i think it's just difficult with people's schedules and availability. hopefully we can bring that back in october and we can fill up that committee. why don't we open it up for public comment. are there any members of the public that wish to address the commission regarding committee assignments? seeing none, i will make a motion to accept the committee assignments. >> so moved. >> there's a motion, there's a second. any discussion? can we take this motion without objection? great. item passes. thank you very much. and then while we're on it, why

don't we just take 17 very briefly. >> item 17, action item. request to combine enclosed charities campaign in the september 2017 allowances. >> this is reoccurring. we see this every year. why don't we open it up for public comment. are there any members of the public that wish to address the commission. seeing none, i'll close general public comment. we have a motion. can i have a second? >> second. >> there's a motion. there's a second. can we take this item without objection? great. item number 17 passes. can we go to item 7. >> item number 7, action item. report on the investments in the retirement fund for the period ending june 30, 2018. >> bill covered much of the background, so i'll try to keep this down to three or four or

five or six pages. your funds generated an impressive 11.14%. as bill said, since the report was produced, you've added another 2.4%, so if we could just annualize that number, we would have back to back terrific years. i'm not going to spend much time on the kmem. it's what it's been for the last ten years. the only difference is you did see it pick up in growth largely as a consequence of the tax -- the tax reform. however, we think that that is going to be very nonreoccurring and what didn't get much attention is we also are in the middle of almost a trillion dollars of deficit spending for the last 11 months. so early next year you're going to get the conflict of i think slowing growth against potentially higher interest rates. so we think your portfolio is well positioned. we think things have been very attra

attractive. we think we'll still lumber along, but we don't see a nirvana economy with accelerating growing. >> cambridge has said zero growth for next year. are you expecting again, the f

11.4%. if you look at the three years, 8.61%, the five years, 9.61%, all comfortably above that 7.5% assumed rate. the only period where you don't make that is going back to ten years where you had the two significant melt offs, some of which we will see drop off

more diversefied portfolios against why didn't you buy 60% in bonds, and you see why you didn't. that's a difference of about 3%, which if you applies to your beginning assesses, which is about $3.8 billion of increment al returns. indeed, indeed, you chose managers that did well on top of that. you see the rankings there.

so extraordinarily good returns. if you then look at the risk you took, and here, we're using the risk measure as volatility going to the tables to the right there, over five years, your annualized standard deviation was 5.4%. in the 46% were less volatile than that. when you combine that lower volatility than the typical peer with the higher return, and you measure what's called a sharp ratio, which is the return perunit of valoluntar v it would be in the highest group. you took less risk than your peers, you earned a higher return. if you compare the three years with the five years, you see a lower relative volatility for the three years. so you've benefited from an

aggressive policy, but over the last little whole, you've started to adopt a more conservative asset allocation. so now, your volatility is actually lower, and if returns going forward with less attract tiff -- are less attract tiff, we think you're much better off in terms of your ability to withstand a downturn. if you put this in dollar terms for the three years, your fund experienced a net investment gain of $2.56 billion. that's what your investment program generated. during the same period, you paid out $498 million of benefits in excess of what you collected. that's why you have a pension fund. so that's sort of the numbers summary page. if you go to the next page, you'll see your compliance. that second column is your asset allocation percentages as of 6-30.

column three is your currently approved policy that this board adopted in october of the year before last. and the target ranges around that. and then, that last column is your interim policy which is simply the policy that represents how fast you can implement some of the changes you made. like in private credit you'll see your target is 10%. that's a drawdown asset class, and so the ability to get there quickly is somewhat constrained, so the interim policy is 2%. if you look at your current actuals versus your policy ranges, you're inside the board approved ranges in every instance other than private credit, and again, that's not a bad thing. as you heard today, your hiring managers, the managers have to deploy the assets. it will take you a while to get there. every other asset classes all

within range. the allocation in the new policy has significantly lowered your exposure to your equity risk. and you can see that on the very next page, page 27, which is simply a snapshot of your actual allocation history versus your current policy there to the right, so you can see equity, that gray area, has come down from what bill said, if you went back to 2013, well over maybe 55%. the new target down at the 40% range. that is -- as you know, you've had kmshl discussion of hedging in terms -- considerable discussion of hedging in terms of protecting yourself. the best protection against that is to have a diversefied portfolio. you can see your absolute return has gone from nothing up into a 15% torth and you're

almost two -- target, and you're almost two thirds there. those core bonds, which used to be the main stay of a public pension plan back in the days when interest rates were in the six and 7% range are now very little because that's become quite risky in terms of unit perrisk provided. so again, you see the pattern of the actions this board has taken with respect to policy. i am going to skip, for the interest of time, to page 33. 33 is a tabular representation of the five-year period. so if you go to the left, your annualized return, 9.61% versus a median of 7.5, and you see your results there right at the top of those floating bar charts. you'll also notice your total fund return, the circle, is

well above your policy return, so you earned a higher return than you would have gotten from your policy. that's a consequence of the tactical allocation of the portfolio plus manager out performance. if you look at the annualized standard deviation in the middle, that's the risk measure. and again, it's upside down because you want to be at the top and have low volatility. your actual volatility is less volatile than your policy, so you managed to be less volatile than your policy and at the same time earned a higher rate of return. it takes a lot to do that, and indeed we'll talk about the sharp ratios to the right. and then, that annualized alpha is simply how did your fund perform versus the risk level you took, and you'll see your alpha, 1.67%, would again, put you in the top 5% of your peers.

so you had an attractive policy during the period. you took an appropriate amount of risk. you were well rewarded for that, and on top of that, manager selection and tactical position, added value. again, this is probably the most positive story you will ever hear in the next five years, so savor it. it's very hard to do. the next page i would call your attention to is page 36. sometimes your results are very end period focused. page 36 shows you your fiscal year performances for 2018 back to 2013, and you'll see where your assumed rate is. so in four of the six periods, you did better than your assumed rate, and what's very

interesting in your case is if you do very well in the up years, as you have, you do less well in the less well years, because you take more risk, you get a higher return. but the consequence is in a less well environment, you do less well. so in 2016 and 2015, years that were less attractive in terms of peer performance, you were still in the top quartile of your peer group. that's an unusual group, and i think a consequence of one having very large performance in real equity and assets to buoy up your overall returns. the last two pages i talk about, if you go to page 37, page 37 shows you quarter by quarter how you performed versus your policy, and you can see the last five periods there, quarterly periods, very

substantial out performance versus policy, and thatably line is the rolling five-year result, and you can see, it's clearly gone from negative territory back in 2013 and '14 in very positive territory and consistently moving up over this period. so again, you've made changes to the portfolio, and they've generally been very creative to value add over this time period. and then, the last page i would call your attention to just to sort of see where that came from is page 42. page 42 is going to examine your out performance versus policy and break it down by asset class and source. so over the five years, you outperformed your policy by roughly 40 basis points net of fees. the allocation effect was actually negative, and you can see what some of those

components were. a lot of it was under weight to private equity, which was structural, not a performance thing, but private equity did well. you were below your target, so there was a negative allocation effect. because the allocation effect was negative, that means your manager selection effect was even more positive, so 64 basis points of net return above indexes generated by doing better, managers doing better than the indexes, and you can see real assets, quite strong, fixed income and private credit, quite strong. international equity, a little bit. private equity, ironically under performed, and that's because your benchmark for private equity was the s&p 500 plus five. so certainly not bad performance, and i'd remind the board that you did adopt going forward a private equity target

that is 75% global -- or u.s., 25% global plus three. today's market doesn't allow to earn that high return. >> wait, al, was that 75% u.s., like s&p 500, and then, 25% equity. >> mm-hmm. you've got a different equity because your program's becoming global. >> and that still makes sense? >> i think so. >> okay. >> so again, you get consistent out performance across asset classes. the one time you didn't was really not a structural issue. you don't want your performance to come because you did a terrific job in domestic equity and not the others. that, i can stop there. we can go into managers. you can see your managers have done remarkably well. i would point out a couple of

managers in particular, because this board was concerned about sans. cap guardian, who staff recommended we defund a little while ago. we didn't do that, and they've done quite well. we're not always right, and sometimes not always right and keeping a manager can be just as good as hiring a manager that didn't do well in terms of impact. >> but allen, what made sans -- i know -- >> sans is a very concentrated manager. >> not that, i'm looking at there were some issues with the firm. >> i think most of the reason they got on the watch list were concerned around performance. they had some issues that were minor, but their performance really because they're in health care, technology, highly volatile sectors, they had a period of time where those sectors didn't do well. >> do you have any other issues

there, kurt? >> i don't think we had some other issues, kurt. >> i just remember some issues that we were looking at. >> there were some issues. i think the big issue that put them on the watch was there performance fell off. >> the concerns were performance. >> solely or conservative focus on performance. the comments that we've made in the past about sans is the firm has gone through a series of succession planning. while their performance has been good recently, we still need to determine what they're going to do in terms of ownership and immediate equity. it's a confirm that at least in my experience, generational succession doesn't work very well. that's what they're going through right now, and i think

we're cautious about given the fact that they under performed. >> the same thing exists. you still have the firm like going into the next phase, but keep us updated. >> come to any conclusions. we're not recommending any actions. >> if the performances continued to lag, there'd probably be more angst about it. those are the comments i would make in a quick period of time. >> thanks. >> one quick question, and our -- i see art in the back. of real assets, we have what, about $3 something billion in real assets. when did we start real assets as a separate category? three years ago? >> five years ago. >> okay. when we started that five years ago. what did we have that was legacy that kind of got carried over to that 3.5 or whatever it is. >> largely, the core --

[inaudible] >> what do you think, sort of ballpark dollar value got moved over? because we didn't have a category called real assets five years ago, right, so we created this new category. [inaudible] >> couple hundred million. so the vast pa joert of real assets as it stands today is all new within -- majority of real assets as it stands today is all new within the last five years. [inaudible] >> so of the 3.5 billion of real assets that we have today, what do you think is new within the last five years, do you think, ballpark?

[inaudible] >> okay. so couple billion dollars, really? 'cause when i look at three -- one, three, five year returns, it's real assets is the category that's really driving it. all that shows is private equity is sort of detracted. i don't consider that could be correct because of the benchmarking issue. it's really private equity and real assets that have been lifting us up above everyone else. >> yeah. i mean, you had an earlier commitment to that than others did, and it's been a good asset class, and you've executed within that extraordinarily well. >> and even the stuff that was moved over for the private equity energy, and some of these investments have done quite well. >> okay. thank you. that's all i have. any other questions from the board? commissioner driscoll? >> let me