>> but to highlight the target asset allocation, is in our current allocation, presents much more risk at higher returns and higher risk adjusted returns, and we are at efficient frontier with the assumptions that we received from napc, which are highlighted in the rest of the pages for reference. i'd like to conclude that this is just part of the review of the risks. we are going to present another important part on the liquidity side in april, at the next board meeting. and we'll have a comprehensive

risk analysis. >> president stansbury: board members, real quickly, i'll say you've seen a large increase in the volume of the board package and board meetings. i'm going to touch upon real quickly why, because this is one of them. we're doing so many new things than we did four or five years ago. we're doing private credit. real assets, absolute return, risk management. we have a much more diversified asset allocation. we now have $25 billion in assets. five years ago we had 17, and then lastly is we are emphasizing more unique niche and specialist strategies. so there are really seven core reasons why you've seen the volume of your board package go up. again, we're doing a lot, lot of different things. now, it's showing up in your returns, the numbers that you see allen provided, so the story

is good but with the consequence you have a much larger board package and longer board meetings. with that, we'll turn it over to the board. >> president stansbury: questions from the board? commissioner driscoll? >> commissioner driscoll: two observations. we were doing private credit for a long time. >> president stansbury: not anywhere near -- >> commissioner driscoll: waylaid for different reasons, but doing more now, better, great. other changes in the fixed income market. i guess i'm going to try to articulate on page 14. there's numbers here that suggest that the 60/40 portfolio or the 70/40 portfolio would be a higher return. however, i would say the board's decision is to go for the average return with the highest probability of achieving it. >> that is exactly correct.

>> commissioner driscoll: might say it's a more efficient portfolio in one sense. we weigh all the odds, skills, but that's why you might say we're not going for the highest total, but the best odds of making a good return. >> another way of saying it is looking at this, comparing the third of the left to the third to the right to the last on the right is we have a 75% probability of outperforming 70-30. in other words, we are three times more likely to outperform 70-30 than we are to underperform it, but there's a chance, there's a 25% chance we do underperform, and, again, in addition, these are based only on beta returns. i think that percentage of 75 goes up materially when you include alpha. >> not necessarily the highests return, but the highest probability. >> that is correct. you hit it on the button. >> commissioner driscoll: thank you for letting me say that. >> yeah. >> president stansbury: any other questions from the board?

why don't we open it up to public comment? are there any members of the public that would like to address the commission regarding this presentation? >> i noticed that you reduced the assumed rate of return from 7.5 to 7.4. what i can't understand is investing is all about risk and reward, you increased the risk of your investments by buying in hedge funds and now you're reducing awards. i don't understand why you do that. it's all about -- every time you retrieve the risk, low liquidity or anything else, that investment portfolio, i guess you're assuming it's going to get 7.5%. if it gets 7.5% return for the next ten years, ask mr. coker how much money he's going to pay in management and performance fees and consultant fees to get

a 7.5 times return. it's simple s&p 500 index funds are going to give you more than 7.5% returns. just take fidelity numbers. ten-year performance on s&p 500 was 30 -- [ inaudible ] -- you have to get a 16% of return. you have to get at least 2.5% to 3% just to pay the management and performance fees. take that into consideration. never asked mr. coker how much you paid in the last ten years in management and performance fees. ask him on that. portfolio, ten years, how much you would pay in management performances. at best you could probably buy a san francisco office building with the money. thank you.

>> president stansbury: i see there are no other members of the public present, i will close public comment. thank you very much. any other questions from the board? >> request that we address the action items in case we lose a quorum. >> president stansbury: of course. okay, thank you very much for your presentation. let's take a look at what is left in front of us. >> item 11, determination of -- >> president stansbury: why don't we jump a little bit out of order here. let's go to item no. 17, please. >> clerk: action item, review and approval of pension adjustments for melonee alvarez. >> president stansbury: we'll take this as submitted. we'll open it up to public

comment. are there any members of the public that would like to address the commission regarding this item? seeing none, we will close public comment. does the board need any discussion on this item? >> so moved. >> president stansbury: the item is moved by commissioner casciato. do we have a second? seconded by commissioner chu. any discussion? i call for public comment. >> you did. >> president stansbury: i did, thank you. take this item without objection? great, item passes, thank you very much. why don't we, since item no. 17 is now passed, why don't we go back to item no. 10. >> yes. >> clerk: item no. 10, action item. approval of hire recommendation for proxy services.

>> sure, board members, i'm going to ask kirk to introduce the item and kirk and andrew have a few comments. >> board members, you may recall that we recently issued an rfp for proxy voting services. we received two responses, one from iss, our current provider and one from glass lewis, a san francisco-based firm. as outlined in our memo and as andrew will describe further, we conducted due diligence on both firms and are recommending to hire glass lewis for proxy voting services. andrew? >> thank you, kirk. as kirk outlined, we issued this rfp. just as a quick reminder, sfers relies on our proxy provider not only to execute votes at companies where sfers is a shareholder, but also to provide insights to reports and analytics, provide us research on corporate governance and

certain environmental and social issues, and to assist in keeping our proxy voting policy current each year as we update it. as kirk outlined, we conducted due diligence on both proxy voting providers. they are the two leading providers out there, and they formed basically a duopoly with iss having 60% of the market cher and glass lewis having about 40% of the market share. what we really focused on and i'll highlight are four areas. one, does the firm have a stable ownership structure, firm customer service and commitment to its proxy services business, two, can it provide high quality voting services for sfers without error and deliver us compelling analytical reports. three, does the firm avoid conflicts of interest and have strong controls, compliance procedures, and lastly, does the firm offer a competitive fee structure for the services that we require?

after we conducted our due diligence, we're recommending that glass lewis be engaged as our proxy voting consultant. we've made this recommendation based on three areas. one, we believe that glass lewis demonstrates a strong commitment to their proxy voting services business segment. two, we believe glass lewis headquartered here in san francisco can deliver highly responsive customer service to sfers, and, third, glass lewis offered the lowest and most favorable overall fee structure for the services we need. we've discussed the ability to transition services from iss to glass lewis with both firms, and we're confident that that could be accomplished efficiently and along the timelines that we require. >> president stansbury: great, thank you so much for your presentation. are there any questions from the board?

there's a motion by commissioner casciato. were you seconding, commissioner bridges? >> commissioner bridges: i will second it, but i had a quick question. >> president stansbury: so we have a second by commissioner bridges. open up for discussion, please. >> commissioner bridges: so besides what you've outlined in here, were any major failures by iss and the services they provided in the past? i know we've been there a long time. i'm familiar with both firms, nothing against glass lewis, i'm just curious about it. >> no. it was a very competitive process. we've been satisfied with the services iss has provided, and i think as we outlined in the memo, we were confident that either firm could deliver the services we needed. >> commissioner bridges: i agree, and glass lewis is a very good local firm. i would agree with that, as well, so i'm familiar with both firms, just curious, that's all. >> president stansbury: okay, great. why don't we open up for public comment. any members of the public that would like to address the

commission regarding this item? seeing none, we'll close public comment. anymore discussion from the board? great, can we take this item without objection? item passes. thank you so much. item 11, please. >> clerk: item 11, action item. recommendation to terminate dfa us small cap value trust, terminate dfa small company portfolio, and to convert russell 2000 growth to russell 2000 core. >> board members, as you know, we've been reducing our allocation to public equity systemically, and so some well diversified strategies, you know, we've had some actions similar to this, and this is the next. it's in line with reducing our allocation to public equity. >> noted in the title that we're really recommending three actions here.

we are -- staff is recommending nepc is in support of the two small cap manages and the russell 2000 growth index, russell 2000 core index. we've written a brief memo that describes our rationale, and unless napc would like to make comments, we'll turn it back to the board for any questions you may have. >> president stansbury: anything from napc on this? >> no, strategies, some 40-odd, two or three are on our preferred list, but these strategies are not. they have been noted as underperform and have been on your watch list, but the restructuring of the portfolio along the lines kirk described are driving this and we're in support. >> president stansbury: great. we'll open up to the board. any questions for the board? commissioner driscoll? >> commissioner driscoll: glad to help continue this reshaping of the total portfolio, as well as the equity portfolio, particularly, but can you make

the case for the conversion of the russell 2000 growth to the 2000 core? not that i'm opposed to it, but where's the data? >> so our u.s. small cap portfolio we have a core portfolio and the dfa small cap value, and prior to several years ago, we had a u.s. small cap growth manager that were terminating and put into a russell 2000 growth to offset the dfa value. now that we're getting rid of value, we would need to put that into a core just from a portfolio construction standpoint. >> in other words, commissioner, we're terminating one value manager, so we're terminating a growth index so that we retain core exposure. we don't have an overweight to grow. >> commissioner driscoll: okay,

i guess i should have figured out how to guess that from the information given to us rather than one table of numbers. then i would have seen it. all i had to do. >> president stansbury: anything else from the board? >> you want to take these separately or take them -- >> president stansbury: let's take them together. would anyone like to move on all of them together? accept staff recommendation? >> i'll second. >> president stansbury: motion by commissioner chu, second by commissioner casciato. before discussion, let's open it up to public comment. any members of the public that would like to address the commission regarding this item? seeing none, we'll close public comment. any discussion? we take this item without objection? great. item no. 11 passes. where would you like to go from here? do you have a preference? >> we have one budget to continue to the next meeting, we

have one additional action item on the gasb report, but jeanette said she wouldn't mind if we just pushed it or took it today. >> president stansbury: what is your preference? >> take it. >> president stansbury: take it? okay. >> clerk: item no. 15, action item. presentation of the june 30, 2018, gasb 67/68 report. >> good afternoon, commissioners. this is the financial accounting report, and we do this annually. it's under a government accounting standards board rules, and i'll be happy to answer any questions. >> president stansbury: any high points, without going through the whole report, anything you want to point out to the board? >> i would just say that under the board summary, that the net

pension liability is $4.3 billion, that is lower than it was a year ago due to our good asset return june 30, 2018. this will, of course, be very volatile, because the gasb net pension liability is based on market value of assets, so as market value of assets has volatile returns, excuse me, the net pension liability will float with that. >> president stansbury: great, thank you. why don't we open up to public comment. are there any members of the public that would like to address the commission regarding this item? seeing none, we'll close public comment. any discussion from the board? would anyone like to move the item? >> i move acceptance of the report on gasb 67/68. >> second. >> president stansbury: there's a motion by commissioner driscoll, seconded by commissioner bridges. any discussion? can we take this item without objection? great. item no. 15 passes. thank you very much.

>> thank you very much. >> president stansbury: mr. huish, do you have a preference where we go from here? >> executive director huish: cio report and finish up the investment section. >> do we want to do absolute return today? >> executive director huish: do you want to do absolute return? >> president stansbury: i think we should do absolute return today. >> executive director huish: next? >> president stansbury: let's do that one. call item no. 12 please. >> clerk: item 12, discussion item, absolute return portfolio update. >> in december, absolute return was two years and three months old. this is alberto and roberta. i'm not sure if the board has met alberto before. program is now two years and three months old. it's outperformed the hfra index by, i believe, 2% annualized. we're going to ask you to make

some introductory comments and walk through the standing of the program. >> thank you, bill, thank you, commissioners. given the lateness of the day, i will attempt to be efficient and stimulating with my comments. i'm going to make a couple preliminary remarks to set some context on the program. and then i'll walk through the presentation materials that were distributed for the meeting. last saturday marked the ten-year anniversary of the end of a 17-month bear market that lasted from october 2007 to march of 2009, in which stocks globally lost approximately 50% and investment portfolios across the globe lost trillions of dollars. closer to home, sfers' portfolio declined in value by approximately $6.3 billion, or 33% during this time frame, and the plan's funded status declined from a value of 125% to

72%. pension reform followed in 2010, resulting in higher contributions both for the city and employees to elevated levels that today, nine years later, are still the norm. memories have faded, but the wounds have healed very slowly. in recent years, equity markets enjoyed the longest bull market in history until q4 of 2018, when global stocks declined nearly 13%. calendar year 2018 ended with a repricing of risk assets and a deleveraging as a result of heightened uncertainty in the global macro and geopolitical global environment. slightly two months into 2019, equity markets have once again found their way and have risen over 10%. the question is, is there more certainty in the world to justify this movement and this retreat in value back to the

current levels. the answer is unlikely, but the true answer is that we really don't know. the good news is that if the answer to that question is no, in the second quarter of 2019, which we're about to go into, looks more like the fourth quarter of 2018 or even worse, the fourth quarter of 2008. sfers is in a much better position than we were during the global financial crisis to weather that storm because of the 13% allocation that we have to absolute return. so now i'd like to direct us to the materials. if we can bring up staff's presentation, please. page 1 of the materials here provide a recap of our program objectives and more granular explanation of why sfers has an absolute return program. i'm not going to go through these in detail, and would

direct us to page 2, where we provide a high level indication of where we are with this program relative to what was approved by the board and how we got here via the program structure that we have in place with blackstone as our strategic partner managing a customized portfolio for us that is complemented by our direct investments that are sourced by staff and approved by the board. i'll provide more detail on this shortly. on page 3, you will find a slide that was included in our october 2017 presentation to the board how staff proposed it would implement a 15% allocation to direct return that was approved at the september 2017 board meeting. there are several key milestones that were established at that meeting, and the status comments indicated here, indicate that staff has delivered the build out of this program in accordance with expectations. page 4 provides a summary of the

absolute return strategies over the last two years, and the mix of capital among the customized ban portfolio and sfers' direct investment. of note, staff has consistently utilized its strategic partnership to accelerate the build out of this program and achieve the milestones previously communicated to the board. >> president stansbury: david, can i pause you right there? >> sure. >> president stansbury: all right, i got out of order. i'm ready, i'm sorry. please continue. >> okay to continue on page 5? >> president stansbury: please, please, i'm sorry. >> with respect to the program capital mix, page 5 provides an indication of where we are today and what we are tracking toward with our pipeline of investment activities in a direct part of our program. we anticipate that by the end of 2019, more than half of the capital in our program will be comprised of direct investments sourced by staff and approved by the board. by the end of 2020, we expect

this to grow to 65%, the growth of which will be funded by reducing the size of the ban portfolio. so i provided an evaluation here on the evolution of the program. now i'd like to speak to some key performance metrics, so if we could move on to page 6. here we provide investment returns over various time periods, again, some benchmarks. the most relevant is which is 9 fund-to-fund index. even though this is not an investable index, if an investor were to implement a purely passive multimanager hedge fund portfolio, this is what that portfolio would likely deliver, so think of this as a reasonable proxy for hedge fund beta. we can then use this metric as one measure for calculating the excess return our program has delivered via active approach to constructing the portfolio via varying ways to various absolute

return sub strategies and manager selection. the comparisons shown here indicates that we have added 181 basis points of alpha on an annualized basis since the october 2016 inception of the program. notably, our program has generated alpha during all time periods represented here, except for calendar year 2017, when global equity markets demonstrated exceptional performance and were consistently positive for all 12 months of that calendar year. i'd like to point out that in that environment, our program captured approximately one-third of that positive performance, but then in calendar year 2018, when equity markets turned negative, our program captured only 15% of that decline. this is exactly the type of asymmetry that we are seeking. capture roughly half of the decline when markets are negative, then we capture of the increase when the markets are positive. and i'll come back to that point

a little later on. >> president stansbury: when it says 2018, we're talking calendar year 2018, right? >> correct. unless it's indicated there where it's fiscal year 2018. >> president stansbury: okay. >> actually, that's fiscal year 2018-19, just to clarify. >> president stansbury: so the column on the far left that's titled 2018, what is that column? >> that's calendar year 2018. >> president stansbury: okay, great, thank you. >> on page 7 we show this in a slightly different format but i return back to the rfia benchmark, global equities, fixed income and a more traditional asset allocation. page 8 highlights some relevant risk metrics and comparisons, and here i'd like to highlight the beta versus market and

sharp. return portfolio is .19, which is right in line with what we desire. our guidelines are set such that we're targeting an equity beta of .30 or less. note that the hfri beta is significantly higher, but the returns are worse, even though since the inception of our program, we have been largely in an equity beta fuelled return environment. also note here the very low standard deviation values. we like the fact that the measure is low on a relative basis, but volatility is also a driver of opportunity for absolute return strategies. despite some spikes in volatility over the last two and a half years, we've been operating in an unusually low volatility environment. ideally, we would like to see this number higher on an absolute basis, and this is also consistent with some of the measures that we saw earlier in allen's presentation on volatility at the overall portfolio level and also what

ana presented in the risk presentation, where we've modelled out target risk at the portfolio level of 12%, but the realized level of volatility over the last few years has been significantly less than that. >> david, can i comment on this page real quick? so let's walk through this here real quick. so first, since inception between the absolute return and 70/30, almost the exact same annualized return, but what do you get in exchange for the absolute return program as opposed to 70/30? look at the standard deviation. you have two-thirds less volatility, downsides risk, two-thirds less downside risk. beta is .2 versus .7, and you have more than 2x, almost 2 1/2x risk returns. so very good metrics all around.

>> okay. page 9 shows a risk return analysis, and here we highlight that the down capture of our portfolio relative to other return streams, and as commented previously, the down capture is about half the up capture. very favorable and desired dynamic. compare this to the hfri and the 70/30 portfolios, which have the reverse. they are capturing more of the equity market downside than they are of its upside. also of note is that we produced positive returns in more than 80% of the months since inception. >> president stansbury: can i ask a question, what are we capturing percentage of? of the market benchmark, which is? >> measure here is of the -- >> okay. >> look also this number of up months and down months. 70/30 is 20-7.

bonds have actually lost money 12 of the last 27 months, and this program has made money 22 out of 27. >> yeah, and that's a good lead into the next page on page 10, where here we show the same metrics as were on page 9, but instead a comparison to the bloomberg cap ag instead of global equities. here the story is that our portfolio has a negative down capture, which means that when fixed income markets are losing money, which as bill just commented, they have for about half of the months since october of '16 when our portfolio went live, our portfolio has actually been making money. so that's what that negative down capture metric reflects. moving on to page 11, here we have investment returns for a more discreet period of time that we wanted to highlight. again, given that this is the

first significant market dislocation that we have experienced in the last roughly ten years, but also since our absolute return program has been live, and here we highlight that our program generated excess return relative to the hfri. again, think of that as a proxy for hedge fund beta, but also that during a brief period of time when the equity market had both a significant decline, october through december of 2018, and a sharp bounceback in january 2019, our portfolio is reflective of a more stable return behavior and delivered aggregate performance during the same time period. this demonstrates the nimble dynamic that we're desiring with the absolute return portfolio. it's showing we're protecting value on the way down and we're repositioning to be able to capture return on the way back up. i'd also like to share the

results of additional analysis that we routinely complete on our portfolio to measure alpha generation. through our partnership with blackstone, we're provided with access to risk analytics tools that allow us to conduct a factor analysis of our portfolio using more than 5,000 different factors. we conduct this analysis to determine expected returns based on monthly exposure data that we receive from the portfolios' underlying managers, and this provides us with values that we then compare to actual performance. this analysis has shown that our program is consistently generating alpha relative to what the factor exposure indicates the portfolio should be earning. for example, during the market selloff in q4 of 2018, factor analysis suggested that our portfolio should have earned a return of -4.6%, but the actual return was -3.5%. when the market bounced back in

january, factor analysis suggested our portfolio should have earned 2.1%, but the actual return was 2.6%. again, providing us evidence that our portfolio is generating alpha both during declining markets, as well as rising markets. on page 12, we have a summary of where we are relative to our guidelines and an indication that we are in line with all of those guidelines except the correlation to global equity. one thing that i'll point out here is the correlation is above target, but given that equities have generally been positive for most of the time period measured, this is actually a desirable metric. we would expect that over a longer time horizon and a full market cycle, that this value would be lower. on page 13, we provide investment returns at the sub strategy level. now, recall that we break the universe of absolute return

strategies down into eight -- the universe of absolute return strategies down into eight sub strategies and those are defined in the appendix of our materials and we're currently allocating to seven of them. this page shows that since the inception of our program, our allocations to six of those seven sub strategies have delivered returns that are equal to or better than a relevant benchmark for that sub strategy. it is only the equity sub strategy allocation that has not delivered excess return during all periods and that's primarily due to a more recent focus on lowering the directional equity exposure. this helped us in the second half of 2018, but it was actually a headwind with respect to this sub strategy in the first half of last year. so what does all this mean? this is another measure of whether we're adding alpha in our portfolio, and this is whether we're adding alpha as it pertains to manager selection.

the data represented here suggests that we are adding that excess return across the sub strategies. on page 14 -- >> president stansbury: can i ask for a favor? >> yeah. >> president stansbury: for slide 13, i don't see the numbers in the presentation, and correct me if i'm wrong, but can you send us the numbers for the other comparisons that you used on slide 11, like the barclay's u.s. aggregate, hfri, i guess that's already on there, but the 90-day u.s. bill, can you send us those numbers for calendar year 2018 so we can compare and contrast? of sub strategies? >> president stansbury: yeah. >> we'll send them so it's all on one page. >> president stansbury: just that one page. >> okay. page 14, this is a reflection of our view based on the current market environment and manager

opportunities. if we had the ability to snap our fingers today and turn the portfolio into exactly the way we would like it to be allocated, what we would do is have fewer managers in total, lower exposure to equity strategies and multi, and have more exposure to quantitative strategies, macro, emerging markets, and special situations. so some of the reason of part of the explanation as to why we're not there is that we're still in buildout phase of our program. we're only two and a half years into this, which is relatively early in the life cycle of a program of this nature. the other thing is that the market environment is constantly changing, and the manager opportunity set is also a dynamic one that we're monitoring and acting upon. the desired mix is likely to change over time, but the one thing we feel very confident

about is that we will expect that the portfolio will become more concentrated and we will see the total allocation to the number of managers reduce over time. page 15. this is a recap of our investment committee presentation slide delivered in the summer of 2018, and i'm not going to run through these bullet points. the only comment that i'm going to make is that nothing has changed in our strategy from what was presented last june. >> president stansbury: thank you for putting all of this together. this is something that i've been wanting to see for some time. we needed more data, little more history, i think, and given an opportunity with last year, anything from blackstone? >> yep. >> president stansbury: alberto? >> good afternoon, commissioners. we have our own presentation. go to page 3, please.

it's a different document. is it in the same file? >> separate. >> separate? there it is. >> there it is. >> all right, thank you. so page 3 highlights what a tough environment 2017 was for investing across asset classes. you have a list on the left and right side of different type of asset classes and 2017 was negative for all of them, and this is a nominal basis, but none of these asset classes actually beat inflation. so on a real basis all asset classes in 2017 were negative. this is the first time it happened in many, many years. in decades, actually. so there was really nowhere to hide. bonds, credit, you were negative, and in this context, you know, a well diversified portfolio of hedge funds actually protect the capital pretty well, and after '17, where there were strong returns

and as david mentioned hedge funds protected upside and capital in 2018. next page, page 4, let's talk about hedges more specifically, and hedge funds should not really be thought of as just one big asset class, but there was difference in performance across the different sub strategies, and as david mentioned, you're invested in seven of them and the performance is quite different. when most hedge fund sub strategies were up at the end of the third quarter, you know, the losses in the fourth quarter were directly correlated with the beta of the sub strategies, so long-term equity in terms of a higher beta, that was the sub strategy that lost the most in the first quarter. and equity long/short, driven, credit all lost very meaningfully in the fourth quarter. now, beta was not the only culprit. there was also negative alpha amongst hedge funds. now, on the other hand, sub

strategies with lower beta, more training oriented, quantitative, macro, did well and preserved capital. so, you know, when you look at the overall performance in '18 in hedge fund land, there were clearly sub strategies that sub stra tracted and some that helped. on the next page, shows you at the portfolio level. in 2018, on the right-hand side, the tailwinds, so the sub strategies that helped in performance, were residential mortgages, structure credit ebs, multistrategy and quantitative strategies. these strategies tend to have bigger low equity data and even low corporate credit data, so your typical high yield index type of data. on the other hand, the headwinds came from equity long, short, stress. at the fate of the cycle when the fault rates are low, stress managers tend to have a decent

amount of equity, which tend to have a high equity beta, and then you have credit. and so as david mentioned, in terms of area focus for 2019 and beyond, it would be to reduce further the equity allocation, and by the way, right now the equity allocation for services is 22%, to give you some sense, the overall hedge fund index is almost 40% equity. so the program is already underweight equities, equity long/short, that is, and the goal is to make that even lower. and replacing that would be to add quantitative strategies. this is equity market neutral, quantitative, and adding global macro, and also continue to add to special situations or coinvestments. so if you look at that pie chart, we're reducing the blue and adding stuff on the left-hand side. this is very consistent with the

view that ban, this next page, page 6. investment committee meets every month and establishes this type of directive in terms of which sub strategies we feel can deliver more alpha, and we want to add to, and which sub strategies we want to reduce from in hedge fund land, and you can see on the top mortgages, macro rates, structure credit, emerging markets, are some of the things that we like to add. and you can see at the bottom the ones they want to reduce. namely fundamental equity, event activist. reason being, these strategies have a lot of beta, so they'll run with a 40/50, sometimes a higher net exposure, and our view is equity valuations are full and there is more downside than upside, so the risk of being long equity, long only equity or higher beta to equity is just not there. so within a hedge fund portfolio, we are reducing and

proposed to reduce further equity. on the other hand, macro rates, emerging markets, structure credit ebs and we feel the opportunity there is more compelling. now that often sometimes comes with some of these opportunities of less liquid, so that will come with some liquidity provision capabilities. i mentioned the emerging markets. this is really for us, the way we see emerging markets is on the eos dollar nominated the sovereign debt side, so not the emerging market equities, not necessarily effects, it's more on the debt side and u.s. dollar denominated. >> president stansbury: thank you very much for the report. >> one more page, sorry, and the conclusion, effectively. as we think about '19 and some of the areas of focus, we agree with staff that they should continue to identify managers with which to strike strategic relationships, given your size

as a program, and continue to leverage your presence in the marketplace to source coinvestments and the team can be very helpful in this and we will be bringing coinvestments to sfers and also helping sfers in analyzing coinvestments as they source themselves. as i mentioned earlier about technology and, you know, at bam we are continuing to evolve our technology infrastructure. we brought in last year a new cto, chief technology officer, who is migrating all our systems into the cloud, and ideally we can have a sfers-dedicated ecosystem into the cloud, where you guys can upload all your return streams and then utilize, you know, the analytics tools in a more efficient and powerful way. this is something that's coming, and we'll be very happy to help with. and then lastly, you know, one

focus would be to ensure that there are consistent guidelines between one and two, so that as we manage one portfolio, it's more seamless and also allow for the ability to participate in some longer dated opportunities. liquidity provision and strategies like mortgages and structured credit that would require some relaxation of some of the constraints. so one thing to focus -- to consider, is maybe the board should consider harmonizing some of the guidelines on leverage, potentially even increasing those guidelines and relaxing some of the guidelines on liquidity. >> president stansbury: some of the takeaways here is the programs are a little more than twice as much or right at twice as much in an up market as it has in a down market. bonds are about flat during this

period, just a little bit better than that, and have lost money 12 out of 27 months, the program's made 2 out of 27. in 2018, 70/30 did lose 6.5, 60/40 would have lost 5.5. this program lost 1.5. for the liquid markets, this has been really additive in terms of completing the -- the risk adjusted returns when you consider the outlook for bond returns is very low, and stocks, as we know, are very volatile. >> i just wanted to make one more comment before we take your questions, and this is to connect back to one of the points that allen made in his presentation around the total plan performance, particular for

2018 calendar year performance, allen mentioned the impact of our asset allocation changes, and one of the fundings, one of the quarters of funding that we reflected on that page in staff's presentation, where we identified the pace and the evolution of funding, the absolute return program by quarter, in q1 of 2018 to be effective january 1st of 2018, staff funded slightly more than $1 billion of additional absolute return exposure, and the majority of the funding for that, the majority of where the liquidity came from, was by selling our equity investments, and if you take a look at the margin of performance difference between what our global equity portfolio delivered in 2018 and

what the absolute return portfolio delivered was 900 basis points of difference there. if you do the math on that, that's about $100 million of value reserved. >> president stansbury: board members, questions? >> questions from the board? >> 13? >> david's presentation. >> page 13, this is combined, right? >> okay, that's enough for now, thank you. >> president stansbury: other questions from the board? >> very thorough. answers a lot of questions. >> president stansbury: i would open up for public comment.

are there any members of the public that would like to address the commission on this item? >> i'd just like to say that hedge funds are a high risk, low return, high cost, long-term investment and you should follow the lead of the state of new jersey pension funds, new york city pension funds and divest from them. the main selling point you were given, hedge funds, is go in the down market and we are going to have a down market. all hedge funds do is 2008. average hedge funds lost between 18% and 20%. even on the bonds, less risk, run of the mill hedge funds last 21% and -- top hedge fund

manager, the average about 2.5% return over that ten-year period and the s&p 500, which was the recommendation, 8.5% return. so if you want to invest in 2008, a million dollars -- and by the way, they were all funded bonds, which was supposed to be electricity. if you would have invested $1 million, you would have had a return of about $250,000. [ indiscernible ] . you should have divested years ago. >> president stansbury: thank you very much. seeing no other members of the comment, we'll close public comment. >> final one, i can take the answer offline, but i'm curious

for david to come back at some point to talk more about the considerations that we should be making going forward. so that would be something i'd be interested to hear. >> we're actually prepared to do that at next month's board meeting. >> i know this is a little bit of a hypothetical, but if you just did a back of an envelope analysis of where we are today on our exposure, versus where we would like to be when we're fully funded, do you have a sense for maybe how we might have performed, say, given during 2018 or these moments of market dislocation? correction? >> i have a thought. >> yeah. there's a little bit of backward-looking selection in there, obviously. >> president stansbury: of course, of course. >> and one of the areas that in our existing investments that

performed quite well during q4 were our quantitative investments, and this part of the reason why you see that in our key initiatives, and, you know, some of bam's comments, as well, that we look to increase our investments in quantitative strategies on an absolute basis but also look to add one or more managers and one or more strategies to increase the diversification on the portfolio. >> president stansbury: i'm sorry, you say did well in q4? >> our quantitative managers did, yeah. >> president stansbury: comparatively speaking. >> correct. for example, looking here on page 13, i agree with david. i think if we'd been fully implemented, we would have run the margin better. for example, stated we planned to reduce our equity exposure. we see that in 2018 we were down

7.5% in the equity part of this book, and we planned an increase quantity and that was flat. so what did that mean? say we had a -- we were 5% overweight equity relative to target, if we'd replaced that negative 7.5% with zero, returns would have been about 38 basis points better. >> president stansbury: how would you -- how would you rate your satisfaction with where we are, if you had to score yourself? simplistic question, but are you -- would you rate us an a, rate us a b-plus, how would you grade us? >> probably b to b +, but i'm a pretty firm grader. take that into consideration.

in terms of the program, i would give us an a. we've absolutely delivered on all the expectations we've set there. we utilized the strategic relationship to the fullest extent possible in order to get to this point in the program, and the results speak to that, you know, both at the absolute return program level but also at the plan level in terms of getting this allocation in place prior to the q4 of 2018 when we experienced the biggest market dislocation that we've had in the last ten years. but as allen mentioned, you know, there's some luck in the timing of that and the board making its decisions when it did and what staff was able to do in the time period from when that decision was made on the asset allocation to when we were able to have the capital in place.

but, you know, in executing the build out, an a. in being able to execute on the composition, the portfolio construction, and getting all of those processes in place and our ability to optimally source, recommend, and monitor all of the relationships that we have in place, we still have some work to do there, so that's why i would grade that slightly lower. >> president stansbury: seems to me maybe the rate at which you built out the program really has a greater attribution to our probably our returns and maybe -- no? >> we have outperformed the hedge fund index by 1.8%, so -- but the asset allocation effect, you can look at it. it's tactical from the point of view that from the time it was approved we got it done relatively quickly, and that just turned out to be

fortuitous, but it was also planned. we did this specifically to achieve more alpha and to considerably reduce the impact caused by negative markets on our funded status. >> i guess maybe what i'm saying is that thank you very much for working so hard to get this done. i think part of our concern as a board and your concern and staff was we felt we were entering a point of time in the market where maybe there was going to be some movement and you were able to execute, get some things done and get our equity allocation down, and, obviously, that shows. so thank you to david, to you, and to bill for even getting us on the agenda in the first place, which was, i think, really extraordinary effort it took to finally get this done. little bit of a rough road, but we got there. i think our returns speak for itself, so thank you very much for everything. >> it's the returns and it's the

risk profile. again, the goal, and we look at this in a portfolio context. and absolute returns contribution in a portfolio context. again, we're designed to do two things, earn high long-term returns and minimize the impact caused by a large market decline. if i were to grade this, i'd say in terms of asset allocation and the like it would be an a. i'd say in terms of, you know, manager selection probably more in the b plus range. the equity returns, i expect a couple of these managers are going to bounce back pretty darn good, but, you know, we do have an a-rated quant manager and lineup, and in terms of portfolio construction, it's always going to be a little

messy when you have two partners. one is going to build a diversified portfolio, the other is going to do the same thing, so when you put it together, you could be overdiversified, so our goal is to get down from 33 into something that every manager is impactful in a portfolio context. >> president stansbury: anything else from the board? okay, i'll just say it's been a little bit of a long and bumpy road at times, but we finally got here. thank you, everyone. i think it's been well worth everyone's time and effort. >> thank you. >> thank you. >> president stansbury: okay. why don't we go to item no. 13. >> clerk: no. 13, discussion item. chief investment officer report. >> board members, we made a little over 1% in the month of february, and now in just two months we're up almost 5%. quite a rebound.

and on a fiscal year basis we're a little over 3%. i'd imagine that we're still probably outperforming the median public pension plan by about 3% or close to that on a fiscal year basis. if we can turn to, real quick, to the narrative, i did include some charts here to show, beginning on page 2, that show our ranking returns by asset class. i don't think we're ever going to see 111 again over one, three, and five years. i'd love to be proven wrong, but we're not set up really to do that if there's a major market rally. again, our absolute returns are going to look great, but our relative ranking would not look so great. i would like to point out the risk adjusted returns. they are all in the top 5%, 6%,

meaning the sharp ratio and the sortino ratio. alpha, we talked about the difference between alpha returns and beta returns. our alpha returns, again, ranking in the top 6% or better. i did want to draw special attention to real assets, in that our returns here over the last five years are the highest ranked returns in the universe of real assets, so special recognition to chris and to ed for the returns and the partnerships that they have posted and built in the real assets program. i do want to move, real quickly, to the closings here, beginning on page 6. aubrey, which is a flagship manager that we've had, mid cap buyout strategy, we asked for $50 million and we did get