shutdown parks and parking lots and make it difficult for people to get out and enjoy things. we have so many parks where there's no reason why people have to crowd in one or two or three park in san francisco. the beaches have been a lot more manageable because we've opened up more space there. again, just use common sense not only to protect you but the people around you. >> thank you so much, madam mayor, and everyone else for your time. there are no further questions at this time, and this concludes today's press conference. thank you, and stay safe. >> the hon. london breed: thank you.

>> public comment. >> reminder to all participants to mute themselves to minimize background noise. please note gray indicates unmuted.

this is caption test.

use the live >>

>> item 5 action item. of the august 12, 2020 retirement board meeting. it's a motion for the august 12, 2020 board meeting. >> so moved. >> madame president we received a request to the administrative changes to the minutes. she made public comment and we indicated she represented the retired employees.

she would like the title of her organization to be spelled out in the minutes. i would propose that we make that one correction on page 9 [indiscernible]. sorry for the interruption. >> i'll second it. accept the change. >> moved and seconded. we'll adopt the minutes with the requested changes and accepted by executive director huish. at this time we'll take public comment. >> thank you. callers, if you have not already done so press star 3 to be added. for those already on hold please continue to wait until the system indicates you have been unmuted. moderator are there any calls?

>> madame secretary no calls on the line. >> hearing no calls, public comment is now closed. president bridges. [roll call] . >> thank you. the motion passes. president bridges. >> commissioner: thank you, madame secretary. next item please. >> item 6 action item consent

calendar. >> commissioner: motion to approve consent colorado in order. >> so moved. >> second. >> thank you commissioner casciato. seconded by mr. huish that we approve the consent calendar. we'll take public comment at this time. >> thank you. callers if you have not done so press star 3 to be added to the queue. moderator, do we have callers on the line? >> madame secretary there are no callers on the line. >> thank you. hearing no calls, public comment is closed. president bridges. [indiscernible]

>> thank you. president bridges. [roll call] >> that's five yeses. motion passes. president bridges. >> thank you, madame secretary. next item please. >> item 7, discussion item. report on investment porms --

performance of the retirement fund for the quarter ended june 30, 2020. -- performance of the retirement fund for the quarter ended june 30, 2020.-- performance of the retirement fund for the quarter ended june 30, 2020. performance of the retirement fund for the quarter ended june 30, 2020. performance of the retirement fund for the quarter ended june 30, 2020.performance of the retirement fund for the quarter ended june 30, 2020. >> members, this is a discussion item and fiscal end report. i'll ask alan to walk through the numbers of our performance and i'll have follow comments after. >> can everyone hear me? >> yes. >> good. you have before you a 6-30-2020 time weighted return on your performance. the punch line for the fiscal year is up 2.41%. since the report was generate the s&p was up 5.6 in july and another 5.6 brs in august. -- 5.6% in august.

i want to highlight an issue associated 6-30 performance reporting. public market results are usually compute and reported within 15 days of the close of the quarter. so by july 15, we essentially had all the results from all of your managers in the public markets. private market results typically, because their evaluation and appraisal-based typically take three months to get those results. so the result we're looking at, which would be true for every one of your peers that has assets invested privately, you're looking at june 30, public market returns but march 31st private market returns. if you hold on that page, if you go down this report and look at the public market returns for q2 for the s&p 500 it was up over 20% but private markets as reflected in the cambridge index

down on the bottom were a negative 11.88%. so that is seriously impacting the results that we're looking at. as we report you against a universe of peers that are larger than a billion, it impacts everyone but since you by design have a higher exposure to private markets roughly 41% versus the median of 30 % to 35%. when we looked at the numbers your results are actually quite good despite what i just told you about. before we dive in to the numbers on the economic numbers if you go back one page, you have the unusual phenomena the economic environment in the second quarter was one of almost

unmitigated boom and the gdp fell down 32.9% for the historians only four quarters worse than that in the last 120 years, q1 of 1921 and q1 of 1946. this down turn literally wiped out five years of gdp growth. as bad as that news was in recent weeks, more timely data is worsening especially in the real economy. so the s&p 500 represents large companies. apple, for example is 6% of the s&p 500 it's 1% of gdp. hotels and restaurants on the other hand are 1% of the s&p 500 but 6% of gdp. you're starting to see the real

difference between cap-weighted market indices driven by successful companies and technology and health care doing just fine, in fact the second quarter number was the fourth best s&p 500 number in the last hundred years at the same time the economy is failing. what's keeping that up if you look down the page at the inflation, it remains low. the fed has stepped in unprecedented stimulus. they've expanded their balance sheet by almost $3 trillion and the interest rates on the 10-year treasury at the end of the quarter were 70 basis points. in fact at one point in the quarter they had dropped to 52 basis points. that is the lowest interest rate since alexander hamilton was secretary of the treasure meaning we've never had rates

that low. if you go to the implications of that on the next page, this is simply how the markets did. column one is the green bars quarterly results, column two, the blue bars reflecting annual results. despite a poor and worsening equity u.s. equities rose 20.5%. for the year we had a couple bad quarters but for the year the s&p 500 was up 7.5%. u.s. bonds, which everyone a year ago including us rejected to generate 2% to 3% returns over the year as we already thought interest rates were low and couldn't go lower, covid took care of that. interest rates dropped and so holding ordinary bar cap ag bonds over the year got you 8.7% even better than the s&p 500 in fact you'll see over the last year u.s. bonds were one of the

best performing assets. as a result of 60/40 u.s. portfolio generated a return of over 8%, no one invests purely in the u.s. so if you add a 60/40 global stock bond portfolio you generated 3.2%. again, you can see the disparity between public and private markets just by looking at that one year column and going down to the bottom you'll see anybody who had lots of money in private markets largely due to this phenomena of delayed reporting did not do as as well. that if we can turn to page 12 the punchline report and to remind everyone the top line is your time weighted net of fee

returns for various period. it was this percent for the year. that put out in the top third of your peers. if you look at the five, 10, 15 and 30-year returns which are on the next page because we don't put them here, you're still exceeding your assumed rate fairly significantly and i've done this report to several others. tons that are diversified as you are the best is plus 1% and some others are down 1%, 1.5% and 2%. i know 2.41% doesn't feel good

but it's quite good and if you look at three years, 7.17% fourth among your peer group and 7.25% for five years second among your peer group and 10 years top 4%. versus a 60/40 you've significantly outperformed a 60/40 index and versus your policy index, again significant outperformance versus your policy. as you know as a board in 2017, you approved an asset allocation that was more diversified than your prior asset allocation wanting to lower the volatility of the portfolio and position for more difficult times. indeed we've accomplished that

lower volatility portfolio if you look at the tables for the three year and five-year. your volatility measured by standard deviation realized is in the bottom 8% of your peer group meaning you're less volatile and less impacted by strong market moves up and down. the risk-adjusted return is to take the return above the risk free rate which in this period is above 0% and divide it by the volatility. return by unit of volatility risk is called the sharp ratio and you can see in that ratio you rank in the top 1%. that is to the return you earn per unit of volatility risk. and the sartenno ratio looks at

the volatility and you can see you're in the top 1%. for year end of june 30th the net investment gain of 9.11 [applause] second and at then the value stood at $26 million. any question on performance? if not we can go and asset allocation versus policy on page 14. . you see the columns and the board approved policy targets column 5 reflecting interim policy targets. you'll notice all allocations are approaching your policy targets. the ones where you are under

like private credit is an asset class you're building and private and public equity are about 5% each. if you were to look at these through time you'd see definite progress towards moving us to the long-term policy results. next page reflects how those actual allocations have changed over time. and if you look at the chat you can see starting at about 2017 the gray portion is public equity coming down and private equity and credit have been going up and absolute return portfolio which hardly existed through 2017 is a significant piece. it's a portfolio that has more colors on the chart less

concentration in any one asset class. in a market that's going crazy on the up side, you want to be in a 70/30 portfolio. but those portfolios when tougher times arrive also decline more rapidly and the belief is through time by having less volatility and more diversification you'll reach your results in a more consistent way. thrown risk return charts which start on page 17, i'm not going to go through each one but each point is for a public fund greater than $1 million and volatility on the horizontal scale. sfers is the green square. it's above the median return for the public funds which is represented by the cross hairs where the medians come together

and less risky. you can look at this and there aren't very many points to the portfolio so your portfolio has been gradually moving to have less impact by one or two asset classes and to be more stable and you'll also see that it's significantly above the median return. the other thing i'm draw your attention to is the black triangle is the policy index. the actual return for san francisco's portfolio versus policy in charts one, three, five and 10 years the actual is higher in return and less volatile than the policy portfolio. that doesn't always happen and

it's a feature in your portfolio that is more evident and the only way to outperform your policy is better allocation from a perspective meaning being in asset classes that do well and not being in asset class do poorly, that's hard to do and you'll see in a minute that number's pretty small. the other factor is having managers who outperform their benchmarks. that's not guaranteed but we'll see in a minute san francisco has done quite well in that respect. so if we turn to page 25, it takes quarter by quarter your performance and your policy. if it goes up that's a quarter in which outperformed. if it's below the zero line it's a quarter you under performed. it's obvious you were fairly flat and generally not doing much better than policy until

some time in 2017 where you start to see the accumulation of quarters that do better than policy. remember, the policy index for your private equity portfolio is public markets plus a spread and we talked about the disconnect what is what drove us down in q2 and you have public markets tanking and you were looking at private equity results that were 12030 results which was a robust environment. nevertheless over time when you do those pluses and minuses you can definitely see return above policy. the next few charts will now look at how did we achieve that return above our policy. so starting on this page, you

see for one year if you remember your actual was 2.4. your policy was 1.6 roughly 80 basis points of outperformance. 35 basis points was allocation effect. you can see you were eveover weighted to private equity and underweight to develop market equity and non-u.s. equity that also helped you. net-net 35 basis points leaving 51 basis points or half a percent net of fees from outperformance asset class by asset class. you can go down the list and you see the consistency of outperformance. we'll talk about u.s. equity in particular. financial research would suggest the outperform in u.s. equity is very difficult. the benchmark is an index portfolio and most people end up either negative or barely

positive for u.s. equity outperformance here you see 43 basis points. the outperformers are private credit. there's some market lag in value of private credit. liquid credit did under perform. you tend to have less performance and when rates dropped you get much more benefit out of a longer duration portfolio. private equity shows up as the biggie. that's nothing wrong your private equity portfolio. in fact when you compare it peers it's done very well. compared to public markets plus a spread, you see that lag and the absolute return portfolio benchmarked here against t bills plus 5 has under performed and i think david and bill talked a little bit about the reasons for that earlier. that's a one-year picture. it's a little bit more useful since we've been building the strategic positioning for three years to look at the three-year

picture and you'll see the three year is consistent with the five year. again over three years we outperformed policy by 1.3% roughly. only 10 basis points of that is allocation effect. you don't want to see a big swing in that because that would be market timing which is really hard to do. so a small contribution from allocation effect and almost a full percent from manager selection effect. again, real assets, strong opportunistic equity strong, u.s. equity 30 basis points. again it's only one or two asset classes where we under performed and that had more to do with the structure of the benchmark than anything else. in terms of attribution, i was going leave it at that and just go to page 28 to take a little bit of a look at your public equity, which we mentioned earlier.

page 28 should be going forward a little bit. sorry, page 29. it's pitch black here. you see the public equity performance if you compare how you did versus your total public equity index. top percentile for one year, three year, five years, 10 years top 7% and significant outperformance. you are one of the few plans i advise who has chosen to be active in public equity. it's hard to out perform in that space. i often said if you have any shot at it you need a good staff and good consultant, we'd say modestly. without those elements there's no chance. those elements you've got a chance and your results for this

period have been quite strong. now, this has been a generally up market so there's no guarantee this persists but certainly it's a strong start. the last page i'd take you to is just to look at if we go to page 36. it's just going look at the risk return characteristics of each of your asset allocations. total fund risk statistics, your return versus benchmark for each asset class. this builds over to the far right where the information ratio is your return above the benchmark divided by the volatility of that return is called the information ratio. it's very similar to the sharp ratio and you can see public equity top percentile of your peers and u.s. equity top 3% and emerging market equity so very

strong results. if you go tots next page, not as strong less duration than the benchmark. here you haven't done quite as well as the benchmark and when that happens you get a negative information ratio inappropriate to rank. fixed income which is a smaller allocation 7% to 10% of your portfolio. less competitive results but a less duration-focussed allocation. if you go not next page you'll see private credit. here for the three-year period top third or top 11% among your peer group on a time weighted basis, top equity percents. the only one where you trailed

the peer and this say peer group comparison is absolute return bill and david talked about that and allowing 40% of your assets valued with a march 30 result versus comparable peers quite strong and unusually strong contribution from your manager selection. the board had asked how do we compare endowment funds and i won't take you there but page 53 of the report endowment fund data is hard to get and takes longer. for the 6-30-2019 period, not 20, in the top endowment funds your return as of one year was in the top 14% and in the five years was in the top 23%. this is data that we do know the individual elements and i will

tell you outperformed harvard, stanford and cal except in the one-year periodical -- period cal did a little bit better than you do. the conclusion is you have had others keeping up you have maintained a return above your assumed rate for the longer term and as mentioned earlier, 6-30 was the bottom of the private markets will ch will now be reflected in your 9-30 numbers and they'll be strong simply because of the market. you should move back up assumed rates. in a period where risk was rewarded and your manager selection was quite strong.

i am going to stop there. bill wanted to make comments. we did provide the individual manager results privately but we didn't get that distributed as in a timely basis as we should. other than a couple parts of the portfolio, which you discussed earlier, amazingly consistent performance, strong manager selection and a low risk portfolio which going forward if the market does crack, which many people believe it will, you're not going to be dragged down like others. >> very good. if you can turn to page 24 real quick.

for fiscal year ending it must be very consistent alan mentioned our returns. i'd like to take a deeper granular look at that. turn to page 28. >> go a few more pages forward.

>> you want 29, i think, bill. >> i see it is page 29. so you see here public equity top 1% across all over five years. i'd like to take a look at to where we're going wrong here. if we come to the next and look at u.s. equity we'll see that for the six months ended is that our return is 1.93%. that's an outperformance versus the index of 5.4% in six months and return negative 4.85% over that period. we out performed our peers in six months in u.s. equity by more than 6.5%.

for the one year ending june, the return 10.8% we outperformed by 2.4%. our peers returned 4%. we out performed peers by 6.7%. we've been managing public equity in a more active manner the last three years. you see over a three-year period u.s. equity formed over 4.2%. the index was up 10% and our peers returned 8.7% we outperformed our peers by 3.5%. one other item to highlight further down on the line item called opportunistic equity. these are our specialist managers and when we look for the one-year ending, this portfolio return was 37% and the

global equity index returned 1.17%. this part of our portfolio 5.7% of our assets end of june out performed for this one year by north of 36%. moving on to the next page, look at the line items and there's two stories to this. there's liquid credit where we're taking credit risk and that's in the next green highlighted line item. is liquid credit where we took credit risk not well rewarded particularly in the month of march. you'll see it performed well in the last three months. for the fiscal year as a whole returned 1.7% comparatively when we took no risk, where there was

a rush to safety on the part of institutional investor sentiment in treasuries. treasuries for the last quarter fell even on a one-year basis returned over 7%. private credit over one year we essentially lost 5 basis points and for the three, five and 10 year we earned 10% in the asset class for each of those. absolute return we have chronicled that for the fiscal year we lost 3.3%. in march it lost 10.5%. we recovered a little bit north of that returning 5.8% in the last quarter. that one month is the entire reason for our under performance over three years except for the

out porms. -- performance. on the next page going up here we turn to private equity. this is the second in our portfolio. public request we saw return 7.9% an out performance of 6.7% for the year. it was an extraordinary performance. private equity was our other star performance relatively speaking up 6% for the year and out performing our peers returning 2.3% in the private equity book we out performed 3.7% in one year and when you look out over three years return of 3.8% and peers had outperformance north of 3%. it's consistent between % -- 2%

and 3% including double digit returns. in net asset this was the biggest point in our portfolio the past year. real estate held up fine. natural resources took a punch in the belly. there was a collapse in demand for oil worldwide due to covid. and our portfolio lost 5.6% however our peers lost 5.7%. you'll see when you get out to a five-year period it still made over 9% on this part of our book. it appears 6.5% thus out performance relative to our peers of 6% over 10 years. this is a 12% rate of return and out performed our peers by north of 6.5%.

>> here's key highlight to sum up. and treasures returned north of 4% including 7% in treasury. pain points were private credit return 0 for the year. absolute return negative 3.2% as we talked about in liquid credit. returns were above even and real assets we lost little north of 5.5% due to the collapse for oil and natural resources in our book. it was quite a difference of stories. some things were especially well and some things weren't. that i'll turn it over to the for questions and comments.

>> board members this is the item. do you have questions or comments? >> leona? >> yes. commission commissioner? >> i'm always amazed at how you make a presentation. >> thank you. >> when you went in the macro data you went to the unemployment numbers. can you please add a chart that shows payroll or earnings. it's a broader number than just jobs. >> you're correct, joe. we will do that. >> we always have this debate about the benchmark for the private equity which is a strong suit.

with the long bull market and the public equity the question i'm trying to figure out is whether or not the returns in the private equity portfolio have been sufficient to cover the illiquidity premium. >> i think we're doing some research on that because there is debate whether the premium is shrinking. historically it's been in the neighborhood of 3%. we're still a believer but there's research being done on that. i do want to emphasize that if private markets and private equity and real estate the measurement we're using here are so-called time-weighted rates of return invariant to cash flow. that is the reporting standards that is consistent across the portfolio. in private markets, the manager does control the cash flow. he calls you when he wants you to give him money so the better

methodology to measure private markets is what's called a dollar-weighted rate of return and that is reported to you bytory cove and cambridge on an annual basis. it is a much better basis if you really want to understand how you're doing in that sort of manager selection piece and we sit in those meetings. your numbers are quite strong, joe. those two things in context private equity in particular as been a very important engine in san francisco's success. [please stand by] .

>> that has extended out to 4% excess revenue. in addition to that there's more private equity companies that are staying private for longer even much longer than they used to. lastly, private equity is benefiting from a narrower concentration of where the new

economy is going -- going towards technology, software, provide science, innovation. large segments of public market equivalence are captured in retail, financial services, industrial materials, etcetera. in some respect, i think equity is extending. >> i'll ask him to explain it. i'm not looking at the one and three-year terms to figure out if we're getting that compensation correctly. thank you. >> any other comments or questions from commissioners?

if not, thank you mr. martin. this is a discussion item only. at this time we'll take public comment. [indiscernible] >> please star 3 to be added to the queue. if you're already on hold, please continue to wait until the system indicate you have been unmuted. do we have any callers? >> there are no callers on the line. >> thank you. hearing no callers, public comment is closed. >> president bridges: thank you. next item please. [agenda item read]

>> president bridges: this is discussion item only. >> this is a discussion item on education -- [indiscernible] we offered an introduction list item earlier in the year. this is follow-up and little bit more granular discussion. we are considering leverage as an option in asset allocation. as we become more mature plan, meaning that our cash-outs for planned benefits from $500 million to $1.3 billion

annually in eight years or on a rather aggressive path to becoming more mature plan or needing more flexibility. as we are about to embark on that, we have couple of options. one is that in future asset allocation we can increase allocation to public market. but that can reduce our returns in where we generated very good output in private markets. second option is to utilize leverage where we can have the flexibility maintain our allocation public equity where we earned access returns

recently. there's a middle place in there where we can reduce our allocation public equity -- excuse me, increase our allocation to maintain our allocation to private markets. we've recently demonstrated the public equity is also a very good place for access returns. tethering along with commissioner driscoll's comment about his private equity, talk about the narrowness of where private equity is generating high returns. public equity is also generating very high returns in the same space. meaning technology, software, innovation, digital economy, etcetera. when you make an adjustment for

where the two landscapes are best, public equity and private equity, when you make that adjustment, the returns may a look a lot more comparable to one another. there's a third option where we continue to invest seeking high alpha in public and private markets. we need some flexibility to manage our changing liquidity needs. one way to do that is utilize the leverage the plan level. >> again, we did an early education on this back in february and we did some follow-up that were a number of questions raised by the board. we wanted to go back and provide

deeper research in terms one, sort of the history of who's used it and how it worked. here very specifically, we went back and did some original research on what we could have expected had we employed leverage during the last 10 years. the reason this discussion is so important today is two things that happened in the last 10 years that make leverage particularly attractive. one, you know by owning your home you take out a mortgage. it's true when you own that home for a long period of time, depreciation in the home value is much higher than the interest rate you pay. that creates wealth. the ability to borrow at a low rate and invest in higher return is what creates that wealth and as we mentioned earlier in the discussion of your performance, borrowing cost today are the

lowest they've ever been. if we can earn a return through our portfolio structuring, hire than a very low borrowing cost, we can increase the wealth of the portfolio. it's the spread of asset class returns versus interest rates that creates attractiveness. secondly, leverage does have risks and you control the risk by limiting the volatility of the risk asset you invest in. as we've talked about, you probably wouldn't have wanted to leverage a 7030 portfolio that has lots of volatility. san francisco's portfolio is not a 7030 portfolio. it's a well diversified portfolio. a well diversified portfolio with a expected return higher than the borrowing rate reduce the risk of leverage. that's the general background

here. chris is going to do the presentation. chris lavelle is with nepc, you can see from the initials after his name, he was an actuary with mercer for years. he understands the liability side. he headed our asset allocation for many years at nepc. he's the strategic advisor to the state of wisconsin. perhaps one of the longest users of leverage in the public fund world. i will turn it over to chris and he'll walk you through this. >> i want to step through this and i'm not going to try to read everything on the page. just present to you as an informational topic, something you already discussed but digging deeper in leverage. leverage is all about somethingg

your returns. if will have negative returns, magnifying losing more capital. leverage asking done through borrowing and that's something that some investors do. it's more common as you see on this page, for public funds and other large institutions use derivative as a way to get inexpensive leverage and doing it on a diversified structure. you already have leverage in the portfolio. we've identified it here as three broad type. type one is really an explicit leverage that you get when you're investing in a fund vehicle that's going to employer

leverage. bementioned private equity and real estate. each of these, especially in the case of real estate when you buy a real estate manager investment, they're going to get loans just when you get a mortgage on your house. they're getting loans that allow them to buy more property that is definitely leverage. little bit more hidden area of leverage but is there, when you invest in equities of any company, you're actually investing in a leverage structure. as you may know, if you look over the last decade or so, u.s. corporations had issued fair amount of debt in some cases, stock buybacks have been

popular. the balance sheet, the debt that's on corporate america balance sheet has actually grown. thebecause you have those equity investments you're experiencing that. type three is what we're looking to discuss today. which is the idea using leverage at the plan level such that you can magnify certain returns. but the focus the return is on diversified portfolio. alan made this point. it's important to recognize, depending on what you're leveraging, you definitely leveraging up the potential returns but also the potential risk in any individual asset. as a portfolio level, judicious

implementation of leverage can give you better results. because you're not leveraging the things you're already risking. key point here, so important we put it in blue so you can see that at the bottom. leverage is neither good or bad. you already have leverage in various investments across the portfolio. really an average investor has to. at the plan level is less common. we'll get into why that is. we consider that to be a constraint that if we relax that constraint, it opens up lot of opportunities for a program like yours that are diversified but in this low return environment looking forward. adding leverage at the total plan level, we do believe can give you higher returns in a risk balance manner. we're going to go through some

examples. we have added couple of pages on the state of wisconsin that i can speak to and i work with them for a number of years. you'll see in terms of u.s. pension plans, not a lot of implementation here but something that's increase in interest. alan mentioned in a lower forward-looking return environment but also one where borrowing cost are exceptionally low. this becomes one of the tools in the tool box that lot of public pension funds are talking about. you'll see it in the cafrs. i mentioned there are multiple ways to add that leverage. the most common way for institutional funds is to use derivatives. frankly, lot of this is done through the futures market. there are things that are clear.

there are things that you can get quite a bit of leverage and have protection from the exchange. usually things are off the libor. i know libor is going away. some of the contracts are changing. you usually going to pay in risk premium spread over libor. we have some examples. organizations sponsors a pension plan that issued p.o.b.'s. they are experiencing leverage. they have a debt of sponsoring a pension plan. at the fund level, we're talking about here, what a pension obligation bond would mean, you

have more capital to invest. at least in my reading of this, it's not leveraged at the financial level of the plan. any questions on this? i like to go next to the case leverage. i believe alan presented to you, beginning of 2020 assumptions, our expectation is that diversified allocation here should earn 7.1% over the next 10 years with expected annual volatility of 11%. the caution is to look at what we were looking at a the

beginning of 2019 versus the 2020 assumption in that second column of numbers that roll up to that 7.1%. you can see all the assumptions are down from cash. if you think about the great return that equities had last year, equity is down, interest rates lower, bonds down. if we roll this forward to today's market, i think most of these assumptions will be going down as well again. because cash rates are even lower, near zero. we had strong equity markets in july and august as alan mentioned. this is a challenge. if this is the set of opportunities over the next 10 years, they're not as good as the opportunities in past years, what can leverage do to impact this? this is very -- [indiscernible].

i say, this is a 50-year-old insight. i have to update my subtraction. we're coming up on 60 years since the official frontier was first developed by harry markowitz which got a nobel prize. if you look at the same types of assets on the previous page and constructed portfolios out of them, we get this odd-shaped blue figure that's characterized -- there's a minimum risk portfolio. if you only investing in risky assets, you can't really squeeze down your risk down to zero. in this case, it's a little bit about 6% looking at the bottom. you can invest in the most risky asset class out to the right. i think we probably cut this off at 16. you can invest going out there in a very risky asset classes. there's another economist that came along and said, wait see

second, this is the most efficient use of asset classes that are risky. if i can invest in cash in combination with risky assets i can go with the blue line. that's a combination of cash. this is now looking at sort of current 10-year cash expectation around 60 bases points. there's a dot, red orange dot that is risky portfolio on the blue figure we're combining with cash. that's one implication. you don't have to invest in rickrisky assets. you can get a better return if that was your risk posture. most people have risk postures that are higher. you can go out on the blue line,

add more and more to things like public equity. or you can take that same portfolio that was at the point there and level it off and beat the portfolio there. this is a bit stylized. this is certainly not the way that investors that use leverage in exactly follow this year to year. this is the concept that's behind this idea that leverage not allowing leverage at the portfolio level. you will not get as good outcome combining with cash for low target risk or combining with leverage at higher target risk. what this mean in practice. here's another way to look at

this in a return framework. all we've done here is developed a normal distribution. you see expected return centered around 7.1%. how likely are you if you leveled a portfolio to have regret that you shouldn't have. that's really about making less than the cost of leverage. over a one-year time period and for many investors, one-year period was pretty strong negative returns. in those cases, you're in that left tail that's blue that says, actually it would have been nice since we were going to lose money not to have levered. if we compound returns, there's a blue region in the right graph now over five years that's kind of hard to see. on our asunshines -- assumption

here, it's pretty small. is there a potential five-year period where you couldn't earn more than that a cash rate. there can be environments like that. hopefully we won't see one. if 2020 were five-year period, maybe that could happen in 2020. five-year forward-looking period, this is a pretty low probability. in that event, we look for other things in the portfolio like the private equity to work through this really bad environment. we do think that leverage is attractive in standard environments where you can outearn the cost of borrowing. next i like to add, alan wanted to run some example but he was able to do looking with the

actual plan through history. >> this was at result of a lot of discussions with firms like pimco and your staff. in terms how we can demonstrate the value of doing this in a credible way. what we did here, we looked at your returns, your actual returns for the last 10 years, quarter by quarter. in effect, took 5% of the portfolio and purchased an asset that consisted of 68% msci equities and 32% bonds. to represent those, we actually have instruments that we can buy. there are e.t.f.s on those. we can go back in history and say, if we borrowed at libor plus 25 bases points which is what a table tells you what the cost of borrowing has been.

we borrow at libor plus 25, we buy that portfolio of 68% equities and 38% bonds, what we would we have accomplished over the last 10 years. you can see your actual results are that green dot. the results of doing the leverage in a very naive way is the blue dot. you did have an increase in volatility over this period of 45 bases points. you did take more risks. but your returns were augmented by 20 bases points on an annualized basis. if you do that little sharp ratio calculation, 20 on 45, there's almost .5, which is a pretty good risk return. i would also point out that we did this over the last 10 years. we started at a period where raters were much higher than they were today. two, you would hardly call a 68, 32% portfolio well diversified.

even in that circumstance you see value. if you go to the next page, we wanted to illustrate what happens every six months. this line doesn't always go up. there are periods where you will see a downturn when that cost of leverage indeed exceeds what you earned on the portfolio. you can see cumulatively what the results are. if you translate that into dollars, it's $513 million cumulative additional dollars in the portfolio as a result of doing this. again, higher volatility but you earned a higher return reasonably efficiently. it's not like dropping 50% or 60%. chris is going to talk later about some issues that have risen in the use of leverage. you've read about them long-term

credit bank. the ones that blew you were 900% leverage. this is 5% leverage. we're not talking about taking enough leverage risk to blow the portfolio up. we're talking about doing it in a conservative fashion. if you remember earlier, what would you really like to leverage, we did an educational presentation last quarter on a gtao portfolio where we had a group of managers that identified that had characteristics of positioning the portfolio through active management to protect downside and do little bit on the upside. we had that data stream of what would had we had it in place. the gtao portfolio, that's a much better thing to leverage. it's more diversified and two, it has downside protection.

we did exactly the same study here but instead of investing the leverage dollars in a 6832 combination, we invested it in that gtaa portfolio, we created for you. it admittedly that portfolio was selected with managers that outperformed. there's no guarantee they'll do in the future. the purpose of having that portfolio is a diversified portfolio that protects on the downside. here you see the same kind of results being shown only in this case, not only did you get the higher return associated with this portfolio -- 38 bases points on an annual basis. it only added about 5 bases points to volatility. a sharp ratio well over two or three and again, if you turn to the next page, which is the cumulative value of this, the

cumulative value of this is $950 million with very little increment. i know this is backward-looking data. it does represent what we could have achieved had we taken that 5% of your portfolio and invested in something other than the portfolio. the financing cost was libor plus 25. fairly low borrowing rate. two, the asset class we invested in particularly with the gtaa, was one that was chosen to be diversified and have downside protection and you see on this chart, those little dips, we had one when the markets dropped. you can see on the far right. but the opportunities to actually do less than the financing rate are significantly reduced. those were two pieces of research we put together to sort of show you what would have

happened had we done this 10 years ago with backward-looking bias. let me stop there and chris can talk about a real case that have been doing this and achieved real results. everybody clear on what we did in that exercise? in some sense it's pretty straightforward. >> alan said, we put in couple of slides here from public materials from the state of wisconsin. just bit of background. this is a currently $130 billion fund that has various assets through the state of wisconsin but mostly supporting the

wisconsin retirement system. one of the things that led down to the path of leverage a number of years ago, they actually have participants -- retired participants, get increases based on the performances fund. but they also -- the fund can take away some of those access benefits. managing risk level was exceptionally important for the state of wisconsin throughout. this first slide is an example from their public material last year when we had five to seven years assumptions than 10 years. these are simple exercise -- this is an exercise that we do

each year for the board to say, what are the major decisions that the board is making and what do they mean and what can happen in the portfolio. it's a little busy in the sense we're changing the reference portfolio. you can see it's got a global fixed income and local fixed income. i'll focus on the lines below that. the reference portfolio is an alternative. it involves no private market. very little levels of justification. that local fixed income line is 40% u.s. public fix the income. it can be index and not have a big staff like they do. we looked at the three key decisions that are at the board level. one of them is, what do private markets do. you can see in our structure

here, they are raising expected return in the first and third column numbers. they're also increasing volatility and standard deviation line of debt. it's a little different than how you might look at private market. this is the way swib looks at it. under the portfolio structure, this is all the decisions they make how they're implementing getting exposure to u.s. public markets, european public markets. they don't have a global benchmark set up. they make decisions. in this case, portfolio structuring line actually like them to decrease expected return but decrease risk a lot more than the reference portfolio even with private market. that was an interesting outcome. sometimes in the past, their

structure has been sort of not changing the return. for last year, lowering it. there was some discussion. key point, now they're using 10% of leverage after doing that, which adds that in. they got a less risky portfolio. now they add back in leverage as a tool to raise their expected return back up. it is raising the standard deviation. increases risk and volatility. it actually is a good trade-off between the risk and reward. such that they get the levels of expected return that they are targeting while keeping the volatility at a level that matches up to their long-term objective. this is a measure that we work with staff on each year to say, these are the big decisions made at the board level.

how are we adding value. it's always tradeoffs. it's never you do for diversified portfolio. these are some tradeoffs. i think the proof is in the next slide. this is the second page that we have specifically on swib. was there a question? this is the swib performance as 6:30. you can see this is the exhibit that they have looking at what the leverage actually did. in point of fact to me, this ends up becoming little bit boring. on the year to date column. they had 1.4% loss looking at it on a number of bases.

what leverage did, if you have a loss, if you're below that borrowing cost, you're going to add a negative return for leverage. that gives you the proof in the pudding i guess of operating level if you had losing period like year to date. you enhance that loss. if you look down over the 1, 5 and 10-year period, here's where we have positive returns. definitely over the borrowing costs. the return from leverage was positive. there's a footnote down below. the key point here, this structure portfolio taking 10% of leverage of the portfolio did

what it was intended to do. which is provide magnification of returns. interestingly, because alan just went through your performance, the 5 and 10-year is not as good as yours. they continue to bill out all the tools. any questions on these? i think this was one of the questions from the board in previous conversations. this is a lot of examples.

>> chris, this is historic data for swib. i didn't even have had when we did the simulation result. over the 10-year period the value of leverage was about 41 bases points. that was on 10% leverage. the results we got earlier that we talked about were about 45 bases points over 10 years. these are in the same ballpark. this is really looking back and what we did was simulated looking back. >> to be fair, they didn't have 10% 10 years ago. that's when the plan was put in place. they got there over six years. they gradually moved up to 10%. i think it's quite solid in matching up to the historical look. >> alan and chris, we've seen

the benefits for sfers is one year 20 bases points of return or about $500 billion. using a gtaa approach of selected composite about 38 bases points. about $900 billion over 10 years. is it fair to say that's the direct benefit and there's also an indirect benefit. you can continue -- by utilizing leverage, you're not forced into making one of two alternative choices. one is you either need to reduce your public equity to provide for more liquidity. we demonstrated we can good earn returns in public equity. we have to reduce private equity

to also provide for more liquidity. we've shown that's also a place of very good access returns for sfers. there's also an indirect benefit in addition to this direct benefit that you're demonstrating. is that fair? >> that's absolutely true. when we get to the conclusion page, there's a statement that higher returns through public market assets, allows the overall plan to invest more in private markets and active public market managers demonstrate output for sfers. without leverage you probably have to reduce one of those things because of liquidity concerns. those are areas where we demonstrated success in the way you built the portfolio. that's exactly right.

>> i like to ask my question now. performance numbers you show, why is the gtaa and other one is wisconsin's experience? how did wisconsin figure out where their returns were coming from to justify the interest payments on the money they borrowed? >> their process they've used going back to the start of the leverage program was to actually identify a lower risk portfolio than they were running at the time. then apply leverage to that. you can see this in the public minutes, it's applied to the entire portfolio. in practice what they de is the whole team that does this, this

may or may not work for other organizations, they are very active working with banks and counterparties to find the cheapest sources of leverage that they can find. if i look at the source of their leverage eight years ago, it would be different from the leverage that they are using today. they are looking across all the public market areas where they've identified how much exposure they need and finding the cheapest to deliver that they can get. i believe we have some examples in the appendix of what some of the terms that you can find. maybe that is not true. okay, here we go, page 24. these numbers change through time. these are some numbers from parametric. this is a view of the financing

cost given spread of three-month libor. you can see usually as we've said, you have to pay an amount over libor. there are some cases where you can actually get amount less for libor because you're providing liquidity sourcing for people that are trig to short these exposures. the highest one was actually u.s. treasury. this has been used from some of my work, that this is something that some corporate plan is due. they are going long 30-year future actually paying less for libor. i would say that in swib's case,

they look at this. it's got all kinds of different categories. through time, they changed their sourcing of leverage. based upon that experience and transaction cost in the public markets for lot of trading. always trying to get the terms that they can. previous thing on swib had an implementation line. back on page 16, you see there's an implementation line that has been positive. part of that is them sourcing the lowest cost leverage that they can find through time. did that answer your question? was that overly specific to what they do? >> that answers part of it.

i assume that anybody goes bond, they get the best possible bill. that's rather a given. i'm trying to focus on this only works if the return on the investments exceed the cost of the borrowing. let's go to the other example you used as gtaa. which is a multiasset class which you can do anything up and down. the example that's shown here has to do coming out a long bull market. maybe the gtaa wasn't as influenced by the up-market overall. if that's going we're going to use to justify the borrowing, i'm trying to figure out how realistic that example is because other funds have done this and they've lost because they borrowed wrong and they invested wrong. i'm trying to get at issues so we don't think it's a free lunch.

sorry for making it a complicated question. >> that's important, the cumulative graph, there's a six month periods where this is not going to work. you will lose money. but the number of actual down jigs in this is very fairly small. particularly relative to the upticks. this is a period that the equity markets generally did well in a less attractive period. this line will be flatter and it will probably have more downward kinks in it. we still deal over the period of time, you're going to add value overtime through the incremental volatility that you pick up. >> i was going to add that -- we'll get to some of the

examples here -- in every case, that we can find any sort of strategy being challenged by leverage has been through the use of quite a bit more leverage than we're talking about here. when we're talking 10% in swib's case where there's some super national funds around the world, maybe 20%. if you think about what that means if you're leveling around 10%, you're levering 1.2 times you're talking about the jigs and jags that alan presented. right at the tail of this chart is 331. i remember what it was like waiting to see if the fed was going to get through this. what was covid going to mean.

even though questions haven't been answered yet. that large downturn in market, lost about 1%, which is a meaningful number. we're looking to suggest and decide this leverage at a point where we're not running that risk. importantly the leverage we're talking about here is an alternative. over the last 10 years, gtaa looks pretty good, equities looks pretty good. what looks good today, for me is not the forward-looking expected return on equities around gtaa. what looks good to me, borrowing is really inexpensive now. assuming that we can get return above that leverage point, i have to believe any given point and maybe this is a bias on my

part, the capital market should reflect that investors think the riskier you go, you should get some incremental return. it doesn't always work out that way. you have a risk premium for taking risks. if that's the case, leverage on that expected bases should have value and we know there will be periods where it's not going to work. our hope would be, 5, 10, 20-year period, you're going to get the return from your portfolio is going to be higher than the cost of borrowing through time. it's going to be added as long as the risk gives me an edge. >> how many points at a minimum we need to justify doing this?

numbers drop over a short period of time, it may not be reflected in the bigger numbers. when we come to the close of year and we had to figure out what the assets are, if it starts to trigger change in the contribution rates, that's when people start to pay attention a to what we're doing. that's normal. the long haul, how many points do we need to justify doing this whole thing. assuming we can execute it correctly and by borrowing from people. that's the number i'm trying to measure whether it's 41 bases points or something significantly different. i'll stop with that. >> alan, did you want to comment there? >> i hear what joe has to say. i have to think about how make him more comfortable with that.

you can keep going. >> there are a number of pension plans using leverage of this type. i mentioned the funds in other countries, certainly the canadian model, part of that model if you looked at ontario and others, they do use leverages. in some cases this is explicit borrowing and they issue debt in the name of the organization and then he -- they use it to invest more into the fund. i have to say that, that model

is something that worked well for those organizations given their governance. as you know, things change slowly, we're seeing a lot of public funds right now interested in this topic are really from two reasons. one we mentioned a few times. the borrowing cost are low. that's attractive. second forward-looking returns are not as attract as they were in the past several years. the combination of those things, at least making folks look at it. we got examples of plans considering leverage at the bottom there. some of these are -- they are doing it in different ways. some of them are funding portable -- [indiscernible]. these are things that have been approved or being considered by the leverage. i think that is a function of

the return environment. i did want to circle back to the previous part. in terms of public funds using leverage, we can't find there were any blow ups in public funds. as you can imagine, starting a more complex strategy for the

long-term and then right out of the gate seeing problems, cost that -- cause that organization to move back from that approach. as they kept it for another year or so, they would have made up all those losses. it can be challenging as you know in starting any new strategy. you like to see positive results right out of the gate. that give you a sense of comfort that it's good for the long-term. the final page that we have is from an organization at boston college that compiles lots of things off their database. this was interesting. it does have wisconsin here and we talked about. you can see missouri state employees, at 52%, that's more of a risk parity type of

approach. you see much smaller amounts. it is out there. it is growing. what do i think this looks like in a few years? i think it's going to be one of the tools that more diversified public funds can think of. then it will be based on a decision point as to whether it's worth doing. one other point, one point i thought of within the question there was, how much do you need to do to get the benefits of leverage. the answer we get the benefits of magazin -- .8% and .2%.

personally eir would usually talk with organizations and say, there's a lot of complexity. you're going to have more complex reporting. usually i talk about doing something around 5% to get started. off more meaningful 20 bases point. that's what other folks are doing. it's happening right now. it's growing. i think it's one of the tools in the tool box that is not been used as much but is one of the things that definitely has more prominence now.

before the conclusion here, i like to get some of the risk levers that we alluded to on the next page. as you already heard t we think that leverage is useful tool to consider here. because you got the public markets that are really doing well. you got the private markets doing well. at the end of the day, we would not -- we would have a lot of analysis needed if you wanted to do lot more leverage in that 50% that we saw on the previous page. the sourcing of leverage is also a user of liquidity. it frees up liquidity. it's a demand on your asset. you see those blow-outs like long-term capital.

that can definitely get you in liquidity space. you don't want to be is distressed seller and have market to market. you expect everything to be good. that's not the type of leverage that we've been talking about here. this is an expansion. this is a magnificatio magnific. things change. you can have a flat one. that might change how you look at leverage. active risk can actually increase through leverage if you doing something like gtaa.

counterparty risk is something that's pretty important. we're not thinking of using swibs here. what we saw during the financial crises, whole series of swibs with banks and financial firms. now it's measured and managed for anybody that uses swibs. what do you do to mitigate the risk? these are things we've talked about. first of all, don't lever a very volatile asset.

definitely have risk control that looks at this through time, understand these positions. as i mentioned this is an ask in the sense that you need people to be monitoring this. having diversified fundings

sources is important. having liquidity -- these are things that you have because you have so much private capital, you have to know your commitments. you have to know the sourcing of liquidity through time. this is another item that'sgoing to -- that's going to need that. probably not as much and probably not as time sensitive as your commitment. realize that in market turmoil, if you were to decide down the road to implement leverage, just like that fund, that can happen. you could put in a program and see a downturn in the market. which will be magnified by this.

finally, we've seen conclusion page once. just to draw those points forward, we think that leverage can be a benefit. it's a tool in the tool box. it's something that some public funds are doing, certainly other investors doing for years. i think it's being invested at the public fund level. just given the nature where markets are. what you do with the leverage, basing it off your diversified portfolio. whether it's gtaa or other investments, you're getting more bang for your buck. we talked about some of the different areas about leverage. i think it's constructive to

talk to this as being a borrowing exercise but probably out the gate, you'd be talking about using futures. it's just simpler. you already have managers across the program that have leverage strategy including parametric which advertises your cash. they're the manager for a number of the strategies that on the previous page where they actually serve as the manager providing leverage for those funds. what's the actuary rate of return, that will tell me what the expected return is.

if you trying to get higher expected return in a low return environment, leverage is definitely one of the tools that should be considered. that's all the prepared pages. happy to answer any more questions. >> president bridges: thank you so much. this is an excellent presentation. commissioners do you have any additional questions for nepc? >> commissioner driscoll: it has to do either i saw it in writing or statement you made before

about our required rate of return. 7.4% rate of return we're using is an assumed rate of return. not a required rate of return. i agree with issue of leverage is one of the big tools to reach it. we use leverage throughout the portfolio. not this particular product that was discussed now. please, i would suggest you not use that word required. people will think we will do something we should not do. i don't want people to think that we have to do this as we have to get that 7.4% return. we want it but it goes back to the assume rate of return is something we believe we can achieve based on our investment opportunities. with that statement, i will stop. i'm trying to get clarification. some people have been scared by your statement.

that's why i'm bringing it up now. >> commissioner, very good distinction. we're evaluating portfolios with 10% levels. they are more efficient portfolio. >> president bridges: any additional question or comments? >> i didn't hear part of your comment. the next steps, this was an educational time to add to the earlier discussion that we had on leverage early this year. the next steps will be that we

will have an asset allocation discussion with the board at the october 21 investment committee meeting. there we will compare and contrast asset allocations with 0, 5 and 10 percent leverage. either november or december board meeting, we will be bringing an asset allocation recommendation to the board. >> where do you think you guys will fall out on? we'll see a recommendation for leverage? >> that's where we're leaning. we are going to give the board some other options with no leverage. we are leaning in that direction. firm decision has not been made yet. >> you requested in the asset

allocation process, we examined going higher in private equity. one of the options we'll show you is adding more to private equity. it is our belief from looking at these analysis while you can get the higher return through more private equity. the incremental risk will be higher. i don't know if that's the outcome. we want to present the board with choices where you can intelligently decide where to go. this isn't the only way to go. we do think in today's market from efficiency standpoint, it will be preferrable to some other options that we'll share. >> tacking on to alan's comment, another reason why we're considering leverage because when rates are low, it's a god

time to be a -- good time to be a borrower.

if we continue to invest prominently at 45% in private, we will need to keep much more in very liquid assets and reduce our allocation public equity where we have demonstrated significant access return. another approach is to significantly reduce our allocation to private method which guarantees us that liquidity and enables us to be prominent investors in active public equity. it doesn't reduce private equity. these are among the ways we are looking for solution where we can continue to earn very good output returns both public and

private. meet changing needs for liquidity. >> commissioner stansbury: thank you for that. i think it's important that we keep this in mind as we think about leverage. if we're going to do this, i want to support using a leverage to do things we don't have a proven track record of success, especially with access returns. with that, thank you for the presentation. >> thank you. >> president bridges: any other comments or questions? thank you very much.

>> commissioner driscoll: there' s lot of statements being ignored overstated. people who done this taking on more risk. people who borrowed short and invested long and couldn't get out. one reason we cannot do private equity is because we have a liquidity problem. liquidity tightness. where we decide to borrow the money, i'm sure it will be great rates. how invest it will determine whether or not we'll have success. we'll discuss all those issues before we go forward. thank you. >> president bridges: any other comments? this is a discussion item.

thank you the investment team and nepc for bringing us this educational item. we'll take public comment this time. >> there are no callers on the line. >> thank you. hearing no calls, public comment is now closed. >> president bridges: can you tall item 11 next. thank you. [agenda item read] >> last month the board approved

staff recommendation to invest in alatus, alatus is a european-based global leader. this is -- this document is a recommendation for the objectives guidelines and procedures. >> [indiscernible] the guidelines were developed over the past several weeks with many discussions with alatus between staff. these guidelines codified the portfolio objectives, guidelines of benchmarks. if they are approve the we'll incorporate them in agreement with alatus. these are comprehensive and

relatively straightforward. i will turn it back to the board for any questions or comments. >> president bridges: thank you. board members are there any questions or comments? this is an action item on the recommended statement of objective and guidelines and procedures for alatus capital public equity portfolio. >> commissioner driscoll: i have one statement. has the issue of their fees been resolved? >> yes, as we noted when we brought this item up last month, they were quite sensitive to open disclosure of discussion of their fees. i will be vague but not specific about what we're able to

negotiate. >> commissioner driscoll: issue has been resolved? >> it has. >> commissioner driscoll: page b4, this is a general thing i should have brought up. it has to do with the cycle. over a full market cycle, normally three to five years. can you edit this with a better definition what a cycle is? which mert method are we identig whether the cycle has been complete or not?

>> that's a request. >> can you be more definition about the cycle. >> commissioner driscoll: so they know it's not a time matter. it's the economic situation or economic environment they're investing in. >> we'll give that a consideration. i would not want us to be too mechanical there. this is a broad statement. >> commissioner driscoll: what about this company?

i do not know what a market cycle is? why can't we define it? >> we would like the liberty to assess a manager over -- certainly a market cycle but also what could be time periods that are shorter or longer. that would be my definition of a market cycle. >> commissioner driscoll: how do you define the market? there are many markets. we have different managers who invest in different markets.

what is the market cycle for this manager? >> perhaps what i can suggest, let me know what you agree, if this is an issue, which i don't believe it is, perhaps we can remove the term market cycle and say normally our review period here is three to five years. i reference fees that we'll be able to negotiate, the length of incentives is going to be commensurate with that time frame. >> that's fair. usually three to five years. >> we can take out that vague term or edit that, would that

satisfy your issue and could we pass these guidelines with those modified numbers? >> commissioner driscoll: the answer to your question is yes. >> how do we make this motion with the revised along? >> if any other questions?

>> president bridges: any other questions or comments? this is an action item. it's recommended that we edit on page b4 to delete over full market cycle, delete that entire phrase. i would like to entertain a motion with the stated correction and edit. >> commissioner driscoll: commis sioner bridges just stated, i move that motion.

>> i will second. >> president bridges: it has been moved by commissioner driscoll and seconded by commissioner stansbury with the recommended edits and changes that i previous the stated. call for public comment please. >> callers who are on the line, press start 3 to be added to the queue. are there any callers on the line? >> there are no calls on the line. >> thank you. hearing no calls, public comment is closed. >> president bridges: thank you. roll call vote on this? [roll call vote]

i believe commissione -- motion. >> president bridges: thank you. you can call item 10 now. [agenda item read]. >> let me share the content.

i'll start. this is a review of the annual result for security lending program. if you remember the board approved the initiation of the security lending program beginning of 2020. as part of the procedures that we discussed at the time of the initiation annual review of the fiscal year. that's what we're going to present. key feature of the program just to remind you, we have

[indiscernible]. it means that in case the counterparty fails, defaults and fails to deliver the loan securities on the non-cash collateral -- [indiscernible] at that point, counterparty can deliver that makes -- deals with the seller of the securities and making sure the program does not suffer in this case. the other key structure of

security agreement is that the cash collateral reinvestment portfolio is separate managed account. we also establish -- [indiscernible] someone is not muted. we proximated about $7 billion lendable assets. we estimated 19% of the mutualization or the securities. the program started operating on february 25th. that's -- we estimated our annual revenue has approximately

$2.3 million. the first four months, ahead of the estimated revenues, 1.59 and utilization was in line at 20%. what i like to highlight -- i know we are tight on time -- highlight three key main trends on the revenue side. we will see -- i will focus on the first table on the top table. you will see in the second column the lendable assets. we estimated 7 billion dollars. we had $4.5 billion available. we were selling equity and treasuries in march and april. we had fewer assets available to

lend. however, the utilization was in line little bit ahead of time at 20%. the key point really was that if you look at the middle row, u.s. equity, look at the spread. we estimated -- [indiscernible] what we delivered was almost 105. right in the middle. intrinsic spread is the securities that we owe is willing to pay for. the reason that we were able to get such higher returns on the borrowed securities is because we owed some of what is called

hot issues or in demand equities that the borrowers wanted -- willing to pay high borrowing cost. that was more than half of our revenues. the second trend that i like to highlight is -- if you look at the second row of u.s. treasuries. the utilization rate for u.s. treasuries, we estimated 35%. u.s. treasuries were in high demand as there was a rush to hold high quality assets. the third trend that i like to highlight, we'll talk about the row that says investment spread. will you see the investment spread is the collateral

account. we estimated 23%. we actually achieved 50% more. the reason for that, highlighted there, because of the rate cuts that the feds instituted in march. the rate immediately went 150 bits down. we were holding on to yields that we're maturing in the next 30 to 40 days.

i like to go to the last page. we provide lot of details what we earned. i highlighted the three trends and the revenues from the lending program. we provided the activities. what we are looking to in the next fiscal year. after working with our counterparties to renegotiate and amend lending agreement to include credit for up to $250 million. which can be lent from the cash

collateral reinvestment account. later in the year, we will review more efficient way of repos. lastly, i like to comment and -- their investment in technology and their digital team.

they have implemented analytics and artificial intelligence tools to collecting lot of data on the agency and lending. you can monitor u.s. treasury portfolio. we benefit from those developments as well. we do have a representative online in case you have any questions.

>> president bridges: thanks. commissioners, this is discussion item. are there any questions on this item? [please stand by]

>> are there anymore questions on this discussion item?

>> well, thank you very much to michael and to anna for bringing us the update and funding and the performance to date so thank you and it's been great and we appreciate that and at this time we'll have public comment. >> clerk: thank you. a reminder to callers press star 3 to be added to the queue. moderator, are there any callers on the line? >> madam secretary, there are no callers on the line. >> thank you, hearing no further calls, public comment is now closed. president bridges. >> thank you, madam secretary. next item, please. >> item number 12, chief investment report. >> thank you, president bridges. board members, we went through in the cio report we went

through the narrative on stage one and through page two in good details and in allen's earlier presentations so, we'll be glad to answer any questions on that. later on on page 2, august, terrific returns. we were up 3.86%. the stalwarts were public equity and private equity which were up north of 6% and 7% and private credit recap tures some of its decline that we've experienced in 2q. with a return of 2% during the month and absolute return posts strong returns in return to 1.15% in the month of august. fiscal year to date, in just two months, we've recorded gains of 6.54% and public equity suppose over 12 and a half percent in just two months.

private equity suppose almos isd private credit is up two. we indicated absolute returns now total returns and on page 3 we are including a new item. the status of our commitments on a calender year basis and we are currently committed through august. 1.3 billion and in our base case it's been 2.4. stress case would be 1.65, a stress case is defined as a three-year gfc like loss and a significant decline from private markets. we're running at 1.9, 1.95 for the year so well below base case from somewhat above stress case.

this is one of our two asian private credit specialist. the board approved 25 million in july. we were allocated to $25 million and personnel updates. i'm thrilled to announce adrian von showbitz has joined us as an analyst in our initiatives supporting andrew. adrian, as you will see in the narrative. she has extensive experiences in a relatively short period of time and she's a graduate of stanford and an nba candidate at stanford and and she arrived at spurs just in time and you will see next month a large volume of work when we provide an update on our and i did invite adrian

to say a few words to the board. welcome to spurs and the floor is years. >> it's been great listening to my first board meeting and i will work with andrew on the team and i worked with companies around their carbon footprint and broader in the space so i'm excited to be joining spurs and with my experience working with the pension fund. i look forward to working with everyone in the future. >> >> we're thrilled to have you on board. welcome. >> welcome. >> and we do have an update in

our -- we do have an offer for in ago raandwill make a formal t to the board at the october board meeting. we have a crowded calender coming up. as noted on page 4. we have our large volume esg updates. we also have a complete set of our risk exposures for the plans so those are two large items that we'll be doing at the october board meeting and we do have an october 21, i.c. meeting as we indicated and it will be allen and anna and i will be leading a conversation with the board on asset allocation and

average between 5% and 10% and we like to hear, i plan to do a presentation on science and technology and ovation at the october 21ic meeting and we would like science and tech to be fully vetted by the board and in advance and in your decision so earlier today, darlene began to poll the board on another ic meeting on either october 28th n november 18th, that will determine whether asset allocation is recommended to the board the night of the november or the december board meeting. and it will be a great second ic meeting and we'll have three presenters amongst our very top performers across the life science digital transformation and software space. it will be a great meeting. with that, i'll pause and turn it over to the board.

>> thank you for your report and i would like to welcome adrian as well. welcome, adrian. we're happy you joined us. any questions? this is a discussion item. no questions? thank you mr. coker. we're called for public comment at this time. >> thank you, do we have any callers? press star 3 to be added to the queue. moderators, are there any callers on the line? >> madam secretary, there are no callers on the line. >> thank you, hearing no calls, public comment is now closed. president bridges. >> yes, madam secretary. can you call items 14 and 15,

the two action items. >> yes, item number 14, review and acceptance of july 1, 2020 supplement tiv cowannal sis. >co-analysis.>> i make a motion. >> second. >> >> it has been moved and seconded that we accept sarah's supplemental code analysis for july 1st, 2020. we will take public comment. >> any callers on the line press star 3 to be added to the queue.

moderators, are there any callers object thcallers on the. >> there are no callers on the line. >> public comment is closed. president bridges. >> thank you, madam secretary. i'm sorry, if you can repeat that action item. it was moved by commissioner and seconded by (inaudible) so we accept the supplemental cola analysis on july 1st torque 20 and wreck retirement staff to that no supplemental cola effective july 1st, 2020. roll call vote, please. [ roll call vote ]

>> motion passes. president bridges. >> thank you, madam secretary. next item, please. >> item number 15 action item. it includes charities, campaigns, correspondence to the september 2020 retirement allowances. >> i'll make a motion to adopt. >> this is an action item. thank you, commissioner. we need a second. >> is that the comp report?

>> this is action item number 15. >> this is brian i'll second the item. >> thank you. it has been moved and seconded. that we approve the request toen close combined charities campaign correspondence in the september 2020 retirement allowances. madam secretary, public comment, please. >> callers, please press car 3 to be added to the queue. moderator, are there any callers on the line? >> madam secretary, there are no callers on the line. >> thank you. hearing no callers, public comment is closed. president bridges. >> thank you, madam secretary. roll call vote, please. [ roll call vote ]

>> we have four yeses, months mn passes. >> at this time if you call item number 13. >> item number 13, discussion items for compensation manager report. >> we'll there will be. >> i'm here. >> ok.

good afternoon, everyone. thank you for the time. my name is steve and for compensation program manager. i'm here to present the deferred com manager report. if you want me to go over the highlights of this report briefly? >> >> yes, that would be great. we appreciate it. thank you. >> no problem. no problem. so, attached i have the july monthly report which includes cares act distributions at the end of july. let me provide with you some more updated numbers as of the end of last month. so, as of the end of august, we have an aggregate total of 40 coronavirus-related new loans issued. 51 coronavirus related loan suspensions and 387 coronavirus related distributions. on the topic of communications, to raise awaral awareness for the sfdcp plan we created an incertain included in the annual spurs statement that went out

last month to spurs members and in case you haven't seen it, we attached a copy. we hope it encourages employees to enroll and remind current participants that they can contact us with any questions on their account. also currently, sfdcp staff is in the final retirement security month in october and the theme is going to be take control of your financial wellness and i hope though share these materials with you next month but i want to go over briefly some of the activities that we're working on. to promote the month we're enacting multiple initiatives and starting october on the website and wore going to have a especially dedicated section or national retirement security month including links to our daily new seminars and normally in october, we hold a large in-person seminal at the san francisco main library and due to current circumstances, this is going to be held in a virtual

setting this year so our main seminar, take control of your financial wellness will be pre recorded and available throughout mot and additionally live versions of this webinar will also be presented for employees that like to attend a live session and ask questions. we're also going to have other new live seminars going over the basis of deferred comp and how to navigate the post log website. in addition the special section will be holding links which provide educational articles on the topic of financial wellness and including insights and also biography flyers for the local retirement councilors to encourage employees to reach out to their department dedicated and retirement community. aside from the link we will send out weakly communications to participants of topics and promoting the financial wellness evaluation and attach the screen shot and this tool is available on the post log in website.

it gives a quick and brief assessment based on six different pill arrest. pillars. if you have any questions let me know. if not, i'd like to thank everyone for your time. >> thank you so much. this is a discussion item. do you have any questions or comments for steve? >> one question. steve, do not try to answer this today but for the next deferred comp committee, are you able, with help, to bring back any of an analysis of the rollover out amount which year to date is north of 50 million and 855 participants. just any kind of general analysis about where that money is going? rollover has a way of effecting our cost structure and they're welcome to roll it out. just looking for analysis of that particular number.

>> i want to thank you for the good work you are doing and to your staff too. yeah, i'd like to really dig down into that because i think we might need an educational component for the people on the rollovers that there is some poor roll-over decisions being made so let's dig down for the committee meeting. thank you. >> thank you. >> >> are there any request additional questions or comments? finance, steve, thank you very much. this is a discussion item. we will take public comment at this time. >> thank you. callers. who are on the line, press star

3 and you will be added to the queue. are there any callers on the line? >> there are no callers on the line. >> hearing no callers, public comment is closed. president bridges. >> thank you call the next item which is item 16. >> item number 16 discussion item. executive director's report. >> i have one item. every year our government consultant and i know that commissioner driscoll has attended as i can and it's a worth while and it's invitation only but all board members have

an invitation and if you would like to register it's throw days starting september 30th and you can go online and see the content but i recommend it and i hope that commissioner chris col would also he can sew and it's a very good compliment. yes, this is the echo. >> thank you, thank you commissioner driscoll. >> the sessions are all live. they're not taped so we can view them at a later time if we have conflicts. they are live. i don't know that they will be available after the fact, you know, as far as the content but it is a very select group of public pension plans trustees as well as staff. i could double check with ashley

to find out if they're going to be available online. >> that would be helpful. >> sure. >> thank you. >> >> the californiael rule issue is part of the conference. >> right, and you can register it if and if you can only make one of the sessions because they're like one or two hour sessions each day for three days and if you want to attend legal as commissioner driscoll point the out, they'll have ashley has played a key role in some of the recent california state supreme court decisions related to the california rule and that will be part of the presentation so even if you can only catch one day, you can go online and register and so that they will send you the entaization and i think it's

going to be very worth while. >> any questions or comments. this is discussion item on the executive director's report. >> thank you, we'll take public comment. >> thank you, callers f. you have not already done so, please star 3 and be to added to the cue. moderator, are there any callers on the line? >> hearing no callers, public comment is closed. president bridges. >> >> thank you, next item. >> item number 17 discussion item. retirement order.

do you have any items for the good of the order? >> if not, i have one. for the good of the order and this is on the reporting for recommendations for investments that are cio and investment teams come before us each month and they bring to us recommendations on our investments and many of us have talked about various formats that we're looking for and what we would like to see for investment recommendations and our cio mr. coker has worked hard and done research and team to try to come up with an expanded format and i think what is happening is that we need to give feedback and we all get

feedback so for the investment strategies across all as set classes and so, at this time i'm going to ask mr. spoker to chime into talk about the different types of recommendations that he comes with and this is not something we need today but we'll work on this through out month and to come up with a standard format so i would ask you to give some thought and recommendations back to mr. coker so we can come up with a format. west indies i know we started on this the administration and we started look agent this and talking about it and we're still going through the process and at some point we do need to come up with a format so we can understand it and it's something that we all agree on. it's an ongoing process, i would like them to work and he has done extensive research already.

do you have any comment? >> sure, president bridges. board members, periodically, different board members have expressed an interest in having a common format across all of our investment recommendations and so, i developed a couple of drafts that the commissioner and president bridges have seen and president bridges is advocating, i believe, we utilize that draft ethat i have developed and give feedback and make any adjustments and edits that are approved or requested by the

full board and from that we'll have a final monday he will to begin work with and so we have a table of contents and a consistent set of subjects that are in the table of contents and a according of the subjects and each section starts with a new page which makes it easier for a board member to go to a particular page and the top of the page two find a particular item and there's an executive summary at beginning which is a two-page summary that will give you the same points of the most port ants you need to know if an

item and those are some of the enhancements and they're ready to begin being furnished to the board should the board request. our proposal is (inaudible). >> so use the draft starting november, correct. >> we're ready to do that and to secretary board for feedback in beginning with the november board meeting and and whatever changes are requested by the full board we'll implement those on a go-forward basis. so in a few months, we would have a revised final draft to begin using.

>> this is joe driscoll. i've been waiting for the draft for a year. >> please send to to me if you want my input? >> any other comments or comments from other commissioners? >> can we just share the draft with share it with the board so everybody can give feedback. >> i would be glad to do that but one quick follow-up we is what would be view to receive two draft zoos that you see different asset classes and how they are mostly similar but also see some distinctions.

not sure you would need to study them in detail and would be helpful or would you just prefer to see one. >> >> are you going to have different write ups for different classes? >>, they'll be so that if you view two, you will see the ordering is the same and the subjects are the same and the executive summaries at the same subjects but they're customized or particularly recommendations and they're broadly very similar and there are distinctions you can see by comparing and contrasting similarities and differences between two but structurally, they're the same.

>> whatever you or anyone else wants but it would be good for us to see before november so the board members have a chance to provide feedback. >> very good. i will furnish drafts for two that are ready to go to the full board and welcome any feedback and comments. >> that works for me and what other the other commissioners? >> i'm fully for that. >> we'll move forward with the recommendations and look for the draft and prior to the november board meeting that we can review and come back to you with comments and edit. >> so to clarify, is what -- so

we're modifying the top of the conversation here a little bit. rather than wait fort full board to see drafts of the proposed format at the november board meeting, is i will furnish those drafts to you now and you will have weeks or a month to work on them. meanwhile, our preparations for the october board meeting are underway and preparations on the november materials we will begin writing here very goon and so we will utilize the format i will end to you for the november board meeting and the sooner you get your comments back to us we can follow those into the november board meeting materials. and i will have simple drafts

tomorrow. >> thank you, bill. >> thank you. >> thank you, that works he for me. we'll move forward with that recommendation. are there any other comments or any other discussions items for the good of the order? >> >> i have one more item good of the order. >> ok. >> you all may have noticed one of our -- manager made it into the "san francisco chronicle" this weekend. it's under the general subject of housing. that manager's performance and i know staff has been tracking made a significant recommendation about our relationship with that manager but the housing rust got some good headlines because of all the work they're trying do on housing which in san francisco is a very large front page topic. in case you did not notice, the

good write-up that the housing good in the chronicle this sunday. >> thank you commissioner. i did read the article and three other commissioners did as well and it was a great write-up and it's one of the largest investments they say union the union has made in san francisco. is that correct? >> >> it depends on how you characterize and it's a significant dollar amount. >> >> any other commissioners and for the good of the order? >> just a reminder. just a reminder about the deferred comp and the last monday coming up and i'm looking for agenda items so if anybody has an agenda item, please share it.