and slowly, and turn down your tv or radio. please note that city policies along with federal, state and local law, prohibit discriminatory or harassing conduct against city

employees and others during public meetings and will not be tolerated. moreover, public comment is permitted only on matters within the jurisdiction of this meeting body. we thank you for joining us on. thank you for before calling the next item and i'd like to do it later on the agenda. but i do want to have an opening statement to make before we go into closed session. and that's for thanking supervisor. so safai, thank you for leaving the house in order and my taking the gavel and appreciate it. it's been great working with you and hopefully i can fill your shoes. i don't know how bigger. so second. okay let's. madam secretary, do you want to call the next item, please? yes item number three, closed session.

at this time, we will be moving into closed session. item three, a public employee performance evaluation immediately after closed session three a, we will be moving into closed session. three b public employee performance evaluation and then into closed session. three investments. we can leave open session at this time. >> do we need a motion order to disclose discussions held in closed session? >> so moved. >> not to disclose. >> to not disclose. >> all right. is there a second? >> second >> and seconded and moved and seconded by commissioner thomas all those in favor?

>> aye. >> aye. >> okay. those opposed? okay. it's been approved. madam secretary do you want to take in person -- i have one person or in person public comment. >> we have no in person at the moment. >> we don't? >> no. that's for general public comment i believe. >> okay. is there any -- >> yes a caller if you haven't done so please press pressing star three and those on hold and please wait until you of unmuted. operator do we have anyone on the line? >> madam secretary there are snow calls on the queue. >> thank you. hearing no comments public comment is

closed. next item four, general public comment. >> . >> [off mic]. >> all right. . >> [off mic]. >> can you hear me now? all right. i just wanted to protect our benefits. tim i know i welcome you to being a trustee but i would like come in person and welcome you. we heard nothing good things about you. i mean my only concern in public comment right now is as others talk about a public bank you know and the retirement system is for the members exclusively for the members. that's the way it's in the charter and everything and i know it would take to

amend the charter to probably get access into that so you would hear about a move like that before i would and i hope you understand not only for myself and i'm a member and there's a broad coalition totally opposed for anybody accessing the retirement system funds and other than that thank you and continue your good work. >> thank you. >> thank you for your comments. remind callers to pressing star three to be added to the queue. moderator do we have any callers on the line? >> madam secretary there are no callers in the queue. >> thank you. hearing no further callers public comment is now closed. >> madam secretary do you want to call the next item. >> item 5 action item approval of the minutes of the june 15, 2023

retirement board meeting. >> move to approve the minutes of the june 15 retirement board meeting. >> second. >> it's been moved and second. all those in favor aye? >> we need public comment before a vote. >> please go on to public comment. >> we have no in person public comment for this item. a reminder to any callers to be pressing star three to be added to the queue. do we have any callers on the line? moderator do we have any callers on the line? >> madam secretary there are no callers in the queue. >> thank you. hearing no callers public comment is now closed. >> okay. madam secretary do you want to call the next item. >> item number 6 -- >> now we need to

vote. we need to vote on the approval of the minutes. >> commissioner thomas made the mission and commissioner o'connor seconded. >> can you turn off your mic? >> [off mic]. >> is that better? >> yeah. >> okay. it's been moved and seconded. all those in favor aye? >> aye. >> those opposed? >> nay. >> the motion passes. can you call the next item please. >> item number 6 action item consent calendar. >> is there a motion to approve for the consent calendar. >> motion to adopted

consent calendar. >> second. >> okay. can we call -- >> we have snow in person public comment on this item. moderator do we have any callers on the line. >> madam secretary there are no callers in the queue. >> thank you. hearing no calls public comment is now closed. >> okay. it's been moved and seconded. all those in favor aye? >> aye. >> aye. >> those opposed? motion passes. do you want to call the next item. >> item 7 action recommend president's committees assignments. >> okay. we have the assignments on that. does anybody have any comments or questions? suggestions? otherwise this is -- [inaudible] a

vote. >> i would certainly like the concurrence. >> is it everybody good? >> is it okay if i make a couple of comments. so we're embarking next year on the committee meetings and i want to take this opportunity to outline how to move forward with a productive year of committee meetings and i will turn this to some of the ground rules but ground rules are outlined in the existing policies which is to say that once the board chairs are determined through this vote sorry the committee chairs are determined through this vote i will work with each of them to get a schedule set up for the year. committee meetings as we have in the policies will be scheduled on a wednesday and i will determine the wednesday with the chair. we will get those on the calendar for the year, and we ask that if some reason committee members

can't participate we will reach out two weeks in advance and if an individual can't come or an individual can't commit don't have quorum in advance of two weeks we will go ahead and cancel the meeting. that is an effective use of everybody's time. i hope we're not canceling meetings but that's the process we will follow. we will also to the extent that the chair of the committee wants to do so if we're having trouble getting quorum the chair can reach out to the president or the vice president if they're not on the committee and sit in for that session so we can continue and get the business done that we need to get done. with respect specifically to the investment committee i think we have a real opportunity here. we have a lot of important things that we need to address this year including the asset liability study which requires a lot of deeper discussion and we want to use the investment committee to talk about topics like that to do

education and talk about investment policy. what we're proposing and would like to do is move the annual asset class updates into the board meeting and spread them out over the course of the year and we're not doing three at once. it's a lot of to absorb and high level topics and use it there and use the ic for discussions the ic will have an important role but we're going to modify and bring some of the items up to the board meeting. >> well stated. i just want to -- [inaudible] everybody that for the next year at least this president is going to be really -- we're going to be efficient in this because we've got a lot to do, and we've over the last year what we're doing we had to cancel one meeting i

think because of a lack of a quorum. correct? maybe two, but that is too many and this is a commitment we all take when we say yes to go whether you're voted on, elected or whether you're appointed it's our responsibility and therefore i can only support what what was just said. >> thanks for that encouragement for all of us to attend. i can tell you the way to avoid the embarrassment of cans will a meeting is do not call a meeting. that's one and there's other comments in the written issues and a problem attributed to the year we were changing over and a new ceo and the new cio and the two persons left and no bearing there are meetings

called. it's a function of the board to have the meetings even if we have a interim ceo or cio or the deputy too. i will make the commitment if i am chair of the governance committee and unfortunate that two of the members aren't here today and i'm not bound to wednesday only if that's the only day of the week we can get a quorum and a productive meeting unless the law says we can only meet on wednesdays. >> well, yeah that will be between our cio and myself and whoever the board chair is to discuss that and make accommodation for it. we will get it done. >> if i may? the objective is ensure that we have regular committee meetings so by suggesting that the starting point is wednesday that's

something we can generally agree to rather than spending a lot of time to find specific dates that work at a ad hoc basis for members that then get canceled at the last minute so if we need to be flexible we can, but we will begin at the starting point of wednesday. >> operative word is "need" . >> i understand when people can rely on one date and block it ahead and are involved in other things as well and we had this problem and certain dates are consistently bad for certain people. i'm going to poll my other members between the three of us and see if your schedule adaptive since you and team can be here five days a week and what can fit for the governance committee and of our actions top the full board and on you and my colleagues on the governance committee know how that's plan how i

work to have a productiving opposed to no meetings. thank you. >> the goal is shared, yes. >> okay. i think -- this doesn't need an action and comments are noted. >> we need a motion to approve. >> sorry? >> we actually do need all of the committee assignments. >> okay. that's noted. all right. >> move to approve president's committee assignments. >> second. >> all those in favor aye? >> aye. >> those opposed? >> president heldfond do we have public comment on this item? >> all right. >> president heldfond we have one public comment in person. >> [off mic] just a point of clarity if that is the -- [inaudible] i just want to know -- so

they can help know it's the second wednesday or whatever. >> thank you for your comments. reminder to any callers to pressing star three to be add to the queue. moderator are there any callers on the line? >> madam secretary there are no callers on the queue. >> thank you. hearing no callers public comment is now closed >> now we're going to take a vote. >> before the vote can i make a comment? >> yeah. >> my understanding given how many subcommittees there are many wednesdays maybe used throughout the month to schedule these committee meetings. is that correct? >> correct. we left flex to maybe sure it works with schedules >> and get them on the calendar for the year so they're established. >> . >> thank you. >> all right. do i have a motion? >> i think we did that.

>> yeah commissioner thomas made the motion and commissioner driscoll seconded it. >> did we have the vote? >> we have to vote. >> all those in favor? >> aye. >> those opposed? thank you. madam secretary call the next item. >> item 8 discussion item personnel committee report. president heldfond if you would like to -- >> yeah, i am just wondering what is the pleasure of the board members. do you want to eat lunch while we're doing this? >> yeah. >> okay. everybody doesn't have a problem with that. okay. personnel committee report -- [inaudible] covered and for the sake of

order here we have met and went over the actuarial service director and the ceo cio of performance within input from all board members. that was presented to the board officially all the ruts with our adviser. that was presented in closed session, so there's nothing there and i would say parenthetically that we just discussed some issues that will go back to the personnel committee as to that process, and for the refinement going forward. this is not an action item, correct? okay. so do you want to call the next item.

>> we have public comment and we have no in person public comment for this item. moderator do we have any callers on the line? >> madam secretary there are no callers in the queue. >> thank you. hearing no calls public comment is now closed. next item is number nine discussion item. chief executive's report. >> thank you. a number of items to go through this afternoon, so first you will notice in the set of materials there is a travel education report for the board for the year. per our policies i am to provide an annual report of the activities which i have included in here. that results to another responsibility they have which is to do a survey every other year educational needs assessment, and poll board members in terms of their educational needs what they want to learn and the

modalities of the training and work with the governance committee to have a plan and i share that today because you will be receiving through email a survey i put together to get your input. please don't view the survey one and done. we can certainly have a dialogue but i tried to create a consistent forum for you all to deliver the feedback and have the governance committee meeting to work through the needs assessment. you will notice in the materials the calendar and we updated this to include the full fiscal year. i put in a handful of committee meetings as place holders,. these are topics we know we have to have on the calendar by policy and process but will add the remaining meetings as we discussed previously. third, our process for managing board requests. as we've talked in prior discussions with respect to the

governance policies requests for work are to come through me and i just wanted to share with all the board members here today the process going forward for that if i get a question that requires a significant amount of work i may reach back out to the board member that has the question to understand the timing and the prioritization of that and indicate how much time staff it will take so we can work towards addressing the question but prioritize those questions appropriately and certainly for topics that require significant amount of work that would likely come back before the board just wanted again to share that with you to the extent there continue to be questions i may reach out with that process. next the budget. we've had a very successful year in getting critical resources to support our business. thank you very much to the operations oversight committee it

to the entire board for your support to make that happen. with these resources we will be able to function as a team better. we will be able to serve our members better and move the business forward beard so thank you for your support there. next on military leave. >> >> and talked about this prior and definition to expand service and for the time in the military and that passed and the form to apply is available and has been provided to everyone who has asked for it and the team is working hard on developing a faq for that process. finally i'm very pleased to announce that we now officially have wilshire on board and acting as the board's consultant and as long as it's okay with policy i wanted to introduceoly and

introduce the wilshire team. >> [off mic]. >> it records. it doesn't amplify. >> sounds good. well first of all thank you so much. we are thrilled now that we have the contract signed and we're really looking forward to work as your suddenly consultant. it's not just me. we brought a team for the first meeting and maybe they can stand up to acknowledge my colleagues present. we thought it was important for our first meeting to show a show of force and show all the people supporting this relationship going forward, and you know from meeting to meeting you will see various components of the team attend, but again thank you so much for the opportunity. we're thrilled to be working with you and look forward to a long and fruitful relationship.

>> as are we. and you gave us a good answer by when you brought your team and we were sitting there wondering why all these people were here. >> i didn't have anything else but i am happy to answer questions. >> one comment i would really make is thank you and your staff, team for getting that budget done. in these days that's a monumental task and well done. so any questions? >> [off mic]. >> not yet. >> okay. >> [off mic]. >> all right. so any other comments, questions? madam secretary you have

open -- [inaudible]. >> mad automatic secretary your microphone is off. >> . >> can't this modulated and everyone's microphone is working. >> . >> can you hear me now? . we have no in person comments at this time. (echo on the audio line). >> madam secretary there are callers in the queue. >> [off mic]. >> (no audio)room we

to restart the meeting please. all right. madam secretary do you want to call the next item. >> item number 10 action item attend select policies in terms of reference with respect to partial investment delegation. >> great. this is in my mind this is an important item, so everybody has any questions or comments? we dealt with a lot of the issues, and

how to go forward in the last meeting or the meeting before that, and so i'm going to it over to our ceo cio. >> thank you president heldfond. as you mentioned last meeting the board approved that we put forward policy changes that align with what we called option four partial investment delegation. that option at a very high level is delegating partial investment authority to the ceo cio to approve investments, increase the funding with existing board approved managers subject to certain limits and also provides authority for terminations. we have put the language of option four as presented in the last meeting into the policies that are in this agenda item. for the most part it's word for word what we presented to you in the last meeting. there are different

ways organizations document investment delegations to a cio. given the nature of our documents the primary document is within the investment policy statement but it required some minor adjustments to the manager's selection termination policy for public markets as well as the executive director in terms of reference and service provider policy. i will note later in the agenda we have a discussion of absolute return that also has some changes to some of the policies. we kept those separate to the point that the board ultimately accepts those and it will be one document but we wanted to discuss those decisions independently. what we put into policy is only the phase one of the partial investment delegation. phase two as we discussed in the last board meeting would be put on to the forward calendar for discussion a year

from now. obviously subject to change at the board's discretion, and so that will be on the forward calendar but we didn't put that phase two in the investment policy because we will make the changes to the policy at that time should the board want to move in that direction. since we discussed this topic so thoroughly the rationale, the design and what we put in place to be able to proceed successfully with delegation i was keeping my comments brief today and really wanted to open it up to questions for the board. >> okay. . >> okay. thanks. it's going to take a while to the concepts into the different documents and perhaps this question should have asked last month. my first concern had to do when i start to read the percentages i try to convert them into dollars so i

see half percent and .5 and one, 2% ranges. the first question those percentages are linked to the total assets but then what you're focusing on those is revenues available for investing because we're a net payer therefore so much of the revenue income must be used for paying pension benefits but we have to reinvest or hold that money so when i just look at the percentages and converting to dollars it's conceivable to me inadvertently -- [inaudible] allocation. maybe that was planned and calls for some judgment because there's ranges around the targets. >> let me try to address this. i missounds the question please let me know, so the criteria

that we set forward we put limits on what you had partially delegate to us, and an investment were to exceed that limit then the investment would still become before the board for approval. we set those limits based on through the typical size of an investment in each of the respective asset classes and with respect to the total fund because it's not only the size in the asset class it's for the risk it presents to the total fund so there's a lot of thought push into the thresholds. all of that is subject for us to continue within the allocation guardrails that we have in place that we report to you on a regular basis, so it would not be the case and let's take a very extreme example that we would continue to put money because we had discretion with private equity and it's hugely under weight because we made that decision.

it has to be within the ips and the guardrails the board approved. >> maybe if i can map that out in my map how the ips reads and within the limit and the discretion to invest whether it's the coinvesting limit or moving within managers and much pel strategies and that's what i thought you meant. that's one. two, this kind of delegation to staff then you've always had the discretion to move money away from a manager. usually [inaudible] because we're disappointed in the manager but now that's an opportunity and fund the new strategy with a new manager or adding more money to the manager and besides the limits and holding on to everything they earn. this is a different issue if you decide to tactically add or

take away and the decision beyond the manager and the board may not hearing about. my question that has to be a separate decision to measure, and i think i asked that about when we were with the general consultants and that's who does the measurement on this issue. that's the issue i am trying to raise. okay. i believe it's worth measuring separately. separate buy hold decision by you and your team -- [inaudible]. >> yes, i would say to some extent we have that capability. we have authority today to move money between managers so that's an action we're already taking and you can see that in the performance results we have. certainly you can do detail analysis to break down the components of the value add, so i think the ability to move

money between managers we already have. what this delegation gives us a little more flexibility to add beyond the maximum allowed that the board had approved. >> my question is not about your ability to do it nor is it about then the authority to do it if we've already delegated it recently and plan to do even more. my question is measuring how well you do it. that's what this question is. >> yes and that comes through in attribute ion analysis >> and not done yet and i can figure out the leveraging piece because there are numbers to do that but with the manager with us for a couple years that's a separate decision to measure that differently because i think the performance numbers are not time weighted. >> we can take a look and evolve our

analysis. i would say that funding and defunding decisions aren't only driven on -- we have confidence in this manager. it could be we have liquidity that we need to fund. we're over weight here so you could have a lot of conviction in the manager and not take as much risk and pull and those are standard analysis but we can have a discussion with the team. >> obviously i think it's important to measure it if we're going to authorize even more authority and opportunity to earn greater return. you wouldn't do it unless you believe you could earn a greater return with the manager, strategy or asset class and why you did all the work but there's this measurement issue to justify continuing or adding to it. that's one. my point is phase two is going to be worked on in the next 12 months so here's the next

part of the question. it's not that wilshire probably set up anything and your people set up any measurement device and the selection process of a manager or a consultant. i haven't found it yet but most corporations and there are actually a couple of pension funds. they don't call it that. they call them auditing committees and we're not talking about how many pencils we're buying but another level and what we currently do and that's my point. staff you're constantly managing our managers ; right? >> correct. >> and this is a decision and opportunity to add -- this is adding to invest more not simply rebalancing. i think we need to come up with a measurement and you might stay so focused perhaps a board maybe so detailed that

[inaudible] but i believe it's that important to do it, how to do it and spend the time and the cost to get it done. that's where i am leading with all this stuff. >> i appreciate that point and one thing that i have worked with the team and we are working -- will be working with wilshire and lead by anna on allocation and risk and bring more quantitative measure to our process so this is something we can look into as we're enhancing the processes over the year. >> okay. i'm glad you're going to look into it because i'm going to look into it too and i'm going to try to convince my colleagues on the board. we need to do it and not a nice to know task. thank you. >> any questions, comments? okay. i just wanted to thank staff for incorporating some of the comments that

we provided and feedback last time for this. i think that the slow transition gives us an opportunity to see how things are going and have plenty of run way to make adjustments and tweaks as we proceed but i'm really excited about this process and i really appreciate the amount of work and time put into developing these options. >> here, here. it's a long time coming and i am glad we're going down this path, yeah. this is an action item, yes, so can i have a motion? action let's be efficient here and what's the motion --

what we have on the agenda. >> make a motion to approve the investment policy statement, the manager selection and monitoring and termination policies, market and octavias and executive director and ceo cio in terms of reference and service provider policy regarding the delegation investment authority. >> second. >> okay. it's been moved by commissioner driscoll and seconded by commissioner o'connor and we will have public comment. >> we have no person in public comment on this item. reminder for any callers to pressing star three to be add to the queue. moderator do we have any callers on the line? . >> madam secretary there are no callers in the queue. >> thank you. hearing no calls public comment is now closed. >> okay. the motion has been made and

seconded. all those in favor aye? >> aye. >> opposed? great. the motion passes. do you want to call the next item please item number 11 action item investment guidelines and changes to manager selection monitoring and termination policy. >> let me say one thing. i really appreciate all the work that you went into this. it's a lot of work, a lot of work. >> so if i may kick off the discussion today. as the board may recall in january with your support we updated investment policy statement and the guidelines for all the asset classes except absolute return. over the last nine months we have done a deep dive

into this asset class. we've dug into the objectives of the portfolio with respect to where we are with the total fund. we looked how we construct the portfolio and how we manage risks. i assure you? was an very intensive process unless involving will asset class team and our risk allocation team, external partners and i was closely involved as well. in my experience absolute return is a tough asset class to define to set objectives, and to construct appropriate guardrails. that's what our process was about and i am very excited to see where we've evolved here today, so where as i would say the guidelines we presented for the other asset classes in january were a bit codifying practice and adding risk guardrails. here we did do a deep dive to make sure where we

want to go forward with the asset classes given how the other asset classes evolved makes sense we're clear with the board and what the objectives are and have a benchmark that aligns with the objectives and with that i will turn it over to david. >> thank you alison and good afternoon commissioners. each of you received a large packet of information on absolute return in advance of this meeting. the materials assemble read reflective of work that started almost a year ago as mentioned and a continuation of an evolution of the absolute return program that staff has been speaking to you about over the last couple of years. it was staff's intent to present this material at an investment committee meeting on july 12 so the presentation in the blackstone memo that you see reflect that date. it would take a long time to go through all of the material so the purpose of my initial comments will be that dispel all it into several key take aways that are on page two of

the presentation so if we can queue that up. . >> [off mic]. >> yeah. .

>> okay thank you. first we developed a comprehensive framework to clarify the role and objectives of absolute returns and guide the portfolio construction process. second we've updated the guidelines to manage a portfolio within this new framework and finally we have analyzed benchmarks and proposed a new primary and secondary benchmark that

most relevant given the role and objectives of the program. the purpose of all of this is to provide more clarity of what we will invest in and why, how we will construct a portfolio, and the risk guardrails and benchmarks that staff will be act believe to. with that in mind i would like to provide more details of the presentation. >> . >> absolute return also commonly referred to as hedge funds is an area of the investment industry that is complex and hard to define. and as a result it sometimes defined by what it is not. although it is included in many asset allocation mixes it's not a stand alone asset class but rather than objective for a set of strategies. unlike real estate or private equity and investments are defineod easily characteristics absolute return is

based on the return and risk objectives of the strategies. spurs seek adjustment to the returns of the plan through exposure of the returns that are available across the spectrum of absolute return. an example that spurs as realized in real terms is the 50% reduction in plan volatility vince the implementation of the program in 2016 of absolute return. next page please. when first began investing in absolute return it doesn't have long-term equity exposure in the plan or a dedicated private allocation or a private equity program that was near its current size. as a result expectations of absolute return were different and most notably the beta tolerance was higher. fast forward to today and it's the plan portfolio has changed so too has the risk profile of the plan and the

diversifying role of the absolute return program. page seven. this is a graphic depiction of the evolution which highlights opt newnistic equity and private credit that doesn't exist as components of the portfolio in 2016 today comprise approximately 13% of plan assets. page eight. this is a graphic depiction of the evolution long standing community-serving business portfolio for years. >> . >> >> and drives performance of exposure to other asset classes. the three categories on the left is what is presented to the board in annual up dates by staff since april 2022 and what staff used as a foundation for the proposed portfolio construction framework. page 10. as staff has been

working to rebalance the absolute return portfolio over the years the need to improve upon the documentation of program objective and portfolio construction process and ensure that guidelines and benchmarks were properly aligned with objectives became clear. importantly we wanted to bring guidelines current with the program objective and align them with the management and oversight of other asset classes. additionally it was important to ensure appropriate benchmarks were in place and supported with qualitative and quantitative analysis. page 11 has a graph i depiction of the approach by staff to create the guidelines included in the packet of materials distributed for this meeting. we started with a clarification of high level objectives and then documented an investment philosophy. this was followed by the definition of the portfolio construction building blocks that we refer to on page eight and identifying appropriate targets and ranges for

exposure to these categories. lastly staff worked closely with the internal risk management team and external advisers to develop guardrails with risk metrics. on page 12 you see a clarification of sfers objective for down side mitigation, diverse ifs and liquidity expectations. the bottom of the page is a proposed quanted ifs of return and risk measurements that are in bien are the plan portfolio and the absolute return. page 13 denotes high level elements that will be taken into account in the construction of sfers portfolio and these are quat tailive and quantitative in nature incorporate current conditions and expectations and long-term data forecast and rend trends. on page 14

staff provides more detail on the building blocks that are proposed for the the absolute return portfolio process. absolute return investors utilize many different ways to categorize strategies, mores and exposures. what maybe relative value for one investor can be referred to as macro for another. there are many exceptions of specific managers and funds that exhibit return and risk characteristics that differ from the norm established by managers and funds that are commonly labeled with that strategy. this is one of the things that makes definition and categorization very difficult among this group of strategies. after much analysis staff concluded that most effective method for sfers would be to measurable return and risk attributes rather than using nomenclature that is

only meaningful for industry practitioners and so we tried to put this in familiar terms. page 15 reflects the matrix developed by staff which can be used to place strategies investment managers and specific investments into four major categories based on expected returns and expected diversification benefits this. matrix was presented previously in the absolute return update that staff delivered in april. each quadrant that you see identifies return, volatility, diversification and liquidity characteristics of an investments that would be categorized together. additionally there are examples provided of common absolute return strategies that sfers may categorize in the four areas. although we may include exposure from all four quadrants in the matrix in january staff will seek to concentrate

in diversifier investments with op you itnistic drivers and risk mitigators. i will get into tarsels and percentages later. the lower beta ratio and [inaudible] will generally be expected to comprise smaller percentage the portfolio however there are exceptions with some investmentings that have these attributes but also process attractive return driver diversifying or risk characteristics that maybe additive to in the total portfolio. absolute return is meant to provide diversification of returns to the overall plan. as such some strategies that are valid on their own merits including those that are other investors may categorize as absolute return but are well represented in the plan portfolio are unlikely for us to be included -- for us to include in the portfolio. on

page 16 staff provides specific detail on the metrics that are used to categorize the absolute return investments. investments will generally be placed into one of the categories based upon their return beta volatility corporation and liquidity characteristics. in some cases where managers operate multiple strategies within a fund and the exposure can be quantified in more than one category looks like process maybe utilized and californiaize it more generallually. staff will measure the matrixes over time periods to provide a more data driven and non static approach to categorization. we're not proposing this to be a set it and forget type of categorization that it's more dynamic in nature. page 17 lays out the target mix and ranges that staff

has identified to be most in line with achieving sfers's return goals. achieving and maintaining the target mix among categories identified with precision is very difficult if not impossible. therefore allocation ranges are presented which provide for reasonable flexibility to implement, the ability to move away from midpoint of stated ranges and adapt along with changes in the part environment and opportunity set. for context the mix of sfers absolute return portfolio is approximately 60% diversifiers 30 return return drivers and 10% risk mitigators so we're not terribly far away from the tars targets at print. next one final point on construction. sfers portfolio is expected to have mixed investments, discretionary and coinvestments . this is done to strike a

balance of in house investment process and capabilities, the use of external advisers to improve sfers's ability to tactically respond to rapidly evolving market and coinvestments that can benefit sfers through enhanced returns fees and alignment with gps. please move to page 20. as mentioned earlier staff followed an approach that started at a high level and objective and philosophy and moving to construction principle, building blocks and range and targets. completion of this framework involved the enhancement of the absolute return guardrails to provide for alignment with the restated program objectives and more comprehensive monitoring and management of risk. page 21 through 24 contain the guidelines proposed. page 21 has the

risk and detta guidelines for the portfolio. we propose tighter constraints on each of these and based on the view using beta as a measure of sensitivity to equity and fix market incomes and standard deviation as the measure of return stability the portfolio should have lower metrics for each of these if it is to achieve the desired objectives so that's the rationale for lowering each of these. note that the metrics reflects a reduction from the current guidelines in the middle column of this page. page 22 is a table showing the current liquidity guidelines with no changes proposed. as a general rule most of sfers absolute return investments will have liquidity terms that contribute favorably to the functioning as a secondary sources of liquidity for the sfers plan but it

include exposure to liquid investment if they provide returns or diversification benefits. staff have returned over 500 million of capital from the absolute return portfolio back to the plan in fiscal 23, and are managing to a schedule that will return the same amount back in fiscal 24. staff maintains a model for more extreme liquidity scenarios more stressed environments, and therefore does not see the need to modify the existing guidelines. on page 23 we reflect two new risk guardrails in the proposed guidelines as a result of much discussion and collaboration with the sfers in house risk management team. these guidelines are extended to help ensure that the total portfolio remain on track with its diof diversification and risk objectives. on page 24 we list

several coons restaurant and exposure guidelines that staff adhered to since the inception of the program and similar to the liquidity guidelines staff believes there is no need to modify these at this time. finally included with the materials for this agenda item were both a clean and red line version of proposed manager selection monitoring and termination policy for public markets and absolute return. the proposed changes that you see highlighted in the red line reflect minor edits that will allow for the existing policy approved for public markets to also apply for absolute return. staff is recommending for board approval and comprehensive effective july 1, 2023. the following items proposed investment guidelines for absolute return, proposed manager selection monitoring and termination policy public markets and absolute return. we have representatives of blackstone in

attendance virtually today should the board wish to address any questions to them. this concludes my comments on this item so i will pause here to address any questions that the board may have for staff or blackstone. >> well presented. thank you. questions commissioners? do you want to start? . >> i have a couple of questions. i'm not sure exactly where to start. i'm trying to understand in part you were given to do all of this over a year ago and things going on in the portfolio. only i am just trying

to figure out where to start and the expectation of tbill plus five or three. were we unrealistic or the fact that two of the other asset classes got more sophisticated adding long short to equity and i think long short in the debt but the whole credit -- private credit asset class wasn't even here when we started doing this. maybe our risk profile changed enough that maybe we don't need to shoot for tbill plus five. i am trying to understand what drive us to this lore rate of expectation? >> do you want to address this now. >> it's a procedure perspective. we have a separate item voting on the benchmark. >> (inaudible) >> but they're all integrated but we started with the core principle of what is the objective of

the absolute return asset class in the context of where we are with the fund today, and so most simplistically i don't need [inaudible] equity or private class in this asset class and with that in mind when you look at the expected return if you're not getting the equity beta and the return will come down but you have the add diversity benefits so we're trying to align the benefits with the a set class and it is expectation and ultimately the benchmark. >> okay. let me ask the same issue this way. normally we're always trying to figure out how to make more money, higher return and normal first shot but at the same time a better risk greater return which is discussed in here and i think in the x and

yquadrants. okay. therefore is it fair or wise to give up some return to get better diversification? is it better to be more efficient or more effective? . >> so the asset allocation was set before i was here but the objective is provide down side protection but in a way that generates return more than fixed income so you do not have access to the same growth -- sorry, the growth assets but it comes at the ability to have flexibility when for instance equity markets are down and we need liquidity or generate return so there is value from the portfolio construction perspective to have

absolute return of that portfolio and we want to make seer what we put in meets that objective and i think the guardrails allow that. if we have absolute return as equity or private credit then it won't protect on the down side and that would ultimately negatively impact returns. >> and i would just add too to answer your question commissioner the purpose is both to be both effective and be efficient, and i think our goal is to be effective at the total plan level with an allocation to absolute return in that and provides some down side risk mitigation, provides that diversification, and functions as a bit of a ballast when equity marts and fix income markets are not delivering and through some of the changes that occurred in some of the other asset classes in the last seven years since we

began investing in absolute return we enhanced the growth sensitivity of the portfolio. we have increased the education to private equity. we have made changes to the public markets' equity portfolio and those are things that we have to be conscious of as we use the capital efficiently allocated to absolute return so that's what we're trying to do here is figure out how to most efficiently effectively utilize capital that is allocated to absolute return to make the total plan portfolio better, to still earn a reasonable rate of return, but importantly provide down side risk mitigation with those other asset classes are not delivering. >> okay. then perhaps we should consider raising our expectation for

what we think our private credit or our equity portfolio are doing since we're now recognizing that we're taking more risk there. we can take more risks there because we decided how to manage risks better -- not better but utilize the portfolio and accepting the rate of -- [inaudible] increasing risk decreasing volatility. so i understand it but i'm trying to turn it around and go this way but all the time what point we pick on the efficient frontier. because we can always go up the market line but not the frontier and comes back to what is the reasonable rate of return that we're using to discount prices and ties into supplemental cola desmines

like that and i am trying to find out why we're making the change and the -- [inaudible] [off mic] and because it makings sense. if you're trying to tell us we have a much -- [inaudible] much better odds of hitting our assumed rate of return doing it this way and that degree of efficiency is worth paying for. >> yes, and certainly we will be go through the course of the year based on where the markets are and capital market assumptions asset liability and asset expectation study and expecting them and return and looking at efficient frontiers but i would say and again i can't speak to conversations that were here in the past but i think what we're trying to say when you do an asset allocation study you make certain assumptions about what the absolute

return portfolio was supposed to add in terms of risk and we want to consider previously when we did the study and importantly when we do the asset allocation study that we model out this objective cleanly so we did appropriately size the asset class. >> plus we maybe a fairer expectation and do less of this and come up on the next benchmark discussion or in a moment when i ask a totally different question. i got your answer. thank you but i want to ask another question and goes to your page 23. the first box the contribution to total portfolio risk of [inaudible] factor. can you just explain that one? i'm not sure what that means because it ties into the total portfolio ; right? >> we spent a lot of time on these two and i may ask anna to

be prepared on the comments they make but where we started was really thinking about again going back to the objective for our allocation to absolute return is to provide diversification, and we know that we have a lot of factors sensitivity in other asset classes particularly with our decisions to over weight certain things like tech, biotech and health care and historically china that we have a lot of sensitivities to some of the factors, and what we wanted to do was in rewriting the guidelines make sure that we had something codified within absolute return where we build in more of a consciousness of that diversification goal, and in doing that

have something that is a defined measurable metric that we can monitor on a regular basis on a monthly basis to make sure that we are not bringing in that additional sensitivity through this allocation that just piles on more sensitivity to some of the other factors that we have a lot in the planned portfolio, so we have already gone through and assessed the number of different ways in which we can run analytics to identify this and we have several ways in which we can do this, but it does include some common traditional market index factors that we will look at as well as some you know more less conventional type of factors in order to make sure that we're continuing to strive for that diversification

benefit. >> okay. were you doing this two years ago? >> i would say we had access to the tools and we were doing it. we were assessing it but we were not as systematic in the approach it to do it like we will going forward. >> were you doing this with the other asset classes or new as well? >> i think it's similar to the guardrails in the other asset classes that you approved in january and to be overly simplistic here so for equities i don't want to take all by risk and only being in one country or sector. in some respects this is the equivalent of absolute return. i don't want all of my risk to come from credit or equities. it's harder to find that that in

absolute return but to do the same as the other asset classes >> that part is good. it's i combination of the word portfolio risk and factors because many different factors; right? i want to get back to the total portfolio number. that's a more important part of the question because the issue of factors has come up as one of the points we hired wilshire because nay consider more factor when is they're helping clients making asset allocation if i remember the answer correctly when the gentleman spoke to that point. that's important because we the board never spoke that way. maybe you did it when you came up with recommendations. >> it is part of the evolution i think what we're trying to go to have qualitative and quantitative assessment of of risk. >> how is total port port risk defined? that could mean a lot of things. >> . >> let me clarify

because in the document there's a very specific footnote that defines this but not on page 23 of the power point. total portfolio risk here is absolute return portfolio so contribution we're measuring and we're holding ourselves accountable to a guideline of 30%, and will be assessing monthly to determine and make sure that the there is no single factor that contributes greater than 30% to the total absolute return portfolio so that's what that means. >> when you say "risk" you don't necessarily -- you do or don't include volatility? >> volatility is one factor. >> that's the easy one to understand when you say it this way but when you say total portfolio risk you're talking more than just volatility? >> there is almost an

infinite ooh! mount of factors you could use but volatility is one. >> . >> there are various measures of volatility. there are many measures of equity risk. >> but what are you using? you're using one tool for that? >> we're using multiple factors. >> so when you say total portfolio risk it's some of all the factors; right? . >> [off mic]. >> it is not the sum of all of those. >> what is it then? >> don't hesitate to ask anna to jump in here. >> yeah. >> absolutely the total portfolio risk in this context reserves to absolute return portfolio. the risk in this in here is referring most of the time to

volatility estimate for the absolute return portfolio. this is -- then we look at the decomposition of this total portfolio risk how much of for each factor and contribution for each factor how much comes from one sector or one country or equity or credit et cetera and no factor should contribute more than 30%. this is volatility. we absolutely hear you that we should be looking at other parts, other types of volatility, risk managements and that's why we have a parameter and look at the draw down and that is a measure of risk. >> . >> so the measure is measured by volatility and the risk system that go into different factor contribution for the volatility

estimate of absolute return portfolio. the second parameter looks at the draw down expectation which is a tail risk measure of the absolute return portfolio. >> right of the draw down part -- now that i understand this the contribution to the absolute return portfolio from one factor that -- it took a while for that to come through. and i assume there's a parallel for all of the classes and the portfolio. >> yes, that's what we're bringing. >> thank you very much. i will wait for the benchmark study to come up and the numbers here is coincidental for the amount of benchmark. you mitigate a risk factor but grab three of the subcategories within that to represent that. >> it's not totally coincidental. >> not totally. when the discussion comes up i will ask that question. this

is great. thank you. >> okay. >> so no further questions i think we need i motion to accept these. >> any questions? >> no more questions. >> great. thank you for that. we're going to have a motion to approve. >> move to adopt proposed changes to the investment guidelines for absolute return and manager selection monitoring and termination policy. >> second. >> moved and seconded. call public comment please. >> thank you. we have no in person public comment on this item. moderator do we have any callers on the line?

>> madam secretary there are no callers in the queue. >> thank you. hearing no calls public comment is now closed. >> okay. we have a motion made by commissioner thomas and seconded by it commissioner driscoll. all those in favor? >> aye. >> all those opposed? motion passes. thank you. want to call item number -- >> item number 12 action item absolute return benchmark proposed changes. >> just one sentence to tthis off. i think seen a theme here and rigor in the process and analysis of the benchmark but we didn't start with the benchmark. we started with the other agenda item which is what is the objective the asset class? how are we going to construct that? the purpose of

this discussion is how we're going to benchmark it based on what our objectives are. >> great and similar to the guidelines it was staff's intent present this at the investment committee meeting on the 12 so the presentation reflects that date but james let's go to page 2. just as we presented with the guidelines staff is proposing changes to the absolute benchmarks to better align the measurements with the evolution of the sfers plan and the absolute return program. the benchmark selected at the inception of the program were chosen with the expectation it would benefit from having a significant amount of equity and credit data. in the last couple of years the needs of the plans have shifted such now the program functions as a ballast to the first plan and seeks to minimize directional market risk. this was a positive change that recognizes some of the unique benefits

of having the absolute benefit allocation. however given this transition a revision is warranted and a change in the program benchmark is largely driven by one a reduction of the overall sfers plan investment risk due to the improved plan funded status, and two increased allocations to private credit and equity long short and other areas of the plan port port. let's move to page three. in evaluating the absolute return benchmarks staff reviewed the core cfa core principles to answer the question what say quality benchmark? the current benchmark was unambiguity, measurable and specified in advance but where it was lacking is being appropriate, reflective and owned relative to the current investment approach, process and style. the

proposed t-bill plus three benchmark is fit with the style of staff and its advisers in having the portfolio. it also matches the investment approach and the philosophy that is documented on the guidelines that were discussed earlier. lastly and connected to and woven into the framework of the absolute return program. page four. staff's analysis included a comprehensive review of sfers's portfolio data as well as industry data on peer portfolios and hedge fund benchmarks want clear observations were that the primary observation of tbill plus 5% was a high outlier and notably high relative to the primary objectives of the program. additionally analysis of the existing secondary fund to fund benchmark show it contains significantly more credit and

equity exposure and data which was implied by the diverse -- then implied by the diversification objectives we have for the absolute return portfolio. in addition to statistical analysis staff sought to ascertain the common practices of it says advisers and research providers. what we found is that advisers and consultants generally construct portfolios with a mandate similar to the sfers's current absolute return goals which have low beta, low correlation and down side characteristics to a tbill three plus three rather than 5 percent. staff got information from numerous peers as a sanity check on the research which agreed with this measure. these observe mashes are better

aligned with investment objectives, provide for more effectively portfolio construction, can be is noted with a multitude of data, and are consistent with industry approaches. page six of the material summarizes the results of staff's collaboration with advisers, consultants and research providers with respect to the proposed primary benchmark. in summary there's a consensus that the tbill plus three benchmark is more suitable for what sfers is seeking for absolute return. on page seven it's noted that a historical quantitative analysis performed by staff on the proposed 60-20-20 mix of construction building blocks would have yielded returns consistent with this measure. on page eight of the materials we summarize the results of staff's collaboration with advisers, consultant and research providers with respect to the proposed secondary benchmark. in summary there's substantial support for the use of this

benchmark as being more appropriate and reflective of our investment style and investment approach. finally on page nine several additional points are cited in support of the new secondary blended benchmark. most notely the current fund to fund benchmark is used is a mismatch given the managers it includes based on the strategy and the size of the organizations. additionally blended benchmarks are currently used elsewhere within the plan in measuring the real assets portfolio so there's a precedent for this blended benchmark. lastly the blended benchmark is relevant match for the return and characteristics of the sfers return portfolio and therefore a more appropriate choice to be used in measuring value added through portfolio construction and

manager selection as well as for plan level asset allocation and analysis. staff is recommending the board approve a change to the absolute return primary benchmark from 90 day bills plus 5% to 90 day plus 3% and a change to the absolute return secondary benchmark from the fund to fund composite to a weight the blend of 60% macro, 20% hfi relevant value and 20% equity hedge to be effective july 1, 2023 and consistent with the start of the new fiscal year and for ease of reporting. included in the materials that were submitted for this item is a memo dealted may 18, 2023 addressed to the retirement board from nepc who was the consultant through

june 30. this memo supports staff's recommendation to change the primary and secondary benchmarks to those metrics noted. this concludes staff's prepared remarks on this item. i will pause here and address any board member questions. >> thank you. again excellent presentation. commissioners? . >> okay. let me do that two easy ones. if you just said it i missed it. why the hfi equity hedge and the relevant value they seem to be the 2020's and why they were picked to represent the mitigating -- not the core but the third -- three categories for the 60-20-20 and the three so just why -- did those two basically represent how the definitions of the mitigation group?

>> we have a pretty complex statistical analysis that we completed in order to arrive at that. i'm going to give james an opportunity to speak to that because he lead up that effort. >> thank you. i would say i collaborated with anna's team heavily on that, but we did -- is my mic on? >> yeah. >> there you go. >> okay. so in collaboration with the allocation team we looked at historical returns in these data bases and we did a principle component analysis which simply means we looked for which indices of the many offered by them we could use to model most of the variation in the entire universe, so you know which of the indeses explained most of the others so we were able to

explain most of the variation with these three, and then we had an economic intuition that this connected to what we were thinking about in terms of a core group and a driver group and diversifier group and nice it came together but they actually housing stability fund oversight boards came housing stability -- incite and one how to achieve the goals and the other was looking at the returns of hug fund and the majority of the strategy that we look at. >> . >> you know what is really possible and arrive back at the same place so that is always compelling when that happens. >> okay. the usual cautions are to understand this area is not really an asset class therefore the standard measurements are difficult, but then there could be huge diversion based on the portfolio versus this benchmark. it

could occur because of how they just operate. >> right. well, our analysis we used to pro forma portfolios to analyze how well this benchmark would have worked and the results were pretty positive. >> okay. the fact that you currently debuted -- will this bench be used on blackstone as well? just measure them against that as well as your direct portfolio? >> correct, with the guidelines that were just approved we will update our the going documents that preside over our strategic partnership with blackstone to reflect those guidelines as well as the benchmark. >> okay. the way the categories are now -- i use the word "category" and not "strategy" and the weight of the once that you are able

to invest in are we changing that -- so we're more focused or complementing the other asset classes and do you need that range for those categories >> what will prevail is the guidelines that will board just approved and that will prevail and use those building blocks and those categories in construction of the portfolio. the guidelines that you're ever referring to and the previous categories and eight categories and eight sub strategies equity credits emerging markets, nabbing ro, special situations, multi-strategy, wants -- maybe i am forgetting one. it's just a different way of categorizing exposure. this is not what we talk with the guidelines or the benchmark and not to

say we will no longer invest in any of the categories. we will. we will evaluate the entire universal of absolute return but for the purposes of portfolio construction we're not going to approach it from that top down top down type of lens putting things into eight different categories. we're going to use the building block approach that we heightened in the guidelines that were just approved. >> so in terms of risk management point of view meaning monitoring you those will be the guardrails you have? >> that's right >> and so there's a smaller number of building blocks, the ranges are also a bit narrower than they were historically >> and a certain strategy can cross categories or managers can cross categories differently the way it's structured? >> yes. >> i will learn to

live with that. now here's the question and i can't find the words but you said it and because the funding level has risen that helped reduce our risk. i don't know how you exactly said it and i don't want to misquote you. it was written in one of the documents i read -- [inaudible]. >> yeah, yeah. what i said that's part of the reason for us adjusting the benchmark is one of the drivers for revising the benchmark is that the overall plan funding level has improved -- >> what does that do with the word risk? >> as a result the plan risk profile is adjusted which is part of the substaniation for recommending a new benchmark. >> which risk? reduce our risk profile. again we have hundreds of risk. which risk or risks are you talking about?

>> well i think probably volatility would be certainly be one. alison do you have anything to add. >> yes it's a way to bring down volatility and protection and maintain another source of liquidity so we can meet our liquidity needs. >> okay. i will find out where i read it and now it's recorded. it's a very important statement and i don't know if it's misunderstood and i might misunderstand or contributing risk to the [inaudible]. much like insurance companies when they get to higher funding level they can take less risk. if that's what we're doing fine but it's sort of a positive result from something you were trying to do opposed to -- [inaudible]. >> yeah, again i want to connect this back to the guidelines so what the board just approved in the guidelines that we

presented was pretty significant reduction in the target risk as measured by volatility so previously it was less than 7%. we're going to less than 5% as measured by the annualized standard deviation so that's a pretty significant reduction, and it's unrealistic to think that you can achieve the same level of return for at a reduction in risk of that amount, and so this is just trying to keep everything rhyming and you know aligned, and we're adjusting our proposed primary benchmark in part because we recognized that the role for absolute return is going to be one of more of a risk mitigator and not taking as much risk, not having as high of a beta profile in some

of the areas when we started investing in the area in 2016 we were more comfortable with it. >> okay. i would understand it that we took greater risk meaning greater market risk, greater liquidity risk and it worked out for us and now we can take more risk and more [inaudible] markets and volatile markets and take chances and the way it was phrased i would have said it differently to understand it better. thanks for the answer to the questions. >> okay. questions? >> yeah. thank you for the presentation. i appreciate it. and i apologize if some of the my questions are rehashd and i was definitely trying to keep up here. i'm curious how you did some of the research in comparison to peer industry peers and i saw the

surveys and but can you unpack the proposal to what the peers are doing? >> we did. through our network of other plan sponsors we reached out when we started doing this work really last summer and we found one of our public plan peers in particular went through a similar exercise and surveyed a bunch of public plans, large public plans that also had material allocations to absolute return, and assessed some of the benchmark practices as well as the objectives that they had for their absolute return program. that was very useful. we validated that inform independently, and that's where we reference the comments

and the tplus five was an outlier and really the highest tbill oriented benchmark of any of the peers surveyed in that group, and was definitely an outlier. then as we worked together with other industry consultant and advisers to see what many of their clients were doing some were not included in the public plans that we connected with. also found it was really not consistent with the diversification, the down side risk mitigating objectives we're going to set for the plan going forward. >> thank you. in the course of your research how common was it for some of the peer organizations to violate blended objectives that absolute return and the liquidity objectives? is it common with them and the absolute return mandates or different? >> anecdotally i

would say yes. i think it's become more of an issue because a lot of our public plan peers are experiencing some of the same things that we are with their allocations to private markets. you know those allocations have grown. other plan sponsors have increased their targets, and they're dealing with the same market dynamics that we are that distributions have slowed down as a result what is happening with the i po market but the pace of calls continues and you have to continue to fund these programs and so then just like we are our peers are reaching to other asset classes in order to find a source for liquidity, so i don't know it's to the same degree that we are, but it's pretty common. >> yeah, i would say

because sfers has invested more in private markets there is probably more eye towards lute return to raise liquidity whereas the plans more in the public equity market are fixed income may have absolute return but that's not at all primary source. i would also say that absolute return from fund to fund really defers. in some cases it's a catch all for things that don't fit elsewhere. sometimes you may have elements of private credit because you don't have a private credit asset class so when you look at peers you need to understand the structure and what their objectives are but even when you take into account all the different objectives our prior benchmark was at the high end of what they use. >> just to in closing on that question i think what we are

doing in terms of monitoring liquidity, managing to a liquidity profile for our absolute return portfolio, and having a very specific cash forecast that we adhere to for bringing cash back, sweeping cash back to the plan to reinforce the balance we have to meet the calls and payment size a little unique want most of our peers are not managing to that level. >> . >> but it's probably unique because of a number of things with our total plan construction. >> so given that what drew us to aligning our benchmarks closer to our peers if we're sort of an outlier in terms of the goals we're setting? >> the return and risk objectives are similar, and one of the things that is

actually helps us is the way in which we clarified our return and risk objectives and the strategies that are more suitable for us to be investing to meet those return and risk objectives coincidentally and conveniently are generally more liquid so it's a little bit of a -- it's fortuitous in a way that the nature of a lot of these strategies provides for that, so while moving to a objectives that are more focused on that diversification, down side risk protection and sensitivity to the markets we also find those strategies commonly have a more liquid profile wherein they have monthly, quarterly liquidity, shorter lockups relative to some of the other strategies

that do not that we historically had greater exposure to. >> thank you. >> if i could make a point the decision to move the benchmark started with a rigorous quantitative analysis based on the return and analyses and objectives that we have and assets that meet that criteria. that's what drove the benchmark selection. then we looked at what peers did to say is it consistent? are we out of line? it's not what are the peers are doing? they're lower so we going to lower it. a data point to supplement the work. >> thank you. >> any other questions? all right. thank you for the presentation and we will need i motion to approve. >> i move to approve

the absolute returns investment guidelines and management selection monitoring and termination -- is that the policy or the benchmark one. >> sorry i was reading the wrong one. motion to approve -- correction. review and approve the proposed -- >> [off mic]. >> change for the absolute return benchmark. >> second. >> okay. it's been moved by commissioner driscoll. seconded by commissioner o'connor and we will take public comment. >> we have no in person public comment on this item. remind to the callers to pressing star three to be added to the queue. moderator do we have any callers on the line? >> madam secretary there are no callers on the cue. >> thank you. hearing no callers public comment is now closed >> okay. all those in favor. >> aye. >> all those opposed? okay. motion

passes. thank you. >> thank you. >> thank you to your team. i mean it was informative, educational. how much definitionses have we heard of absolute return? >> [off mic]. >> that's true. >> [off mic]. >> yeah. okay. madam secretary -- madam chair, you're promoted. >> item number 13 discussion item. private credit updates.

>> alison. >> i think our team is just setting up. >> okay. >> we will quick it off. >> [off mic]. >> okay. want me to

start? good afternoon commissioners. you can relax. we're not making any recommendations. this is just a discussion item but before we begin i will provide a little context for each of you. the last several items we talked about or proceeded this focus on changes to the changes to the judgment policy statement -- investment policy statement and one of the requirements is that each of sfers six asset classes provide an annual update to the board. we provided updates for the public equity fixed income absolute return portfolios back in april. today we're going to review our private credit portfolio and our intent is to provide up date for the private equity and class in august. the format is general as you know and staff will provided performance and composition within

the initiatives within the next year and cambridge will provide their views on the landscape and turn it back to the board encourage you to ask questions and not only at the end or interrupt us. this is the one time during the year to address this and asset classes and in this case private credit so with that i want to reintroduce our private credit team to you. you may recall henry joined us at the beginning of this year from the firm and a associate and had investment roles at morgan stanley and goldman sachs and next is brady and joining remotely and covid is still a thing and joined the team as a associate manager at the beginning of january

2022. he joins sfers at the beginning of 2021 as an analyst working in the asset allocation and risk management group and from the uc regents and our effort is lead by eunice and joined in 2013 as an analyst in the fix income group. she was propromoted as a manager in 2016 and sfers approved formal allocation and over seen the portfolio ever since and promoted to a director of private credit in 2022. before we dive into a review of the portfolio i want to acknowledge what this team and what eunice in particular accomplished in private credit. there was a discussion just now about the changes to our absolute return program given some of the revolution in the public equity portfolio and the growth of our private credit portfolio

which has grown from scratch from nothing in 2017 to almost 8% of sfers's assets and there was a variety for the reasons for the board to approve or staff to recommend for the board to approve a commitment to private credit and a new class and stems from the global crisis and banks globally to provide credit to companies and consumers and governments as a timely recommendation in our experience has been quite strong but i think what we failed to recognize in 2017 is just how complicated of an asset class or intensive resource this is to introduce and unlike private equity and assets are out for 10, 12 years and these are shorter and reup 18 months later and intensive cycle. and the drivers a little bit of absolute return the drivers of risk and

return are eso atmospheric and manager selection is critical and staff knowledge is critical and from senior lending to non sponsored private equity or private companies to private equity backed companies, asset back lending, life settlements, urine yang npos, debt and aviation finance. it's a broad category that requires special knowledge and they're know well there in my opinion and what is not seen and true of all asset classes after we make the recommendation to invest and legal negotiations and working with the city attorney's team and negotiating terms and the team has been vigilant getting the best terms as far as mitigating risk and improving our economics so i want to make sure that the board understand and acknowledges that to some sense and

this program, sfers private credit program has become a well regarded well known within our industry and for her efforts and our efforts eunice has been recognized by institutional institute and others in portfolio construction and a little promotion on my part. she won't do it so with that said i will get to the agenda and provide a brief overview of the program and performance. performance -- again this is true and true of the private market portfolios next month through 12-31 or the end of the calendar year we have supplemental performance in the first quarter. we will provide an overview of the portfolio and discuss activity and initiatives and cambridge will close about comments about the current private credit landscape so briefly in 2022 you're aware it was a very difficult market in the public equity and fixed income were down for

reasons we discussed in the past but private credit was a positive contributor to the plan in 2022 returning about five and a half percent. we started from basically zero in 2017 -- a little more zero but this portfolio grown to 7.7% of sfers and goal of 10% which i want talk about in a little while and up from five half percent from the end of 2021 so it's difficult and a treadmill to get up to 10% and as they will describe with the reset in interest rates private credit opportunities have become really, really attractive and we will talk more about that. i noted we [inaudible] asset class in 2017 and doing private investing in the portfolio so the track record goes back to 2008 but i would

acknowledge the amount of capital we committed to the opportunities is quite small. again the purpose of this private credit was to the advantages here what we're trying to take advantage of is the derisks of the banking system. again banks world wild and traditional providers of credit to companies, consumers and governments as well. all of that or much of that risk taking is replaced by private pools of capital and [inaudible] and end of december we had about 7.7% of the portfolio committed to private credit. in order to get to that 10% goal or target rather we expect to allocate or commitment about 850 million [inaudible] 10%. program is performed well producing just below 10% and multiple of 1.two

times. a little bit of a timeline on specific objectives and remind the board what we're trying to achieve with private credit. we're looking to achieve concerns that are greater than in the liquid credit markets perhaps three, 4% over and absolute return we're seeking a return of 8-10% with an emphasis on returns that are generated by yield or cash ultimately and little bit less focus on capital appreciation. our benchmark here is a combination of liquid markets, 50% bank loans, 50% high yield and plus premium of 1.5% so a blended benchmark or liquid mark and indices and 150 basis points. i will reference to this a couple of times. this is a new market and even though it

happened several years ago it's a prominent market. there's a lot of institutional capital poured into private credit. manager selection is key and richard will talk about this with the rise of interest rates there is pleasure placed on credit and managers' ability to work out and [inaudible] work out under certain situations is going to be critical. again diversification is critical. as true throughout sfers portfolio the private credit team emphasizes bottom up manager selection while mindful of diversification by strategy, geography, ventage year and relationship. we divide the portfolio into three broad categories: capital preservation which includes senior debt and mezzanine strategies. opportunistic and specialty finance and real estate strategies and return maximization strategies which

include distress and special situations and you see the target ranges and currently have 50% of the portfolio in preservation prejudices and a third in the next and 15, 16 in the maximization category. in terms of structure the core of our portfolio or a lot what we did is allocated into two separately managed accounts and strategic relationships and one with [inaudible] provide an update on this later on in the presentation and we surround them at any one point and time twenty 20-25 active relationships and a spectrum of relationships that i described earlier. we note here (inaudible) there's no time table here. we're pleased in these areas with hps and take our time advancing the account

but nothing imminent there. i'm not going to go into detail here or do it at a different time or talk to cambridge about it and this is described and passing from 7.7% to a 10% by committing $850 million annually get to 10% at approximately 2025. over our history we've committed about 5.3 billion dollars to funds managed by 10 managers. importantly that -- those allocations have grown or have earned us -- sorry i lost my point. i'm sorry. the 3.9 billion has been invested and that portfolio generated multiple one, two times for a net value

of the plan of approximately $876 million.ize to pause here and provide some technical commentary before we get to performance. the most conventional way to describe performance to the board or others is to present the compounded rates of return over a period of time one year, three year, five year. we refer to this and commissioner driscoll you mentioned them earlier and time weighted returns. this approach works well for the plan as a wheel and public market managers and give them capital on a particular day and you could measure its growth over a period of time. we do that in private markets as well but the calculation is a little more nuisanced because the manager controls the cash flow. we can make a commitment today and manage all of the capital over a build of time and distributed it over

the same period of time so during the course of any private market life cycle we're calling capital, distributing capital so the performance management or private market is a little more nuisanced so we do a public market equivalent analysis and take the cash flow in the blended benchmark and 50% yield and 50% bank loans and get the performance measurement relative to the public markets. secondly we do an internal rate of return and annualized implied discount rate and put the cash flows back. my purpose is not to confuse you. we can talk about the methods. in fact there are staff members that can do the calculations in their head. i am sure wilshire can understand the nuisances or the

performance measurements. the reason i wanted to bring it up we're doing performance in different ways and you have a perspective of about performance and in private credit in particular we have done extraordinarily well so the first table shows our performance time weighted basis. again against that blended benchmark and [inaudible] [off mic] portfolio and the blended benchmark and substantial performance for all measurement time periods and similarly down below is the comparison of pmes and that public market equivalent. the data looks similar which isn't surprising but relative to that benchmark of ours we consistent out performed by pretty sizable magnitude. in the plan context i know in markets and general in 2020

struggled private credit is a positive contributor to the overall plan's performance. as you can see over the last year and as of 12-31 positive contributor to a performance when the plan was down and notably the return from private credit is commence at with the plans over three, five and 10 years. . >> . >> this is an important slide and becomes increasingly important over time in my opinion and again we have a choice. we can invest in public markets. we made a choice to allocate to the private markets or private credit in lieu of liquid markets. relative to this benchmark sfers has added more than $470 million of value so that's sort of evidence and justification for the decision to invest in private credit perhaps over liquid credit and $470 million difference over a

relatively short time period. next these are irrs. we'll show our performance relative to cambridges' benchmarks and private credit generally but the various substrategies it we described earlier. ask you read these on your own but you can see we consistently out performed relative benchmarks both at at substrategy level and over multiple time periods. a little bit of a busy slide but all substrategies appreciated over the year lead by capital appreciation followed by distress and special situations however you look and over a longer time period we are positive stronger performance -- [inaudible] [off mic] portfolio. what the following slides 18 and 19 i'm not

going to cover but we were compelled to give an update and focus on the numbers and provided this update in july and we would have some estimated returns for the first quarter. in my view one quarter worth's of returns is not relevant for a private market asset class but you can see over longer periods one year, three year, five year et cetera this portfolio continues to do well. so i will pause to see if there's any questions there in terms of objectives, history, performance? if not i will hand it over to eunice to talk about the portfolio. >> [off mic]. >> commissioner your microphone is not on. >> thank you. what credit rating would you basically assess to the holdings across the managers and funds and different companies? . >> it's hard to give a straight -- sorry. it's tough to

give a tough answer for the direct lending portion. that is equivalent maybe -- >> [off mic]. >> yeah, it depends, right. it's really hard and if you consider the distress allocation we can try maybe to work through that -- >> [off mic]. >> the risk -- >> [off mic]. >> right. >> [inaudible]. >> i think it's a fair assumption that we're taking more credit risks. these companies are not rated and they're private but get the protections through the documents; right? so that's the mitigating to that. >> okay. very nuisanced question because the companies in many cases are private and therefore not rated and you could perceive them more risky but the covenants around the documents are much stronger than what you get in the public market and maybe risky

companies but less risky in terms of structure. >> [inaudible]. >> it's the under writing we're paying for. thank you for the answer. >> okay. all right. we will start. okay. thanks and good afternoon commissioners. so i will provide an update on the current portfolio including exposures and recent activity and wrap it up with the initiatives for the year and hand it off to richard from cambridge and begin on slide 21 and you have seen before and the portfolio exposures by substrategy on these bases. on the charts can see the allocations to the three buckets are well diversified and in line with the target allocations which is shown on the portfolio construction side earlier. increase as we stated several times before diversification is your friend especially in the credit program and used as a tool to provide protection to a port port. we do strive to remain discipline and

thoughtful about this including being thoughtful about the portfolio reactions poisures as we deploy capital each year and next slide and the chart illustrates the exposures by the three primary strategies and [inaudible] public exposure basis based on the cambridge associates and benchmark and does include unfunded commitments through may of this year and when you look at the chart on the left you can see from the third column especially our portfolio has [inaudible] to cop tap preservation strategies and under weight to op you itnistic and strategies relative to the cambridge benchmark . this is intentional and the allocation for private sedit was funded by the fixed allocation and try to be mindful of the role in the program and the risk we take and consider the portfolio's performance relative to cambridge and kirt discussed this

previously and our portfolio is taking lower risk again we have more exposure to job opportunities while out performing the cambridge benchmark and the graph on the right illustrates maximization strategies is the biggest driver of performance while capital preservation -- recent performance and capital preservation is the strongest over the 10 year and since its inception period. this showings the portfolio reactions posures and performance from geography. on the left you can see that the portfolio has a over weight to global strategies as well as to asia and dedicated under weight to europe and the cambridge benchmark. we think it's important that we ran the analysis on the basis and our exposure to europe is 16% based on that analysis and a lot of that is coming from the global exposure and in addition from the graph on the right you can see that

global strategies has been the dominant performer across all periods. asia has been recently been an under performer and until recently were the strongest performer and this heights the need for diversification and this shows the credit of the portfolio by over time and a five year look back. the portfolio originally had a [inaudible] and primarily drench to the transfer of the legacy investments from private equity to private credit in 2017 and we built out the allocation. however given the role of the private credit program and our objectives of providing superior risk of returns and relative to fix income as well as diversification to the broader plan we have higher education to direct lending and less to distress and moving on to the next slide on 25 this shows the portfolio construction port industry exposures on

top and private versus public exposures at the portfolio company level on the bottom. the key take away is the portfolio is well diversified as we don't often take sector risks and additive to the broader plan given the private and public equity portfolios do take more risks there. as vected with the private portfolio the exposure is to private companies but speaks to the number of private transactions we're seeing on this side and the other thing to note too obviously is the public company exposure is low but if we see more market volatility and side winding and the distress cycle we could see this pick up through the investment. then moving on to slide 26 and 27 these two slides provide an update on the two separate accounts. as you all know the first one

is with aires on slide 26 which is focused on bond to be direct lending and next slide provides overview of our account and focused on [inaudible] lending and the performance for both is strong and expect the portfolios to benefit in the current rate environment given their focus on floating rate loans. however we do monitor the accounts closely especially as rates rise further. always says also our separate accounts have stringent and investment guideline and the purpose of this is provide additional protection to these investments especially considering their size and role within the program. i think it's worth noting that we do monitor the impacts of the guidelines elative to each manager's expected commingled accounts and the accounts are adverse selection. the answer is no. in fact our accounts have lower leverage

ratios and higher interest rate i don'ts with the commingled fund and protect the portfolios in the current environment. further both accounts have a [inaudible] benefit our investments by lowering the blended fees -- i'm sorry, overall lower fees and worth noting too that the [inaudible] incorporate stricter guidelines and provide down side protection. then to move on to our recent activity on slide 29. okay. so you can see from slide 29 that shows the portfolio's cash flow since inception as our commitments have increased with the program see everseen additional activity and worth noting even though we're cash flow negative it shows how much investments we generate and we believe is valuable today and moving to slide 30. this summarizes our activities over

the last year. of note as was said earlier the allocation to credit increased as shown [inaudible] and end of 2021. 2022 was a busy year for us. portfolio made 12 investments representing $930 million of total investments and including 10 managers and three new managers. we also hired henry toothman as anginvestment officer this year and focused on assisting with the portfolio as well as [inaudible] [off mic] with dig gent [inaudible] investments. further the slide shows the total amounts as the portfolio experienced over $100 million in net appreciation and due to the performance that kirk discussed earlier and moving to slide 31 and the incorporation of [inaudible] into our process. we work

with the team on each and every one of the investments and continue to work with them as necessary on the existing investment. let's go to the initiatives and for 2023. i don't want to to steal richard's presentation and the market dynamics have changed. obviously the biggest change that we have seen is a meaningful increase in interest rates and subsequently resulted in fall of regional banks and the pull back of banks and the capital market so therefore liquidity is timeed in the market. this therefore creates a lot of opportunities for alternative sources of market like private credit and improvement in terms including pricing which i everyone richard will discuss shortly but with that said there's a lot of market uncertainty and as interest rates continue to move higher it's not [inaudible] increase

in defaults. with that said our pipeline budget is set at $850 million and expect to come close in the calendar year. we received approval for seven investments and evaluate new opportunities by the current environment. as noted earlier alignment is very important to us today especially in the current environment and it's something we continue to strive for from prospective managers. in addition we have always been focused on relative value and risk of returns but we do believe this is very much important today and what does this mean? this means with higher interest rates we don't have to extend ourselves as much on the risk spectrum and for the first time in a decade we can afford to derisk where possible and ref duce leverage in the separate accounts, focusing on more opportunities in the structure as well as reducing the amount of the jurisdictional risk

with other factors. with that said we continue to maintain emphasis on portfolio construction and diversification is your friend and remains key during period was of market uncertainty like today and we look to build a portfolio that will have attractive returns over the market cycle and strategies like credit opportunities and distress can benefit during volatile period and continue to be a theme for us over the next year. real estate debt is another opportunity we continue to monitor closely and add capital too and more broadly i expect corporate credit and direct lending is a larger theme over the next year. as you may recall over the past years we were looking to diversify credit and concerns about leverage and weak terms and not feeling that the returns were attractive enough trathat basis and invested in different

opportunities and going to pivot now and look to deploy credit in private credit and the volatility to the market. [inaudible] and furthermore to improve our monitoring efforts and comes again with the hiring of henry and will include the utilization of our new system [inaudible] [off mic] to work with the rest of the team and our consultants on both initiate diligence and ongoing monitoring. with that i will turn it over to richard. >> before we turn it over to talk about the environment any questions regarding the portfolio composition or initiatives? >> i did have one. i noticed on 26-27 just some of the geographic exposure we have largely north america and europe and some others. can you give us thoughts about opportunity or one of the reasons we relegated

to that area and if you have thoughts about opportunity of expanding elsewhere? >> yeah for these are for separate accounts so that is intentional because we do want to limit potential risk so they're going to be focused on more north american opportunities but ear always looking at the relative value between u.s. and europe and given where interest rates are in the u.s. and we along with the two separate account managers are focused on the u.s. or monitoring the rate movement in europe especially if the fed pauses here and continue to rise and we could pivot and add and even outside of these separate accounts as well if that answers -- >> great richard we will turn it over to you and either i can control the slides or welcome to

put yours up. >> great. yeah. i may have you kirk control the slides so well good afternoon commissioners. really just picking up off what kirt and eunice have already presented your private credit portfolio continues to perform very well and we believe is really well positioned for the current environment and is for what maybe headed our way over the next 12-24 months, so hopefully the market slides that i will walk you through will draw well we think it's so well positioned. first off to put more context around the environment the performance data with the exception of the couple of slides that kirt alluded to for q1 are as of december of last year, so a bit of a lag, but what that performance is

captured is one of the steam rising environments over a nine month period so a quick reminder and being specific on the rates that matter really to the private credit market or the corporate floating rate market in general you're focused on for rates specifically one month and three months for rates and those went from in early 22 a zero rate environment to above three half percent by end year and fast forward to the rates are around 5.3% so significant further increase since year end. obviously now there's a broader debate where things are headed from here. we don't tend to forecast rates. we don't publish anything along those lines but looking at market forward curve and the rates are expected to be the current levels in 23 and slightly higher in 24 and take those at face

value the next 18 months from this point going forward are expected to carry a higher cash interest burden for borrowers than the prior 18 months to today and obviously there's been a lot of strain on certain borrowers already to date and i think that's a meaningful point to make and that will create opportunities within performing private credit as well as within opportunistic and private credit and senior secured to corporate lending and the remainder around finance and opportunistic and distressed strategies is well balanced to take advantage of the current market so now turning specifically to slide 547 there's a lot of content here. i won't go through every data point and skip over some sections and perhaps slides just in the interest

of time, but as kirt and eunice have already articulated that base rate increase makes private credit which is really a floating asset class predominantly or any floating rate asset class more attractive relative to others, and so that has made this asset class increasingly attractive in today's environment, but what we tend to focus on is really what implications does that rate increase have? and so really on this slide one of the big ones or one of the big themes is leverage. if you're structuring a deal today you're doing that with lower leverage or lower debt because you know what your cash interest burden is for internal leverage so what we're seeing is the amount of leverage as a ratio [inaudible] has come down so your yield return for

leverage has gone up for new deals and deals structured in a different environment and different dynamics for the two and we'll unpack that a little bit and the one that is more meaningful and the trend that we see and because it's more sustainable in the portfolio is improved pricing and terms. you know as was alluded to private credit has been an attractive space partly because not just pricing but the terms have been that much better than the public market and what we saw through the course of really the back half of 22 and into 23 is increased spread for internal leverage and a metric that we focus on and improved terms and when we're talking about terms we're talking about loan documentation. you know loan documents are not uniform agreements. there's a lot of variance from one contract to another based on the borrower and what we have been seeing is that those

loan documents have tighten up more to the lender's or investor's benefit over the last 12 months so that's a notable point for considering where we're at within this asset class and default rates. i will touch on this further. these rates as you recall a lagging indicator so default rates are still below historical averages. yielded loan and default rates etched 2.8% based on jp morgan and the long-term is 3.2% and saw an increase in q 2. so we're seeing spikes there and again we will touch on that further of the i think on slide 48 the only common i make on this slide is within the opportunistic and distressed opportunities obviously we're highly

conscious of increasing defaults how they affect your performing credit portfolio, but we also look at the opportunity set that creates, and again the market segment that we think strongly loses out here isn't the private credit market but the public credit market and the leverage credit market. we don't believe you need to have a recession to increase defaults and two even if you don't have significant increases in defaults we think there are plenty of opportunities where private credit managers that are within your portfolio today will work alongside borrowers to structure very attractive risk award investments that frankly will be at the cost of some of the public lenders that are already in those capital structures. if we go forward to slide 49 we have a few slides here just to speak to the private credit market, so this slide

is looking at global high yield, global bank loans or leveraged loans and global direct lending and what really jumps off the page in green is the increase in direct lending and remember it's one subset of private credit but it's the fastest growing and the largest segment. we choose 2010 purposely and right on the heels of the financial crisis and it was an accelerant within increased bank regulations for the capital formation away from the banking sector so you see that 2%, the 13% and private credit's role has grown significantly on i global basis. the other thing though i would focus you on this slide is the size of the pies or circles. 2010 you add the three components up and 1.9 trillion dollar market and 2022 and [inaudible] trillion market and

leverage and high yield agree significantly and the lie gray being bank or leverage loans and dark gray is leverage and opportunity for private side or opportunistic or diss stressed and some of the capital structures are going through a transition. if we go to the next slide those were global pies. really though it's been driven especially on the direct lending side in north america and europe. i think there's a perception that direct lending is even more so a u.s. phenomenon and i think that chart on the right shows that europe has grown really in lock step with the u.s. and this is relative to liquid markets. you can see europe is

actually private credit is taking a bigger share. with that said europe is a more heavily banked market so that's worth considering in those charts but you can see that the growth is really across geography and then if we go forward to the next slide i won't comment too much here but this is really i think again to some of the kirt's commentary this created and been the pitch for direct lending for the past decade and that is bank consolidation in the u.s. and with that banks have grown. the borrower size is looking to grown and that is vacated portions of the market in the u.s. and pushed some of the capital formation out of the banking sector. we see no reason why that trend doesn't continue and in fact what we saw in q1 into q 2. with the regional bank crisis and a further accelerant to this trend and to that point on

the next slide this is fi dc data from year and to the right is 2022. what this is showing and across all us banks and not just regional banks and show the market to market losses. now the dark gray is available for securities (losses that a bank would occur if they were a foreceller and hence why the federal government put in place after the three bank failures mechanics to hopefully prevent further bank runs to the extent depositors leave the system but it stands out as to you

know the embedded losses that sit on bank balance sheets and even if those losses are never crystallized and held to maturity it affects what banks are going to do and in terms what business lines lean into it and put that together we think there's a lot of wind for private credit to continue to grow and the next slide speaks to that a little bit further. this shows you on the left private equity shows the this within private equity. these companies are the largest users of performing private credit, and we think that there will continue to be a lot of demand that will meet the supply that's coming into the market given how much this asset class is growing. the next few slides really speak to a little bit more on the liquid markets and the secondary market and

default rates. i will try to blow through this fairly quickly. top right we're looking at the leverage or bank loan market. you can see spreads spiked higher in 2022 and flat lined for a while, lower left we're looking at pricing. the blue line on the lower left is yield and fix rate market so you can see that pricing was hurt more than the floating rate orange lines and leveraged loans and just in terms of in term volumes but what is down is a portion of financing them future is the debt capital markets. they picked up recently but private cred sit taking share. next slide. this really talks to direct lending and i will spend a few seconds on this and the headlines are yields are up and [inaudible] are down and [inaudible] covenants are improved

and originated today so a lot to like in the next slide if we go there. similar messaging. i think this shows you know i think pretty succinctly and this is you know really meant to be illustrative and talking to another managers that we work with and in your portfolio. you can see going from january 22 to march 23 first of all that blue segment in the bars is the base rate and the so fr. through march it was four half percent and now 5.treatment the gray is the spread. you can see the increase there from left to right. again that's the stickier component of the return. that may have compressed slightly since q1 but it's wider than historical averages and what you're seeing is the yields for 10-12 plus and the loan value of the product with

typically very strong equity owners so there's a lot to like and then i will go through the next few slides fairly quickly now. this is historical default rates. as i said previously they spiked in q 2. and still below historical average and expect them to continue to climb but you're no where near some of the other sort of default rate spikes. you know again we're not going to forecast where we think they will go. i can tell you that s&p or jp morgan had a 4% rate default target nudes was 5-6% and take that and multiply by the size of the marts that would be a sizable default volume and have a good segment of the portfolio is set up to take advantage of some of

the opportunities and then if you move forward i think i won't comment too much on this around the leverage market and credsit quality decreased over time so we think that is the market that feels the most pain and 59 and 60 just show you we have been talking about default rates again a lagging indicator. the chart on the left and on 59 and also 60 is what is being your distressed ratio so a portion of the market trading beyond a certain -- in high yield example thousand basis stead and diss stress level and 10% of the market and flat line. that could certainly go up and what you take away from this is it's really spread across sectors and speaks to why i think it's interesting to work with managers in different regions in the u.s. it's primarily health care, media and services. if you go to 60 you will see a lot of real

estate, retail, capital goods and 61 just wrapping up. we think the portfolio is well positioned and balanced to take advantage of the capital formation and the deals that are being originated today on the performing credit side and take advantage of the secondary opportunity and the more opportunistic and distress side of things. we expect that the default rates to go up and creditors within this portfolio will not be immune however i will tell you the reason that private credit we think is more attractive than public markets if you can afford the liquidity is they're better structured deals and you have seen that historically. default rates are better within private credit but

even not you care about recovery rates and they're better and as default runs through the portfolio on a portfolio basis the incremental yield you're earning today will more than offset we think the losses that may come through your portfolio if we do enter into a much higher default environment, and i will pause my comments there. >> thank you richard. questions or comments? >> thanks richard. great presentation. any questions, comments? . >> i have basically two sets of questions. first of all i want to recicize 13. i want to reconcile to page 36 but make sure i understand the period covered on page

13 represent 12-31-22? [inaudible] would that performance number for the close of december 31, 2022? >> that's right, yeah. >> okay. i'm curious on 36 when you see the break down by substrategies first of all is each manager put in one -- substrategy or do you break down their holdings what you consider the correct substrategy. >> that's the manager level. >> each manager? that makes sense. obviously certain substrategies are better than others versus the excess performance that you have achieved and the benchmark and obviously very high. i just wonder always asking to do more but the weighting in the substrategies and i'm not to the issue of the sectors yet, but are the guidelines we have on here prevented you

from doing what you might would have considered superior substrategies? >> no. when you say "superior" more higher returns? >> basically. >> no. >> it might sound i am chasing return and [inaudible] and you're the one that analyzes that. >> i don't think the guidelines prevent us from doing that, right, but with that said we're not going to extend ourselves on the spectrum. for example mez is a component of the portfolio but represent 50%? i don't think so. that's not in our opinion what we think would be beneficial for the program just given our return target, right, and the role of the program and also considering the allocation [inaudible]. >> i know exactly where it will line up. okay. two, i am

curious and i know we're across many sectors of industry. i saw the way it was listed in one area where is the aviation [inaudible]. >> it's in special finance or the substrategy area. the aviation -- let me pull it up. i have to confirm that exactly with you commissioner driscoll. my guess though -- >> [inaudible]. >> it might be in the other -- >> [off mic]. >> i know you have a clever ones that you found but obviously aviation and transportation is what i am focusing on. you have it other under. >> let me come back to confirm. >> thank you for the explanation and one more to question after the quarterly review and richard from cambridge was speaking? >> yes. >> and to under score the point he

made and dc a copy of representatives try to raise the requirement two points and is huge and the work for you isn't going to get smaller eunice? >> yeah. >> the opportunity is still there. >> that's great. >> still there. >> any questions? >> yes. thanks. this is a great presentation. i know it's a lot to go through and we're in the after lunch phase and i appreciate you taking us through the steps on this. as i was listening and earlier reviewing the materials it just going back to as long as i have been looking at private credit for sfers and great performance and continues to do great and now i guess we're almost to the point we're relying on it to great for the total portfolio and i guess the part

of my brain i am looking at well is this sustainable? what happens when it isn't? and everything i heard today says there's more opportunity and when i was looking and okay what if things go bad and even at the end of the presentation we had and the end of page 61 public policy has secreted an environment where we think some of the down side risks of things not go so well the federal government or can step in and continue to bolster this sort of area. i guess i am looking for areas where this could go wrong because it's gone great so far and now we're getting to a point we need it to continue to go great for liquidity and for returns for the portfolio, so i guess i am trying to figure out what keeps you up at night? where is the

worry? >> i will start and richard if you want to add to that. i think for some of the conversations that we've had internally with alison and the amount of capital going into the space. we get a lot of calls from other investors that are looking to build allocations so there's a lot more demand but with that said as richard touched on i think there's especially with the pull back or the fall of the regional banks and [inaudible] coming out too there is still going to be plenty of opportunities but what i think is really important though is the manager selection and really especially on the direct lending side which is always going to represent a significant portion of the program making sure that we're with managers and they're acutely focused on protection and that is something we spend a lot of our time on with our managers in terms of the

monitoring, right, and i think when we're building out the program i think it's worth noting we had a lot of concerns about direct lending and the capital as well as the pricing and the weak terms we were seeing that wasn't attract and i have why we put the strict guidelines into the straight accounts and meant to protect the portfolio during periods like this and preserving and managing the risk as much as we could on the district lending side and looking to get out size returns through the fund investments, right, and then i think it is other thing i would add it's really important to build a portfolio that works in different environments; right? and that's something we're hyper focused on and spent time with alison on and as i said in the past years we were diversifying away from private credit and doing labor strategies and labor intense and i have add to the portfolio but we're at the point

and go back to corporate credit and i know i'm going to a tangent here and richard did you want to add anything? >> yes, i would say it's universe is subgreat credit and why it was chosen so if you go through a dramatic recession or downturn like the financial crisis there are parts of this portfolio that would ultimately get stressed. having said that one of the great benefits of private credit is there is no asset liability mismatch. if nothing else what the covid dislotion showed is that these managers some of whom do apply leverage to the portfolio do it in a

prudent way. it's not mark to market. it's held in maturity longer perspective term and in a higher stressed environment you're structured to see through to the other side and a lot of focus too that eunice didn't mention but we talk about all the time when choosing the managers ensuring that we have managers who have historically and are well prepared to deal with defaults, and to be able to step in and have good restructuring acumen and teams in place, so i think eyes wide open. it's an a set class that we think will in that environment look favorable to other asset classes but doesn't mean if you have a very dramatic downturn it's not stressed, but you know as long as you're with the right managers as long as you have a portfolio that

is well diversified that can play offense when others are playing defense ie with the other opportunistic and distressed managers to take advantage of the locations we think it's a ballast and serve as a ballast to your port port. >> . >> i have a couple more comments that are existential. when i joined sfers this program was beginning and the 10-12 recommendations to build a high quality portfolio with the resources that we had which was eunice. we couldn't sustain that pace with the resources we've had so i am releaved and grateful for the board and your support that we were able to broaden that team. a big concern and discussion we had can we sustain the pace to build the portfolio. we have

addressed that the other is the returns -- (paused (. >> we're a little bit to the best managers have capacity and can we continue to build along with them. fortunately we are early. we have great relationships early on so i think we have endured yourself and established yourself. capacity is going to be a problem. the other thing i worry about and the interest rates rise and the cost of debt for a corporation is increasing at a time when the labor is increasing and there's going to be defaults and problems here. it's great to earn a floating coupon but at some point some companies will balk

and restructuring and defaults. my worry is there will be managers that don't perform well and if there are issues with that these things will the regulators resist keeping their hands off and nothing we can prevent but we have to think about and as eunice said several times and diversification is critical and we have a variety of strategies and ideal for the plan and a lot of resources and money and do the regulators do something stupid years down the road? >> thank you. manager selection. >> that raises the question is there a secondary market for private credit interest? then you should think about as one. she knows the market. two if the mayor needs work you can put them to work here

>> learning curve is steep. >> [off mic]. >> thank you. >> all right. any other questions? none? great presentation. thank you. this is a discussion item. we will have public comment please. >> we have no in person public comment on this item. a reminder to any caller to please pressing star three to be added to the queue. moderator are there any caller on the line? >> madam secretary there are no callers in the queue. >> thank you. hearing no calls public comment is now closed. . >> okay. we will move on to the next item please madam secretary. >> item number 14 chief investment officer's report. >> again we're nearing the home

stretch here so i will hit the highlights here. as you've noticed and back by popular demands we added in several slides to provide a visual update of performance but also provide some sentences and more paragraph form with what is going on in at least the will be capital market so we will continue to provide these. i will preview that perhaps the quarters auto meetings were covering quarterly performance and go through this briefly since we don't need to duplicate efforts there. the key take aways we've had strong year to date performance particularly from equity rebound from the prior fiscal year but what we're also seeing a bit and if you want to look at this slide the first slide in my presentation you're seeing a lag in private equity . this is sort of what we saw coming into this year when we saw equity markets coming

down and private equity still pretty high. this is level setting that but all and all what we're seeing for the estimated return these are [inaudible] numbers return of 3.9%. i think it's helpful to look at the three year performance given that very rapid and significant market move covered in the fiscal year and this tells the story we like and want to see and the performance is 10.5% over the three years as many estimated and beats the 60-40 portfolio -- 60-30-10 portfolio abduces well and beats the long actuarial rate of return. unless you want me to i wasn't go to go through all the slides on the commentary and benefited from the equity market and

navigating through the yield curve. as i do every month i will now go through the yields that the board has approved and we have closed and funded. so at the board meeting on march 16, 2023 the retirement board approved in closed session investment up to $75 million to serve as [inaudible] opportunity fund five, sfers investment of -- [inaudible] loan opportunities by close on june 22, 2023 and classified as a direct lending investment within the private credit portfolio. next cassel like aviation stable five at the board meeting june 16, 2023 the board approved in closed session investments up to

$75 million in the stable yield. the investment $75 million and the fund closed on june 28. this is classified as a global specialty finance investment within our private credit portfolio. third cap ron partners and partners at the board meeting the board approved in closed session investment up to $60 million to this group and first committed $55 million to the fund and closed on june 30, 2023. that is classified as a real estate investment within the real assets portfolio. finally tourist feeder two and [inaudible] lp fund at the june 15, 2023 board meeting the board approved in closed session investment up to $100 million in feeder and [inaudible] through the lute

return investors two fund. our investment of $50 million in tourist feeder two and $25 million in feeder two closed on july 1. these are macro investments within the asset return portfolio. i am happy to address in any dethe slides here or other topics. those read highlights. >> i have one observation. much like i think with the pages where you spot the total pension liability number at one point and time on the one chart this one versus the total assets that one. next to that going back to your performance chart where you have the three year performance number the number that might be useful on the chart and not on the one year one and add a five -- you assume greater return average that ties. again that

is not a boggy but that's the number we have to watch and how are we with the assumed rate? that is the evidence -- [inaudible] [off mic]. >> any other discussion? . >> any other questions? >> no questions? is there any public comment? >> we have no one in person public comment on this item. moderator do we have any callers on the line? >> madam secretary there are no callers in the queue. >> thank you. hearing no calls public comment is now closed.. >> okay. let's call the next item, last but not least. >> item number 15 discussion item. san francisco deferred compensation monthly report. >> thank you. can you hear me okay? good afternoon commissioners. before we start i wanted to thank for providing the manager report in

june. my eight year old was representing the city and county of san francisco's best baseball youth for the alstars and in the pony tournaments. they didn't make it. >> [inaudible]. >> they didn't make it to the international world series but as proud parents are relieved to no longer sit in double headers of 110-degrees so that's why we were gone but happy to be back. i wanted to provide a quick update to the report that you received last month. as you know plan and staff have been incredibly busy this year particularly with the transition of our targeted manager. i am delighted to share we have completed our negotiations with trp with a signed contract. thank you to city attorney for her assistance in that and our july 1 transition went successfully. staff and [inaudible] worked over the weekend to ensure a

smooth experience. participants who merged into the fund according to the age 65 retirement chart were given two notices one informing them of the trade and the other of the future contributions. we had 1119 participants opted out of the mapping in which >> . >> 119 participates and the rest were safety personnel and selected an earlier retirement age and the message resonated with the target audience as we had counselors reaching out to police, fire and sheriff and on site visits to assist. we haven't received any complaints of the transition and thank them for the participant's experience of the targeted manager transition was featured in the q 2. newsletter and then attached to your materials at the very end of your board packet. this newsletter might be our highest open

rate to date with a 69% over rate. slightly besting last quarter's rate of 66 that. is unforward of. i don't think i ever seen a 70% email open rate. the manager that trends the average open rate is about 22% across all industries and highest for 23% for financial services and 29 for education. the take away our participants are actively listening and we strive to provide inform that is timely and helpful with the retirement planning. we've been tracking the pdf website by [inaudible] price. had 718 unique user had accessed the site spending two and a half minutes each time. about 20% return to the site to learn more on the explore tab which details the changes and in august next month we will provide you with the full review of the target

day campaign as part of the plan review. shifting to the investment side for target day funds all new underlying funds were added at close of business at their full allocation within the subclasses. all spring short duration bond and [inaudible] inflation protected bonds were fully liquidity at their close. the vintage funds were completely redeem at a high yield in emerging markets when they get their final equity allocation towards the end of september. with the other targets reaching their allocations by end of august. if there's no questions on this i can move to stable value. i am happy to inform you that the crediting rate jumped up 22 bits to 2.9 zero percent. this rate is guaranteed for the

quarter and reset in q4. it holds $1 billion in assets and yields are flat this quart irmoving from 5.17% to 5.07 as the fed moved 25 bits. the market ratio for the portfolio was up slightly 93 -- from 93 to 93.9 and we continue to see strong market value performance at the underlying fixed income portfolio. both the high underlying yield and the increase to mtb contributed to the increase in the crediting rate. we also have our investment consultant here. he's more than welcome to answer any questions you have around stable value but if not commissioners this summarizes my report. we've also attached the activity report in the event there are any questions on the other investments for me or

mr. ungerman demographics or money or loans. >> commissioners any questions? . >> not a question. i just want to affirm an understanding i v i don't know when the next deferred compensation meeting is and whether it's scheduled or not? >> i was waiting for the board to approve the committee assignments and that was today and from there i plan to reach out to the chair to checked calendar to get a couple of dates. >> okay good because the item i am trying to focus on which will hopefully done before next committee meeting is the review of the large cap equity managers because we're using them both in the core and the funds big numbers. >> yeah. >> we're certainly going to be reviewing the large cap and valley but to clarify for the target date funds his just use the s&p 500 index so not active management.

>> so the [inaudible] two parts in there. if we don't i must have misread the allocation. it's still a big number. >> correct. but it's only the s&p only. >> great. thank you. >> yeah so we're looking autoing. thank you and we be sure to reach out to committee members. >> okay. everybody is good? okay. i don't think this is an action item, so let's do public comment. >> thank you. >> will you accept the report? >> accept the report. >> we have no in person public comment on them ymoderator are there any callers on the line? >> madam secretary there are no callers in the queue. >> thank you. hearing no calls public comment is now closed.

>> okay. let's go to the next item. >> item number 16 discussion item retired board member good of the order. >> anybody have anything? nope? okay. . >> we have 17 adjournment. >> public comment on the good of the order please. >> we have no in person public comment. on this item. moderator are there any callers on the line? >> madam secretary there are no caller in the queue. >> thank you. hearing no calls public comment is now closed. . >> okay. motion to adjourn. we don't need a motion to adjourn. just we're adjourned. not a

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