Minutes of SamCERA’s Investment Committee

1.0

Call to Order: Ms. Colson called the Public Session of the Investment Committee of the Board of Retirement to order at 10:32 A.M., November 27, 2001, in SamCERA's Board Room, Suite 280, 702 Marshall Street, Redwood City, California.

2.0

Roll Call: Mr. Buffington, Mr. Bryan, Mr. Cottle and Ms. Colson. Board Members in Attendance: Mr. Lewis (10:46), Mr. McMahon, Ms. Stuart and Ms. Salas. Alternate Board Member: Ms. Arnott Staff: Mr. Clifton and Mr. McCausland. Consultant: Mr. Meier , Mr. Thomas and Ms. Ward Custodian: Mr. Gleason (11:02) Public: None Retirees: One

3.0

Action: Motion by Cottle second by Bryan to approve the Minutes.

4.0

Oral Communications From the Committee

5.0

Oral Communications From the Public

6.1

Acceptance of Monthly Portfolio Performance Report SamCERA's Total Plan Return for the trailing twelve months is -9.27% and for the Fiscal Year To Date -5.75%. In both periods the Total Plan Returns outperform Total Plan Policy Benchmark by +2.44% and +1.24% respectively.

(1) The aggregate is a current return. A variance against the one-quarter lag in the NCREIF in misleading.

Ms. Colson noted that the variance between Deutsche Asset Management and the Custodian was four basis points (4 bps) for the one month and ~10 bps for the other periods reported. Those results are a great improvement over the approximately 20 to 40 bp variance of prior months. Mr. Clifton concurred, but wants to see a trend established before acknowledging the Investment Manager's improved reporting. It appears the manager was calculating performance without considering the monthly accounting reconciliation. The variance has been reduced when the performance calculation occurs after considering the reconciled records.

6.2

Acceptance of Strategic Investment Solutions' Performance Analysis for periods ending September 30, 2001.

John Meier, Patrick Thomas and Anne Ward presented SIS's 9/30/2001 Performance Report.

• The Composite fund returned -7.9% in the third quarter of 2001 and ranked 69th among other public funds (median -7.0%). The fund beat its policy index (-9.2%) during the period. longer term, the three and five-year returns of 4.1% (73rd percentile) and 6.9% (78th percentile), respectively, were below median among total public funds (5.1%
• 69th among other public funds (median -7.0%). The fund beat its policy index (-9.2%) during the period. longer term, the three and five-year returns of 4.1% (73rd percentile) and 6.9% (78th percentile), respectively, were below median among total public funds (5.1% and 8.4%).
• Third quarter results were enhanced by the following factors:
  1) Bank of Ireland's quarterly return outpaced the MSCI All Country World exUS Index (-13.2% vs. -14.8%) and the international equity managers' median of -14.2%.
  2) BGI US Debt Index Fund (4.7%) beat its index, the Lehman Aggregate (4.6%) and the median core bond manager (4.6%).
  3) Deutsche Asset (5.4%) outpaced its benchmark and ranked in the top quartile among core bond managers (median 4.6%). The Lehman Aggregate Index returned 4.6%.
  4) INVESCO Realty returned 1.5% for the quarter, trailing the NCREIF Index (2.3%) but still ranking in the second quartile among real estate investments.
• ·Third quarter results were hindered by the following factors:
  1) BGI Russell 1000 Index Fund ranked in the third quartile among large cap managers (median-14.7%), and matched its benchmark. The Russell 1000 Index had a return of -15.2%. passive large cap managers had difficulty beating actively managed portfolios.
  2) BGI Russell 2000 Index Fund outperformed its benchmark, the Russell 2000 Index (-20.7% vs. -20.8%), but ranked in the 60th percentile among small cap equity managers. The median small cap managers outperformed the Russell 2000 by 350 basis points.
  

The above information is illustrated on page 10 where a performance attribution chart is available.

Mr. Thomas presented the manager allocation analysis and total fund composite, which was compared to the historical quarterly asset allocation. On a total public funds three-year risk/reward chart SamCERA shows less return (4.1%) and slightly higher risk (11.1%) than the median fund (5.1% and 10.9%). The five-year total public funds risk/reward chart again shows SamCERA with less return (6.9%) and an even greater standard deviation (11.6%) than the median fund (8.4% and 10.8%)

Mr. Cottle referred SIS to the Manager performance Comparison on page 45 and asked if SIS's calculation was independent of the Custodian. Ms. Ward responded that it was and that there could be a variance, but when one occurs they consult with State Street. This consultation generally results in clearance of the difference and an agreed upon return.

• The Committee was appreciative of the thoroughness of the first performance report.

Action: Without objection the Committee will recommend that the Board accept Strategic Investment Solutions' Quarterly Performance Report for the period ending September 30, 2001.

6.3

Annual Investment Manager Review - Bank of Ireland Asset Management. The Investment Manager Annual Review is held during the Investment Management Services section of the November 27, 2001 Board Meeting.

• The MSCI ACWI exUS Free replaces the MSCI ACWI exUS as of October 31, 2001. Ms. Colson wished to reaffirm that the Committee would recommend amending the Investment Plan benchmark to reflect this change.

Action: Motion by Bryan, second by Cottle to recommend to the Board of Retirement that the Investment Plan be amended to employ the MSCI ACWI exUS Free as the benchmark for the International Equity Portfolio as of October 31, 2001.

6.4

Approval of Schedule for Asset / Liability Modeling Study. Item 6.4 was combined with Item 6.5 for purposes of discussion.

Action: Refer to Item 6.5

6.5

Approval of Asset/Liability Modeling Study Phase One: Determination of Suitable Asset Classes, Constraints and Weighting Scheme for Integration of Sub-Classes. Mr. John Meier presented the basic framework of an Asset liability Study. He walked the Board through the expected timeframe and the Capital Market Assumptions. The assumptions are in the table below:

Below is a projection of SamCERA's Risk and Return based on the current asset allocation compared to the projection as published in SamCERA's Investment Plan. The projection based on SIS's Capital Market Assumptions shows the portfolio should have a lower return at a higher standard deviation.

Mr. Meier noted that with the above projection it is important that you view it relative to inflation. SIS's inflation assumption is 2.5% yielding a 6% premium over inflation. The Committee expressed surprise that the expected return had decreased by slightly over 1% in the one year since last reviewing the SamCERA's Investment Plan. In conclusion, Mr. Meier stated that an asset liability study is typically undertaken when there have been fairly dramatic events in the capital market. He believes those events have occurred. SIS's expectations have changed enough that those changes in themselves could trigger a check-up of assets and liabilities.

• Ms. Colson reminded that the Board that the expectations adopted for the Investment Plan were developed with the assistance of an Investment Manager, BGI, not an independent third party consultant. SamCERA's last asset liability study was 1998. As a fiduciary, she believes it makes sense, even if it only confirms the existing goals, to have an independent verification of SamCERA's targets and expectations.
• Mr. Cottle stated that the Board sought BGI's assistance because it did not have an Investment Consultant under contract and the Board was using the available resources. He is also in favor of proceeding with a study, which will help SamCERA bracket its exposure. This study will show best and worst case scenarios and help the Board determine where it should be positioned relative to those events.
• Mr. Bryan concurred that the simulation is a valuable tool, but he is concerned about the timing. He sees SamCERA's liabilities shrouded in a great deal of uncertainty for at least the first half of 2002.
• Mr. Buffington echoed Mr. Bryan's concerns. Employee contract negotiations and ramifications from the Ventura decision will impact the liabilities. Even the triennial study could show liabilities in a different light. He thinks the study should begin in September or October of 2002.
• Ms. Colson reiterated, as a fiduciary, it is not prudent to delay this study, which is the foundation of so many of the Board's decisions. She is uncomfortable when the Board does not have a current view of the its exposure to the market. Through Mr. Thomas she confirmed there would be no additional cost to the Plan if the Committee chose to have multiple studies. She proposed a study now and one again in a year when the most of the "uncertainties surrounding the liabilities had been resolved.
• Mr. Thomas stated that given liabilities are uncertain it would be possible for SIS to complete a study, which looks only at the assets. That study takes the current level of risk looks at the assets and allows one to develop a view on the efficiency of that mix.
• There were mixed opinions regarding the suggested compromise. Therefore, the Committee opined to continue the discussion at the Board level. The Committee would not offer a recommendation to the Board.

Action: The Committee was split on recommending an Asset Allocation Study. There will be no recommendation for the Board.

7.0

Other Business:

8.0

Adjournment: There being no further business Mr. Colson adjourned the Committee at 12:00 p.m.