ABOUT LACERA

BOARD OF INVESTMENTS MINUTES 7-8-09

PRESENT

• William R. Pryor, Chair
• Herman Santos, Vice Chair
• Diane Sandoval, Secretary
• Simon Russin
• Mark J. Saladino
• Michael Schneider
• Leonard Unger

ABSENT

• John M. Barger

• Paul C. Hudson

STAFF, ADVISORS, PARTICIPANTS

• Gregg Rademacher, Chief Executive Officer
• Robert Hill, Assistant Executive Officer
• Janice Golden, Assistant Executive Officer
• Lisa Mazzocco, Chief Investment Officer
• John McClelland, CRE, Principal Investment Officer, Real Estate
• Vache Mahseredjian, CFA, Principal Investment Officer
• Christopher J. Wagner, Senior Investment Officer, Private Equity
• June Kim, Senior Investment Officer, Equities
• Trina Sanders, Investment Officer, Real Estate
• Robert Z. Santos, Investment Officer, Fixed Income
• Gerald Flintoft, Investment Officer, Private Equity
• Stuart Mesnik, Senior Investment Analyst
• Shelly P. Tilaye, Senior Investment Analyst, Private Equity
• Shannon O’Connell, Senior Investment Analyst
• Dale Johnson, Senior Investment Analyst, Equities
• Earl W. Buehner, Senior Staff Counsel
• Johanna M. Fontenot, Senior Staff Counsel
• Michael D. Herrera, Senior Staff Counsel
• Cynthia Lau, Legislative Affairs Officer

1. APPROVAL OF THE MINUTES OF THE SPECIAL MEETING OF THE BOARD OF INVESTMENTS OF MAY 27, 2009.

   A motion was made by Ms. Sandoval, seconded by Mr. Santos to approve the minutes of the special meeting of the Board of Investments of May 27, 2009.

   The motion carried by unanimous vote.

2. PUBLIC COMMENT

   None.

3. REPORT ON CLOSED SESSION ITEMS

   None.

4. ACTION ITEMS
   1. Recommendation as submitted by Gregg Rademacher, Chief Executive Officer: Approve attendance of Board members, and staff as designated by the Chief Executive Officer, at the Corporate Library’s 2009 Public Funds Forum from September 8 –10, 2009, at the Hotel Del Coronado, in San Diego, California, and approve reimbursement of all travel costs incurred in accordance with LACERA’s Education and Travel Policy. Placed on the Agenda at the request Mr. Santos. (Memo dated June 2, 2009.)

      Mr. Santos moved approval of the recommendation, but with a requirement that attendees stay at a hotel offering a government rate. Ms. Sandoval seconded the motion.

      The motion as amended carried by unanimous vote.

   2. Recommendation as submitted by Gregg Rademacher, Chief Executive Officer: Approve attendance of Board members and staff as designated by the Chief Executive Officer, at the Forum for Institutional Investor 2009 at the New York Palace Hotel in New York City on October 23 and 24, 2009, and approve reimbursement of all travel costs incurred in accordance with LACERA’s Education and Travel Policy. Placed on the Agenda at the request of Mr. Schneider (Memo dated June 3, 2009.)

      A motion to approve the recommendation was made by Mr. Saladino, seconded by Mr. Santos.

      The motion carried by unanimous vote.

   3. Recommendation as submitted by June Kim, Senior Investment Officer, Equities and Esmeralda V. del Bosque, Senior Investment Analyst, Equities: (1) Adjust the allocation range for U.S. equity emerging manager mandates from 2 – 4% to 0 – 5%; and (2) Authorize Staff to approve variances from LACERA’s sub-manager selection criteria on a case-by-case basis. (Memo dated June 29, 2009.)

      Ms. Kim and Ms. del Bosque reported on staff’s review on LACERA’s U.S. Equity Emerging Manager Program (EMP). Currently the Program consists of two fund-of-fund advisors, Northern Trust Global Advisors (NTGA) and FIS Group (FIS). As of May 31st the combined value of the two portfolios was approximately $273 million. This constitutes 3.1% of LACERA’s overall U.S. Equity composite, which is within the current policy range of 2 – 4 %. An important part of this review was to evaluate the Program’s success. Staff applies three measures for evaluating success. The first and most critical is investment performance. The second is manager graduation from the Program when their assets exceed $3 billion; and the third (related to graduation) is whether managers in the program are subsequently selected for a larger, separate mandate in LACERA’s U.S. equity composite.

      To date the Program has been successful on all measures. On the performance front, both Northern and FIS since inception have outperformed their Russell 3000 benchmark. As a result, staff has proposed recommendations which should improve the implementation of the Program. The first recommendation is to widen the policy range to 0 – 5%. Moving the bottom to zero is not meant to imply that there would be a decrease to the allocation, it merely reinforces the philosophy that LACERA is not forced to allocate a minimum amount to these strategies if high quality managers are not available. Moving the top to 5% would allow more room going forward, particularly once the new global equity structure is implemented. It also leaves room to potentially add to the existing mandates or add new emerging manager strategies, should opportunities arise.

      The second recommendation authorizes staff to approve variances from the sub-manager selection criteria on a case-by-case basis. It is strictly an implementation issue and would improve the program, which should ultimately make it more effective and more successful. Staff is pleased with the performance and fundamental characteristics of the EMP. NTGA’s and FIS’ strategies are complementary in terms of risk, style, and investment approach. A brief discussion followed.

      A motion to approve the recommendation was made by Mr. Santos, seconded by Mr. Russin.

      The motion carried by unanimous vote.

   4. Recommendation as submitted by Cynthia Lau, Legislative Affairs Officer: That your Board continue its “Support” position on AB 1584. (Memo dated June 24, 2009.)

      Ms. Lau reported that AB 1584 was brought back before the Board with a continued Support recommendation, as a result of a June 18, 2009, amendment to the Bill. This is urgency legislation that is sponsored by both the California State Treasurer, Bill Lockyer, and the California State Controller, John Chiang.

      AB 1584 is aimed at increasing disclosure and accountability of investment placement managers or agents, including Board members and others associated with public pension funds in California.

      This Bill came about as a result of the recent scandal involving placement agents in the New York Pension Fund.

      One of the provisions of the Bill provides that the public pension fund would develop and implement a placement agent disclosure policy on or before June 30, 2010. The first amendment to the Bill would prohibit an external investment manager or placement agent that violates the Board’s disclosure policy from soliciting new investments from the system for five years from the time of violation, rather than for two years as in the prior version of the Bill. Additionally, the amendment would allow your Board or Boards to reduce this penalty by a majority vote in open session upon the showing of good cause. The second amendment has to do with requiring the disclosure of campaign contributions. In addition to disclosures already provided for in the Bill, the amendment would require placement agents to disclose all gifts made to Board members during the 24 months prior to acting as a placement agent in connection with a potential investment by the Board. Your Board adopted a “Support” position on this Bill at your June 10, 2009, meeting.

      Currently registered as supporting the Bill are co-sponsors John Chiang, Bill Lockyer, the American Federation of State, County and Municipal Employees, CalPERS, the California School Employees Association, LACERA and SEIU. There is no opposition on the Bill to date.

      Ms. Lau also reported that at the Investment Board meeting of June 10, 2009, the Board asked staff to present to the author an amendment requiring disclosure of relationships between external managers and placement agents prior to soliciting new investments for the System. Matt Back from Ackler & Associates reported that he did bring this to the Committee and the sponsors of the Bill, while supportive of the concept felt the proposed language could possibly result in the unintended consequences of narrowing the Bill’s scope. Staff indicated that Section 4 of the Bill does allow the Board to self-impose additional requirements to their disclosure policy beyond those proposed by AB 1584, so long as the additional requirements do not conflict with the law. A brief discussion followed on gift policy concerns.

      A motion to approve the recommendation was made by Mr. Russin, seconded by Ms. Sandoval.

      The motion carried by unanimous vote.

5. REPORTS
   1. Manager Reviews – Fixed Income Robert Z. Santos, Investment Officer, Shannon O’Connell, Senior Investment Analyst, Fixed Income (Memo dated June 26, 2009.)

      Robert Santos gave a brief overview on the portfolio’s performance on the following managers: Goldman Sachs Asset Management (Goldman), Loomis, Sayles & Company (Loomis), and Principal Global Investors (Principal) and reported that pursuant to LACERA’S Manager Monitoring and Review Policy, investment managers must conduct formal presentations when their one-year rolling excess returns are outside pre-determined performance bands for three consecutive quarters. (The performance bands for core-plus mandates are -25 basis points to +125 basis points.)

      Goldman Sachs Asset Management
      Michael Swell, Managing Director, Co-Head of U.S. Fixed Income
      Troy Thornton, Managing Director, Senior Client Relationship Manager, Public Funds

      Group Goldman is headquartered in New York City. As a core-plus fixed income manager, Goldman invests primarily in domestic investment grade bonds, but may also make tactical allocations to high yield, international investment grade, and emerging market bonds. Their investment guidelines allow them to allocate up to 15% in high yield securities, 15% in non-dollar investment grade securities, and 5% in emerging market debt. Their investment process begins by defining the level of risk relative to the benchmark that is consistent with each client’s risk tolerance and performance objectives. Portfolio managers then allocate that risk across strategic exposure to create an optimal risk-adjusted return. They utilize top-down and bottom-up strategy teams. Top down strategy teams primarily focus on cross sector, duration, country, and currency exposure decisions. For example, cross-sector teams provide portfolio managers with insight on the key sectors of the fixed income market. Both teams are expected to generate investment ideas within their specific area of expertise. Trades are ultimately executed by the bottom-up strategy teams in conformance with the top-down strategy decisions. Goldman’s performance objective is to outperform the benchmark by 80 basis points annualized net of fees. Their core-plus fixed income portfolio under-performed the BC Aggregate due to their exposure to non-agency mortgages and corporate bonds. However, as the markets begin to stabilize, this strategy has recouped approximately 30 basis points of its earlier losses. Goldman is confident in their investment team, strategy and ability to produce long-term out-performance. A brief discussion followed and the Report was received and filed.

      Loomis, Sayles & Company
      John Hyll, Vice President, Fixed Income Portfolio Manager
      Stephanie S. Lord, CFA, CIC, Vice President, Client Portfolio Manager

      Mr. Hyll and Ms. Lord gave a presentation on Loomis’ investment strategy, philosophy and performance. Loomis is based in Boston, Massachusetts, and began managing a core plus fixed income mandate for LACERA in March 1997. As a core plus fixed income manager, Loomis invests primarily in domestic investment grade bonds, while opportunistically investing in domestic high yield bonds, international investment grade bonds, and emerging market debt.

      Their investment approach to fixed income investing is a combination of the firm’s top-down and bottom-up analyses. Their top-down analysis focuses on global geopolitical and economic developments to formulate their macroeconomic outlook and set the duration ranges for specific fixed income strategies. Loomis’ bottom-up analysis brings together investment professionals from research, portfolio management, trading, client service, as well as their quantitative risk specialist. This team provides recommendations for all fixed income products, identifies risks for all segments of the bond market, and ensures that client guidelines are not violated. Additionally, they assess the investment opportunities within their respective sectors, and identify those securities offering the best return potential.

      Loomis also reported that their core plus fixed income portfolio trailed the benchmark by 7% on a one year, net-of-fee basis. This was the result of the portfolio’s poor returns that began in the third quarter of 2008 and continued into the first quarter of 2009. Mortgage-related losses, concerns over higher expectations for increased corporate defaults, de-leveraging of hedge funds and the evaporation of liquidity all contributed to the market’s extraordinary underperformance. Over the 18 months ended March 2009, Loomis underperformed the benchmark by 17.6%. The primary reason for Loomis’ underperformance is the overweight allocation to Corporate securities; however the portfolio outperformed nearly 4% in April and 4% in May, with the portfolio outperforming the index by 7.3%, net-of-fees, on a year-to-date basis. Loomis has made no material changes to the structure of the organization, the investment strategy, or their decision making process. A brief discussion followed and the Report was received and filed.

      Principal Global Investors
      David Blake, Executive Director, Fixed Income
      William Armstrong, Portfolio Manager
      Paul Stover, Senior Relationship Manager

      Messrs. Blake, Armstrong and Stover gave a presentation on Principal Global Investors’ (Principal) investment strategy, philosophy and performance. Principal is based in Des Moines, Iowa and began managing a core plus fixed income mandate for LACERA in December 2006. The firm’s performance objective is 80 basis points (bps) net-of-fees, annualized, above the Barclays Capital Aggregate Bond Index (BC Aggregate).

      As a core plus fixed income manager, Principal invests primarily in domestic investment grade bonds, and per LACERA’s approved guidelines, they also have the flexibility to investment limited amounts in sectors outside of the Aggregate index. These include domestic high yield bonds, international investment grade bonds and emerging market debt. They do not attempt to add value by forecasting the direction of interest rates and their goal is to add value primarily through security selection and sector rotation. Principal’s approach to investment management begins with the formulation of an economic outlook by the lead portfolio managers and sector specialists. Their team identifies market themes and relative value among fixed income sectors. There have been no material changes to the structure of the organization, the investment strategy, or the firm’s decision-making process.

      As of May 31, 2009, Principal’s portfolio trailed the BC Aggregate by 11.6% and 8.9%, for one- and two-year periods, respectively, net-of-fees. Since the account’s inception, the portfolio has underperformed the benchmark by 7% annualized, net-of-fees. Principal’s underperformance occurred form the 4th quarter of 2007 to the 1st quarter of 2009. Since the 1st quarter of 2009, as the fixed income markets began to recover, Principal outperformed the benchmark by 5.3%. A brief discussion followed and the Report was received and filed.

   2. Private Equity Annual Report Christopher J. Wagner, Senior Investment Officer, Private Equity (Memo dated June 16, 2009.)

      Mr. Wagner provided an executive summary on the fund’s Private Equity portfolio’s annual performance for the year ending December 2008. The portfolio has generated an internal rate of return (IRR) of 16.34% since inception. The IRR is calculated using all the outflows to and inflows from the underlying fund investments, including cash flows for expenses and fees paid by the portfolio to the underlying fund investments. The benchmark is the Russell 3000 Index over a 10-year period, plus 500 basis points. For the 10-year period ended December 31, 2008, the portfolio generated an IRR of 14.69%, exceeding the benchmark by 844 basis points.

      Private Equity activity slowed significantly in 2008 as a result of the escalating credit crisis and its negative economic impact. A majority of buyout managers continued to shift their focus to preparing their existing portfolio companies to take advantage of, or withstand, a period of difficult operating conditions. The U.S. Venture capital industry continued to be affected by the global economic crises, with venture capital firms delaying fundraising plans, investing less in new companies, and instead focusing on recapitalizing existing portfolio companies. Investment activity during the fourth quarter of 2008 stood marginally higher than the preceding quarter. A brief discussion followed and the Report was received and filed.

6. GOOD OF THE ORDER (For discussion purposes only.)

   Messrs. Santos and Schneider reported that they attended the U.C. Berkeley SACRS Public Pension Investment Management Program, which was excellent and complementary to The Wharton School.

   Mr. Rademacher offered his congratulations to Mr. Santos, who ran uncontested for his election. He will begin his new term on January 1, 2010. He also reminded the Board of the upcoming Board Off-Site meeting in January 2010. He expressed his concern over the current troubled financial times and after much consideration thought a two day format, instead of a three day format would work just as well as the customary three day off-site. The tentative dates are January 26 and 27, 2010. One of the topics to be presented will be by LACERA’s actuaries and would address the actuarial assumptions for 2010, with emphasis on the highest level assumptions and methodology.

   For Information Only

   1. Memo dated June 29, 2009, from Vache Mahseredjian, Principal Investment Officer and Shannon O’Connell, Senior Investment Analyst regarding Neuberger Berman Fixed Income, LLC.
   2. Memo dated June 29, 2009, from Dale Johnson, Senior Investment Analyst regarding Corporate Governance Update. Green Folder Items 1. Chief Executive Officer’s Report dated July 1, 2009.
7. ADJOURNMENT

Documents subject to public disclosure that relate to an agenda item for an open session of the Board of Investments that are distributed to members of the Board of Investments less than 72 hours prior to the meeting will be available for public inspection at the time they are distributed to a majority of the Board of Investments Members at LACERA’s offices at 300 N. Lake Avenue, Suite 820, Pasadena, CA 91101, during normal business hours of 9:00 a.m. to 5:00 p.m. Monday through Friday.

Listening Devices are available at days notice before the meeting date. Persons requiring an alternative format of this public notice pursuant to Section 202 of the Americans with Disabilities Act of 1990 may request one by contacting Cynthia Guider at (626) 564-6000, x3327 from 8:30 a.m. to 5:00 p.m. Monday through Friday, but no later than 48 hours prior to the time the meeting is to commence.