ABOUT LACERA

BOARD OF INVESTMENTS MINUTES 9-9-09

PRESENT

• Simon S. Russin, Chair Pro Tem
• John M. Barger
• Mark J. Saladino
• Michael Schneider
• Leonard Unger

ABSENT

• William Pryor, Chair
• Herman Santos, Vice Chair
• Diane Sandoval, Secretary
• 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
• Robb Van Der Volgen, Chief Counsel
• Earl W. Buehner, Senior Staff Counsel
• Johanna M. Fontenot, Senior Staff Counsel
• Michael D. Herrera, Senior Staff Counsel
• Cynthia Lau, Legislative Affairs Officer

Mr. Rademacher reported that the officers of the Board of Investments would not be in attendance at today’s meeting and a chair pro tem would have to be elected, as provided in Robert’s Rules of Order. Therefore the following motion was made:

On a motion made by Mr. Schneider, seconded by Mr. Unger the Board unanimously nominated Mr. Russin as Chair Pro Tem.

1. APPROVAL OF THE MINUTES
   1. A. APPROVAL OF THE MINUTES OF THE MEETING OF THE BOARD OF INVESTMENTS OF AUGUST 12, 2009.

      A motion to was made by Mr. Unger, seconded by Mr. Saladino, to approve the Minutes of the meeting of the Board of Investments of August 12, 2009.

      The motion carried by unanimous vote.

2. PUBLIC COMMENT

   None.

3. REPORT ON CLOSED SESSION ITEMS

   None.

4. IV. ACTION ITEMS
   1. Recommendation as submitted by Gregg Rademacher, Chief Executive Officer: That your Board approve attendance of Board members and staff as designated by the Chief Executive Officer, at the Relational Investors Client Conference and approve reimbursement of all travel costs incurred in accordance with LACERA’s Education and Travel Policy. (Memo dated September 2, 2009.) (Placed on the Agenda at the request of Ms. Sandoval.)

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

      The motion carried by unanimous vote.

   2. Recommendation as submitted by John D. McClelland, Principal Investment Officer, Real Estate and Earl W. Buehner, Senior Staff Counsel: (1) Approve attendance of Board members, and staff as designated by the Chief Executive Officer, at INVESCO Real Estate’s 6th Annual Client Conference on November 3-5, 2009, at the Lodge at Torrey Pines in La Jolla, California; (2) Approve payment to INVESCO for its actual costs of providing meals and associated programs to LACERA’s representatives attending the conference; and (3) Approve reimbursement of all other costs associated with conference attendance in accordance with LACERA’s Education and Travel Policy. (Memo dated August 25, 2009.)

      A motion to approve the recommendation was made by Mr. Schneider, seconded by Mr. Unger.

      The motion carried by unanimous vote.

   3. Recommendation as submitted by Lisa Mazzocco, Chief Investment Officer: Reschedule the Wednesday, November 11, 2009, Board of Investments meeting to Wednesday, November 18, 2009. (Memo dated August 26, 2009.)

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

      The motion carried by unanimous vote.

   4. Recommendation as submitted by John McClelland, CRE, Principal Investment Officer, Real Estate: Adopt the 2009-2010 Real Estate Investment Plan as presented. (Memo dated September 1, 2009.)

      Mr. McClelland provided a brief overview of the 2009-2010 Real Estate Investment Plan. He reported that staff developed the Real Estate Investment Plan (the “Plan”) to guide the equity real estate investment activities of the Fund during the 2009-2010 fiscal year. If approved and fully implemented the Plan is projected to result in the Fund reducing its current allocation to real estate from 10.2% to 9.6%, well within the Policy range of 7% to 15%. Mr. McClelland also reported that new investment commitments are expected to be minimal since the Fund is beginning the year in an over-allocated state. A portion of the existing commitments are expected to be drawn during the year.

      The real estate investment environment remains extremely challenging. Rental rates have dropped, capitalization rates have increased, and debt availability has declined substantially.

      A couple of key points on the proposed Plan are: Separate account managers, responsible for over 90% of the portfolio investments, will manage existing assets and very selectively sell properties; and no capital is being made available for new investment by these managers as LACERA begins the new fiscal year. The Plan will also allow for LACERA to opportunistically take advantage of compelling opportunities if/as they arise. Also, new commingled fund investment opportunities will not be considered until the over-allocated condition is remedied. A brief discussion followed.

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

      The motion carried by unanimous vote.

   5. Recommendation as submitted by John D. McClelland, Principal Investment Officer, Real Estate: Adopt the revised Real Estate Strategic Plan as presented. (Memo dated August 26, 2009.)

      Mr. McClelland provided an executive summary on the proposed Strategic Plan. A brief discussion followed on risk and allocation concerns.

      A motion was made by Mr. Schneider, seconded by Mr. Unger to Adopt the revised Real Estate Strategic Plan as presented.

      The motion carried by unanimous vote.

   6. Recommendation as submitted by Lisa Mazzocco, Chief Investment Officer, and June Kim, Senior Investment Officer, Equities: Provide Staff with direction regarding LACERA’s holding companies identified as having operations or investments in Iran. (Memo dated September 1, 2009.) Ms. Kim reported that the Los Angeles County Board of Supervisors met at their regular meeting on July 21, 2009, during which they approved a motion requesting that LACERA “divest from those companies that are liable to U.S. Government sanctions by virtue of their investments in the Iranian energy sector”.

      Ms. Kim stated that LACERA has no holdings in any Iranian companies or any companies that are domiciled in Iran. Any exposure would be from holdings in global companies, typically oil, construction, or energy companies that may have a small portion of their operations in Iran. Ms. Kim pointed out for the record that there was a typo on page 6 of the memo dated September 1, 2009, as follows: The divestment-related costs of $16.97 million is incorrect; the correct amount is $18.9 million.

      Ms. Kim also reported, when dealing with these type of divestment issues, in the past the Board has generally opted to adopt a policy (such as with tobacco and Sudan) directing the investment managers to choose (in this case) the Iran-free security when choosing between two securities having the same investment goals concerning risk, return and diversification.

      A brief discussion on issues relating to proposed legislation.

      Mr. Saladino made a motion, seconded by Mr. Unger to adopt option 4 in staff’s memorandum (to adopt a policy similar to LACERA’s existing Tobacco and Sudan Policies) with further instruction to staff to send a letter to the Board of Supervisors informing them that State legislation protecting LACERA Board members and staff from claims of breach of fiduciary, similar to AB 221, would give LACERA more flexibility regarding divestment. The motion carried by unanimous vote.

      Mr. Rademacher agreed to respond to the letter from the Board of Supervisors addressing their divestment concerns.

   7. Recommendation as submitted by Earl W. Buehner, Senior Staff Counsel: Consent to the assignment of the Investment Management Agreement from PENN Capital Management Company, Inc. a New Jersey corporation, to PENN Capital Management Company, Inc., a Delaware corporation, and authorize staff to execute such consents and other documents to effect the assignment as reviewed and approved by the LACERA Legal Office. (Memo dated August 25, 2009.)

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

      The motion carried by unanimous vote.

   8. Recommendation as submitted by Michael D. Herrera, Senior Staff Counsel: That your Board authorize the Legal Office to retain the Grant & Eisenhofer law firm on a pro bono basis to file an amicus curiae brief on behalf of LACERA in Merck & Co. Inc. v. Reynolds. (Memo dated August 31, 2009.)

      Mr. Van Der Volgen on behalf of Mr. Herrera, provided a brief summary on the retention of the Grant & Eisenhofer law firm. This amicus brief filing would be on a pro bono basis and would be on behalf of LACERA. A brief discussion followed.

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

      The motion carried by unanimous vote.

5. REPORTS
   1. Manager Review – Fixed Income Robert Z. Santos, Investment Officer, (Memo dated August 31, 2009.)

      Post Advisory Group
      Larry Post, Vice Chairman
      Allen Schweitzer, Chief Investment Officer
      Ralph Canada, Managing Director, Marketing

      Robert Santos provided an executive summary on Post Advisory Group’s (Post) performance. He reported that LACERA’s Manager Monitoring and Review Policy (the Policy) stipulates that 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 band for high yield mandates is -50 basis points to +250 basis points.) Post is presenting due to their strong performance results during the 18-month period ending March 2009. Mr. Santos introduced Messrs. Larry Post, Allen Schweitzer and Ralph Canada, who gave a presentation on the fund’s historical background, investment process and performance.

      Post is based in Los Angeles, California and has $8.8 Billion assets under management, with approximately $5.7 billion in their Traditional High Yield Fixed Income (High Yield) strategy as of July 31, 2009. They began managing a high yield fixed income mandate for LACERA in January 2002 as part of LACERA’s fixed income Emerging Manager Program, and in March of 2003, Post was awarded a full high yield mandate.

      Post manages high yield portfolios based on a bottom-up process that utilizes a proprietary model for all of their investment decisions. The model enables Post to compare, in a consistent manner, different types of securities from diverse companies and industries, as well as estimate probable downside risk. Their philosophy emphasizes downside protection with a primary concentration on controlling credit risk, default risk and liquidity risk. There are no changes to the investment strategy, the firm’s decision-making process or the team responsible for managing LACERA’s portfolio.

      As of July 31, 2009, Post’s portfolio trailed the BC High Yield Ba/B Index by 4.7% and 1.4%, for calendar year-to-date and one-year periods, respectively, net-of-fees. However, since the account’s inception, the portfolio has out-performed the benchmark by 62 bps annualized, net of fees. Post’s strategy, which focuses on the upper and middle tiers of the high yield market, outperformed their Index by 236 and 385 bps, gross-of-fees, in 2007 and 2008, respectively. This outperformance occurred in the midst of the worst credit crisis since the Depression. This portfolio has performed as expected: outperforming in 2007-2008, underperforming in the 2nd quarter of 2009. Post believes over the long term, their investment approach will outperform the benchmark. They are cautiously optimistic and the fund’s outperformance since-inception of 62 bps supports this view. A brief discussion followed and the Report was received and filed.

6. EXECUTIVE SESSION
   1. A. Public Employee Performance Evaluation (Government Code Section 54957)

      Title: Chief Investment Officer
      In the matter of a Public Employee Performance Evaluation, the Board met in Executive Session pursuant to Government Code Section 54957, for the Chief Investment Officer and there was nothing to report at this time.

7. GOOD OF THE ORDER

   (For discussion purposes only.)

   Mr. Schneider reported that the Wall Street Journal had an article relating to attorney’s fees and hourly rate content being reviewed by clients. He asked that the Legal Office explore outside counsel fees and to ensure they are in line with LACERA’s guidelines.

   Mr. Barger asked that LACERA’s Actuary comment on an article they wrote relating to the world’s economic evolution. (For discussion purposes only.)

   Mr. Rademacher congratulated and thanked Mr. Russin for winning this morning’s election and stepping in as Chair pro tem. Mr. Rademacher also reported on a letter he received from the Interim Executive Director at SACRS expressing his concern relating to an elected trustee’s role on a retirement board being their primary duty, in relation to their other county employment. Mr. Rademacher agreed to respond to this letter.

   The Board and Ms. Mazzocco extended their good wishes to Stuart Mesnik who is retiring from the Investment Office on September 30, 2009.

   Informational Items

   1. Memo dated September 2, 2009, from John D. McClelland, Principal Investment Officer, Real Estate, regarding Renovation Update, St. Regis Princeville Resort.
   2. Memo dated August 27, 2009, from Trina L. Sanders, Investment Officer, Real Estate, regarding Real Estate Appraisal Results. 3. Memo dated September 2, 2009, from Robert Z. Santos, Investment Officer, Fixed Income, regarding Wachovia Global Securities Lending.

   Green Folder Items

   1. Chief Executive Officer’s Report.
   2. Copy of letter dated September 1, 2009, from Robert Palmer, SACRS Interim Executive Director.
8. 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.