HomeMy WebLinkAboutMINUTES - 08142012 - C.86RECOMMENDATION(S):
ACCEPT quarterly report of the Post Retirement Health Benefits Trust Agreement Advisory Body.
FISCAL IMPACT:
No specific fiscal impact. This is a quarterly report of the County's assets in the Public Agency Retirement Services
(PARS) Public Agencies Post-Retirement Health Care Plan Trust.
BACKGROUND:
On December 14, 2010, the Board of Supervisors directed the formation of a Post Retirement Health Benefits Trust
Agreement Advisory Body (consisting of the County Administrator, County Finance Director, Treasurer-Tax
Collector, Auditor-Controller, and Health Services Finance Director).
The Advisory Body meets quarterly. At its meeting of August 4, 2011, the body discussed and reviewed final report
formats with HighMark Capital Management and made recommendations regarding a final standardized quarterly
report. The attached report is in the standardized format. The following is the investment summary presented at the
August 2, 2012 quarterly meeting for the period ending June 30, 2012:
APPROVE OTHER
RECOMMENDATION OF CNTY ADMINISTRATOR RECOMMENDATION OF BOARD COMMITTEE
Action of Board On: 08/14/2012 APPROVED AS RECOMMENDED OTHER
Clerks Notes:
VOTE OF SUPERVISORS
AYE:Candace Andersen, District II Supervisor
Mary N. Piepho, District III Supervisor
Karen Mitchoff, District IV Supervisor
Federal D. Glover, District V Supervisor
ABSENT:John Gioia, District I
Supervisor
Contact: Lisa Driscoll, County Finance
Director (925) 335-1023
I hereby certify that this is a true and correct copy of an action taken and entered on the
minutes of the Board of Supervisors on the date shown.
ATTESTED: August 14, 2012
David Twa, County Administrator and Clerk of the Board of Supervisors
By: STACEY M. BOYD, Deputy
cc: Robert Campbell, Auditor-Controller, Russell Watts, Treasurer-Tax Collector, Patrick Godley, Health Services Chief Financial Officer, Lisa Driscoll,
County Finance Director
C. 86
To:Board of Supervisors
From:David Twa, County Administrator
Date:August 14, 2012
Contra
Costa
County
Subject:Quarterly Report of the Post Retirement Health Benefits Trust Agreement Advisory Body
BACKGROUND: (CONT'D)
Additional Materials -
A Post Retirement Health Benefits Trust Agreement Advisory Body web-page can be found at the following
address: http://ca-contracostacounty.civicplus.com/index.aspx?NID=2915. The page describes the function of the
body, posts quarterly meeting materials, and all pertinent trust and plan documents.
CONSEQUENCE OF NEGATIVE ACTION:
None.
CHILDREN'S IMPACT STATEMENT:
None.
ATTACHMENTS
Second Quarter 2012
PARS: County of Contra CostaySecond Quarter 2012Presented byAndrew Brown CFAAndrew Brown, CFA
DISCUSSION HIGHLIGHTSDISCUSSION HIGHLIGHTSIn the second quarter, the Plan returned -1.28% net of fees, which basically matched the Contra Costa County blended benchmark return of-1.21%. From an asset allocation perspective, decisions that were positive for performance included an overweight to real estate equities, anunderweight to small cap stocks, and an underweight to international/globally equities. Decisions that detracted from performance in thesecond quarter included our underweight to fixed income and, converselyour overweight to equities. Regarding investment performance, ourlttitiddtilittf litf dth itibhkOllitit ti lrealestateequities andourdomesticlarge cap equityportfoliooutperformedtheir respectivebenchmarks.Our smallcap equity,internationalequity, large cap growth funds, and our separately managed fixed incomebond portfolio all slightly underperformed their benchmark targets forthe quarter.A familiar pattern seems to be emerging. The stock market rally that started towards year end, continued into the first quarter as the impact ofthe most recent central bank intervention(s) was accompanied by a more positive tone in U.S. economic data. Then, as if someone flipped affswitch, the specter ofa European contagion reared its ugly head at the same time the economic data took a turnfor the worse, which causedthe market to decline sharply, causing investors to turn to central bankers (and various other authorities and rescue funds) for solutions. Inrough terms, this was the story that played out in both 2010 and 2011. And now, in 2012, an eerily similar scenario is unfolding. WithinEurope, the cast of players and their respective roles has not changed. Greece remains the potential contagion catalyst that everyone fears.Spain and Italy are the dominoes that are too big to fall. Germany is the set of broad shoulders, which everyone is ultimately counting on tocarry the burden of peripheral Europe. The ECB meanwhile is the reluctant lender of last resort, imploring the other parties to find a solutionthatdoesn’tinvolvetheECBfiringupitsprintingpressthatdoesn tinvolvetheECBfiringupitsprintingpress.Domestically, the situation also seems reminiscent of the recent past. The economic data that was looking so much better earlier this year hasnow turned far less convincing. While there are pockets of bright spots, like the apparent bottoming in the housing market, other areas likeemployment, look less encouraging. As before, the market continuesto look to the Fed, and the Fed continues to be far more proactive thanits European counterpart. Although its decision in late June to extend Operation Twist until the end of the year failed to create any incrementalth ifiktthFdiilditit tttffllithtftildt i tiithenthusiasmfor riskassets,theFedagainsignaleditsintenttoactmoreforcefullyintheeventofamaterialdeteriorationintheeconomy.In addition to the events in Europe, we are concerned about the upcoming Fiscal Cliff of 2013. The Fiscal Cliff relates to a term dubbed byFed Chairman Bernanke in describing several fiscal stimulus measures that are scheduled to expire at the end of 2012. Items encompassedwithin the “cliff” include: expiration of the Bush tax cuts, elimination of the payroll tax reduction, elimination of the emergency unemploymentcompensation benefit, indexing AMT to inflation, and the Budget Control Act of 2011. Various estimates have been developed to quantify thepotential impact to the economy. Ranges we have seen have spanned from $350 billion to $750 billion of economic impact. If ourrepresentatives in Washington DC can come together to formulate a policy response, these negative impacts may be mitigated. However, inlight of last summer’s disappointing outcomesurrounding the debt ceiling negotiations, it is hard to see how progress will be made on this frontuntil after the elections. And frankly, one could easily forecast scenarios whereby a set of policy responses are not devised until next year.While the declines in the market in the second quarter cannot really be blamed on the fiscal cliff, there is little doubt that as we progressthroughout the year, this will become a bigger issue... One that potentially could argue for a more conservative stance within our assetallocationframe orkallocationframework.PARS: County of Contra CostaJune 30, 2012PARS: County of Contra Costa1
DISCUSSION HIGHLIGHTSDISCUSSION HIGHLIGHTSMost of the market pullback in the second quarter took place in the month of May, as equity markets around the world grew cautious in the faceof the European situation, coupled with slowing economic data in the United States. Defensive sectors outperformed cyclical sectors within theRussell 1000 Index for the quarter as telecommunications (+14.1%), utilities (+6.5%) and consumer staples (+2.9%) led returns. The moreeconomicallysensitivesectorssuchastechnology(-6.7%)financials(-6.8%),energy(-6.1%)andmaterials(-4.3%)pressuredmarketsintoeconomicallysensitivesectorssuchastechnology(6.7%)financials(6.8%),energy(6.1%)andmaterials(4.3%)pressuredmarketsintonegative territory for the second quarter. The separately managed large cap core portfolio performed well compared to the benchmark,returning -0.61% vs. the Russell 1000 Index of -3.12%. The outperformance was driven largely by stock selection. Top contributors for thequarter included Vertex Pharmaceuticals (+24.8%), Ecoblab Inc. (+11.4%), Petsmart (+19.4%), Altria Group (13.3%) and American Tower(+11.7%). Bottom contributors included Riverbed Technology (-44.1%), EMC (-14.2%), Qualcomm (-17.8%), Danaher (-6.9%) and Praxair (-4.6%). During the quarter, the managers sold out of the position in Riverbed. Recent earnings disappointments called into question thecompany’s ability to generate a level of long-term growth that would justify the valuation. Additionally, the managers sold their position inVertex Pharmaceuticals. Following the company’s release of preliminary data on their new Cystic Fibrosis combination therapy, the stockappreciated substantially. Shortly afterward, the company released additional data and disclosures, both of which created controversy withregards to the interpretation of the preliminary data release. The managers felt the risk and reward no longer justified maintaining the position.Large cap value, as measured by the Russell Indices, outperformed large cap growth (-2.20% vs. -4.02%) in the quarter. With the market in“risk-off” mode, stocks in the value index tended to offer more defensive characteristics for investors, as opposed to the more cyclicallyoriented growth index. Our two large cap value funds outperformed the Russell 1000 Index for the quarter. The T. Rowe Price Equity IncomeFund registered a -2.73% return for the quarter. While sector positioning was a modest benefit, the Fund benefitted primarily from stockselection that spanned a variety of economic sectors. Holdings such as AT&T (+15.6%), Kimberly-Clark (+14.4%), Disney (+10.8%), Merck(+9.8%), and Allstate (+7.3%), were the fund’s leading gainers during the quarter. The Loomis Sayles Value Fund slightly outperformed theRussell 1000 Index, and returned -3.0%. Performance for the quarter would have been likely very strong had it not been for the fund’s thirdlargest holding JP Morgan (-21.6%) holding back returns. Top holdings that were additive to performance were AT&T, Merck, EdisonInternational(+94%)Comcast(+76%)andPepsico(+73%)International(+9.4%),Comcast(+7.6%),andPepsico(+7.3%).Our two large cap growth funds underperformed the benchmark during the quarter. As much as the technology sector supported returns forthe first quarter, this sector was a bit of a “tech wreck” in the second quarter for our two funds. Both funds maintained sector allocations totechnology in the 30% range during the quarter. The Harbor Capital Appreciation Fund declined by -6.87% in the quarter, which ranked in the78thpercentile of the Morningstar Large Cap Growth Universe. The Fund was negatively impacted by holdings in Network Appliance (-28.9%),Rackspace(-240%)VMWare(-19%)Qualcomm(-178%)Altera(-148%)andEMC(-142%)TheTRowePriceGrowthStockFundwasRackspace(-24.0%),VMWare(-19%),Qualcomm(-17.8%),Altera(-14.8%)andEMC(-14.2%).TheT.RowePriceGrowthStockFundwasoff -4.91%, and ranked in the 35thpercentile of the Morningstar Growth Universe. Technology holdings that impacted the fund included Juniper(-28.7%), Baidu (-21.1%), Qualcomm, and Google (-9.5%). Both management teams will be quick to tell you that for the first six months of2012, both funds are in the top quartile of large cap growth managers, as well as both funds have posted strong absolute returns: +10.9% forthe Harbor Fund, and +13.3% for T. Rowe Price.PARS: County of Contra CostaJune 30, 2012PARS: County of Contra Costa2
DISCUSSION HIGHLIGHTSDISCUSSION HIGHLIGHTSMid-cap stocks performed the poorest of all domestic equity segments within the Plan for the second quarter. The Russell Mid-Cap Index returned -4.41% in the quarter. The TIAA-CREF Mid-Cap Value returned -3.79%, which on a relative basis ranked inthe 21st percentile of mid-cap value funds in the Morningstar Universe. REITs and utilities supported performance during thequarter with Sempra Energy (+15.9%), Progress Energy (+14.5%), Edison International (+9.4%), Boston Properties (+3.7%), andVdRltTt(06%)titREITihl13%fthidlbhkdREITVornadoRealtyTrust(-0.6%)supporting returns.REITs comprise roughly13%ofthemid-cap valuebenchmark,andREITsenjoyed a strong second quarter. The HighMark Geneva Mid-Cap Growth Fund despite posting a loss of -5.2% in the quarter,ranked solidly in the mid-cap growth fund universe of Morningstar, placing in the 38thpercentile. An overweight to technologycombined with an underweight to materials hurt relative performance. Stock selection in health care, industrials, and consumerstaples contributed to relative performance during the quarter. SXC Health Solutions in the health care sector was a positivecontributor. Stock selection in the energy and consumer discretionary sectors hurt performance with Coach, Oasis Petroleum,and Whiting Petroleum hurting performance.Despite a negative environment for equities, REIT stocks posted gains in the second quarter. REITs shrugged off thedisappointing employment results in the U.S. during the second quarter to register a 3.71% return as measured by the Dow JonesWilshire REIT Index. Gains in the REIT sector were positive throughout almost all of the REIT sub-sectors. The leading sectorsincluded: Healthcare (+10.2%), Free Standing Mall (+7.2%), Regional Mall (+6.2%), Self-Storage (+4.9%), and ShoppingCenters (+3.8%). Apartment REITS, which had been performing very well over the last few quarters, returned only a modest0.9% in the quarter. The Nuveen Real Estate Securities Fund outperformed the benchmark for the quarter, returning 3.91%. TheNuveen Fund was helped by holdings in the healthcare sector: HCP (+13.2%) and Health Care REIT Inc. (+7.4%). Additionally,an overweight to the index’s largest holding, Simon Property Group (+7.5%) also supported returns.Our small cap funds returned -4.10%, which underperformed the Russell 2000 Index return of -3.47%. The T. Rowe Price NewHorizons Fund (small cap growth) underperformed the Russell 2000 benchmark for the quarter, and posted a -3.61% return.While underperforming the benchmark, the Fund did rank in the 22ndpercentile of Small Cap Growth Funds as ranked byMorningstar. The strong relative performance was supported by stocks from the health care/bio tech sector: Athenahealth(+6.8%), Alexion Pharmaceuticals (+6.9%), and SXC Health Solutions (+32.4%). The fund’s underperformance relative to theIndex is mainly attributed to energy and technology related issues. The Columbia Small Cap Value Fund lagged the Russell 2000Index as well during the quarter, and returned -4.51%. The fund suffered most of their decline in May. The fund managersreported that sector allocation in the portfolio was negative overall, with an overweight to technology shares detracting fromperformance. As well, an underweighting in the defensive areas in the market such as utilities and consumer staples hurt thefund. Additionally, as mentioned previously, REITs were a strong performer in the second quarter, and the managers do not findREITs attractivelyvalued,hence theyhave underweight this sectorforsome time. This underweight was a detractortoy,yggperformance for the second quarter.PARS: County of Contra CostaJune 30, 2012PARS: County of Contra Costa3
DISCUSSION HIGHLIGHTSDISCUSSION HIGHLIGHTSInternational equity markets struggled during the quarter as macroeconomic concerns surrounding both Europe and the fate ofthe Euro pressed markets. In addition to Europe, concerns about a potential slowdown in China, as well as unemploymentfigures in the United States, combined to pressure markets lower. The primary international equity benchmark that the Planlooks to outperform is the MSCI-EAFE Index. This Index currentlyis approximately64% exposed to Europe and the Unitedpypp yppKingdom, thus with the pressures that this region is facing, it will have a significant impact on international equity returns. It is nosurprise then that the MSCI-EAFE Index declined -7.13% during the quarter. Regions that most negatively impacted the MSCI-EAFE during the quarter included: Germany (-12.4%), Portugal (-18.4%), Italy (-12.1%), Spain (-12.5%), and France (-9.0%).Ourinternational equitysegment returned -7.93%,which underperformed the MSCI-EAFE Index return of-7.13%. Theqyg,pperformance was hampered by our exposure to both European stocksas well as emerging market equities held in our funds. Ourthree developed market international equity funds posted lackluster returns. The “leader” for the quarter was the HighMarkInternational Equity Fund which returned -6.2%. The Fund has favored an overweight to Asia, specifically to Japan, and anunderweight to Europe. While the fund still has a 15% allocation to emerging markets, the managers have reduced their holdingsin emerging markets by almost 5% during the quarter. On top of this, they were able to avoid much of the downturn in the BrazilandIndianmarketsduringthequarterThemanagersincreasedtheirallocationtoJapaninthequarterastheyseeanumberofandIndianmarketsduringthequarter.ThemanagersincreasedtheirallocationtoJapaninthequarterastheyseeanumberofthings that make them feel better about the country; (Japan is poised to see a jump in M&A activity, a good number of companiestrade below book value and there has been a change in the legal landscape that is conducive to merger transactions).The Dodge and Cox International Fund underperformed the benchmark by 1.2% for the quarter. The fund’s holdings intechnology(22%comparedto14%fortheindex)hinderedreturnsHoldingsinNokia(60%)InfineonTechnologies(34%)technology(-22%comparedto-14%fortheindex)hinderedreturns.HoldingsinNokia(-60%),InfineonTechnologies(-34%)and Nintendo (-23%) were the primary poor performers. Additionally financial sector holdings such as Credit Suisse (-33%) andBarclays (-32%) negatively impacted performance. The managers of the fund still are constructive on their holdings, as well asthe current state of international equity investing. They cite that the MSCI-EAFE is trading at a 3.8% dividend yield, compared toan average yield of 2.9% over the last 42 years. Furthermore, the index trades at 13 times trailing earnings, compared to a 19times price to earnings ratio over the same period of time. The near-term challenge for an international value equity fund is thattkttilltithbt‘l”htfthktth ttltilFstockspotentially representingthebest‘value”mayhave some exposuretoareasofthemarketthatare mostvolatile.Forexample, the fund is currently invested in European financial sector holdings such as Credit Suisse, Banco Santander, andUniCredit (SPA). Additional European investments such as Nokia, Telefonica, and Telecom Italy also are holdings that appearattractive to the mangers, yet have been under pressure this year.PARS: County of Contra CostaJune 30, 2012PARS: County of Contra Costa4
DISCUSSION HIGHLIGHTSDISCUSSION HIGHLIGHTSThe MFS International Growth Fund matched the benchmark return of -7.1% for the second quarter. The fund ranked in the 54thpercentile of the Morningstar Large Cap Growth Universe.In an environment where “risk-off” thrived, our emerging marketsegment suffered the biggest declines during the quarter. In arush for safety, emerging market opportunities offered little to investors. The areas of safety, or “least amount of risk” foremerging market investors focused on consumer staple companies in the beverage industry, or telecommunication firms. Thesetypes of investments are not what the RS Emerging Market Fund focuses on typically. Instead the RS Emerging Market Fundlooksforcompaniesthathavemorelonger-termattractivegrowthopportunitiesthanwhataninvestormightfindfromaconsumerlooksforcompaniesthathavemorelonger-termattractivegrowthopportunitiesthanwhataninvestormightfindfromaconsumerstaple or utility type stock. The managers of the Fund concede that China is in fact seeing a slowdown in growth rates, howeverthey are encouraged that China can find a sustainable equilibrium level of growth. For the second quarter, the RS EmergingMarket Fund returned -11.02%, underperforming both the MSCI-EAFE Index, and the more representative benchmark the MSCIEmerging Markets Index return of -8.77%. With the decline in energy prices, the energy sector impacted performancenegatively. Four of the top five largest country weightings in the Fund saw strong declines: Brazil (-18.8%), China (-5.5%) India (-95%)dSthK(86%)Thdliithftt ib tibdbd9.5%)andSouthKorea(-8.6%).Thedeclinesinthe performance attribution wasbroadbased.An overweight to European stocks was the primary challenge for the Templeton Global Opportunities Fund. The Fund returned -7.4% for the quarter, which underperformed the MSCI-ACWI benchmark return of -5.6%. The Fund placed in the 72ndpercentileof the Morningstar World Stock Universe. The value opportunities that the managers are finding, tend to be the beaten up,ldfEOlblll tibithFdttditi d423%ll titEunlovednamesfromEurope.Onaglobalallocationbasis,theFundatquarterendmaintaineda42.3%allocationtoEurope,compared to the MSCI-ACWI allocation of 24.2%. In a quarter where the European market sold off, the impact to having almosttwice the benchmark allocation was severe. European holdings that impaired performance were -39.2%, Credit Suisse Group (-33%), Credit Agricole (-28.4%), Akzo Nobel (-17.8%), Deutsche Lufthansa (-16%), BNP Paribras (-14.9%), and AXA (-14.3%).As the Templeton Fund has a deep value tilt, there will be times when the investments that the managers invest in, will beunloved and out of favor. And, as these companies sell off, theycan become more attractive as an investment opportunity. TheTempleton Fund has struggled, and they are under internal review for possible elimination from the Plan. While on the one hand,they do provide the Plan with a diversification element that we do not get elsewhere within the Plan. On the other hand, we dolook for them to outperform a benchmark, and throughout the Plan’s seventeen month history the results have beendisappointing.PARS: County of Contra CostaJune 30, 2012PARS: County of Contra Costa5
DISCUSSION HIGHLIGHTSDISCUSSION HIGHLIGHTSFixed IncomeThe Barclays Capital (“BC”) U.S. Aggregate Bond Index gained 2.06% in the second quarter, as investment-grade corporatebonds, agency mortgage-backed securities and U.S. Treasuries all posted positive returns. The quarter experienced a significantamount of volatility, driven primarily by events within the Eurozone as sovereign and banking concerns drove bond yields inGreeceSpainandItalysharplyhigherasinvestorsoptedforsafehavensAtthemostrecentEuropeansummitleadersagreedGreece,SpainandItalysharplyhigherasinvestorsoptedforsafehavens.AtthemostrecentEuropeansummit,leadersagreedto establish a Eurozone financial supervisor, after which the ESM (European Stability Mechanism) would be allowed to investcapital directly into banks, a potentially positive development. Earlier in the quarter, the Spanish government requested $125billion from the European Central Bank to recapitalize its troubled banks, a signal that the financial crisis was worse than manyhad expected. Concerns over stagnating growth and continued high unemployment levels in the U.S. led the Federal Reserve toextend their $400 billion “Operation Twist” program originally announced in September 2011 which expired in June. The FederalRillldditi l$267billifhtttdbthldith itf liithldtdTReserve willreplace an additional$267billion ofshort-term governmentdebtheldintheirportfoliowithlonger-datedTreasurysecurities through the end of 2012. The Fed also reiterated its plan to keep short-term interest rates at record lows until at leastlate 2014 and is prepared to act with additional stimulus if the economy deteriorates furtherThe Pimco Total Return Bond Fund (+2.79%) had a strong quarter, outperforming the Barclay’s Aggregate Index and placing inthe5thpercentileoftheMorningstarIntermediate-TermBondUniverse.Whilehighyieldbondsunderperformedingeneralthe5percentileoftheMorningstarIntermediateTermBondUniverse.Whilehighyieldbondsunderperformedingeneralduring the quarter, the fund’s exposure to high yield was additive to performance in the quarter. Additionally, an overweight toAgency mortgage backed securities was also a highlight. In terms of strategy, the managers seek to remain broadly defensive intheir positioning, with a focus on yield derived from high quality sources over price appreciation. The managers have reducedtheir duration overweight in recent months to where the duration now stands at 4.82 years, compared to the Barclay’s AggregateIndex of 5.07 years. The Fund seeks to maintain positions in agency mortgages as they are perceived as offering an importantsourceofhighqualityyieldTheFundisminimizingcorporateholdingsincompaniesdependentonrevenuefromregionswhichsourceofhighqualityyield.TheFundisminimizingcorporateholdingsincompaniesdependentonrevenuefromregionswhichare in the earlier stages of their deleveraging cycles, such as Europe. Finally, the managers seek to maintain their positions inemerging market corporate and quasi-sovereign bonds in higher quality balance sheet nations such as Brazil, Mexico, andRussia.The core bond strategy returned 1.79% in the second quarter. The strategy underperformed this quarter, primarily due to itsshorterduration, but also due to the higherweighting in corporate bonds ratherthan Treasuries. Positive Contributors to theFund’s performance included several industrial names, such as Georgia Pacific, Ecolab, Magellan, Verizon, and Lab Corp ofAmerica. Issues that detracted from performance included companies with foreign exposure or more cyclical businesses such asTelefonica, Hewlett Packard, Petrobras, and Teck Resources. The strategy chooses to remain underweight treasuries,agencies, mortgages and sovereign issues. The manager is overweight investment-grade corporate bonds and asset backedsecurities. Theportfolio’s overallqualityratingisA1. New holdings added to theportfolio thisquarterincluded Hydro-Quebec,pqyggpqy,United Technologies, Amgen, AT&T, Sempra Energy, Petrobras International, and GE Capital.PARS: County of Contra CostaJune 30, 2012PARS: County of Contra Costa6
DISCUSSION HIGHLIGHTSDISCUSSION HIGHLIGHTSHigh yield bonds posted gains in absolute terms during the quarter, helped mainly by a decline in Treasury yields. However, theasset class underperformed investment grade credit in this “risk-off” environment. The Pimco High Yield Bond Fund returned1.46% which underperformed the Merrill Lynch U.S. High Yield BB-B Rated Index return of 1.91%. As we saw in the equitymarket,an underweight to the energysectorwas beneficial to the fund,due to decliningenergyprices in thequarter. Holdingsin,ggy,ggypqgthe automotive sector were a positive as a benchmark issuer (Ford Motors) was upgraded to investment grade by Moody’s andFitch in the quarter. However, the lag in performance relative to the benchmark was a function of some exposure to Europeanhigh yield issues, as well as security selection in financials – specifically in European banks. The managers point to a lowmaturity schedule over the next two years as a factor that may mitigate default risk to the holdings in the Fund. The managersseek to overweight sectors that are industrial, defensive in nature, non-cyclical, and asset rich. In terms of credit quality, themanagersarefocusingonopportunitiesamonglowerratetiersofhighyieldwherethereisahighlevelofconvictionTheFund’smanagersarefocusingonopportunitiesamonglowerratetiersofhighyield,wherethereisahighlevelofconviction.TheFund sduration currently remains at 3.1 years, with an average coupon of 7.6%.PARS: County of Contra CostaJune 30, 2012PARS: County of Contra Costa7
INVESTMENT STRATEGY AS OF June 30 2012INVESTMENT STRATEGY AS OF June 30, 2012Tactical Asset Allocation Asset Class% Portfolio WeightingRationaleAsset ClassRationaleTargetCurrent PortfolioOver/Under WeightingCash1%8.6%7.6%End of quarter cash balance high due to contribution Cash1%8.6%qgreceived at the end of the quarter. Cash target for most of the quarter was 2%.Fixed Income45% 38.6%-6.4%Bonds still appear overvalued, with potential returns for intermediate-term bonds at 2-3% over the next five years. We also remain cautious on inflationary di hi h ld l tb dreadings which could also put pressure on bonds. Allocation target for the quarter was 41.5%High Yield0% 3.2%3.2%High yield should continue to offer attractive opportunities, despite a slowing U.S. economy. Default rates are predicted to remain low TargetDefault rates are predicted to remain low. Target allocation was 3% for the quarter.Real Estate (REITS)4% 4.7%0.7%With funding costs likely to remain low and demand showing signs of strength, the fundamentals should support the REIT sector. The sector seems to be fairly valued across a number of metrics. Our target allocation for the quarter was 5%June 30, 2012PARS: County of Contra Costa8
Tactical Asset AllocationTactical Asset Allocation Asset Class% Portfolio WeightingRationaleTtCurrent PtfliOver/Under WihtiTargetPortfolioWeightingGlobal Equity8% 5.8%-2.2%We remain underweight in international equities. The combination of a slowdown in China and continued problems in Europe have compelled us to be underweight. Valuations in European equities are beginning to look tempting and we may look to narrowbeginning to look tempting and we may look to narrow this underweight position during the quarter. Our target allocation was 7% in the quarter.International (Developed)10% 4.2%-5.8%See above. Our target allocation in the quarter was 5%.28%International (Emerging)0% 2.8%2.8%We continue to maintain the maximum allocation to emerging markets (by Plan Policy). We believe that emerging markets represent an attractive combination of growth at reasonable valuations.Target allocation 3%Total Domestic Equity32% 35.2%3.2%Large Cap18% 22.4%4.4%Given the risk factors present from international markets, and given the current valuations of large cap domestic stocks, we remain overweight in large cap domestic equities. Target allocation in the quarter was 23%.Mid Cap6% 6.6%.6%Our target allocation during the quarter was 7%. Small Cap8% 6.2%-1.8%We have reduced our allocation to small cap during the quarter by 1%. Small cap stocks do not appear as attractive relative to large cap domestic equities based on valuation. Currently small cap stocks are trading at 18X next year’s earnings. Allocation target in the quarter was 6.5%.June 30, 2012PARS: County of Contra Costa9
Investment SummaryP i d E di J 30 2012Investment SummarySecond QuarterBii Vl75 769 915 95$Period Ending June 30, 2012Beginning Value75,769,915.95$ Net Contributions/Withdrawals10,635,008.13 Fees Deducted-28,775.44 Income Received409,577.27 Market Appreciation-1,256,098.21 Net Change in Accrued Income-5,115.92Ending Market Value85,524,511.78$ June 30, 2012PARS: County of Contra Costa10
Asset Allocation3/31/20123/31/20126/30/2012 6/30/2012 TargetAsset AllocationMarket Value% of Total Market Value % of Total AllocationDomestic EquityPeriod Ending June 30, 2012Domestic EquityLarge Cap Core Holdings10,271,575$ 13.6%10,985,023$ 12.9% -T. Rowe Price Equity Income Fund2,677,1303.5%2,650,9133.1% -Loomis Sayles Value Fund2,689,2793.6%2,655,4433.1% -Harbor Capital Appreciation Instl1,178,3231.6%1,377,6721.6% -T. Rowe Price Growth Stock Fund1,176,8981.6%1,407,2181.6% -TIAA-CREF Mid-Cap Value Instl3,167,1074.2%3,234,4843.8%HighMark Geneva Mid Cap Growth Fund2,402,5123.2%2,396,1762.8% -Cl bi S llC Vl F dII3 016 10840%3 071 36936%Columbia Small Cap Value Fund II3,016,1084.0%3,071,3693.6%-T. Rowe Price New Horizons Fund2,250,6223.0%2,214,5792.6% -Total Domestic Equity28,829,553$ 38.2% 29,992,876$ 35.2% 32.0%RangeRange 21-57%International HighMark International Opportunity Fund1,133,6581.5%1,225,5831.4% -Dodge & Cox International Stock Fund1,117,6791.5%1,200,7421.4% -MFS International Growth Fund1,168,8351.5%1,234,7511.4% -RS Emerging Markets Y2,212,1282.9%2,347,3692.8% -Total International 5,632,301$ 7.5%6,008,445$ 7.0% 10.0%RangeRange 4-19%GlobalTempleton Global Opportunities A LW4,093,3445.4%4,943,8325.8% -Total Real Estate4,093,344$ 5.4%4,943,832$ 5.8% 8.0%RangeRange 4-12%Real EstateReal EstateNuveen Real Estate Secs I Fund3,853,5955.1%4,035,2584.7% -Total Real Estate3,853,595$ 5.1%4,035,258$ 4.7% 4.0%RangeRange 0-8%Fixed IncomeCore Fixed Income Holdings22,671,035$ 30.0%23,984,435$ 28.1% -PIMCO Total Return Instl Fund6,417,7738.5%6,225,0377.3% -PIMCO High Yield Instl2,622,9633.5%2,752,6953.2% -Total Fixed Income31,711,770$ 42.0% 32,962,167$ 38.6% 45.0% Range Range 35-67%CashHighMark Diversified MM Fund1,417,156$ 1.9%7,355,9388.6% -Total Cash1,417,156$ 1.9%7,355,938$ 8.6% 1.0%RangeRange 0-5%TOTAL75 537 718$100 0%85 298 516$100 0%100 0%June 30, 2012PARS: County of Contra CostaTOTAL75,537,718$ 100.0%85,298,516$ 100.0%100.0%11
Selected Period PerformanceYear to DateInception to DatePARS/COUNTY OF CONTRA COSTA PRHCPAccount 6746038001Period Ending: 06/30/2012Sector3 Monthsto Date (6 Months) 1 Yearto Date (17 Months)Cash Equivalents .00 .01 .02 .02 iMoneyNet, Inc. Taxable .00 .00 .00 .00Total Fixed Income 2.00 3.69 7.68 7.65 BC US Aggregate Bd Index 2.06 2.37 7.48 7.16Total Equities-3.47 9.34.35 1.46Indiv Domestic Common Stock-.61 13.46 9.38 5.50Large Cap Funds-3.94 9.50 2.74 1.58Russell 1000 Index-3.129.384.385.88 Russell 1000 Index3.129.384.385.88Mid Cap Funds-4.40 7.65 -.09 2.30 Russell Midcap Index-4.41 7.96 -1.67 2.85Small Cap Funds-4.17 8.77.83 3.24 Russell 2000 Index -3.47 8.53 -2.06 3.00REIT Funds4.07 14.44 12.46 12.27 Wilshire REIT Index3.71 14.90 13.22 14.57International Equities-7.93 5.16 -12.73 -7.48 MSCI EAFE Index-7.13 2.96 -13.83 -8.35Total Managed Portfolio128637325313*Inception Date: 02/01/2011**Benchmark: 18% Russell 1000 Index, 6% Russell Midcap Index, 8% Russell 2000 Index, 8% MSCI AC World ex US Index, 10% MSCI EAFE Index, 45% Barclays Aggregate Index, 4% DJ Wilshire REIT Index, 1% Citigroup 3 Month T-Bill Index.Returns are gross-of-fees unless otherwise noted. Returns for periods over one year are annualized. The information presented has been obtained from sources believed to be t d li bl P t f i t i di ti f f t t S iti t FDIC i d h b ktdllTotal Managed Portfolio-1.286.373.253.13 County of Contra Costa-1.21 5.29 2.32 4.21June 30, 2012PARS: County of Contra Costaaccurate and reliable. Past performance is not indicative of future returns. Securities are not FDIC insured, have no bank guarantee, and may lose value.12
PARS/COUNTY OF CONTRA COSTA PRHCP1-Month 3-Month Year-to- 1-Year 3-Year 5-Year 10-YearFund Name Return Return Date Return Return Return ReturnT. Rowe Price Equity Income (1)4.21 -2.73 8.20 2.64 15.40 -0.94 5.28LiSlVl(2)43630087601012 60142633PARS/COUNTY OF CONTRA COSTA PRHCPFor Periods Ending June 30, 2012LARGE CAP EQUITY FUNDSLoomis Sayles Value (2)4.36-3.008.76-0.1012.60-1.426.33Harbor Capital Appreciation Instl1.61 -6.87 10.89 2.88 15.52 3.52 5.86T. Rowe Price Growth Stock2.12 -4.91 13.29 6.58 17.74 1.97 6.82Russell 1000 Index3.83 -3.12 9.38 4.37 16.64 0.39 5.72HighMark Geneva Mid Cap Growth0.21 -5.23 7.31 2.66 20.13 5.42 8.65TIAA-Cref Mid-Cap Value Instl2.54 -3.79 7.90 -2.08 17.09 0.00 --MID CAP EQUITY FUNDSRussell Mid Cap Index2.81 -4.40 7.97 -1.6519.44 1.068.45Columbia Small Cap Value II Z3.01 -4.51 6.63 -3.23 18.15 0.26 8.08T. Rowe Price New Horizons2.63 -3.61 11.80 6.46 25.98 6.59 10.85Russell 2000 Index4.99 -3.47 8.53 -2.08 17.80 0.54 7.00Dodge & Cox Intl Stock63483433215 71783499810SMALL CAP EQUITY FUNDSINTERNATIONAL EQUITY FUNDSDodge & Cox Intl Stock6.34-8.343.32-15.717.83-4.998.10HighMark Int'l Opportunities Fid6.70 -6.19 5.79 -14.96 7.06 -5.79 6.89RS Emerging Markets Y3.41 -11.02 4.44 -14.56 9.90 0.47 14.54MFS International Growth I4.41 -7.11 6.43 -9.24 11.07 -1.13 8.43MSCI EAFE Index7.01 -7.13 2.96 -13.83 5.96 -6.10 5.14Templeton Global Opportunities A LW6.43 -7.36 4.24 -12.79 5.88 -4.63 5.49MSCI ACWI Index4.94 -5.56 5.64 -6.49 10.78 -2.71 5.73Nuveen Real Estate Secs I5.48 3.91 15.09 12.59 32.64 4.56 12.43DJ US Select REIT Index5.53 3.75 14.91 13.29 33.52 1.97 10.27Pimco Total Return Inst'l 0.46 2.79 5.75 6.96 8.68 9.23 6.98BarCap US Aggregate Bond Index0.04 2.06 2.37 7.47 6.93 6.79 5.63PIMCO High Yield Instl2.18 1.46 6.64 6.34 15.797.14 8.84REIT EQUITY FUNDSBOND FUNDSgMerrill Lynch US High Yield BB-B Index1.82 2.35 6.57 7.57 14.54 7.60 8.99Source: SEI Investments, Morningstar Investments(1) Fund was added to the Plan in March 2011(2) Fund was added to the Plan in June 2011Returns less than one year are not annualized. Past performance is no indication of future results. The information presented has been obtained from sources believed to be accurate and reliable. Securities are not FDIC insured, have no bank guarantee and may lose value.June 30, 2012PARS: County of Contra Costa13