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HomeMy WebLinkAboutMINUTES - 11132012 - C.63RECOMMENDATION(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 November 1, 2012 quarterly meeting for the period ending September 30, 2012: APPROVE OTHER RECOMMENDATION OF CNTY ADMINISTRATOR RECOMMENDATION OF BOARD COMMITTEE Action of Board On: 11/13/2012 APPROVED AS RECOMMENDED OTHER Clerks Notes: VOTE OF SUPERVISORS AYE:John Gioia, District I Supervisor Candace Andersen, District II Supervisor Mary N. Piepho, District III Supervisor Karen Mitchoff, District IV Supervisor Federal D. Glover, District V 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: November 13, 2012 David Twa, County Administrator and Clerk of the Board of Supervisors By: Carrie Del Bonta, Deputy cc: Robert Campbell, Auditor-Controller, Russell Watts, Treasurer-Tax Collector C. 63 To:Board of Supervisors From:David Twa, County Administrator Date:November 13, 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 Third Quarter 2012 PARS: County of Contra CostayThird Quarter 2012Presented byAndrew Brown CFAAndrew Brown, CFA DISCUSSION HIGHLIGHTSDISCUSSION HIGHLIGHTSThe Plan returned 4.03%, net of fees in the third quarter. Performance was aided mainly by our overweight to domestic equities.While the return from our international and global equity holdings outperformed the benchmark, our underweight allocation was adetractor to performance as international equities were the strongest performing segment in the quarter. The weakest performingsegment was real estate, and we have moved to an equal weight in this asset class. Detracting from performance was our midcapequityandsmallcapequityfunds,asbothsegmentstrailedtheirrespectivebenchmarktargets.Inthelargecapequitycapequityandsmallcapequityfunds,asbothsegmentstrailedtheirrespectivebenchmarktargets.Inthelargecapequitysegment, our separately managed large cap core strategy trailed the benchmark, while our large cap mutual funds outperformedtheir benchmark targets. Finally, being underweight fixed income was a positive decision in the third quarter, as bond returnswere dwarfed by equity returns. That being said, our fixed income returns were addititive to performance as they outperformedthe benchmark for the quarter.MarketOverviewMarketOverviewThe quarter experienced a rally in risk assets as the European Central Bank as well as central banks in the United States, Japan,the United Kingdom, Brazil, China and South Korea provided monetary stimulus to ease concerns over a global slowdown and tobolster market confidence. In September, the ECB pledged unlimited purchases of government debt through a program called“Outright Monetary Transactions” that will target short-dated maturities of up to three years for governments that meet conditionssetbyEurope’srescuefundSpanishandperipheralEuropeandebtconcernsremainedthefocusofthefinancialcrisissetbyEurope srescuefund.Spanishandperipheral-Europeandebtconcernsremainedthefocusofthefinancialcrisis,prompting the ECB to intervene with the new bond buying program to lower borrowing costs and support the Euro commoncurrency. Also in September, the Federal Reserve announced a third round of quantitative easing actions in an aggressive stepto lower borrowing costs and stimulate the U.S. economy. The new Federal Reserve program increases the pace of agencymortgage-backed securities purchases by $40 billion per month while extending the commitment to keep short-term interest ratesat record lows until at least mid-2015. The Fed will also continue the $267 billion “Operation Twist” program through the end of2012hi hlhtttdbthldith itf liithldtdTitiiff ttfth2012,whichreplaces short-term governmentdebtheldintheirportfoliowithlonger-datedTreasury securitiesinanefforttofurtherlower long term interest rates. Together these programs will increase the Fed’s holdings of longer-term securities by about $85billion each month.While it was encouraging to see positive signs emanating from Europe, the same, unfortunately, cannot be said in regards tosignals from Washington DC in response to the fiscal cliff. The near-term risks of our legislators allowing our economy to fall overthe proverbial “fiscal cliff” grows largerby the day. Most likely, there will be no compromise, large orsmall, between the partiesbefore the elections. Then, depending upon the outcome of the election, we may see some movement between the two partiestowards a solution. Still it is also very possible that we will not see any action along this front until early next year, especially if thelame duck congress does not feel motivated to work responsibly towards a solution. It seems as if corporations are beginning toembrace the potential fall-out of the fiscal cliff a little more readily than consumers. Retail sales figures have been encouraging,howeverreadingsfromcorporations, as well as the forwardguidance companies areprovidingon theirquarterlyearningsPARS: County of Contra Costagpgppgqygupdates, have been tepid at best. If we are allowed to fall over this “cliff”, both consumers and business will feel a great impact.September 30, 2012 DISCUSSION HIGHLIGHTSDISCUSSION HIGHLIGHTSIn response to the combined risks of the fiscal cliff, a slowing Chinese economy, the unknown outcome of the elections, and thegeneral volatility regarding the situation in Europe, we took our equity allocation to a neutral position at the end of the thirdquarterOurcurrenttargetassetallocationstanceforthePlanis:50%equities4%realestateand43%bondsand3%cashquarter.OurcurrenttargetassetallocationstanceforthePlanis:50%equities,4%realestate,and43%bondsand3%cash.Performance OverviewLargecapvalueasmeasuredbytheRussellIndicesoutperformedlargecapgrowth(65%vs61%)inthethirdquarterThe•Largecapvalue,asmeasuredbytheRussellIndices,outperformedlargecapgrowth(6.5%vs.6.1%)inthethirdquarter.Theleading sectors for the quarter were energy (+10.1%), telecommunications (+8.1%), consumer discretionary (+7.5%), andtechnology (+7.4%). Laggard sectors included consumer staples (+3.8%), industrials (+3.6%) and utilities (-0.5%). Utilities werethe only sector that posted a negative return in the quarter. The main driver in the performance differential between value andgrowth indices in the quarter was energy stocks. The Russell 1000 Value Index maintains a 17% weighting to Energy stocks,while the Russell 1000 Growth Index’s weight is 4%.The separately managed large cap core portfolio underperformed the S&P500 Index (4.13% vs. 6.35%). The manager’sstrategy focuses on investing in high quality businesses with durable, sustainable growth outlooks. The strategy has put aparticular emphasis on companies whose growth drivers are secular in nature, rather than on companies whose growth isdependent on a more robust economic backdrop. During the quarter, the portfolio’s performance was negatively impacted by theunderperformance ofa numberofpositions in the energy, materials, industrial, consumerdiscretionary and financial sectors. Inmost cases, the fundamental performance of these holdings remained strong, and they were perhaps simply victims of someprofit taking as the market rotated away from previous winners. Stronger performance from some of the portfolio’s holdings inthe technology sector acted as a partial offset, as did an underweight to utilities. Top performers for the quarter includedAccenture PLC (+16.5%), Apple Inc. (+14.7%), Procter & Gamble (+14.2%) and Qualcomm (+12.6%). The worst performers forthequarterincluded J.B. Hunt Transport Services Inc.(-12.7%),DollarTree Inc.(-10.3%),UPS(-8.4%),and Ecolabs(-5.1%).qp(),(),(),()PARS: County of Contra CostaSeptember 30, 2012 DISCUSSION HIGHLIGHTSDISCUSSION HIGHLIGHTSWithin the Plan’s two large cap value funds, energy holdings in Chevron and Exxon helped returns, and stock selection infinancials and healthcare was also additive to performance. The Loomis Sayles Value Fund returned 7.95%, which bested thebenchmark. Three of the fund’s top holdings, hailed from the financial sector: Fifth Third Bancorp (+16.5%), Discover Financial(+15.2%) and JP Morgan Chase (+14.3%). Additionally healthcare issues such as Merck (+9%) and Pfizer (+9%) also buoyedresults. The T. Rowe Price Equity Income Fund matched the benchmark target for the quarter, returning 6.32%. Many of theholdings that helped the Loomis Sayles Fund in the quarter, also supported the T. Rowe Price Fund: JP Morgan Chase, Merck,and Pfizer. Despite the struggles for the industrial sector in the quarter, two of the top performing stocks for the fund whereWhirlpool(+36.4%)andIllinoisToolWork(+13.2%).Whirlpool(36.4%)andIllinoisToolWork(13.2%).Both of our large cap growth funds underperformed the benchmark during the quarter. On a positive note, the technology sectorhelped both of our growth funds, with support from common holdings such as Google (+30.1%), Qualcomm (12.6%), Apple(+14.7%), and Amazon (+11.3%). While technology proved beneficial, each fund had other noticeable issues that impactedperformance for the quarter. The Harbor Capital Appreciation Fund returned 5.62% in the quarter, which ranked in the 66thtilfthMitLCGthUiThFdff dflhi hfiltkdi i t tpercentileoftheMorningstarLargeCapGrowthUniverse.TheFundsufferedfrom severalhighprofilestockdisappointments,with Facebook (-30.3%), Chipotle Mexican Grill (-16.4%), Dunkin Brands (-14.6%) Mead Johnson (-8.6%) and Harley Davidson (-7.0%) all proving problematic. The T. Rowe Price Growth Stock Fund faired slightly better, returning 6.07%. The fund’sperformance was impacted by exposure to the industrial sector,with UPS (-8.4%), Federal Express (-8.0%), Praxair (-4.0%) andPrecision Castparts (-0.7%) all posting sub-par returns. The fund ranked in the 50thpercentile of the Morningstar Large CapGrowth Universe.PARS: County of Contra CostaSeptember 30, 2012 DISCUSSION HIGHLIGHTSDISCUSSION HIGHLIGHTSRelative to the various benchmarks for the Plan, our mid-cap segment performance was the most disappointing of any of thesegments within the Plan for the quarter, with both funds underperforming the Russell Mid-Cap Index for the three month period.TheHighMarkGenevaMid-CapGrowthFundreturned33%StockselectioninthehealthcareconsumerdiscretionaryandTheHighMarkGenevaMidCapGrowthFundreturned3.3%.Stockselectioninthehealthcare,consumerdiscretionary,andindustrial sectors all detracted from performance. Top detractors for the quarter included Chipotle Mexican Grill and Gentex (-18%). The managers pointed to “quality” as having a negative impact on the fund. Low quality stocks (“C” and “D” rating fromS&P) outperformed high quality (“A” and “A+” rated stocks) by over 5% during the quarter. Within the Russell Mid-Cap Index,stocks in the lowest quintile for ROE (Return on Equity) gained roughly 3.0%, and stocks in the highest quintile for ROE declinedabout -1.5%. A further measure of quality, price per share, also was quite informative for the quarter. Stocks priced less than$5/sharegainedroughly39%whilestockspricedhigherthan$20/sharegainedjust5%onaverageduringthequarterStocks$5/sharegainedroughly39%,whilestockspricedhigherthan$20/sharegainedjust5%onaverageduringthequarter.Stockspriced at less than $5/share can be viewed as lower in quality. The fund historically does not invest in “lower-quality” stockinvestments. The managers of the TIAA-CREF Mid-Cap Value Fund also pointed to the quality trade as a reason for the fund’sunderperformance in the quarter. The fund returned 4.34% for the quarter. Most of the decline for the quarter came in the monthof September, where the fund underperformed by roughly 1%. Specific holdings that detracted from performance included:Green Mountain Coffee Roasters, Mead Johnson Nutrition, and Lorillard. In telecommunications, the biggest drag onfftibhkSit(693%)dMt PCS(936%)tiltth tperformance camefrom notowningbenchmarknamesSprint(+69.3%)andMetroPCS(+93.6%),two wireless operatorsthatposted gains on rumors of various merger combinations involving T Mobile. Shortly after quarter-end, T Mobile announced that itwould pay a premium to acquire MetroPCS. Both of these companies would be an example of stocks that trade between the $5 -$10 per share level.Afterpostingstrongreturnsforseveralquarters,theREITmarketpausedinthethirdquarter,withtheDJWilshireREITIndexAfterpostingstrongreturnsforseveralquarters,theREITmarketpausedinthethirdquarter,withtheDJWilshireREITIndexposting a decline of -0.14%. Overall, most REIT earnings were in-line with analyst estimates. However, the combination of aREIT universe that is beginning to look fairly valued across a variety of industries, along with REIT management teams that aresounding quite cautious in their forward guidance, combined to create some selling pressure in this asset class for the quarter.The Nuveen Real Estate Securities Fund returned a positive 0.09% return, which was modestly ahead of the benchmark. Thesell-off in apartment REITs had the most dramatic impact on the fund in the quarter, with Camden Property (-3.9%), EquityResidential(-72%)AvalonBay(-32%)andEssexPropertyTrust(-30%)allpostingnegativereturnsforthefundThemanagerResidential(-7.2%)AvalonBay(-3.2%)andEssexPropertyTrust(-3.0%)allpostingnegativereturnsforthefund.Themanagerbelieves that apartment REIT holdings still are an attractive sector within the market as long as the housing market is struggling torecover.PARS: County of Contra CostaSeptember 30, 2012 DISCUSSION HIGHLIGHTSDISCUSSION HIGHLIGHTSOur small cap funds returned 4.19%, which underperformed the Russell 2000 Index return of 5.25%. The T. Rowe Price NewHorizons Fund (small cap growth) underperformed the Russell 2000 benchmark for the quarter, and posted a 4.76% return. Theunderperformance in the quarter stemmed primarily from stock selection in the consumer discretionary sector, where ChipotleMexican Grill, O’Reilly Automotive, Angie’s List, and Zumiez were noticeable detractors. Additionally, underweights in thefi i ldthtffthtWhilthtdi i tithfdtillkith13thfinancialandenergy sectorshurtperformanceforthe quarter.Whilethe quarterwasdisappointing,thefundstillranksinthe13thpercentile, year to date, for small cap growth managers, as measured by Morningstar. The Columbia Small Cap Value Fundlagged the Russell 2000 Index as well during the quarter, and returned 3.86%. Both stock selection and sector positioningproved unhelpful for the fund in the quarter. The biggest negative impact came from the fund’s underweight position in energyand financials. Individual names that hurt performance included Metals USA Holdings, Nu Skin Enterprises, Helen of Troy, andKilroy Realty. A further negative that was cited by the managers was an excessive position in cash during the period.International markets, outside of Japan, enjoyed strong gains during the third quarter. The MSCI-EAFE Index returned 6.92%, asglobal markets, especially Europe, rebounded due to the actions of a variety of central banks. Europe was in the spotlight withthe European Central Bank committing to unlimited bond purchases for EU members that requested support. Combining thismeasure with both the European Stability Mechanism (ESM) and the European Financial Stability Facility, liquidity supportvehicles are now available to members, and the benefits were noticeable as yields for sovereign issues receded throughout thequarter. While challenges still remain in terms of trying to develop growth initiatives to help European nations emerge from therecession, these various measures are encouraging. There is still a long road ahead for many of these European nations.Aside from Europe,the slowingChinese economyis becomingmore ofa focus forinternational investors.As Chinaprepares forp,gygppits biggest political handover in years, political tensions are emerging with Japan over the Senkaku Islands, a chain of islandslocated between Taiwan and Okinawa. The days of China growing over 8% seem to be over, as growth rates of between 5-7%seem to be a more reasonable forecast over the next few years. And for some who doubt the authenticity of ChineseGovernmental statistics, perhaps the true rate of growth is lower than this. China faces a challenge as it transitions from anexport-oriented economy, to one that is more focused on internal domestic consumption. And with one of their largest tradingpartners(Europe)facingaprolongedrecessionthistransitionisallthemoredifficultpartners(Europe)facingaprolongedrecession,thistransitionisallthemoredifficult.India rebounded strongly from a disappointing second quarter, to be one of the leading markets in the third quarter up, +15.4%.Other areas of strength in international markets for the quarter included Germany (+13.9%), Portugal (+13.0%), Norway(+13.6%), Spain (+11.1%), Finland (+10.6%) and the Netherlands (+9.1%). Japan was the noticeable laggard, returning -0.8%.PARS: County of Contra CostaSeptember 30, 2012 DISCUSSION HIGHLIGHTSDISCUSSION HIGHLIGHTSThe Dodge and Cox International Fund was our leading international fund performer in the quarter, returning 7.41%, whichranked in the 23rdpercentile of the Morningstar Foreign Large Blend Universe. From a country perspective, the fund benefitedfrom a 5% overweight to European issues, relative to the MSCI-EAFE benchmark. Additionally, the fund was significantlyunderweight Japan (11.2% vs. the benchmark 20.1%) in the quarter. While two Japanese holdings in the fund, Panasonic (-17%)and Mitsubishi Electric (-10%) detracted from performance, the lack of Japanese corporate exposure benefited the fund.StandoutperformersforthefundcamefromEuropeanfinancialholdingssuchasBarclays(+37%)LloydsBankingGroupStandoutperformersforthefundcamefromEuropeanfinancialholdings,suchasBarclays(+37%),LloydsBankingGroup(+29%), and Banco Santander (+15%). Additionally, the managers pointed to healthcare and construction, as sectors thatboosted returns. Holdings such as Lafarge (+22%), Lanxess (+32%), Sanofi (+13%) and Bayer (+19%) were positivecontributors.The other two international developed market funds slightly underperformed the MSCI-EAFE Index in the quarter. The HighMarkInternationalFundreturned628%inthequarterThefundwasslightlyimpactedbycountryselectionasanoverweighttoInternationalFundreturned6.28%inthequarter.ThefundwasslightlyimpactedbycountryselectionasanoverweighttoJapanese issues and an underweight to Nordic countries hurt returns. The managers are moving to increase their northernEuropean exposure. Currently the HighMark Fund is underweight in emerging market investments. The MFS InternationalGrowth Fund returned 6.44% for the quarter, which also underperformed the MSCI-EAFE Index. Over the past five years, themanagers of the fund have maintained an emerging market allocation between 15 – 23% of fund assets. Currently, the fund ispositioned at a 16% target for emerging markets. With emerging market equities performing well in the third quarter, this was oneslight negative factor contributing to performance. The managers feel that emerging market nations are fairly valued at this point,andthemanagerspointtoselectEuropeancompanies,asattractiveopportunities.Thefundhasa40%allocationtoEurope,exandthemanagerspointtoselectEuropeancompanies,asattractiveopportunities.Thefundhasa40%allocationtoEurope,exUnited Kingdom, where the managers feel comfortable about their holdings in names such as Danone, LVMH, Diageo, Nestle,and Linde. While disappointed that they underperformed the benchmark in the third quarter, the managers stressed that in a verystrong, upward moving market, the investments that the fund holds will likely underperform a higher beta oriented fund.Emerging markets slightly outperformed international developed market returns in the third quarter, with the MSCI-EmergingMarket Index registering a 7.7% return. As mentioned previously, India was one of the leading markets for the quarter, butTaiwan(+109%) Thailand(+111%)andKorea(+99%)alsosupportedreturnsTheRSEmergingMarketFundreturned71%Taiwan(+10.9%),Thailand(+11.1%),andKorea(+9.9%),alsosupportedreturns.TheRSEmergingMarketFundreturned7.1%in the quarter, which slightly trailed the benchmark. Country selection was additive to performance with underweights in Brazil(+4.7%), and overweight positions in South Korea and Taiwan supporting returns. India was a highlight for the fund withholdings such as Mahindra & Mahindra, HDFC, and IDFC supporting returns. A slight underweight to European shares was thedifference in the underperformance relative to the benchmark in the quarter. While slightly underperforming the benchmark, thefund did rank favorably in the Morningstar Emerging Market Fund Universe for the quarter, ranking in the 28thpercentile. Themanagers in their quarterly outlook wish to remind investors that their style is one that seeks out higher growth orientedcompaniesandthatinaperiodofamarketdownturntheirinvestmentsmightfacesomedownsidepricingpressureHowevercompanies,andthatinaperiodofamarketdownturn,theirinvestmentsmightfacesomedownsidepricingpressure.However,over the long-term, the market should reward these types of investments.PARS: County of Contra CostaSeptember 30, 2012 DISCUSSION HIGHLIGHTSDISCUSSION HIGHLIGHTSThe Templeton Global Opportunities Fund was the top returning fund in the Plan for the quarter, returning 9.98% which rankedin the 3rdpercentile of the Morningstar Global Equity Universe. After a difficult stretch of underperformance for roughly the lastthree consecutive quarters, the managers feel somewhat vindicated that their value-oriented approach to global equityinvestinghasbeenrewardedThemanagershavebelievedforsometimenowthatvariousfactorshavecreatedaninvestinghasbeenrewarded.Themanagershavebelievedforsometimenowthatvariousfactorshavecreatedanenvironment where Europe, in particular, is offering a compelling investment opportunity. Despite Europe’s gains in thequarter, Europe still remains historically cheap on every valuation metric. As the managers stated in their quarterly review,“While we can no longer say that the region (Europe) trades at the biggest ever discount to its global peers, we can say that thediscount remained wider at the end of the third quarter than 96% of the time on record”. Similar to the managers at HighMark,new holdings that entered the portfolio hailed from northern Europe. Aside from Europe, the fund benefited from anunderweight to Japanese stocks, and an overeweight to South Korea and Singapore.Fixed IncomeThe Barclays Aggregate Index returned 1.59% for the quarter, as the U.S. Treasury Index returned only 0.6% during the quarter, with two-year yields declining by 7 basis points while thirty-year yields rose by 7 basis points. All non-treasury sectors outperformed rebounding strongly from the prior period as European financial crisis concerns eased Investmentgradeoutperformed, rebounding strongly from the prior period as European financial crisis concerns eased. Investment-grade corporate bonds gained 3.8%, outperforming equivalent duration treasuries by +324 basis points as monetary easing by the world’s central banks provided the catalyst for tighter credit spreads. High yield corporate bonds returned 4.5%, outperformingequivalent duration U.S. Treasury securities by +387 basis points during the quarter due to the continued search for yield byinvestors and the resulting flow of funds into the sector. Investment grade corporate bond spreads ended the quarter at +169basis points, while high yield bond spreads finished at +574, both of which are close to or below their long term averages afterth t dit ll d i th t I t t d d hi h i ld t b d i b t d i ththe strong credit rally during the quarter. Investment grade and high yield corporate bond issuance was robust during the quarter as companies took advantage of low borrowing costs and receptive capital markets. All major corporate sectors posted positive excess returns during the quarter, with the best performance coming from Communications, Energy, Finance, Insurance and Real Estate Investment Trusts, while Technology, Healthcare, Consumer Products and Metals underperformed the Barclays U.S. Corporate Index. PARS: County of Contra CostaSeptember 30, 2012 DISCUSSION HIGHLIGHTSDISCUSSION HIGHLIGHTSThe Pimco Total Return Bond Fund had another strong quarter, posting a 3.15% return which placed it in the 24thpercentile ofthe Morningstar Intermediate-Term Bond Universe. This is on the back of an even stronger second quarter, where the fund wasranked in the fifth percentile. Most of the strategic decisions that worked in the second quarter, continued to bear fruit in the thirdquarter. The fund’s exposure to highyield bonds,emergingmarket debt,Agencymortgages,and corporate bonds all supportedqpgy,gg,gygg ,pppperformance. The managers continue to reduce their duration target, which at quarter end stood at 4.02 years.The separately managed fixed income portfolio returned 1.96% in the third quarter. The strategy outperformed the BarclaysAggregate benchmark this quarter, primarily due to its higher weighting in corporate bonds (45.5% vs. 21%). Individual namesthat positively impacted performance for the quarter included Spanish telecom Telefonica, GAP Stores, Kinder Morgan Energy,VidBkfAiAlhlifthtt ’ilditi idithtdtiVerizon, andBankofAmerica.Alsohelping performance, wasthestrategy’syieldcurve positioning anditsshortdurationpositioning (approximately 95% of the benchmark), as longer dated Treasuries posted negative returns. The managers do notsee rates rising until sometime in 2014. As such, the managers are keeping the strategy’s duration at approximately 95% of thebenchmark. The strategy will remain underweight Treasuries, agencies, mortgages and sovereign/suprantionals. The strategy isoverweight investment-grade corporates, high yield, asset backed securities, and CMBS.U.S. high yield issuance totaled $45 billion in September, which is a record for monthly issuance. For the first nine months of2012, the total high yield issuance in the U.S. totaled approximately $236 billion. A yield hungry investor base, and corporationslooking to take advantage of low interest rates are the two primary catalysts behind the strong issuance trends in 2012. For thequarter, the Pimco High Yield Bond Fund returned 4.09%, which slightly underperformed the Merrill Lynch US HY BB-B ratedindexreturnof445%Thefund’shigheroverallcreditqualitywasanegativeina“riskon”quarterAnunderweighttofinancialsindexreturnof4.45%.Thefund shigheroverallcreditqualitywasanegativeinarisk-onquarter.Anunderweighttofinancialsdetracted from returns as banks outperformed due to the actions from the various central banks. As well, an underweight totelecommunication names also was a negative to performance. Exposure to underperforming, lower-beta sectors such asutilities, capital goods, and energy was also a detractor in the quarter. The fund ranked in the 70thpercentile of the MorningstarHigh Yield Fund Universe.PARS: County of Contra CostaSeptember 30, 2012 INVESTMENT STRATEGY AS OF September 30 2012INVESTMENT STRATEGY AS OF September 30, 2012Tactical Asset Allocation Asset Class% Portfolio WeightingRationaleAsset ClassRationaleTargetCurrent PortfolioOver/Under WeightingCash1%3%2%Cash1%3%Fixed Income45% 42.5%-2.5%We reduced our equity overweight in the quarter, and have increased our allocation to fixed income. We have not amended our long-term forecast for fixed income returns (2-3% over the next five years).(y)High Yield0% 3.5%-High yield should continue to offer attractive opportunities, despite a slowing U.S. economy. Default rates are predicated to remain low. Real Estate (REITS)4%4 75%75%We remain slightly overweight REITs ValuationReal Estate (REITS)4%4.75%.75%We remain slightly overweight REITs. Valuation metrics for a variety of REIT sectors: multifamily, Industrial, regional malls, office, and shopping centers, are becoming fully valued.September 30, 2012PARS: County of Contra Costa Tactical Asset AllocationTactical Asset Allocation Asset Class% Portfolio WeightingRationaleTtCurrent PtfliOver/Under WihtiTargetPortfolioWeightingGlobal Equity8% 6.75%-1.25%Our concerns remain regarding China and Europe. While the recent quarter was positive for European equities, it was more based on central bank liquidity measures. Risk factors compel us to be underweight both global and international equitiesboth global and international equities.International (Developed)10% 5.0%-5%International (Emerging)0% 2.5%2.5%While we are still overweight emerging markets, we did reduce slightly our allocation this quarter. Emerging markets still offer a compelling combination of growth and value.Total Domestic Equity32% 35.5%3.5%4%Large Cap18% 22.0%4%Given the risk factors present from international markets, and given the current valuations of large cap domestic stocks, we remain overweight to U.S. domestic equities.Mid Cap6% 7.0%1%Mid-cap stocks are trading at 13X next year’s earnings The growth prospects appear moreearnings. The growth prospects appear more attractive than small cap equities.Small Cap8% 6.5%-1.5%Based on valuation measures, we are underweight small cap equities.September 30, 2012PARS: County of Contra Costa Investment SummaryInvestment Summary Third QuarterPeriod Ending September 30, 2012Beginning Value 85,524,511.78$ Net Contributions/Withdrawals -31,253.18 Fees Deducted -30,322.47 Income Received 424,625.86Market Appreciation3 014 484 50 Market Appreciation3,014,484.50 Net Change in Accrued Income 6,832.76Ending Market Value 88,908,879.25$ September 30, 2012PARS: County of Contra Costa Asset Allocation6/30/2012 6/30/2012 9/30/2012 9/30/2012 TargetAsset Allocation Market Value % of Total Market Value % of Total AllocationDtiEitAsset AllocationPeriod Ending September 30, 2012Domestic EquityLarge Cap Core Holdings 10,985,023$ 12.9% $11,300,505.66 12.7% -T. Rowe Price Equity Income Fund 2,650,913 3.1% 2,845,658 3.2% -Loomis Sayles Value Fund 2,655,443 3.1% 2,864,225 3.2% -Harbor Capital Appreciation Instl 1,377,672 1.6% 1,349,347 1.5% -T. Rowe Price Growth Stock Fund 1,407,218 1.6% 1,377,058 1.6% -TIAA-CREF Mid-Cap Value Instl 3,234,484 3.8% 3,451,575 3.9%HighMark Geneva Mid Cap Growth Fund 2,396,176 2.8% 2,625,657 3.0% -Columbia Small Cap Value Fund II 3,071,369 3.6% 3,519,504 4.0% -T. Rowe Price New Horizons Fund 2,214,579 2.6% 2,178,037 2.5% -Total Domestic Equity 29,992,876$ 35.2% 31,511,567$ 35.5% 32.0%Range Range 21-57%International HighMark International Opportunity Fund 1,225,583 1.4% 1,784,457 2.0% -Dodge & Cox International Stock Fund 1,200,742 1.4% 1,289,774 1.5% -MFS International Growth Fund123475114%1 314 28415%-MFS International Growth Fund1,234,7511.4%1,314,2841.5%RS Emerging Markets Y 2,347,369 2.8% 2,237,170 2.5% -Total International 6,008,445$ 7.0% 6,625,685$ 7.5% 10.0%Range Range 4-19%GlobalTempleton Global Opportunities A LW 4,943,832 5.8% 6,049,647 6.8% -Total Real Estate 4,943,832$ 5.8% 6,049,647$ 6.8% 8.0%Range Range 4-12%RlEttReal EstateNuveen Real Estate Secs I Fund 4,035,258 4.7% 4,281,213 4.8% -Total Real Estate 4,035,258$ 4.7% 4,281,213$ 4.8% 4.0%Range Range 0-8%Fixed IncomeCore Fixed Income Holdings 23,984,435$ 28.1% $27,031,442.76 30.5% -PIMCO Total Return Instl Fund 6,225,037 7.3% 7,662,573 8.6% -PIMCO High Yield Instl 2,752,695 3.2% 3,039,100 3.4% -Total Fixed Income 32,962,167$ 38.6% 37,733,116$ 42.6% 45.0% Range Range 35-67%CashHighMark Diversified MM Fund 7,355,938$ 8.6% 2,474,085 2.8% -Total Cash 7,355,938$ 8.6% 2,474,085$ 2.8% 1.0%Range Range 0-5%TOTAL85 298 516$100 0%88 675 313$100 0%100 0%September 30, 2012PARS: County of Contra CostaTOTAL85,298,516$ 100.0%88,675,313$ 100.0%100.0% YearInceptionSelected Period PerformancePARS/COUNTY OF CONTRA COSTA PRHCPAccount 6746038001Period Ending: 09/30/2012Sector 3 MonthsYear to Date (9 Months) 1 YearInception to Date (20 Months)Cash Equivalents .01 .01 .02 .02 iMoneyNet, Inc. Taxable .00 .00 .00 .00Total Fixed Income244623844802Total Fixed Income2.446.238.448.02 BC US Aggregate Bd Index 1.59 4.00 5.17 7.06Total Equities 5.28 15.11 28.14 4.42Indiv Domestic Common Stock 4.13 18.14 32.81 7.23Large Cap Funds 6.70 16.83 29.62 5.36Russell 1000 Index63116 2830 06890 Russell 1000 Index6.3116.2830.068.90Mid Cap Funds 3.92 11.86 25.87 4.33 Russell Midcap Index 5.58 13.98 28.02 5.81Small Cap Funds 4.19 13.33 31.87 5.31 Russell 2000 Index 5.25 14.23 31.91 5.74REIT Funds .29 14.78 32.43 10.53 Wilshire REIT Index -.14 14.74 32.43 12.16International Equities 8.35 13.94 19.97 -1.78 MSCI EAFE Index 6.92 10.09 13.75 -3.34Total Managed Portfolio 4.03 10.65 18.26 5.12CtfCtCt38993915 87597*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 ktdll County of Contra Costa3.899.3915.875.97September 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. PARS/COUNTY OF CONTRA COSTA1-Month 3-Month Year-to- 1-Year 3-Year 5-Year 10-YearFund Name Return Return Date Return Return Return ReturnT. Rowe Price Equity Income2.586.3215.0428.90 11.480.557.97PARS/COUNTY OF CONTRA COSTAFor Period Ending September 30, 2012LARGE CAP EQUITY FUNDSqyHarbor Capital Appreciation Instl 2.73 5.62 17.13 25.46 12.73 3.40 8.51Loomis Sayles Value Fund 3.11 7.95 17.41 32.05 9.76 0.08 9.28T. Rowe Price Growth Stock 2.60 6.07 20.17 32.20 14.95 2.50 9.23S&P 500 Index 2.58 6.35 16.44 30.20 13.20 1.05 8.01HighMark Geneva Mid Cap Growth 1.73 3.34 10.89 25.08 16.59 5.00 10.33R ssell Mid Cap Gro th Inde20053513 8826 6914 7325411 11MID CAP EQUITY FUNDSRussell Mid Cap Growth Index2.005.3513.8826.6914.732.5411.11TIAA-Cref Mid-Cap Value Instl 1.26 4.34 12.58 26.44 11.64 0.87 --Russell Mid Cap Value Index 2.23 5.80 14.03 29.28 13.86 1.73 10.96Columbia Small Cap Value II Z 2.49 3.86 10.74 30.93 12.05 1.51 10.58T. Rowe Price New Horizons 2.11 4.76 17.11 33.49 20.90 7.08 13.76Russell 2000 Index3.285.2514.2331.91 12.992.21 10.17SMALL CAP EQUITY FUNDSDodge & Cox Intl Stock 3.44 7.41 10.98 15.67 2.69 -3.70 11.72HighMark Int'l Opportunities Fid 3.45 6.28 12.44 17.09 2.98 -5.62 9.69RS Emerging Markets Y 4.59 7.14 11.90 20.80 4.43 -1.10 17.37MFS International Growth I 3.36 6.44 13.28 20.18 6.99 -0.62 10.82MSCI EAFE Index 2.96 6.92 10.08 13.75 2.12 -5.24 8.20Templeton Global Opportunities A LW33599814 6420 36328396905INTERNATIONAL EQUITY FUNDSTempleton Global Opportunities A LW3.359.9814.6420.363.28-3.969.05MSCI ACWI NR USD 3.15 6.84 12.88 20.98 7.23 -2.07 8.61Nuveen Real Estate Secs I -1.78 0.09 15.19 32.27 21.03 4.01 13.30DJ US Select REIT TR USD -1.97 -0.38 14.47 32.06 20.52 1.60 11.28Pimco Total Return Inst'l08931590811 51769892695REIT EQUITY FUNDSBOND FUNDSPimco Total Return Instl 0.893.159.0811.517.698.926.95BarCap US Aggregate Bond 0.14 1.58 3.99 5.16 6.19 6.53 5.32Pimco High Yield Inst'l 1.17 4.09 11.01 18.02 11.87 7.78 9.76Credit Suisse High Yield Index 1.25 4.27 11.22 17.92 12.55 8.62 10.54Source: SEI Investments, Morningstar InvestmentsReturns 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 valueSeptember 30, 2012PARS: County of Contra Costabelieved to be accurate and reliable. Securities are not FDIC insured, have no bank guarantee and may lose value.