HomeMy WebLinkAboutMINUTES - 02262013 - C.82RECOMMENDATION(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
February 7, 2013 quarterly meeting for the period ending December 31, 2012:
APPROVE OTHER
RECOMMENDATION OF CNTY ADMINISTRATOR RECOMMENDATION OF BOARD COMMITTEE
Action of Board On: 02/26/2013 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: February 26, 2013
David Twa, County Administrator and Clerk of the Board of Supervisors
By: June McHuen, Deputy
cc: Robert Campbell, Auditor-Controller, Russell Watts, Treasurer-Tax Collector, David Twa, County Administrator, Patrick Godley, Health Services Chief
Financial Officer
C. 82
To:Board of Supervisors
From:David Twa, County Administrator
Date:February 26, 2013
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
Fourth Quarter 2012
PARS: County of Contra CostaFourth Quarter 2012Presented byAndrew Brown CFAAndrew Brown, CFA
DISCUSSION HIGHLIGHTSDISCUSSION HIGHLIGHTSThe Plan returned 1.24%, net of fees in the fourth quarter, which trailed the Plan benchmark target of 1.67%. The Plan’s equityperformance was mainly in-line with benchmark targets with the real estate, international equity, small cap equity, domestic fixed income,and large cap funds registering performance that was in-line with their respective benchmark targets. The biggest area of disappointmentforthequarterwasthelargecapcoreequityportionoftheportfoliowhichcontributedtotheshortfallinperformanceforthequarterwasthelargecapcoreequityportionoftheportfolio,whichcontributedtotheshortfallinperformanceThe fourth quarter of 2012 brought an abundance of angst and speculation surrounding how, and when, Congress might resolve itsongoing battle over fiscal policy. As investors worried about the impact of the tax and spending provisions the Budget Control Act of 2011would have on an already fragile economy, Congress showed little inclination to reach a bi-partisan compromise. The result was a layer ofuncertaintyinthefinancialmarketsthatpersistedintotheproverbial“eleventhhour”FinallyoverthelastweekendbeforetheNewYearuncertaintyinthefinancialmarketsthatpersistedintotheproverbialeleventhhour.Finally,overthelastweekendbeforetheNewYear,Vice President Joe Biden and Senate Minority Leader Mitch McConnell negotiated to avoid sequestration. Within seventy-two hours of theirinitial discussions, Congress passed, and the President signed, the American Taxpayer Relief Act (ATRA) of 2012. It appeared that fourplus years of dispute over fiscal policy was resolved in less than three days --- or was it?TheATRAof2012prolongsbytwo months the budget sequestration deadline established in theAct of2011. Congress now has until thepgygqgend of February 2013 (unless extended) to negotiate spending cuts intended to lower the Federal deficit. Much now must be done in ashort amount of time by a group that has had little success reaching any sort of consensus over the past few years. Due to this reality,uncertainty remains high which has not been lost on the financial markets. This thread of uncertainty can be expected to weigh oninvestors, and caution will prevail until a detailed plan to lower deficit spending has been articulated. The sequestration established in theAct of 2011, if allowed to prevail, could threaten the economy in 2013. A compromise would have less impact on the economy, though whatformanycompromisemighttakeispurespeculation.Thisuncertaintyshoulddampenupsidepotential(especiallyintheequitymarkets)formanycompromisemighttakeispurespeculation.Thisuncertaintyshoulddampenupsidepotential(especiallyintheequitymarkets)until a resolution is reached, and failure to pass a needed increase in the debt ceiling could be most damaging.The debate over fiscal policy had a modestly negative impact on U.S. economic output over the fourth quarter of 2012. The third quarterGDP grew at a stronger-than-expected 3.1%, yet appears to have slowed to near 2% in the fourth quarter, as both businesses andconsumers remained reluctant to spend in anticipation of potential tax increases and further economic slowing. The ongoing recession inEurope and a modest slowing in emerging markets detracted from U.S. growth as well. Despite slowergrowth in the fourth quarter, the U.S.added 453,000 jobs over the quarter, keeping the rate of unemployment at 7.8%, a number consistent with the end of the third quarter.Dominant areas supporting job growth include health care, food services, construction and manufacturing.PARS: County of Contra CostaDecember 31, 20121
DISCUSSION HIGHLIGHTSDISCUSSION HIGHLIGHTSLarge cap value outperformed large cap growth by roughly 200 basis points in the quarter. The outperformance of the financial sector,which is a large constituency of large cap value investing, and the underperformance of the technology sector, which has a large allocationin large cap growth indices, drove much of the performance differential. The main focus of the T. Rowe Price Equity Income Fund is tofindhighqualitylargecapcompaniessellingatattractivevaluationlevelswithgooddividendyieldsTheFundhadastrongquarterfindhigh-qualitylargecapcompaniessellingatattractivevaluationlevelswithgooddividendyields.TheFundhadastrongquarter,posting a 1.92% return, which ranked in the 23rdpercentile of the Morningstar Universe of Large Value managers. The outperformancewas due to a combination of sector weightings and stock selection. Within the Fund financial holdings (Bank of America, Sun Life, SallieMae, JP Morgan, Lincoln Financial) and industrial/business services (USG, Eaton, Masco, Avery Dennison) had the largest gains.Information technology had the largest positive impact on relative gains due to stock selection. One positive attribute for the Fund was notowning Apple. Apple was off -19.8% in the quarter, and at quarter-end it had the largest weighting in the S&P500. The managers areffinding new value opportunities in the energy sector. New positions developed in the quarterincluded Hess andApache. Positionseliminated in the quarter included Cooper Industries, Molson Coors Brewing, and Harley-Davidson. The other large cap value fund in thePlan, the Loomis Sayles Value Fund, considers dividend yield, but also seeks to identify companies that are undervalued by the market inrelation to earnings, assets, and growth prospects. The quarter was a strong one for this fund too, with the Fund returning 1.96%, whichranked in the 22ndpercentile of large cap value managers within the Morningstar Universe. Sector exposure within consumer discretionary,materials, and the financial sector supported returns. Investments in JP Morgan (+8.6%), Citigroup (+20.9%), and Comcast (+4.6%)supported returns.With technology shares under pressure in the quarter, it is not a surprise that growth funds lagged their value oriented counterparts. TheHarbor Capital Appreciation Fund returned -1.23% in the fourth quarter, and ranked in the 60thpercentile of the Morningstar Large CapGrowth Universe. Technologyissues such as Red Hat(-7.0%),EMC(-7.2%),Apple(-19.8%),Google(-6.2%),and VM Ware(-2.1%)gy(),(),pp(),g(),()negatively impacted returns. While consumer discretionary stocks did well during the quarter, the Fund’s holdings in Chipotle Mexican Grill(-6.3%) and Whole Foods Market (-6.4%) negatively countered this trend. On the positive side, financial related issues such as Visa(+12.9%) and Mastercard (+8.8%) aided returns. The managers believe that their investments will post double-digit earnings growth in2013, and the focus of the Fund will continue to be in technology shares (36% of the fund on 12-31-12) and consumer discretionarycompanies (21.9% of the fund on 12-31-12). The T. Rowe Price Large Cap Growth Fund performed similarly, declining -1.04% in thequarterwhichplaceditinthe43rdpercentileintheMorningstarLargeCapGrowthUniverseTheunderlyingsectorpositioningfortheTquarter,whichplaceditinthe43percentileintheMorningstarLargeCapGrowthUniverse.TheunderlyingsectorpositioningfortheT.Rowe Price Growth Fund was similar at quarter-end with 35% of the holdings based in the technology sector and 20% allocated toconsumer discretionary holdings. Sector allocation was a drag on relative performance, but was partially offset by positive stock selection.The T. Rowe Price Fund was aided by communication holdings American Tower (+8.2%) and Crown Castle International (+12.6%).Additionally, industrial exposure to Precision Castparts (+16%), Fastenal (+8.5%) and Union Pacific (+5.9%) were positives during thequarter. During the quarter the fund added new positions in Samsung, Philip Morris International, Colgate Palmolive, and Coca-Cola. ThefundeliminatedTeradatafromtheportfolioPARS: County of Contra CostafundeliminatedTeradatafromtheportfolio.December 31, 20122
DISCUSSION HIGHLIGHTSDISCUSSION HIGHLIGHTSThe S&P500 Index returned -0.38% in the quarter. The financial sector returned 5.9% in the quarter, as the sector responded positively tothe actions of central bankers around the globe. Other pro-growth, cyclically oriented sectors that were positive in the quarter included:industrials (+3.6%), materials (+2.7%), and consumer discretionary (+2.1%). Sectors that declined in the quarter included energy (-2.7%),consumerstaples(17%)utilities(28%)technology(57%)andtelecommunications(60%)Thelargecapcoreportfolioreturnedconsumerstaples(-1.7%),utilities(-2.8%),technology(-5.7%)andtelecommunications(-6.0%).Thelargecapcoreportfolioreturned-2.92% in the quarter, versus the S&P500 Index return of -0.38%. The underperformance can be primarily attributed to stock selection inthe consumer discretionary, energy, and technology sectors. Holdings in technology impacted returns, with Apple (-19.8%), EMC (-7.2%),IBM (-7.7%) and Ansys (-8.3%) detracting from performance. Energy stocks also hurt returns, with Chevron (-7.2%), Exxon (-5.4%) andOccidental Petroleum (-11.0%) suffering declines in the quarter. The final area that was a disappointment was the manager’s overweight toconsumer stocks. Dick’s Sporting Goods (-12.3%), Dollar Tree (-16%), and Target (-6.8%) were decliners. In addition, Bed Bath and(%)fOBeyond(-12.0%)was sold in the quarterdue to concerns aboutfuture growth rates.On a positive note, investments in the materials sectorperformed well with Ecolabs (+10.9%), Monsanto (+4.0%), and Praxair (+5.4%) posting gains. The managers’ feel that the first quarterrally is a continuation of a “Fed fueled rally”. Given this, it’s reasonable to question the sustainability of this rally. However, the managersare seeing some “green shoots” within a variety of industries, and this is leading the team to believe that growth may exceed expectations.New positions added to the portfolio this quarter, that support a pro-cyclical economic growth environment include Pall Corp, Kansas CitySouthern, Citigroup, Agilent, and Schwab.The small cap equity segment performed in-line with the benchmark in the fourth quarter, posting a return of 1.84% versus the Russell 2000Index return of 1.85%. In the small cap arena, value outperformed growth by roughly 2.8% in the quarter. Within the Plan, the ColumbiaSmall Cap Value Fund returned 3.46%, while the T. Rowe Price New Horizons Fund posted a negative return of -0.78%. The Columbiafund was aided bysectorexposure to industrials,materials,energy,and consumerdiscretionarystocks. The fund was also the beneficiaryyp,,gy,yyof the merger and acquisition deals surrounding two of their holdings: Metropolitan Health Networks and Alterra Capital Holdings. Themanagers are maintaining a slight cyclical growth tilt, with overweight positions in the technology and industrial sectors, but they stillmaintain an underweight to the financial sector, and specifically to REITs. The T. Rowe Price New Horizons Fund was hindered by stockselection in the energy and consumer discretionary sectors. In the consumer sector, Panera Bread (-7.1%) and Vail Resorts (-6.2%)lagged. While industrial sector holdings Clean Harbors (+12.6%) and Waste Connections (+11.7%) aided returns, the Fund sufferedslightlyfromanunderweighttothissectorslightlyfromanunderweighttothissector.PARS: County of Contra CostaDecember 31, 20123
DISCUSSION HIGHLIGHTSDISCUSSION HIGHLIGHTSWhile the Russell 2000 (small cap) Index experienced more broad based performance, the Russell Midcap Growth’s performance leaderswere more confined to lower quality securities, exemplified by stocks that trade under $5/share and non-earning companies. Theseinvestment categories were up 33% and 49% respectively in 2012. The managers of the HighMark Geneva Mid-Cap Growth Fund cite thisasaprimaryreasonfortheFund’slacklusterperformanceinboththefourthquarteraswellasfortheentiredurationof2012ManyofasaprimaryreasonfortheFund slacklusterperformanceinboththefourthquarter,aswellasfortheentiredurationof2012.Manyofthese lower quality companies come from the biotechnology, materials, and housing-related industries, and the managers of the Fund havestrict balance sheet guidelines that restrict such investments. For the quarter, the Fund returned -0.83%, which ranked in the 82ndpercentile of the Morningstar Mid-Cap Growth Universe. During the quarter, weak investment performance was exhibited from thetechnology, health care, consumer discretionary and energy sectors. These combined four sectors represent 60% of the overall portfolio.Panera Bread (-7.1%), Dick’s Sporting Goods (-12.3%), and Tractor Supply (-10.6%) were significant disappointments. The TIAA-CREFMidCVlFdtdtbl358%tithtFi i lhldidbitiltktMidCapValueFundposteda respectable3.58%returninthe quarter.Financialholdings andbasicmaterialstockswerestrongperformers. W.R. Grace (+13.8%), Ashland (+12.3%), Eastman Chemical (+19.4%), Georgia Gulf (+14%), Ameriprise Financial (+10.5%)and Aon (+6.3%) helped performance. The managers are positioned conservatively relative to their benchmark, both in terms of sectorallocation and by type of stock investments. At quarter end, the portfolio was overweight in sectors such as consumer staples, health care,and utilities, and in less-volatile companies with more conservative balance sheets and strong free cash flows. The managers feel that theearly part of 2013 could see a slowdown in consumer spending due to the impact of the return of the 2% payroll tax, as well as a highercapital gains tax, and an increase in upper-income taxrates. While these impacts will likely impact consumerdiscretionary purchases, theFund is overweight the consumer discretionary sector. However, the managers are invested in holdings they believe will be less impactedby these events: auto parts, homebuilding, and the media.The Plan’s Real Estate Investment Trust stocks returned 2.53% in the fourth quarter, which slightly outperformed the DJ Wilshire REITIndexreturnof248%REITswerethesecondbestperformingsegmentinthePlanduringthequarterThePlanisinvestedintheIndexreturnof2.48%.REITswerethesecondbestperformingsegmentinthePlanduringthequarter.ThePlanisinvestedintheNuveen Real Estate Securities Fund. During the quarter, the managers reduced their allocation to apartment REITs, taking their positionfrom an overweight at the end of the third quarter, to an underweight at the end of the fourth quarter, relative to the benchmark. Theperformance of the apartment sector has struggled over the latter part of 2012 as investors have taken profits in a sector that has had astrong run since 2011. The Fund benefitted from exposure to Prologis (+4.2%), which is an industrial REIT that has a global footprint.Prologis has exposure to Europe, and at least during the quarter, the company benefitted from this European exposure. DefensiveholdingsinthehealthcareandselfstoragesectoralsoaidedtheFundinthequarterwithPublicStorage(+42%)andVentas(+40%)holdingsinthehealthcareandselfstoragesectoralsoaidedtheFundinthequarterwithPublicStorage(+4.2%)andVentas(+4.0%)enjoying strong quarters. In the quarter, the managers increased their allocations to the retail mall segment, as well as the hotel segment,positioning the Fund towards a more economically cyclical focus.PARS: County of Contra CostaDecember 31, 20124
DISCUSSION HIGHLIGHTSDISCUSSION HIGHLIGHTSInternational equity markets were the strongest performing area for the Plan in the fourth quarter, as international markets posted gainsboth in local currency and U.S. dollar denominated terms. Despite concerns regarding a recession in Europe, fiscal cliff issues in the U.S.,elections in the U.S., and uncertainties over China, international markets rallied in the fourth quarter to pull ahead of U.S. equity marketindicesforthecalendaryearWehaveanequalweightingininternationalequitiescurrentlyThishasbeenadifficultpositiontomaintainindicesforthecalendaryear.Wehaveanequalweightingininternationalequitiescurrently.Thishasbeenadifficultpositiontomaintainin that on the surface, unemployment rates of 11.1% in Italy, 26.2% in Spain, 10.7% in France do not inspire confidence. We feel, though,that with strong central bank support, many of these nations have received additional time to fix their issues. In the quarter, ourinternational equity holdings returned 6.5%, which matched the benchmark return.The HighMark International Fund returned 7.5%,which outpaced the MSCI-EAFE Index and ranked in the 21stpercentile ofthe Morningstarg,ppgForeign Large Blend Universe. The manager’s top six ranked markets include: Hungary, Turkey, Belgium, Hong Kong, Singapore, andIndia. At quarter-end these six countries represented a combined 22.7% portfolio allocation. These allocations are significant both inabsolute size, but also in terms of the relatively small allocation that some of these countries represent in the international benchmark.During the quarter, the managers moved to an overweight to investments in Eurozone Europe (26% allocation vs. the benchmark allocationof 19%). The managers highlight Belgium, France, Germany, Netherlands, France, and Austria as being attractive. The portfolio’semergingmarketweightingendedthequarterupsignificantly(214%fromjustover15%attheendofthethirdquarter)Theincreasewasemergingmarketweightingendedthequarterupsignificantly(21.4%fromjustover15%attheendofthethirdquarter).Theincreasewasdue to initial positions established in Brazil (1.4%) and India (1.7%). As well, the managers feel more confident about the prospects inChina, and increased their investments in Chinese companies.The strongest contributing fund in the fourth quarter was the Dodge and Cox International Stock Fund, which returned 9.06% in the quarter.An underweight to Japan and an overweight to Europe (ex-UK) aided results. Holdings in the financial, construction, and health caresectors were mentioned by the managers as aiding performance. Within financials, Sabanci Holding (+25%), Barclays (+23%),Aegone(+22%) and Credit Suisse (+15%) were stand-outs. Within the construction sector, Lafarge and Cemex each returned over 18% in thequarter. Other holdings highlighted by the managers included BMW (+31%), Nokia (+49%), and Infineon Technologies (+27%).The MFS International Growth Fund returned 5.68% for the fourth quarter which ranked in the 52ndpercentile of the Morningstar ForeignLargeGrowthUniverseThemanagershighlightedexposuretoEuropeanConsumersharesasaprimaryreasonfortheslightLargeGrowthUniverse.ThemanagershighlightedexposuretoEuropeanConsumersharesasaprimaryreasonfortheslightunderperformance in the quarter. While the top holding in the Fund, LVMH enjoyed a fabulous fourth quarter in posting a 25.3% gain,positions in Nestle (+3.1%), Diageo (+3.4%), and Pernod-Ricard (+2%) were detractors in a quarter where the MSCI-EAFE Index returned6.57%. While these large multi-national corporations detracted from performance in the quarter, these are the types of high-quality,sustainable-durable franchises that the management team focuses on. These companies are market leaders with experiencedmanagement teams, and have competitive advantages that allow them tomaintain both higher returns and earnings growth versus theirPARS: County of Contra Costapeers.December 31, 20125
DISCUSSION HIGHLIGHTSDISCUSSION HIGHLIGHTSIn November we sold out of the RS Emerging Market Fund, and initiated an investment in the Schroder Emerging Market Fund. Thisinvestment change was made because the RS Emerging Market Fund had decided to replace the sub-advisor on the Fund Ballie Gifford,with a team from Principal Asset Management. From our perspective, we were quite comfortable with the Ballie Gifford team, and we areunfamiliarwiththeteamfromPrincipalAssetManagementBecauseofthischangewehavemovedtheemergingmarketfundunfamiliarwiththeteamfromPrincipalAssetManagement.Becauseofthischange,wehavemovedtheemergingmarketfundinvestments into the Schroder Emerging Market Fund. Schroders has over 200 years of financial services experience with over 2,900employees based in 26 countries. As of June 2012, they had $305.1 billion in assets under management, of which $22 billion was investedin emerging markets. The team has 5 global sector portfolio managers, and they are supported by over fifty market analysts located in their11 global offices. Their investment philosophy seeks to outperform the MSCI-Emerging Market Index through a combination of quantitativeanalysis and fundamental research. They anticipate 50% of their value added will come from stock selection and 50% will come fromcountry selection.The MSCI-Emerging Market Index registered a 5.58% return for the fourth quarter. While we were invested in the Schroder EmergingMarket fund for half of the quarter, this fund returned 7.08% for the full fourth quarter period, which outperformed the benchmark. In thequarter, the Fund benefitted from positions in China +12.8%, Turkey +18.4%, and the Philippines +11.5. The Fund also receivedcontributions from stock selection in Brazil (Vale, Lojas Renner, and Brasil Foods), Russia (Lukoil) and India (HDFC Bank, Tata Motors andICICI Bank). In the quarter, a strategic shift was made with additional investments added to Mexico, Poland, Turkey, and South Africa. Themanagers reduced their China exposure in the quarter. The managers are encouraged about the current state of emerging marketinvesting. They believe the asset class is poised to perform in an environment with valuations trading roughly at a 10X price to earningsbasis, compared with historic forward multiples of 12X, while earnings are estimated to growth between 10 – 15%.PARS: County of Contra CostaDecember 31, 20126
DISCUSSION HIGHLIGHTSDISCUSSION HIGHLIGHTSIn the Plan’s global equity segment, the Templeton Global Equity Fund returned 6.66%, which compared favorably with the MSCI-ACWIIndex return of 2.89%. The Fund was ranked in the 7thpercentile of the Morningstar World Fund Universe. Additionally, the Fund was thetop performing fund in the Plan for 2012, registering a 22.27% return for the calendar year. The quarter was marked by continued strongperformancefrombothEuropeandAsiaaswellastheFundbeingabletoavoidforthemostpartthedisappointingJapaneseequityperformancefrombothEuropeandAsia,aswellastheFundbeingabletoavoid,forthemostpartthedisappointingJapaneseequitymarket. The managers have pointed out that while the Fund typically invests in larger capitalized corporations, over the course of 2012 theFund has seen the average market capitalization of their holdings meaningfully contract, with the managers increasing their allocation toglobal mid-cap equities. As well, the managers have also increased their investment allocation to emerging markets, where the valuationshave contracted. Previously, the Templeton Fund has avoided emergingmarket investments, as the valuations have typically been viewedas excessive. In 2012 though, emerging market stocks fell to their cheapest levels relative to developed market stocks since the depths off%fthe globalfinancial crisis, according to the managers. The Fund now has roughly a 17%allocation to emerging markets as ofthe quarterend. While emerging markets are attractive to the managers, the Fund is still heavily invested in Europe (47% at quarter end). Based onTempleton’s work, the firm views Europe as having eight of the world’s 10 cheapest markets, based on cyclically adjusted P/E ratios. Theyfeel comfortable with their positions in Europe, especially with the backstop that the European Central Bank has provided since thesummer.Fixed IncomeThe Barclays U.S. Aggregate Bond Index gained 0.22% in the fourth quarter, as investment-grade corporate bonds posted a gain of 1.1%,while agency mortgage-backed securities and U.S. Treasury returns were slightly negative. The Barclays U.S. Treasury Index lost amodest-010%duringthequarteras10and30yearbondyieldseachrose13basispointsrespectivelyAllnon-treasurysectorsmodest0.10%duringthequarteras10and30yearbondyieldseachrose13basispointsrespectively.Allnontreasurysectorsoutperformed, with the exception of agency mortgages, as global monetary stimulus and an easing of the European financial crisis drove ademand for risk assets. The Barclays U.S. Aggregate Bond Index generated an excess return of +21 basis points, having outperformedequivalent duration Treasuries in all but three periods since January 2009. Investment-grade corporate bonds gained 1.1%, outperformingequivalent duration treasuries by +120 basis points as improving fundamental conditions in the US and further monetary easing measuresby the Federal Reserve provided the catalyst for tighter credit spreads. High yield corporate bonds returned 3.3%, outperforming equivalentdurationUSTreasurysecuritiesby+325basispointsduringthequarterduetothecontinuedsearchforyieldbyinvestorsandpositivedurationU.S.Treasurysecuritiesby+325basispointsduringthequarterduetothecontinuedsearchforyieldbyinvestorsandpositivemoney flows into the sector. Investment grade corporate bond spreads ended the year at +153 basis points, while high yield bond spreadsfinished at +531, both of which are slightly below their long term averages. Both investment grade and high yield corporate bond issuancewere robust as companies took advantage of low borrowing costs and receptive capital markets. Among quality tiers, BBB rated corporatebonds fared the best, generating an excess return of +180 basis points, while AA and above rated securities lagged on a relative basis at+37 basis points of outperformance.PARS: County of Contra CostaDecember 31, 20127
DISCUSSION HIGHLIGHTSDISCUSSION HIGHLIGHTSThe core fixed income portfolio generated a 0.35% return, vs. the benchmark of 0.22%. The duration target (interest rate sensitivity) of theportfolio was in-line with the benchmark at the end of the quarter at 94% (4.55 years vs. 4.84 years for the benchmark). Performance wasaided by both Build America Bonds and corporate bond exposure, but in a quarter where lower quality issues faired best, the overallportfolio quality of Aa3, held back returns. Over the course of the quarter, the fixed income portfolio sought to reduce exposure to morecyclicallyorientedcorporatebondissuers,andtilttheportfoliotomorestableindustriessuchasconsumerstaplesandhealthcare.Duringcyclicallyorientedcorporatebondissuers,andtilttheportfoliotomorestableindustriessuchasconsumerstaplesandhealthcare.Duringthe quarter, new corporate bond positions were established in the following companies: McKesson, CVS, BP, Royal Bank of Canada,Oracle, TCI, Teva Pharmaceuticals, Dow Chemical, Intel, and Toyota Motor Credit. Additionally, the strategy seeks to maintain anunderweight in U.S. Treasuries given their lack of perceived value. Finally, the managers modestly increased their allocation to assetbacked issuers in the quarter.ThPiTtlRtBdFd’tf117%ithfthtdfft2012ff tTh117%ttdthThePimcoTotalReturnBondFund’sreturn of1.17%inthefourthquartercappedoffastrong2012effort.The1.17%return outpacedtheBarclays Aggregate Index return and placed the Fund in the 22ndpercentile for the quarter. For the year, the fund returned 10.36%. In thequarter, the Fund benefited by an underweight to U.S. Treasuries as most spread product outperformed. An allocation to non-Agencymortgages, holdings in Build America Bonds (BABs), and exposure to emerging market bonds supported performance. Emerging marketassets benefitted from a decline in yields and a rise in the underlying currency as many EM currencies appreciated, in the face of CentralBanks from developed markets engaging in quantitative easing. Brazil was highlighted as a favorable market for the Fund. Mortgageexposure for the fund was reduced from 49% of Fund assets at the beginning of the quarter, to a 42% position at the end of the quarter.The managers offered that they will continue to decrease their holdings in Agency mortgages as they believe these assets are fully priced,with limited upside following central bank actions. The managers also wish to maintain their exposure to select corporate and quasi-sovereign bonds in countries with strong financial positions (balance sheets), such as Brazil and Mexico.InthehighyieldsectorspreadsoverUSTreasuriesendedtheyearat531basispointswhichrepresentsa43basispointtighteningInthehighyieldsector,spreadsoverU.S.Treasuriesendedtheyearat531basispoints,whichrepresentsa43basispointtighteningthroughout the quarter, and close to 200 basis point tightening for the course of 2012. In the quarter, all of the major sectors within highyield were up with technology (+2%), telecom (1.8%), and utilities (+3.0%) the leading sectors. Default activity was very low in the quarter,and is expected to stay at low levels throughout 2013. New issuance in 2012 hit an all-time record with $322 billion. The Pimco High YieldBond Fund recorded a 3.19% return for the quarter, which ranked in the 45thpercentile of the Morningstar High Yield Universe. The returnwas only slightly ahead of the B of A Merrill Lynch U.S. High Yield, BB-B Rated Index return of 2.71%. The Fund was aided by Europeanhi hildllitltifthtilittWhilfd tltilltbtdiddthhighyieldexposure, as wellas securityselectionfromtheutilitysector.Whilefundamentalsstillappeartobestrong, wedidreducetheallocation to high yield by 1% in the quarter, moving from 3.5% of Plan assets to 2.5%. Profit taking was the primary motivation in reducingthe exposure.PARS: County of Contra CostaDecember 31, 20128
INVESTMENT STRATEGYINVESTMENT STRATEGY As of December 31, 2012Tactical Asset Allocation Asset Class% Portfolio WeightingRationaleTargetCurrent PortfolioOver/Under Weighting Cash1.00% 3.00% 2.00%Fixed Income45.00% 42.75% -2.25%We moved 1% from real estate securities to fixed income during the quarter. Over the intermediate-term, we do notanticipate fixed income returning in excess of 2- 3%.High Yield0.00% 2.50% -We reduced the high yield allocation by 1% in the quarter. High yield spreads continue to tighten, and the totalreturn for high yield topped 14% in 2012, leaving the asset class somewhat over bought.Real Estate (REITS)4.00% 4.00% -We reduced our REIT position by 1% in the quarter. Valuation metrics for a variety of REIT sectors: multifamily,industrial, regional malls, office andshopping centers are fairly valued.Global Equity8 00%7 50%-0 50%WeareslightlyunderweightglobalequitiesChinaseemstohaveregainedsomemomentumbutEuropeisstillGlobal Equity8.00%7.50%0.50%Weareslightlyunderweightglobalequities.Chinaseemstohaveregainedsomemomentum,butEuropeisstillstruggling economically. On the positive side, global equity dividend yields and pay-out ratios look appealing in theface of historically low bond yields.International (Developed)10.00% 5.00% -5.00%While valuations are cheap in some international markets, Europe remains in a recession, and we do not see a planfor growth. The rally in global/international assets seem to be more about central bank liquidity measures, than aturnaround in fundamentals.International (Emerging)0.00% 2.75% 2.75%The current allocation is near the upper limit of the Plan’s policy range. Emerging markets offer a compellingcombination of growth and value.Total Domestic Equity32.00% 35.00% 3.00%Large Cap18.00% 22.00% 4.00%Given the risk factors present from international markets, and given the current valuations of large cap domesticstocks, we remain overweight to U.S. domestic equities.Mid Cap6.00% 7.00% 1.00%Mid-cap stocks are trading at 14X next year’s earnings. The growth prospects appear more attractive than small capequities.Small Cap8.00% 6.00% -2.00%While small cap valuations seem somewhat reasonable at 15X 2013 expected earnings, large and mid-capvaluations appear more attractive.December 31, 2012PARS: County of Contra Costa9
AtAllti9/30/20129/30/201212/31/2012 12/31/2012 TargetAsset AllocationMarket Value% of Total Market Value % of Total AllocationAsset AllocationPeriod Ending December 31, 2012Domestic EquityLarge Cap Core Holdings 11,300,506$ 12.7% $12,057,862.00 12.7% -T. Rowe Price Equity Income Fund 2,845,658 3.2% 2,864,100 3.0% -Loomis Sayles Value Fund 2,864,225 3.2% 2,865,974 3.0% -Harbor Capital Appreciation Instl 1,349,347 1.5% 1,433,298 1.5% -T. Rowe Price Growth Stock Fund 1,377,058 1.6% 1,448,246 1.5% -TIAA-CREF Mid-Cap Value Instl 3,451,575 3.9% 3,811,253 4.0%HighMark Geneva Mid Cap Growth Fund2 625 65730%284306330%-HighMark Geneva Mid Cap Growth Fund2,625,6573.0%2,843,0633.0%-Columbia Small Cap Value Fund II3,519,5044.0%3,641,3073.8% -T. Rowe Price New Horizons Fund2,178,0372.5%2,161,0472.3% -Total Domestic Equity31,511,567$ 35.5% 33,126,150$ 34.9% 32.0%RangeRange 21-57%International HighMark International Opportunity Fund1,784,4572.0%1,942,8732.0% -Dodge & Cox International Stock Fund1,289,7741.5%1,426,9771.5% -MFS I t ti l G th F d1 314 28415%143326115%MFS International Growth Fund1,314,2841.5%1,433,2611.5%-RS Emerging Markets Y2,237,1702.5%-- -Schroder Emerging Market Equity--2,478,0792.6% -Total International 6,625,685$ 7.5%7,281,190$ 7.7% 10.0%RangeRange 4-19%GlobalTempleton Global Opportunities A LW6,049,6476.8%7,163,7007.5% -Total Real Estate6,049,647$ 6.8%7,163,700$ 7.5% 8.0%RangeRange 4-12%Real EstateNuveen Real Estate Secs I Fund4,281,2134.8%3,831,5684.0% -Total Real Estate4,281,213$ 4.8%3,831,568$ 4.0% 4.0%RangeRange 0-8%Fixed IncomeCore Fixed Income Holdings27,031,443$ 30.5% $30,210,293.0031.8% -PIMCO Total Return Instl Fund7,662,5738.6%8,084,4228.5%-,,,,PIMCO High Yield Instl3,039,1003.4%2,334,2492.5% -Total Fixed Income37,733,116$ 42.6% 40,628,964$ 42.8% 45.0% Range Range 35-67%CashHighMark Diversified MM Fund2,474,085$ 2.8%2,879,9423.0% -Total Cash2,474,085$ 2.8%2,879,942$ 3.0% 1.0%RangeRange 0-5%December 31, 2012PARS: County of Contra CostaTOTAL88,675,313$ 100.0% 94,911,514$ 100.0% 100.0%10
Investment SummaryPeriod Ending December 31, 2012Investment SummaryFourth QuarterBeginning Value88,908,879.25$ Net Contributions/Withdrawals5,065,686.60 Fees Deducted-31,802.45 Income Received1,565,045.38 Market Appreciation-362,068.56 Net Change in Accrued Income-816.96Ending Market Value95,144,923.26$ December 31, 2012PARS: County of Contra Costa
Selected Period PerformanceInception to DatePARS/COUNTY OF CONTRA COSTA PRHCPAccount 6746038001Period Ending: 12/31/2012Sector3 Months 1 Yearto Date (23 Months)Cash Equivalents .00 .02 .02 iMoneyNet, Inc. Taxable .00 .00 .00Total Fixed Income .75 7.03 7.36BC US Aggregate Bd Index22423624 BC US Aggregate Bd Index .224.236.24Total Equities1.83 17.22 4.82Individual Securities-2.92 14.71 4.49Large Cap Funds.95 17.94 5.16 S&P 500 Composite Index-.38 15.98 7.90Mid Cap Funds1.65 13.71 4.64 Russell Midcap Index2.88 17.26 6.60Small Cap Funds1.84 15.42 5.60 Russell 2000 Index 1.85 16.34 5.98REIT Funds2.53 17.68 10.53 Wilshire REIT Index2.48 17.5911.91International Equities 6.50 21.34 1.74 MSCI EAFE Index 6.57 17.32 .37Total Managed Portfolio 1.27 12.05 5.12Total Account Net of Fees 1.24 11.91 4.99Inception 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 Costa Benchmark*1.67 11.226.08December 31, 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 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 Income18419217 2517 2510 26158722PARS/COUNTY OF CONTRA COSTAFor Period Ending December 31, 2012LARGE CAP EQUITY FUNDST. Rowe Price Equity Income 1.841.9217.2517.2510.261.587.22Harbor Capital Appreciation Instl 0.64 -1.23 15.69 15.69 9.11 2.99 8.03Loomis Sayles Value Fund1.62 1.96 19.70 19.70 9.20 0.85 8.52T. Rowe Price Growth Stock0.29 -1.04 18.92 18.92 11.25 2.64 8.25S&P 500 Index0.91 -0.38 16.00 16.00 10.87 1.66 7.10HighMark Geneva Mid Cap Growth 0.63 -0.83 9.97 9.97 13.64 4.87 10.02RllMidCGthId17916915 8115 8112 9132310 32MID CAP EQUITY FUNDSRussell Mid Cap Growth Index1.791.6915.8115.8112.913.2310.32TIAA-Cref Mid-Cap Value Instl 2.58 3.58 16.60 16.60 11.40 2.45 11.19Russell Mid Cap Value Index2.64 3.93 18.51 18.51 13.39 3.79 10.63Columbia Small Cap Value II Z4.23 3.46 14.57 14.57 12.00 3.14 10.45T. Rowe Price New Horizons1.57 -0.78 16.20 16.20 18.61 8.00 12.69Russell 2000 Index3.561.85 16.35 16.35 12.25 3.569.72SMALL CAP EQUITY FUNDSDodge & Cox Intl Stock5.64 9.06 21.03 21.03 4.96 -1.89 11.63HighMark Int'l Opportunities Fid3.88 7.50 20.87 20.87 4.50 -3.97 9.85Schroder Emerging Market Equity Inv (1)5.85 7.08 21.73 21.73 4.79 -0.03 0.00MFS International Growth I2.42 5.68 19.71 19.71 7.24 0.45 10.84Templeton Global Opportunities A LW3.91 6.66 22.27 22.27 4.81 -2.43 9.07MSCI ACWI NR22728816 1316 13663-1 16811INTERNATIONAL EQUITY FUNDSMSCI ACWI NR2.272.8816.1316.136.63-1.168.11MSCI EAFE Index3.20 6.57 17.32 17.32 3.56 -3.69 8.21Nuveen Real Estate Secs I3.60 2.54 18.34 18.34 18.60 7.26 13.44DJ US Select REIT TR USD3.77 2.31 17.12 17.12 17.94 5.08 11.48Pimco Total Return Inst'l0.251.1710.3610.367.758.346.82REIT EQUITY FUNDSBOND FUNDSPimco Total Return Instl 0.251.1710.3610.367.758.346.82BarCap US Aggregate Bond-0.14 0.21 4.21 4.21 6.19 5.95 5.18Pimco High Yield Inst'l1.40 3.19 14.55 14.55 10.82 8.39 9.18Merrill Lynch US High Yield BB-B1.13 2.71 14.36 14.36 11.48 9.08 9.38Source: SEI Investments, Morningstar Investments(1) Fund was added to the Plan in November 2012Returns less than one year are not annualized Past performance is no indication of future results The information presented has been obtained from sourcesDecember 31, 2012PARS: County of Contra CostaReturns 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.13