HomeMy WebLinkAbout04.b. PFM Asset Management LLC's independent review of the GASB 45 Trust and OPEB (Other Post-Employment Benefits) Trust investments, 4mbo
1GHMARjN.
CAPITAL MANAGEMENT
February 16, 2017
Cent-al Contra Costa Sanitary District
5019 Imhoff Place
Martinez, CA 94553-4392
E. PFM OPEB Trust review
Dear Finance Comimitteer
We have had the opportunity to review the OPEB Plan analysis provided by PFM Asset
Ma nagem ent LLC. We have a hi h amount of respect for PFM as an institution, and we believe
that they presented several topics that are worthy of further discussions with respect to potential
adoption within our management of the OPE Plan for the District- The review focused on six
components: investment guidelines,-asset allocation, plan performance, performance monitoring
and reporting«Ρ i n vestment m anagers, and fees- We will provide comm tints below on these six
topics, and look forward to further discussions next Tuesday at our meeting-
Investment Policy:
There were two observations put forth.
a. Policy states asset allocation ranges and targets for broad asset classes but no
overall portfolio benchmark.
On page five of the investment guidelines document("guidelines"),we list a portfolio
blended benchmark, with corresponding asset allocation targets for the sub-asset classes
that we invest in. Perhaps as a follow up, if we were to amend the investment guidelines,
we cou ld be more clear I n e stabl is hi ng this al location a s a n"official" benchma rk to rg et for
the Plan.
L Security guidelines and total portfolio blended benchmark are very spedific and
quite restrictive,but weights don't correspond to overall target alljocation for the
portfolio.
On the top of page four of the guideli
ines, we offer a policy quideline,target of 50%equity,
45%fixed income, and 511/o cash for the Plan- On page five,that is what we calculate
when we add up the sub-classes depicted on the portfolio blended benchmark- We are
counting REITs as an equity, perhaps that is the difference here. VVIth respect to being
too restrictive, we have never felt that our hands were tied with respect to achieving YOUr
investment objectives with the asset classes and/or managers that we invest with. We
understand PFM's point about using the Russell 3000 Index, and MSCI ACWI ex-US
Indices, as these are a bit more broad in scope. There can be advantages and
disadvantages with this approach.
With respect to high yield, good catch. There is an inconsistency in the report, which
should be corrected- The preferred benchmark has changed over the years and the
documentation should be updated.
Regarding the use of alternatives, we do have several clients that allow us to invest in
alternative asset solutions We have mentioned this option in the past to the committee,
but it was not viewed as something we should actively pursue. Asa firm, Highmark
believes that the inclusion of alternative investments can reduce the risk in a portfolio,
and potentially increase the return. We would be happy to review this topic with the
committee.
Asset Allocation:
PFM's commentary here was important.
a. current allocation is likely to achieve actuarial return assumption of 5.25% over the
long-term.
b. PFMAM expects portfolio to underperform actuarial return assumption of 6.25% in
the intermediate-term.
The notion of risk tolerance,with respect to the equity allocation, has been a topic in
every meeting that I have attended at the District since managing the Plan in-2000.
There has been a desire to maintain a conservative stance with respect to Plan design on
behalf of the District, yet still seek to obtain an investment return that would meet or
exceed the actuarial expected rate of return. On page 14 of the review, PFM puts forth
that the Plan allocation is more conservative than most Public Plans <$100 million, and
the allocation target should exceed 6.25% long-term. In the short-run (1-7 years), 6.25%
may be difficult to achieve. Given the low interest rate environment that we are in, fixed
income returns will likely be disappointing, and below the investment return level that we
assume for a longer investment horizon. And with 40-60%of the portfolio invested in
fixed income, this will likely provide a headwind to attain 6.25% in the near-term. PFM
highlights further diversification in fixed income, and that could be a solution to consider.
Our addition in the fourth quarter of 2016 of the Eaton Vance Floating Fate High Income
Fund is an example of diversification in the fixed income universe. However, at the end
of the day,fixed income returns will likely disappoint for the next several years, and that
will likely be a hindrance to obtaining the target rate of return.
Given that historically the Plan has not distributed much, if any, of the Plan assets to
either pay for benefits, or reimburse for prior year expenses, a 5%target could certainly
be lowered to a 1 --2%target level.
Plan Performance:
The report analyzed results for the period ending June 30, 2016. The report discussed
short falls with respect to the blended benchmark. The performance lag can be attributed
to both asset allocation decisions and manager performance. With respect to asset
allocation decisions, for the better part of the last three years, we have chosen to be
either equal weight or underweight with respect to the equity allocation Plan targets. This
was our decision, and not based on the District's risk tolerance considerations. We were
not significantly under the 50%target allocation, but in a period where the S&P 500 Index
was up 11.6% annualized (three year annualized return thru 6-30-20.16), and the
Barclays Capital Aggregate Index returned 4.1% (three year annualized return thru 6-30-
2016), investing more in equities would have supported returns. Secondly, with respect
to asset allocation, we have maintained an overweight to international equities for the
majority of the previous three years. The MSCI-EAFE Index returned 2.1%annualized
over the past three years, which is much lower than the previously highlighted S&P500
Index return.
An area that is not unique to the District's Plan has been the struggle that has taken
place in the world of active management. Mutual fund managers who.are hired to
outperform certain target indices, have struggled mightily over the last three years.
Reasons highlighted by managers include:falling equity correlations, high level of
expenses,the flood of investment dollars leaving active management into passive index
products, and the impact of the government's quantitative easing measures that have
distorted market asset performance. Thru December 31, 2016,the number of large cap
managers who have outperformed their category benchmark was 14% over a rolling 5-
year period. The number of mid cap equity managers who have outperformed their
category benchmark was 27% over the same rolling 5-year period.
With respect to our large cap managers in the Pian, over the three and five year horizons
they have for the most part, performed well on a relative basis, compared with their
peers. The following statistics represent the period ending December 31, 2016. The
Columbia Contrarian Core Fund ranked in the 26th percentile of managers in the Large
Cap Core Morningstar Universe for the 3-year period and in the 6th percentile for the 5-
year period. The Dodge and Cox Stock Fund ranked in the 1 2t" percentile for the 3-year
period and the 1 st percentile over the 5-year horizon in the Morningstar Large Cap Value
Universe. The T. Rowe Price Growth Stock Fund ranked in the 27 percentile of large
cap growth managers in the Morningstar Universe over the 3-year horizon, and the 9th
percentile for the 5-year period. The Harbor Capital Appreciation Fund, another large
cap growth manager, ranked in the 39th percentile(3-Year)and 30th percentile(5-Year)
as well. The challenge though has been beating benchmark targets. Despite the Dodge
&Cox Fund ranking in the 12th percentile of large cap value managers over the last three
years,the return of 8.55%, was slightly under that of the S&.P500 Index 8.87%. over the
last five years,these managers have posted a slightly better record versus the S&.P500,
however it should be pointed out that we have not held all of these managers over this
five year period.
PFM also provided a review surrounding calendar year returns. We typically do not
present to clients performance on a calendar year basis. When we calculated the
calendar year performance for the Plan, in five of the previous eight calendar years
(including the abbreviated 2009 period),we outperformed the blended benchmark. In
this bull market that we have witnessed since 2009, more criticism could be applied to
HighMark missing the upside, rather than protecting on the downside.
Performance Monitoring & Reporting:
There were three observations put forth by PFM:
a. Current performance reporting provided by PARS and HighMark lack
quantitative and qualitative analytics accepted as industry best practices.
My comments will focus on the HighMark report. The quarterly report contains an asset
allocation snapshot(pie chart), asset class breakdown based on holdings, Plan
performance report based on asset segment, and a manager/mutual fund performance
report which shows returns and peer rankings. Accompanying this `quantitative report' is
a 2-3 page written overview of market highlights and noteworthy contributors to
performance for the previous quarter. We do have several clients that ask for more in-
depth analysis with respect to the performance, and a deeper look into the capital
markets. If the committee would like something more extensive, we can accommodate.
b. Reporting comes from different sources and is not consolidated into a
comprehensive report.
We do not consolidate our reports with PARS or US Bank. The Trustee(U.S. Bank) does
not provide investment performance reports, although their statement should be
considered the asset value of record.
c. Reports do not show manager performance vs. peer group
A request was made by the District in 2016 to show manager peer rankings. It should
have been incorporated in the June 30th report that PFM reviewed. It is something we do
provide to the District.
Inves amen t Managers:
PFM listed the underlying investment platform,while making several recommendations with
respect to manager line-up and active-passive allocations.
a.' Reducing the number of funds used would simplify monitoring and will probably
reduce Investment management expense.
Less managers would make the investment manager's life easier, but it would not necessarily
reduce the investment management expense.
b. The District should consider using passive Investment strategies for`efficient'
asset classes like U.S.equity and international equity. Passive strategies reduce
underperformance risk while lowering all-in fees.
The underperformance of the Plan's managers relative to a passive benchmark, is not an event
isolated to 2016. It has been an industry-wide phenomenon that has stretched out over several
years. When will things change? We cannot tell you, but we have not sat back and waited for
things to get better. In early 2016, we moved the mid-cap equity segment from active to a
completely passive approach. The disappointing performance of our mid-cap managers,
combined with the lack of conviction in finding a suitable replacement, led us to this action. In
the fourth quarter of 2016, we eliminated one of our large cap equity active managers, and placed
the proceeds into a Vanguard Growth and Income Fund that seeks to generate returns in-line
with the underlying S&P 500 Index. The Vanguard allocation is 10%of Plan assets and 40%of
the large cap equity allocation. combining this position with the mid cap index funds gives the
Plan 28%of passive exposure in the equity segment. Is this the right number? I don't know.
We have GPEB clients who have asked for a higher percentage of passive exposure, and we
have clients that have requested 100% passive exposure. We are flexible in working with all of
our clients to develop customized investment solutions.
c. PFM highlighted other asset classes that might be candidates for passive
investing.
International:While adding passive exposure would reduce some of the embedded fees
incurred by the Plan,we would not be inclined to excessively allocate to passive in the
international arena.
US REIT: Potentially this might be one area to explore a passive option. At the current allocation
of 1.5%of Pian.assets,there is not a large pick up in reduced embedded expenses.
Fixed income:We agree with PFM on their views regarding the advantages of active
management. one area to explore with the committee is the possible development of an
individually managed fixed income portfolio within the Plan. While still using the Prudential and
the Pimco managers, we could carve out a large portion of the bond segment, and purchase
individual bonds, and possibly save .08%to .1% in embedded costs.
Fees:
a. Administrator and Investment advisor fees are competitive.
Check.
b. overall portfolio's investment management fee of 0.58% is relatively high for a Plan
of this size with no alternative investments.
With the addition of the Vanguard Growth and Income Fund, our current embedded fees have
declined to 0.51%. Fees and expenses are an important component of return. To the extent that
we can reduce them, all things being equal, returns should improve at the margin. Despite the
disappointing recent track record of active management, we believe it would be a mistake to
completely ditch active management at this point in the cycle, and adopt an entirely passive
equity approach. We have migrated towards a passive/active hybrid approach in 2016, perhaps
not in the magnitude that might be suggested by PFM, but certainly moving in that direction.
From day one, we have sought to meet or exceed your investment goals and objectives, and we
are flexible in our portfolio offering to accomplish this goal.
I look forward to further discussions on Tuesday.
Best,
Andrew Brown
JAEN) W Central Contra Costa Sanitary District
February 21 2017
T . FINANCE COMMITTEE
VIA- ROGER S. BAILEY, GENERAL MANAGER
ANN SASAKI, DEPUTY GENERAL MANAGER
PHIL LEIBER, DIRECTOR OF FINANCE AND ADMINISTRATION.,P/
FROM: THEA VASSALLO, FINANCE MANAGER(
SUBJECT: GASB 45 OP EB I N D EP E N D ENT TRUST RE' I EW
Attached is PFS Asset Management LLC's (PFIV) original evaluation of Other Post-
Employment Benefits (OPEB provided to the Finance Committee at the December 27,
2016 meeting. The primary focus at that meeting was on the Executive Summary
(Pages 1 — 8 of the attached report).
Andrew Brown, Director of HighM,ark Capital Management, and Mitch Barker, Executive
Vice President of PARS will attend the meeting to review IPFII`
s
findings/recommendations, and to answer questions.
TV:cg
40
Central San
December 27, 2016
T . FINANCE COMMITTEE
VIA: ROGER S. BAILEY, GENERAL MANAGER
AN SASAKI, DEPUTY GENERAL MANAGER
PHIL LEIBER, DIRECTOR OF FINANCE AND ADMINISTRATION
FROM: THEA VASSALL O, FINANCE MANAGER
SUBJECT.- GASB 45 OPEB INDEPENDENT TRUST FRE IE'
This is a follow up item from the Finance Committee parking lot to have the GASB 45
Other Post-Employment Benefits (OPEB) Trust independently reviewed. PFM Asset
Management LLC (PFM) was hired to review the following:
* Investment Policy (including Investment Guideline Document (IGD))
* Asset Allocation
* Plan Performance
* Performance Monitoring & Reporting
* Investment Managers
* Fees
The primary focu s at the Co m mitt m tin g gill be the Executive S u m m ary (Pages 1 —
8 of the attached reporl). Lauren Brant, Managing Director of P17M will attend the
meeting to review PFM's findings and answer questions,
TV'sle
Attached Sypporting Document,
1. Evaluation of Other Post-Employment Benefits("OPEB") Trust Report
C-\Users1CGranzella'AppData\Local\MicrosoMWindowsTemporary Internet FiIes\Gontent.0utIook\1FG38EC I IASB 45 Trust
Review Cover Memo 12-20-16 An°(002).docx
Central Contra Costa
_ Sanitary District
Protecdn9 Public Health ana the Environ ent
Evaluat'i'on of Other Posta-mEmployment Benefits (""OPEB"'). Trust
December 27, 2016
p F,M
PFM Asset Management LLC
50 California Street, Suite 2300
San Francisco, CA 94111
415.9825544 . 315.982.4513 fax veia:�,.P4 iTI.ce,rr
Table of Contents
Page
L Executive Summary 1
111 Investment Policy 9
111 . Asset Allocation 14
IV. Plan Performance 22
V. Performance Monitoring & Reporting 26
VI. Investment Managers 33
VII. Fees 38
VIII.Appendix 41
Q 2016 PFM Asset Management LLC
Executive Summary
(d 2016 PFM Asset Management LLC
Introduction
PFM Asset Management ("PFM") is Pleased to present our analysis of the
Central Contra Costa Sanitary District OPEB Trust. The following documents
were reviewed as part of the study:
HighCapital ManagementFee Schedule for PARS and Mark U.S. Bank)
I've Actuarial Valuation as of July 1 , 2014
• Investment Policy Statement, last amended October 2013
Actuarial Valuation for DB Pension, as of January 1 , 2015
Quarterly Performance Report, as of June 30, 2016
• Quarterly Performance for Total Plan through June 30, 2016
2016 P F M Asset Management L LC
Invrestment Ralic (pp. 9 — 13}
OBSERVATIONS RECOMMENDATIONS
• Investment Policy Statement (IPS) Review IPS annually to comply with policy
last updated October 2013 and guidelines and best practice. Suggest creating an
contains some frequently appendix or separate document that is easily
changing information i.e. asset revised to reflect information (i.e. asset values and
values cashflows) that is likely to change frequently
Policy states asset allocation Add overall portfolio benchmark representing
ranges and targets for broad target portfolio 40% Russell 3000, 10% M50
asset classes but no overall ACW1 ex US, 45% Bloomberg Barclays US
portfolio benchmark Aggregate and 5°Io 90-Day T-Bill
Security guidelines and total Consider broadening ranges to +/- 20% to allow
portfolio blended benchmark are for tactical shifts and separating U.S. Equity and
very specific and quite restrictive, Non-U.S. Equity into two distinct asset classes
but weights don't correspond to aid adopting broad portfolio benchmark described
overall target allocation for the above
portfolio
2016 PFM Asset Management LLC 2
Asset Allocation ( pp. 14 - 21)
OBSERVATIONS RECOMMENDATIONS
Current allocation is I"kely to achieve Review and adjust asset allocation
actuarial return assumption of 6.25% Increase allocation to international
over the long-term Diversify fixed income
PFMAiV1 expects portfolio to Reduce cash allocation
underperform actuarial return
assumption of 6.25°/o in interrnediate-
te rm
02016 P F M Asset Management L LC 3
Plan Performance ( pp. 22 25)
111 1111
OBSERVATIONS RECOMMENDATIONS
Plan underperforms total portfolio r PFMA recommends benchmarks be
blended benchmark for all trailing reviewed to ensure they remain compatible
periods ending June 30, 2016 with the specific goals of the plan. Advisor
should focus on achieving target returns over
When calendar year performance full market cycles — not just beating blended
lags the total portfolio blended benchmarks
benchmark, it as by a significant
margin-2%+ Consider adjustment to underlying manager
structure. Recent performance has lagged
Plan goes up 5% more than total benchmark and peer group comparison.
por#folioblended benchmark in a Portfolio performs poorly in down markets.
rising market Seven year annual performance is competitive
Plan goes down 24°/a more ire a down
market than the total portfolio blended Plan should focus or reducing downside risk
benchmark while trying to capture more upside return
02816 PFM Asset Management LLC 4
Performance Monitoring Reporting (pp. 26 32)
OBSERVATIONS RECOMMENDATIONS
Current performance reporting Board should require the investment
provided by PARS and HighMark advisor to provide quarterly reports with
Rack quantitative and qualitative greater consistency of infiormation and
analytics accepted as industry best more detail regarding the areas currently
practices' missing from some or all of the reports to
ensure the Board is fulfilling its fiduciary
Reporting comes from different duty in overseeing the investment advisor
sources and is not consolidated for the Plan. Report should include:
into a comprehensive report Information on economy, capital
markets
Reports do not show manager Financial reconciliation of portfolio
performance vs. peer group value
Allocation tv managers and asset
classes
Portfolio characteristics
Performance attribution
Manager and portfolio performance vs
relevant benchmarks and peer groups
(if available)
I Donald Stone., AIF . "in vestment Selection and Man(ftoring.-A Practical Approach to Best Practices,
401khrlpcentercoml4o1klstone investment selection.h.rMl
@ 2076 PFM Asset Management LLC
Investmen# Managers (,pp. 33 - 37)
OBSERVATIONS RECOMMENDATIONS
Portfolio has 18 managers, 1 active = Reducing the number of funds used would
managers simplify monitoring and will probably reduce
�nvvestment U.S. Equity - eight funds., management expense
including two passive ETFs
International - four actively CC.,.JCSD should consider using passive
maninvestment aged funds strategies for "efficient" asset
REIT – one active fund classes like U.S. equity, developed
international equities. Wide analyst coverage
Fixed income – five actively of stocks ("near perfect information") ire these
managed funds asset classes reduces opportunities for active
managers to beat the market. Passive
Managers generally have competitive strategies reduce underperformance risk
performance over the long-term (5 while lowering all-in fees
years)
9 Majority of managers are lagging Continue to monitor manager performance
benchmarks/peer group for trailing 1
year
C�1 2016 PFM Asset Management LLC 6
Fees (pp. 38 - 4,0T
OBSERVATIONS RECOMMENDATIONS
Administrator and Investment
Advisor fees are competitive
Overall portfolio's investment PFMAM recommends incorporating
management fee of 0.58°Ia is passively-managed index funds for efficient
relatively high for a plan of this asset classes, i.e. U.S. equity, developed
size with no alternative international equity to reduce investment
investments manager fees from 0.58°/o to 0.28% resulting
in annum estimated savings of $123,155 (pp.
49)
(D 2416 PFM Asset Management LLC 7
Recommendations (Top Action List)
011
1 ) Update Investment Policy Statement, review annually
2) Refine asset allocation to maximize value,-added from portfolio structure
and diversification
3) Consider using fewer funds and low-cost passive management for
efficient asset classes, i.e. U.S. equity, developed market equity, to
reduce investment fees
4) Seek more comprehensive reporting to support CCCSD fiduciary duty to
monitor portfolio and facilitate decision-making
45 2016 PFM Asset Management LLC
Investment Policy
02016 PFM Assts Management LLC
Key Components of a Sound Investment Policy
�- Purpose: Discusses the origination of the Plan and identifies the fiduciaries. Outlines the
general purpose of the Investment Policy.
Investment Authority: Documents significant {parties involved and their respective roles
(Committee, Investment Advisor, Custodian,, etc.), as well as fiduciary requirements of all
parties,
Statement of Objectives: Documents the Plan's objectives performance expectations cash
flows, risk tolerance and liquidity expectations.
Investment Guidelines: Establishes the investment time horizon, diversification parameters,
asset allocation targets and ranaes, rebalancing philas�ophy, risk toleranc. BS! and performance
expectations.
Selection of Investment Managers: Documents criteria for selecting investment managers.
�- Guidelines for Portfolio Holdings: Establishes the criteria for portfolio holdings in equities,
fixed income, cash, and other asset classes. It also discusses prohibited investments.
:� Safekeeping of Assets: Documents the manner in which assets are held in custody.
Control Procedures: Documents the procedure for reviewing 'investment objectives,
investment performance, the voting of proxies, and the execution of security trades.
(D 2016 PFM Asset Management LLC 9
Investment Policy Statement
1 0111110111 Im 11111 111111 0
1b Investment policy was last updated in October 2013
Policy states that 'Investment Manager should assist the Committee with maintenance
of policy guidelines on an annual basis
PFMAIVI recommends references to specific information that changes frequently (i.e.
asset value, monthly cash flow needs) to be in appendix or other document that is
easily updated
Roles and responsibilities are defined well, but policy should clearly state that all
parties have a fiduciary duly to the Plan and its beneficiaries
In-vestment Objectives & Constraints
Guidelines for Equities and Fixed Income provide good description, but does not define
target allocations
Consider separating Equity into two distinct asset classes (US and Non-US) and
broadening ranges to +/- 20% of target to allow for greater tactical changes
Non--US Equity guidelines should contain some language recardin9 nconcentratio
within emerging markets
PF AIV1 recommends adopting guidelines for overall fixed income allocation that
include a minimum average credit quality and range of duration relative to a broad
benchmark., e.9 Bloomberg Barclays U.S. Aggregate
0 2416 PFM Asset M an agem en t LLC 10
Investment Policy Statement
Investment Clbjectives & Constraints (Cont.)
Total Portfolio Blended Benchmark includes indices for each asset class represented
by funds held
The weights of each index should correspond to the target allocations for the
portfolio. Target allocations are not specifical referenced ire the p►��icyly
PFMAN1 recommends using a total portfolio blended benchmark with allocations
to Russell 3000 (US Equity), MSCI AC4N1 ex US (Non-US Equity), Barclays
Aggregate (Fixed Income) and 90-Day 7=Bill (Cash)
International Equity should be benchmarked against MSCI ASW f ex X15, which
includes emerging markets
High Yield benchmark is not consistent with the one used in the total portfolio
benchmark
Policy does not contain any language allowing alternative investments such as real
estate (other than REITs), commodities, private equity or hedge funds
Some altematives may add value during certain market environments and should
at least be considered as part of the entire investment universe
2036 P FM Asset M a na gerne nt LLC
Inestrnent Polelcy State ent
• Duties and Responsibilities
Responsibilities of Plan Sponsor, Trustee and Investment Manager are clearly outlined
Detailed responsibilities do a good job of defining the role of each party, but the
policy sh o u Id a Is o clearly s tate that a// parties have a fiduciary duly to the Plan
and its beneficiaries
2016 PFM Asset Management LLC 12
P01 "Icy COmpl *iance
N
s of 6/3 0/2016, the portfolio was i n compliance with the investment l i Cy
guidelines
:Total Equities 49.43% 50% 40% 60% Yes
Domestic Large Cap Equity 23.82% 15% 45% Yes
Domestic Mid Cap Equity 3.63,01,'o 0% 10% Yes
Domestic Small Cap Equity 9.15% 0% - 15% Yes
International Equity (incl Emerging Markets) 11-33 0% - 15% Yes
REIT 1 .50% 0% - 15% Yes
Total Fixed Income 46.98% 45% 40% - 60% Yes
Long-Term Boads 0.000."0 0% - 25% Yes
Intermediate-Term Bonds 39.39q� 25% - 60% Yes
Short-Term Bonds 7.59% 0% 25% Yes
High Yield Bonds 0.00% 0% 10% Yes
Convertible Bonds 0.00% 0% 10% Yes
Cash 3.59% 5% 0% 20% Yes
Source: Central Contra Costa Sanitary District Performance Report as of 6/30/2016
Central Contra Costa Sanitary District Investment Guidelines Document as of October 2013
0 2G16 PFM Asset Management LLC 13
Asest Allocation
m
2Dl6 PFM Asset Martagame nt LLC
Asset llocation Summary
Relative fia its peers (Public Plans < $1 00m in assets}, the Plan's current
allocation is more conservative
Allocation to CJS equity falls in the bottom quartile of peers, while fixed income and
cash fall in the top decile
Actuarial return assumption of 6.25°I4 is also lower than most peers and may justify the
more conservative portfolio
Long-term -expected return for target asset allocation of 7.00% (reflected ire table
on page 16) exceeds actuarial return assumption of 6.25%
Further diversification within fixed income and a slightly higher allocation to
international equity may improve risk/return of the portfolio and increase the probability
of achieving the target return
Target cash allocation of 5°Io seems -excessive for an OPEB plan that is less than 40%
funded and should be experiencing net positive cash flows each year, but a further
analysis of cash flows should be done to confirm appropriate allocation
If ARC is fully funded and portfolio achieves a roughly 7°lam return, the Plan should be
fully f ire 20-25 years
@ 2016 PFM Asset Management LLC 14
Asset Allocati*on Peer Group Compa ..rlson
AH POW Mms,:510 MiRialm
At 01JUSE SO.201-6
91
US E TWL Eat cki n Fix-ed In mm bjrLftE-L6d bmi -Vz@ma*v bir. RmW L%m i? C4,1
10 aXCSDO?EST mm 34-60(S!'. 11.1)3 115 - 4t Set 49 0.I 0 cc A tool 3 14
�4 9E .17 4 124
441
1:PJ-3=t -r z-mt A CCC=VL
N u mbe rs j n paren theses re p resent C CC S D's pe rcentj 19 ra n k in the universe of all Pub I is P lans<$100 m i Ili on.
0
2016 PFM Asset M a ria geme rpt L LC 15
Asset Allo+cativn Comparison
Alternative 50/50
CCCSD
Portfolio
,Equity 48a3% 5000%
Domestic Equity 39.0°I8 33.0%
International Developed Equity 6,{}% 12.0%
Emir in Markets Equit 3.3°/0 5.0%
Fixed Income 50,0% 50,0%
Core Fixed Income 43.5% 32.0%
Investment Grade Corporate 0.0% 3.3%
Emerg:ing Markets Debt 0.0% 3.3%
High Yield 1 .5°/Q 3.3%
Bank Loans 0.0% 3.3%
Cash 5.0°/0 5.0°l0
Alternatives 1 .8°/0 0.0°l0
Real Estate Investment Trusts 1 .8°l4 0.0%
ntermediate Assump.r (5 Years)
Expected 4.8°/a 5.2%
Standard Deviation 9.0% 9.4%
Probability of 6.25% Return 36.4% 40.2°/0
Loi -Term Assam 30 Years)
Expected Return 7.0% 7.1%
Standard aeviatiQn 8.7% 9.0%
Probability of 6.25% Return 65.7% 69.0%
Source: CCCSD allocations are based on the blended benchmark in the Investment Guidelines Document as of October 2013
@ 2416 PFM Asset Management LLC 16
a 0
Efficient Front*ier
Based on Intermediate-Term Capital Market Assumptions (CMA)
10
Emerging Markets Equity
International Developed
9 Equity
Domestic Equity
7
Real Estate Investment
High Yield
Z 6 Trusts
Alternative 50/5D Portfolio
E CCCSD
4w4
Bank Loans Emerging Markets Debt
4 -
3
Investment Grade
Corporate
2
Core Fixed Income
2 7 12 17 22 27
Risk: Standard Deviation
C 2DI 6 P FM Asset M a nagement LLC 17
Expected Returns Inter ed *late�Ter CMAs
25 l Year 5 Year 10 Year
1.70
20.84
20
1
12.28
11.66
9.51
to 1 .1
t
Cc
5
*�
1
Target return may be achievedthe following,
Hi h r than expected market returns
-10 Higher equity asset allocation
p
Adding lu through tactical i I ti ro changes
Adding value through strong manager performance
-1
CCCSD Alternative 5 0/5 [ I to r native 0/50 CCCSD Alternative 50/50
Portfolio P o rtfo l o Po rtfol io
Ear cha its re p is en t th e 5'h.7 05" 501", 25"", and percentile expe t ai returns,Actuarial return assumption of � 5�. is represented by the reed line.
2016 PFM Asset Management LLC 18
0 a
Efficient Fronti*er
Based on Long-Term Capital Market Assumptions
Emerging Markets Equity-
10
International Developed
9 * Equity
Domestic Equity
8
E Emerging Markets Debt
CC_C Iternative 50150 Portfolio
High Yield -ent
7 Real Estate Investm
Trusts
Investment Grade
Corporate
6
0 Core Fixed Income
Bank Loans
5 —1 ___ ___T___---__ - - - --- - _T
4 6 8 10 12 14 16 18 20 22
Risk: Standard Deviation
Q 2016 PFM Asset Management LLC 19
Expected Returns LongmTer CM'As
14 10 Year 20 Year 30 Year
11.40
10.31
10-001
C
--
i
S
C
4.38 4.47
. 5 3.92
2.519 2,61
2
CCCSD Alternative 50/50 GCCSD Alternative 50/50 CCCSD Alternative 50/50
Portfolio Portfolio Portfolio
Bar c h a its represent the 95%,75 th'50019 511-, and 5th percentile expected returns. Actuarial return assumption of 6.25%is represented b the red line.
2016 P F M Asset M a n agem en t LLC 20
misty Model *ing Project*ions,
Asset/Liabi i
S60090005000
95th Pe rcen It i le
$5KOOD5000 Scenario -- -
40P
$400,000-1000
75th Percentile
S cen ari o
S300,0009000 00
fl- elms
dew
50th Percent[l 9
Scenario
S200.0009000
moo
Soo- moo
4006406 25th Percentile
Opp MOM Scenario
WOO wow 41 MOM
1w
S100,000.000 --1 —nWs 4.1-all IQI 11
--E—dpml -0 ..0 woo Swo ol
5th PercentHe
Scetwilo
to fo Co Nc� Ri 1%. L'Ie eb toL .1b ilb A Lb
eV �V 4k Co
L
ef, ep rp ep ep rV rp $§ q
er r
ep eV CV eV q; rp rp of eo rp rp rp fl rf' te ee�rp rl ey
CCCSC 951h Percentile CCCSD-75th Percentile CCGS D-50kh Percentile GGG S D-2 51h Pe rcentire
Mom Mom, CCCSD-5th Percentile Altemative 50/50 Portfolio-951h PercenliWe Altemalive 50,1 Partfolio-75th Percentile Alteffmlive 50150 Portfolio-5C*Percentile
Allemative 50150 Portfolio-251h Percentile Alternative 50150 Portfolio-5th Per cenlife
Based on data ff om 2014 actuarial valuation & P FMAM projections-
2016 PFM Asset Management LLC 21
Plan Performance
�
2D16 PFM Asset Martegement LLC
Performance Risk Su aryr
Over the time period analyzed, the Plan has exhibited underperformance relative
to both its blended benchmark and peer universe
Trailing Performance (page 23'):
Plan has lagged its blended benchmark for all trailing periods shown
Plan performance falls in the bottom quartile for trailing 3, 5 and 7 year periods
• Cale
ndar Year Performance (page 24}:
Plan has lagged the blended benchmark for orly 2 of the 6 calendar years shown, but
each has been significant (2% or more)
-- Plan performance falls in the bottom half of peers in 3 of the 6 calendar years shown.,
but 2 of them were in the bottom de i fe
Risk Statistics (page 25).
Plan has captured 105% of up-market performance vs. �ts blended benchmark, but
has also captured 1 24% of down-market performance
Plan has experienced a lower standard deviation relative to its peers, but its up-market
,capture ratio falls in the bottom decile during the past 7 years
O 2016 PFM Asset Management LLC 22
0
Peer Co parison Traieloing Perfor ance
Plan$P*315 0 r Petr C;r-OMPA"h-Si%
-UI NbLic Plans<S 100 Imlifflon
As Orjijar 4,0,2014
60
't tact 1
3
vatTo V"r t VUH
3 OS: 141 4 19 Oro d 15 T2. -Y4 134-�
L B7 a 7i qj2
)2*
mm�4:1:1 4 1 R MAM210L
Numbers"n parentheses represent CCCSD's percenfle ran kin the universe of all Public Plans<:$100 milli-Ork.
C 2016 PFM Asset Management LLC 23
Peer Co paris.on Calendar Performance
YN n Spons-ni Pee r G rn up A ni I%siq
ki I Pulil Ic Plame, f.L n n m1111-n
1i u-ne A-1.i G16
db
4.0
4-1)
-4r a
I I U 1 21111
■ccm CHIR Crum G.--Q 4U) (91-1 24 091
OD Vx!iA-,d Berxi=k -0.l2 S4'! 4,5* 04 92 qgOo 01)
%hAM a-03 17,42
?Vill:.:,2t 32.1 lip
P2
Numbers in parentheses represent CCCSD's percentile rank in the universe of all Public Plans<$100 million.
0 2016 P FM Asset Man agern eni L LC 24
a 0
Peer Co parison Risk S-tat*lst'locs
I 1 0
Pima Sponsor Pier GM%3p A=h-!Lk-'41LL11j Sta 4-50cs
Al I Nblic Pla-M-L I H mr-IlWm-rs,CCC&D WerLdtA]Uacbmar%
As afJune 30,1016
5 ri adaad ad-adSIS&q" I-P w" DWO'Maii:e.
Ra nio
L 4
1400 2(V t
14
132-0
I
9 L 1.3
DW C
2 IL I
LAO 0
I L I a I 1
10 1
I I -
L.6
IWA I-DO C
ID'S
9!
&L
VISM Yen's yan Vtm vem
wCCCM()YFBTrUff -932(W -130(50 L 14(71) 103(56) 1 63.1v 00 1:3-%M%)
5e3 9 L-13 L13 ON 1 16zs 1 17.!3
P&A"bx- 275 .139 2r
�Ia mt��ro-cotm pv ca&k mzzzi
Numbers-rn parenthes,es represent CCCS.D's percentile rank in the universe of al'i Public Plans<S1 00 mill.io.n.
2016 P FM Asset M a ria ge me nt LLC 25
Performance Monitoring & Reporting
m 2016 PFM Asset Management LLC
onitoring & Reporting Reca e,ndat'ivns
lei A best practices approach to monitoring and rxr:7;%jr-j%orting,,, provides plan fiduciaries
with the knowledge they need to make informed decisions.' PFMAM suggests that
at a minimum, CCCSD should receive a comprehensive report on a quarterly
basis that ineludes the following information:
Review of the economy and financial markets, as well as a future outlook
Financial reconciliation that includes beginning and ending market values, cash flows
and return on investment for various trailing periods (QTR, YTD, 1 Year, etc.)
Current allocation to each manager and asset class, as well as a comparison against
investment policy targets and allowable ranges to ensure the portfolio is being
managed ire compliance with the investment policy
Trailing and calendar/fiscal year performance for the total partfolifl and each underlying
investment/manager compared ed to applicable benchmarks
Comparison of total portfolio performance to a plan sponsor universe of similar funds
Performance attribution at the portfolio level that clearly illustrates the sources of value
added, such as asset allocation changes or manager selection
Portfolio characteristics, sector/industry allocation, capitalizatic)n weights, credit
allocations and other holdings-based statistics for each of the underlying managers
I D on aid Stone.A I FO. In vest-men t Selection and Monitoring:A Practical Approach to Best Practices.
401khelprenter-comI401k1stane investment sefection-htrn)
02016 PFM Asset Management LLC 26
arneitoring & Repor#ing Current
HighMark
Quarterly Report
Review of economy, financial markets and investment strategy/outlook Na
Financial reconciliation showing beginning and ending market values, �,�5,cash flows and investment earnings for tralling periods
Documentation of compliance with investment policy guidelines No
Current allocation ($ & %) to each asset class and underlying manager Yes
Trailing and cakendar year performance for total portfolio and Yes2
underlying managers vs. applicable benchmarks
Comparison of total portfolio performance to peer universe of similar 0
finds
Performance attribution for total portfolio that shows value added from 0
asset allocation and 'investment manager decisions
Portfolio characteristics, sector/industry allocation, capitalization
weights, credit allocation and other holdings-based statistics for each No
underly,ing manager
'Shown for entire since inception period only
2Traffing performance is provided but not calendar year; Na benchmark is provided for total portfolio
0 2016 PFM Asset Management LLC 27
0 !
Sample Report"ingiFinancial
Reconc'iI *iat*ion
AccountReconciliation
As of Jure 30, 2016
QTR
1
ll
i r
° Ea
IT, .FIND 6..-;'-'-0,5 0.8 3 6
-1.394.918- °
YTD
r I F F
1 Year
i
1
TONAL TFUND 62.164-453
2016 PFM Asset Management LLC 28
Sa pie Reporting Allocati*on Performance
Asset Allocation & Performince
-Sample Chen -Ifuld-Asset C14-iss'Man.-toement
As of June 30. 2016
ENDIM LIN4_111 I I
TOTAL IFUND 100.0 3.61 1.92 6.'
9 zq 6.36 071VI1,2006
Polio-Indy t 150 9.0 pit 5.35 0741-2006
Domestic Equiry
2"
Man-ager A -.69 3-6.5 .14 11.OT 11.519 1-1; 05'01:
Rus-re 3000 hon.- -63
-3.6- 11-60 14-95 1- -0
201
NIMI.1'ger B 11-36 2.66 51�60 0101 12
11 A3
S&P
1.RQ 500 '..46 24 I 66 1110 1--I-9.ZI 14.43 0161201-
hte UKUN dMa L E qtUiry
110
4 1-05
N�arr C 1-96 -0-30 -2.311 -S-55 6.28 06 01201
1-06
E. err -
.4. -10-16 1.6S 5-9- 0-S2 06 01
Momner D 3.70 Illp" 8.571 6-90 N�A 01 01. 01
,kfscl.4 C odd er VIL o�,.-erj -Lo" -10.114 1.16 0.10 5.�d"1'5 -1-0" 0101 '016
Manazer E -0,31 9 -11-62 1.312 1.1" _5-3.3 1 91 0-5 01 "'016
3.06
.jIISCI AC R-oHd a U&I �Ycn -1.01 -10.'14 1.16 0.20 5.35 05 012016
Mamizer F L79 0.44 -1.92 0.6� 13,-09 11.34J 16.2 1 4.779 04,01-1015
- W
115 CIA C MO OHS'ex U,�4-S n i U Cap IP i-da-r Ne v 1 2 1 '7-0.31 -613 4�01 6 7,84- 01 04 01,-;01
Otber Growth
1110
Nimazer G 6.71 6.90 13.50 23.93-3, 1x.41 12-44 74
6.90 04 01'201.6
-153 '1081 6.SI 04012016
.1 fS(I VS R&7 In dex 6.3-J 13.56 i-f.10 13�51 L..
2016 PFM Asset Ma nageme rpt LLC 29
Sample, Reporti*ng Peer Group Co parison
Plan Sponsoi- Pepi- Gi--oup--knalyslis
All Public Phnv;.-Total Fund
ample C fient-Multi-_Maser lass'Mau3vement
Is of June 30.1016
14 G
1 1 3 Jut-206
T
Qudiffel, at e Year Years yews years Toimll-N16
-1 -1 (19) r 1 (48) -r. (A 938 (50) 6.36 (19)
0 Sample Cliew-NN ti-A -:et C 1?L,.93 IVI m-a zement .13 (125) 3.61 (24-) 1.92 � 6.7 6.1-� - -1
Pal.cv Ladex L75 (56) 3 34 k'--1'3 1.50 (30) 6.21 (713) 6-14 ("112) 9.07 (71) 535 (79)
5th Percent�e 2.96 4.91 2.8 31 8-19 S-1- I D. 6.78
1q, Qum-ffle -1-18 3.5-1 1.63 11.39 1 ff." 6.2 1
.7
'192 D.61 6-74
Medim 1.83 66 9-57'
rd Quardle -0.-61 6.109 6-01 S.9
Percentile 0-99 1-14 -LBS 4-91 P-O -7_8
P
362 -�44 idation 4w- -403 394 391
0
01 P F M Asset Ma n agem-ent L LC 30
Is.
Sa pie Reporti* ng Performa' nce Attr*ibution
Total Fuud Aff ribution
sample Chew--Ifuld-Amet C ass Afanalgarement
I Yea r En din a Jun e 0. 2016
Tcoral Fund P-eilormance Total Value.1-dde d:0.-340 eo
Totg Vahw-AA&%d
A-46
-dup
Tond Fund Bmm+=&
TCC31 hmd
0.071-0 0.7911.0 2.3-M 3.16% -1.66 -:a.93% 0-0614.0 .'c c
To c il A--f-ce r.Uocadon:-0.46 o Tota I-Abnager Value Added:1,0"1 a
4am
Re2i Ewe
41
Lzed EK-,%ine
C yj Eqmvifer-t
yy
�r3
-0.K 0.00Q 0.T 0.OCP, O.W
-5-W fel,CKIr IOW 0 .0c _e
A-%V73 WuEnir A,,-,e-.Alkcin�';31ue Aidad �,Lvugw Vah*Added
(5 2016 PFM Asset Management LLC 31
Sample Report*ing IPS Compl *iance
Ell 1 11 1 1
Asset o c-a ti n -Su mmn-
ample Client- ul ;A ss e i Class Ma n-a creme n I
As of June 30. 2016
F 1 1 1 oil 1 1 1 1 1 1 I
I
TOTS 47D W.� 1 -0 Ni ": NYA 0.0
Interm. Euy 105 �`1 r 1.01 -10-5
Othu
FLLXed Income 40. .3 .0 18-0 58.0 i..�
Other Income 0.0 0.0 0.0 20.0 0.0
RVI Rett 0.0 0.0 0.0 20.0 0.
Each E i&ail t .1 2-0 0.0 10-10 .1
Domemr z',q .Cq°
- 21Ve
orffieT G"M-th
Real tmT- N _
Eqw.eC ent s -
30-0
Tar Allocance Amin Allocau= AHoci..a::L-- 'asace!;
ig 2016 PFM Asset Management LLC 32
Investment Managers
�2016 PFM Asset Management LLC
Investment I lanager Su mary
US equity allocation consists of 8 investment manages, including 2 passive ETFs
5 of the 8 managers lagged their benchmark for the trailing 1 , 3 and 5 year periods
7 of the 8 managers lagged their benchmark for the trailing 1 year period
8 managers, including 5 large cap, may be more than necessary and could result in
overlap of securities and an index-like allocation holding nearly the entire market
US equity is a fairly efficient asset class where it is difficult for active managers to
outperform, making low-cost passive funds an attractive option
International equity allocation includes 4 actively managed funds, including 1
emerging markets manager
All 4 managers have outperformed their benchmark for the trailing 5 year period, but
only one has outperformed more recently on a year-to-date basis
Developed international equity is also fairly efficient and a good candidate for passive
management, while emerging markets provide an opportunity for active management
O 2016 PFM Asset Managemerit LLC 33
Investment Manager Summary'
4 US REIT allocation inc'ludes a single actively� mana ed fund
9
REIT mana er hasgen+�ralfytracked its benchmark for most trailing periods
9
US REIT market is highly efficient due to a relative small universe of securities, making
low-cost passive funds a good option to save on fees and achieve the market return
Fixed income allocation includes 5 actively managed funds, 'Including a dedicated
dust high yield manager (whichappears to be residuals from recent liquidation)
--- 3 of the 5 managers have exceeded their benchmarks for the trailing 5 years
-- Prudential Total Return has had strong long-term performance but was only added to
the portfolio in X1316
HighMark Bond Fund is the largest allocation and is affiliated with the Plan's investment
advisor
Active management makes sense within fixed income currently as they are better able
to navigate low interest rate environment
2016 PFM Asset Management LLC 34
Invest ent Manager Perfor ance
As of June 30,201-6 QTR YTID 1 Ye ar 3 Years 5 Years
U S Equity
Columbia Contrarian Core 1.65 2.28 2.29 11-95 12.45
R u s s ell 1000 Index 2.54 3.74 2.93 11.48 11.88
-0.88 -1.46 -o.64 0.47 0.57
Dodge & Cox to 1.70 0.70 -5.09 8.28 10.44
R u s s el 1100 D Value Index 4.58 6.30 2.86 9-87 11.35
Loorris Sayles Value 3.17 1.46 -3.45 7.95 9.92
RUSSell 1000 Value fridex 4.58 6.30 2.86 9.87 11.35
-1-41 -4.84 -6.31 1.9P -1.43
T.Rovve Price Growth Stock -0.69 -6.02 -2.74 12.40 12.04
Russel 1 1000 Growth Index 0.61 1.36 3.02 13.07 12.35
-1.30 -7.38 7 -0.67 -0-30
iShares Russell Mid-Cap 3.12 5.40 0.39 10.61 10.73
Russell Mdcapp Index 3.18 5.50 0.56 10,80 10.90
-0.06 -0.10 -0.16 -0.19 -0.17
iShacres Russell Mid-Cap Value 4.68 8.73 3.03 10.75, 11.47
Russell Midcap Value Index 4,77 8.87 3.25 11.00 11.70
Columbia Small Cap Value 2.12 2.79 -4.27 7.72 8.75
Russell 2000'4 alu Index 4.31 6.08 -2.58 6.36 8.15
-2,ig -3.29 -1.69 1.36 0.60
T. Rowe Price New Horizons 5.16 0.85 -2.21 11.59 13.03
Russell 2000 Growl h Index 3.24 -1.59 -10.75 7.74 8.51
1.92 2.44 8.54 11-3.85 4.51
2016 PFM Asset Management LLC 35
Inv-estment Manager Perfor ance
As of June 30.,2016 QTR YTD 1 Year 3 Years 5 Years
lnternafional Equity
Nation de Sailard International Equity -2.13 -4.05 -B.88 4.35 2.46
NIS C I AC World ex USA(Net) -0.64 -1-02 -10.24 1.16 0.10
-1-49 -am 1.37 3.19 2.35
Dodge &Cox International Stock -1.20 -4.91 -18.86 0.37 1.02
MS01 AC World ex USA(Net) -0.64 -1.02 -10-24 1-16 0.10
-0.55 -3.89 -8,62 -0.80 0.92
MFS International Growth 0.55 2.10 -3.01 3.21 2.47
MSC I AC World ex USA.Growth-(Net) 0.46 0.13 -6.20 3.11 1.52
0.09 1,97 3.18 0.10 a95
Schroder Ermi-ging Markets Equity 2.32 5.42 -10.58 -1.38 -3.12
MS C I E M(net) 0.66 &41 -12.05 -1-56 -378
1.66 -1.00 1.47 0.18 0.66
Real Estate
N uv e e n Real Estate Se cu riti e s 6.49 11.56 23.03 13-48 12.18
Wilshire US REIT lnvdex 5.60 11.09 22.82 13.63 12-48
0.90 0.47 0.21 -0.15 -0.30
2016 PF'M Asset Management LLC 36
Investm-ent Manager Perfor ance
As of June 30,2016 OTR YTD 1 t 3 Years 5 Years
ii I nco,,ff*
Vanguard Short Term Corp Bond 1.30 3.09 3.26 2.55 2.42
BImbg. Barc- U.S. Aggregate 1-3 Yrs 0.68 1.66 1.60 1.26 1.14
0.63 1.43 1-66 1.30 1.28
NationvAde HighMark Bond Fund 2.s4 5.93 5.54 3.90 3.94
Blrrdbg. Bare. U.S. Aggregate 2.21 5.31 6.00 4.06 3.76
0.33 0.62 -0.46 -0-16 0.18
PMCO Total Return 2.o7 3.93 4.31 3.49 3.71
B I m-bg, Barc. U.S.Agg reg ate 2,21 5.31 6.00 4.06. 3.76
Pr u d e retia I T otall Retu rn 3.25 6.57 6.56 5.28 5.21
BlImbg. Bar-c. U.S. Aggregate 2.21 531 6.00 4.06 3.76
1.04 1.26 0-56 1.22 1.45
PI MCO High Yield 3.32 6.17 1.92 4.19 5.39
BofA Merrill Lynch US High Yield, 1313-E3 Rated 4.60 7,90 2.06 4.59 5.87
-1-29 1.72 -0.1-4 -0.40 -0.48
2016 P F M Asset M an agern ent L LC 37
Q 2016 PFM Asset Marsagement LL
Administratvr Advisor Fees
PARS
9 Trust Administrator & Consultant
0 Provides recordkeeping, administration and legal/compliance services
HighMark Capital Management
Investment Advisor
Serves as sub-advisor to U.S. Bank (Trustee/Custodian)
PARS HighMark Total
lFirst $5 Million 0.225% 0.315% 0.540%
Next $CJ Million 0.225% 0.225% 0.450%
Next $5 Million 0.180% 0.1 80% 0.360%
Next $35 Million 0.135% 0.135% 0.270%
Thereafter 0.090% 0.090% 0.180%
Weighted Avergge ($42.6m) 0.161% 0.172% 0,333%
Estimated Annual Fees $68,833 $73,333 $142,166
Source.- Fee Schedule as of July 2013
C�}2016 PFM Asset Ma na g eme nt LLC 38
Money Manager Fees
The investment manager fees are i n line with the median f-ees of similar funds
The overall portfolio's i nvestment management fee 0,58% i s relatively h igh for a plan of this
t
s I ize with no alternative investments
93% of the portfolio is invested in active investment managers
'IncludiI location to passively-man aged index funds i n certain asset classes can further
reduce fees and offset higher cost investments
Lage Cap InSWUd-
o Plu rmn b la Contrarian-C fo)r-a Z 3omesiic Equity 5.60"0 2.390,543 1 0.84% 20,081 conal 0.79%
Dodcre&Cox Stook Dpmes,4c EqWy 5.761�,,'] 2,455j751 0.5r% 12.770 Lage Cap No Load 0.90°
00mis Sayles Value Y RomesW Equity 573% 2,4-2,478 0-70--a 17,097 Large Cap Ins9tut-Ional 0.79%
arbor Ca-pital Appreciation Insli )umestiz Equi!y 3.36% 1.,434,590 0.65�-o 9,325 Large Cap lnsWutional 0.7911.�
..Row--Phee Growlih Stock I omestic Equi .37% 1.435,897 0,5201116 7,467 Large Cap Institutional 0.79%
shares Russell mid. -Cap omestic Equity 2.62% 1,118.698 0_ '.& 2,237 Nild Ca e Insti.utional 0.93%
Shares Russell Wd-Cap Value Domestic Equity 1.01% 430,065 O.25'�-o 1.075 ilrlrj Cap Inst gut ional 0.93°'-6
olumbi a Small Cap Value Fund 11 Z Domestic Equq 5.65% 2,410.312 t-020,16 2.4.585 Er.„ 'tea p Pnstllufional 1.0011--V
Rowe Price New Hort ions t ba mestic Equo 3.Sox, 1,4913.276 M-70,-6 10, 5 Sma I]Cap I nsblOonal 1.00%
atiormide Ballard Inil Egs Instl htemaTional Developed Equi , 4.08% 1.741.877 0-87`1-
n 15.154 Foreign Large Cap rn5tilufional
cdge&Cox IntemMional Stock 'ntemafional Deveiopad EquiN 2.27% 967,607 0.649.,.o 6.193 Foreign Liae Cap No-Load
FS Intemational Gmwilh I riternalional Develoeed Equ` , 2.27% 967,409 0.97% 9,384, Foreign Large Cap insli tuWnal
0-93
arUbrd Schroders Erne(ginpq Mkts Eq I
Ern-erung Markels Equity 2-71% 1.156,753 1.21% 13,997 Emerging Markels Slo.-k No Load 1 39
uveen Real Estate Securities I Real Estate t-5.W/13 &3%836 1.05% 6,708 Special!y Institutional 1.02%
Vanguard Short-Term Investment-Grade Adm ixed Incom e 7-5 9a,-� 3,237.2,87 010% 3,237 Short-'TeTm Gond No Load O.
Nalpon-duide HighMark Bond In-s11 ixed,IncDmc, 19.6804a 8,394,946 0.50% 41-1975 Nitermedia-le-Term Bond Insfifutional 0.50%
IMCO Tolial Return Ind ixed Income 9.86% 4.203,603 0.46.,.0 19,337 Intermechate-Term Bond Institutional 0.50*1
nidential Total,He-,.um Bond 0 ixed Income 9.85% 4,202,600 0.-43-0.-6 18,071 Intennechale-Term Bond InsIftWonal 0.50%
IMCO Hbqh Yield Insd ixed Income .00`'r 0.:550% a Hiqh-V eld Bord Institutional 0.75%
Source: Central Cont.ra Costa Sanitary District Performance Report as of 6/3012016
Mo rn i ng tar Di rect
2016 PFM Asset Management LLC 39
Money Manager Fees
The following i s an example of the potential cost savings by incorporating passively-managed
index funds in some of the more efficient asset classes like domestic and international equity.
Manager fees were reduced from 0.58% to 0.28%, resulting i n annual estimated savings of
$1231-155.
W
Vanguard Total Stock Index :)ornestic ERy 36.60u."o 15,611,610 0.05% 7,805 Large Cap NoLoad
an- uard Total Intl Stock Index International Developed Eguh 8.62% 3,676.8-93 Q.1 ,6 4,412 Foreign Large Cap No Load 1.04%
artford Schfoders Emerging MkIs Eq I mer Nn Ma-kets Equily 2'.71% 156.7 535 -21% 13.997 Mme r n.q_Markets StoGk No�.oad 1-3911,
uveen Real EsIale Securities I eal Estate 1.50% 638,836 1.05P�� .6.708 1 Sperjafty Instritullonal 1.0e%
anquard Shorl-Term investment-lam rade Adm ixed Ircome 1 7.59% 3,237,287 0.1 U2.10 3.23 Short-Term Bafld No Loact 0. ,a
atior-wide HighMark Bond Instl ixed Income 1!9.68% 8,394.946 0. 116 4 1.9 7'77 ince rmEdlate-Term Bond Institutional
D
IWO Total Reftim Instl fixed Incc-me :9.86r. 4.203.603 0.4 P-:o 19,33-07 Inlermediale-Term Bond instil utional 0.50P-�
rudenlial Toial Relum Bond 0 ::ixed lincGme q+.850,: 4.202.600 0.43% 18.07 T Intermediate-Term Bund Institirtimal 0_50
High-Yl.=-:d Bond Insfilution-a 1 0-75%-MCO Hioh Yield!nstl hxpr'h',-c-re 0-00�_� 1.3-76 0.__I 5
P
Source: Central Contra Costa Sanitary District Performance Report as of 6,-'30,.'2016
Morningstar Dir-ect
OMAN
2016 PFM Asset Management LLC 40
App- end.lx
2016 PFM Asset Management LLC
Colu b*1a Contrarian Core
Portroba
cGIEMhiA:cRtr
As of J=*30,1-DI-6
11111111111111p
L24 4
ljF
A D
ire
Mft
L rw
4N)
71-W Tor %-W
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Dnrlri® Ride VIVPr Lr rrw RAP60 X-Sqwmvd
C*hm&i a -ji C.-r-
Itm DV4- 1 0-23 Or
PAnip]I-M7,IM&M IIA 1117 0 LI 00) 0')c, N-A 109
We D IL%US!"T�TL BLJ DA� E13
D-W �J* :i Ic Ii
A ffp::i?5 L
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Numbers in parentheses represent Columbia Contrarian Core's percentile rank in the universe of U.S. Large Cap Core Equity Mutual Funds.
2016 PFM Asset Management LLC 41
Dodge Cox Stock
portrouo
"e Cox Stwk.0 EQDG'X�
I Jmme ID,3016
4M
j Mr 1 .1
QWMW to V� Tam VULN
M5 24-P NO III!
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Dedge&-COX SWO sDCOM 2,214, 12 64 L M :9 3;vi
Ru, Ow VLke Uww 5..- 7 9 H :19 WX IX ba 1 D *,a X k-DD
PCO DXT 0 3 rNASM Ba Ir IM 0. I.1 w II l 13
0 Do
Numbers in parentheses represent Dodge & Cox Stock"s percentile rank in the universe of U.S. Large Cap Value Equity Mutual Funds.
2016 P FM Asset Management LLC 42
Loomis Say es Value
Nt I im j S.:t,%'%':I I in c Y
AS of JwAt 310,2016
2L
To
0 -4 4-*Ub'� C!rj -0 Nmm:s T dug-c-:.sCr--c 1:;r
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2 w 4A
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14.L
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a ram LS 3-� 3 IF Tins A 1504 -F
pi- 3 DD 011 c-:0 -A %'A
W Das 13 S In i r--n 30
% L YJ D DI) -NI M 4z -0 3�
Numbers in parentheses represent Loo rel is Saryles Value's percenbile rank in the universe of U.S. Large Cap Value Equity Mutual Funds.
jujonmr-
2015 P FM Asset M a nagem e n t LLC 43
T. Rowe Pr*ic,e Gro-wth Stock
PortfoLio
T Rum e Price Gro SM(.P_K(;FXo
X-5-of 130.21616
4
TIN it
WW Ml
-0 W Wi 03, .14C-;,O-t 4ZIA 0 IT k2we Pf"Gis S*,Wk'X_
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amwl &&W& ILM t -M LW 90 0A N A 3(k
10 D i U S rtts-_%n E%1 a r A -32-W 11 ft
�ISI umbers-in parentheses represent T. Rowe Price Growth Stock's percentile rank in the universe of U.S. Large Cap Growth Equity Mutual Funds.
0 2016 PFTVI Asset Management LLC
'IShares Russell M *Id�Cap
ro We lu
iSharti;Rm-L Alid-Cap(MR)
As co-rJ=t 30,2016
W14
XJ5
JO
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iiuwt Ra U 19 sqsz r1i d
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Numbers in parentheses represent iShares Russell Mid-Cap's percentile rank in the universe of U.S. Mid-Cap Core Fquity Mutual Funds.
0 2016 PFM Asset Management LLC 45
'IShares Russell M *IdmCap Value
i%Lhar"_-Rws'.%LC Val
m-of JOWL..11),20 M
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13
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Uad%1-.&4;:A a Ll r E Do L OD 0.33 Din X to
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Numbers in parentheses represent iShares Russell Mid-Cap Value's percentile rank in the universe of U.S. Mid-Cap Value Equirty Mutual Funds.
2016 PFM Asset Management LLC 46
Columb*la S all Cap Valu!e
E:*j w=bh a.'s-nkc P Va I U;Z
of JNA*jo,20145
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D.n I'M y7rm rM!; .1210 9.90 :331
f- IP v id 7.2 NW-OLO G-- 11,
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37
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rt 4 u ki wi t lrjicLizg Wwwalfhm
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uuasG O:Q vtluk ajn 4,-C
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Numbers in parentheses represent Columbia Small Cap Value's percentile rank in the universe of U.S. Small Cap Value Equi ter Mutual Funds.
P 2016 PFM Asset M a na geme nt L LC 47
T. Rowe Pri*ce New Horizons
T Rmwe ftl c c N i?Y&M w C
As of dune 0.1G]6
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44
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YA&W 3 -;agl UA A-2
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Owrbiliblill 1 RAIN Kamm Es"le Ra" a46",d
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Ruud I-OW CAVqLvl hkk% &54 0 W a W Ao 5 JV D-CC "N A lix
51Tj 11mv U-S Trg wmr;W V- 004, N,A 130' 7 M a M -A 36� �-4 0.01
N u rnbe rs i n parentheses re present T. R owe Price N ew Ho riz o n s6'pe rc entil e ran k in t he u n rs e of U.S. S m al I C ap G roW h E q u-Ft y Mut u aF Funds.
(D 2016 PFM Asset Management LLC 48
'de Ba *11ard Intl Equiti'es
Nat'ionwi
AS of Amp 34).2016
V
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Numbers in parentheses represent Nationwide Ballard Int'l Equities percentile rank i-n the universe of International Equity Mutual Funds.
(D 2016 PFM Asset Management LLC 49
Dod 9, e Cox Mn Stock
Dodpf&.Cox"11 Stack(DODFX)
Al of JEM 30..2014
7
Ono 'Farr wun 13L` :OLL
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W9
Numbers-in parentheses represent Dodge& Cox International Stock's percentile rank in the universe of International Large Cap Core Equity Mutual Funds.
9
2016 PFM Ass et M in n a g ement I.LC so
MFS Internat*ional Growth
.N IW I(;Tq)I"bl:I{.%l iLX)
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f-"9 F-
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M�V Alt WMU M IRA Or*-.Ith NcS'- 3.13 L2- 031 CID I W �Di Oto x N A L:C
K ULM tP 5 Tftumar Ba 'N'A 6 T Oto M 3-'.Z S -4.11
Numbers in parentheses represent MFS International Growth's percentile rank in the universe of International Large Cap Growth Equity MutuaJ Funds.
0,2016 PFM Asset Management LLC 51
Schroder E Ing Equity
POFItaJiD
SchrodevEta Nll%l]Eq�Im
As of Jmu*30,201-6
AIL_
"or m 17� Vwn YnrL MF 1OL4 2Q :a3'. :SLI
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50,%Dz-r C S:rtar—m BO N 4)Cr *tO 0,07
N u mbe rs i n p arenthes es re p resent S ch rode r E mergil n g Ma rkets E q city s pe rcent i le ran k in the u n i ve rs e of E rg i n g Markets Eq u i ty M utual F u n ds.
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(D 2016 PFM Asset Management LLC 52
Nuveen Real Estate Securi*teies
NOT"m Real Estrl
As af Jw"30,2016
It dF
T& L 5 .1dt
I P.L- DareI mr I cut. 5-an
8 Nwrom WA tnii — , -
'AWEjr.-[FAMMC- ---
4L 121 1 :3
-C 14JU
A-&a rpe Trwymw Ar*F1 Troad" bdmmuA�
Dimilaam Rmab Rm do off ]Ewrw JLH1W
r.fxr-XK;k3ZW-1qARC-C1 1143 14-•t f.Zl I L P, 0141 W -OT GJaG
P,x I IS it r M bxkm 11A
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Dam U.1'In&mw BO Ijim -03t 0 Cr
Num b ers in pa rentheses represe rpt N uvee n Rea I Est ate S e c u rit i es'perce nti le ran k i n the u n i ve rse of R ' E stat e Sector M ut u a-' Fu nds.
2 016 P FM Asset Mena ge nett LLC 53
Vanguard Short Ter Corp Bond
Van-. and Sb-Tm Jun A44m
As of Jew 30.2016
1j)
1.0
40
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f Ll
I
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IV JM
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1-10 ILK *41 1"r
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C4
a-&I 34m US AW-pn L Yts LZ6 0. A 14DD.
Dir EP 5 T-tamm.-EO
N A M, A Is a -V4 0.35
Numbers in parentheses represent Vanguard Short Term Corporate Bond's percentile rank-in the universe of U.S. Short Term Investment Grade Mutual Funds.
ALP
@ 2-DI 6 P FM Asset M a nage m c nt LLC 54
*de H "ighMark Bond Fund
N'at'ionwi
a 4 i a mm We:ELM Bo tmd IS(N'%VJ 3N,-)
A5 Of Jumb$0,2616
Peer Gripap Amal%A!& 174 t-.I;-Rru 2dAT3 rl%vi C*oFp R-i-rd Fnnim.cA rv.,
��i
-4L%
'YEW L t 0
T*' Tor Vmn Trm
D-bi M5 NLA 211:: Ni t
ruwzr-� R NLe "-M77, ju 3 ID N-acw- 4 Ln -TL C I a'd Lni
S:jki t"z S A r i--T U-!- 411
.S) �;'1�p _22 :Zt -,3L
(24) k'3- 4L Sbkl�-r Rwz
sri■awl 5i a .mar ra 'r rrrjiw ACE" Trim" Idmm"M R4q"rta
Na
. anr—LAE
ahnft Ra r,-Cl AIM r;j re a J l LX
ti DA I.,S Tra 40 YA-.EW, 019 X A 13.IV-
N
umber s in parentheses represent Nationwide HfghMark Bond Funds percentile rank in the universe of U.S- Broad Market CGre Fixed Income Mutual Funds,
0 2016 P FM Asset Management LLC 55
PI' MCO Total Return
Pn_ICO--Tat Rtm;lwt
As or Tmrtt 30-20146
illriiiLWl I
L.
--s-D
Tip
DW Vw V42" van M4
Ox� do C tj% .41X .5--t 4 R,-- C, -.1P Ir
ROWE Trr.pw Aotm lrvwbft InEw"Lo"
FAMid Emr FAAN
rawc�Ter Zmbw_Y�r-m IN C.0 I a -D;A 073
Ukrft SA ir US AZpNWU:a Z.E L MP O-N Ow _X A Ift
W.1b V US tv aaws BE a IF Dot NA M (r_w 1.IN
I _D
Numbers in parentheses represent PIMCD Total Return's percentile rank-in the universe of U.S. Broad Market Core Fixed Income Mutual Funds.
0 2016 PFM Asset Management LLC 56
Prudentaial Total Return
PorifDlin
Pru Too Rw Rund-Q
M Of JWIL&3113,213116
111111111 IIIIIIIIIIIqI IIIIIIIIIII11pill iq 111111 q IpIiI
3
Ed-rc
21
I L D
Q"4ff To V1w
NO Nts :41 wj M: Wkl
71
3o r,i
2.P. Ain jX -:!V i 4 dI
Hi-.tn rics]Natkg hI-3 Vrw r-,
shm qw T I 1--%AW AI T-ra c W*rMI CLOL
lkmm Owrhdeir IEL-mqr AM II
hm Ise am Bam4-Q 1?74 R
abski 3LX.V t AMP rW 1! L ]NI A.
PA.DLy'D-S N A
Numbers in parentheses represent Prudential Total Return's percentile rank in the universe of U.S. Broad Market Core Fixed Income Mutual Funds.
2016 PFM Asset Management LLC 57
PIMCO H 'I'gh Y'I*eld
Pl[NICO:fficrb Vie*wt
.4.111 of jffimt 36,20 16
Jill i
JI;1I Pill 1111111 11
6 1LUJ
rw1r,
*Nnff Vow 'pan Vmn NLE M14 �111!;-L A,!
8 Pat jVIJ '..�.i 121
.13
D dh-C,4
..i
irsl �All MGM Tow-Lmw A&I.1%r Ir:i&uft :Erg Irma U,-qm
N,La CLO R JUAW rror iNSR49i
PI 419 5 L 9 IV GJ04 AAC I
w.1. A-4L YiI DURA Ka 1 .159 i4l DM 3 JD IM ODC
go DLr 111 3 1W.- P 06 D.W Gin -45- 2.4 -4)V, a III
Numbers in parentheses represent PIMCO High Yield's percentile rank in the u niverse.-of U.S. High Yield B-on Mutual Funds.
2016 PFM Asset Management LLC 58
I Data
Overview of Actuaria
• Actuarial Value of Assets: $33.7 million
• Actuarial Accrued Liability: $103.9 milli-on
• Funded Ratio: 32%
Normal Costa. $2.3 million
• Amortized Unfunded Liability: $5.5 million
Annual Required Contribution: $7.9 million
Benefit Payments: $4.9 million
Discount Rate: 6.25%
Medical Trend: 8.9% grading down to 5.0% in 2022+
Plan Participants. 259 active; 249 retirees
• Additional Information: Medical and dental benefits are lower for employees
hired after 6/30/09.
Source:Central Contra Costa Sanitary District Actuarial Valuation as of July 1. 2014
@ 2016 PFM Asset Management LLC 59
SCI [A►s Are Basis sof Our Investment Strategy
2016 Intermediate (5-Year) and Long Term (3a-Year} Capital Market Assumptions
40 (CMAs)
_R
0
V I
o 30
CL
> 20
cc 10
N 3.3
■ 1.0
c
c
41
a ■ �
� � r
10
CL
x
LU
-20 4-
4§1b
ore
CP S4,
CP
M, Intermediate-Term Capita I Market Assumptions(5-Year)
-19W Long-Term Capital Market Assumptions(3a-Year}
Ranges represent+/- I standard deviation from the expected return
-SKEW,
(D 2016 PFM Asset Management LLC 60
0
2016 Capi 4 tal Market Assumpt*ions
Intermediate: Next 5 Years Long Term Projections
Expected Retum E)pected Risk Expected Return Dpected Risk
US Equity 71% 17% 770�--� 16%
International 7.3% 18% 7.7% 17 Oieo
Developed Equity
Ernerg*lng Markets 65% 24% 8.1% 20%
Equity
Core rBonds 1.5% 4% 5.5% 5%
Intermediate 2.6% 6% 6.3% 7
nv %
Iestment Grade
Emerging Markets 4.4% 10% 7.3% 10%
Debt
High Yield 5.7% 10% 6.8% 10%
Bank Loans 4_5% 6% 5.2% 6%
REITs 5.5% 12% 64% 12%
Private Equity Real 6.8% 15%, 7.7% 15%
Estate
Commodities 3.0% 169---� 5.3% 16%
Hedge Funds 6.5% 15% 7.4% 15%
Pritvate Equity 95c% 25% 25%-
Cash 1.0% 1 3.3/0 1%
Fo r the i nterm ediate to r m (up to 5 yea rs).ou r c a Pita I ma rketass u rn ptio ns de rive f rorn o u r assessment of c u rrent econom is cored ItIons,lincllud[rig corporate profits. balance
sheets. etc,and current valuations for various asset classes.Our long-term assumptions are derived using an economic building block approach that project s economic and
co rpt rate p rof i t growth taki ng i nto cons i de-rat i o n t h e f u n d ame rata I f a-,r--to rs d riv 1 n g long-te rm re al ec o n omit g rowth, expectations f o r i n f I ati on, p re ducti'vity a n d I a bo r force growt h
2015 PFM Asset Management LLC 61
0
2016 Capaital Market Assumptions Cont.
PW
-E-qudy 1
Intemational Developed 0.8 1
Eq Lw-ty
Emerging Markets 0.7 0.7 1
Eq LA-ty
Core Bonds 0.3 0.2 0.2 1
Irten-nedig ate lryvestmerft 0.3 0.2 0.2 0.9
Grade Corp
Emerging Markets Debt 0.5 0.5 0.5 0.4 0.4 1
High' eId 0.7 0.5 0.5 0.4 0.4 0.4 1
Bank Loans 0.4 0.3 0.3 0.3 0.3 0.7 0.7 1
RET s 0.5 0.4 0.4 Od3 0.3 0-3 0.4 O.4 1
PO to E q ui t `Real 0.4 0.3 0.3 0.3 0.3 0.2 0.4 0.2 0.8 1
Estate
Comirnodities 0.1 0.1 0.2 0.2 0.2 0.3 0.2 0.2 0.1 0.1 1
Hedge Fund s 0.6 0.5 0.5 0.4 0.4 0.3 0.4 0.4 0.4 0.3 0-2 1
Private Equity 097 0-6 O. 0.3 O. 0.3 0.5 0-2 0-4 0,4 0.1 0.5 1
Cash 0.1 0-1 0.1 0.2 o.2 0.1 0.1 0.2 0-1 0,11 0.1 0.1 G,I
2016 PFM Asset Management LLC 62
D"Iscla r rners
• Any investment advice in this document is provided solely by PFIV1 Asset Management LLC.
PFM Asset Management LLC ("PFN'IAIVI"} is an investment advisor registered istered under the
Investment Advisers Act of 194(1. PFS Advisors is a division of PFIVI Asset Management
LLC. Public Financial Management Inc. is not providing and is not responsible for any
investment advice herein.
• This material is based on information obtained from sources generally believed to be reliable
and available to the public. however PFM Asset Mana ement LLC cannot uarantee its
1 9 9
accuracy, completeness or suitability. This material is for general 'Information purposes only
and is not intended to provide specific advice or a specific recommendation. All statements
as to what will or may happen under certain circumstances are based on assumptions, some
but not all of which are noted �n the presentation. Assumptions may or may not be prover
correct as actual events occur, and results may depend on events outside of your or your
control. Changes ire assumptions may have a material effect on results. Past performance
does not necessarily reflect and is not a guaranty of future results. The information
contained ire tpresenta#ran i not an offer to purchase or sell any securities.
OO 2016 PFM Asset Management LLC