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COMMONWEALTH OF PENNSYLVANIA

PUBLIC SCHOOL EMPLOYEES’ RETIREMENT SYSTEM

Investment Expenses Report

FY 2016

December 6, 2016

Thomas Bauer, John Kemp, Charles Spiller

Table of Contents

Reporting

Total Investment Expenses vs Alpha

Total Investment Expenses

External vs Internal vs Other

Stylized Example

Asset Class Summary

Why Use External Managers?

FY 2017 Investment Expense Initiatives

Key Takeaways

Appendix

– Breakdown of Internal and Other Expenses

– Asset Class Breakdown

1

2

Challenge: No uniform disclosure reporting or evaluation convention exists for

Public Funds

Unable to compare one fund to another fund

No guidance from GASB, GIPS, GFOA, etc.

Some organizations claim to analyze fee terms but do not take sufficient

details into account to make meaningful comparisons

Example: Ranking all Non-U.S. Equity mandates without regard to their

performance, size of mandate, or volatility will not provide actionable

insights

Reporting

3

Given lack of reporting and disclosure standards, public pensions funds can and do

report and disclose differently

Example

Assume:

Fund of funds manager charges 1% fee

Underlying fund managers charge 2% base fee and 20% profit share

Pension 1 and Pension 2 invest in the fund of funds manager

Pension 3 and Pension 4 do not invest in the fund of funds manager but

instead directly invest in the underlying fund managers

Reporting and disclosure:

Perception: Pension 2 > Pension 3 > Pension 4 > Pension 1

Reality: Pension 1 = Pension 2 > Pension 3 = Pension 4

Reporting

Pension 1 Pension 2 Pension 3 Pension 4

1%

1% plus

2% and 20% 2% and 20% 2%

Table of Contents

Reporting




Stylized Example

Asset Class Summary

Why External Managers?


Key Takeaways

Appendix



4

5

PSERS defines Total Investment Expenses as:

External Manager Expenses

Public Markets

o Base Fees

o Profit Share

Private Markets (i.e., Limited Partnership structures)

o Base Fees

+ Internal Management Expenses

Compensation and Benefits

Technology Services

Miscellaneous Service Providers

+ Other Expenses

Consultants (e.g., Aon Hewitt, Portfolio Advisors, Courtland, Aksia)

Legal

Overhead


6


Amounts in millions of dollars

$314

$399

$478

$522 $515

$481

$558

$482

$455

$416

$0

$100

$200

$300

$400

$500

$600

FY 2007 FY 2008 FY 2009 FY 2010 FY 2011 FY 2012 FY 2013 FY 2014 FY 2015 FY 2016


7


Calculated based upon quarterly net NAV, i.e., excludes leverage and undrawn commitments

0.52%

0.60%

0.96%

1.15%

1.07%

0.98%

1.13%

0.97%

0.87% 0.86%

0.00%

0.25%

0.50%

0.75%

1.00%

1.25%


Total Investment Expenses as a % of the Total Fund (Net NAV)

8


Calculated based upon quarterly gross exposure, i.e., NAV plus leverage and undrawn commitments

0.41%

0.47%

0.70%

0.82% 0.83% 0.80%

0.95%

0.83%

0.75%

0.68%

0.00%

0.25%

0.50%

0.75%

1.00%

1.25%


Total Investment Expenses as a % of the Total Fund (Gross Exposure)

Table of Contents

Reporting




Stylized Example

Asset Class Summary



Key Takeaways

Appendix



9

10



$305

$387

$465

$510 $500

$467

$538

$463

$432

$396

$6 $8 $9 $8 $10 $10 $15 $12 $9 $10 $3 $4 $4 $4 $5 $4 $5 $7 $14 $10

$-

$100

$200

$300

$400

$500

$600


External Internal Other

11


Calculated based upon quarterly net NAV, i.e., excludes leverage and undrawn commitments

0.50%

0.58%

0.93%

1.13%

1.04%

0.96%

1.09%

0.93%

0.83% 0.82%

0.01% 0.01% 0.02% 0.02% 0.02% 0.02% 0.03% 0.02% 0.02% 0.02% 0.00% 0.01% 0.01% 0.01% 0.01% 0.01% 0.01% 0.01% 0.03%

0.02%

0.00%

0.20%

0.40%

0.60%

0.80%

1.00%

1.20%


External vs Internal vs Other as a % of the Total Fund (Net NAV)


12


Calculated based upon quarterly gross exposure, i.e., NAV plus leverage and undrawn commitments

0.40%

0.46%

0.68%

0.80% 0.80% 0.77%

0.92%

0.80%

0.71%

0.64%

0.01% 0.01% 0.01% 0.01% 0.02% 0.02% 0.02% 0.02% 0.02% 0.02% 0.00% 0.00% 0.01% 0.01% 0.01% 0.01% 0.01% 0.01% 0.02% 0.02%

0.00%

0.10%

0.20%

0.30%

0.40%

0.50%

0.60%

0.70%

0.80%

0.90%

1.00%


External vs Internal vs Other as a % of the Total Fund (Gross Exposure)


13


Amounts in billions of dollars

Calculated based upon gross exposure, i.e., NAV plus leverage

45 45

30 32

35 36

40 41 40

37

22

17

13 14

16

13 13

17 17

19

-

5

10

15

20

25

30

35

40

45

50


External AUM v Internal AUM (Gross Exposure)

External Internal

14


Calculated based upon gross exposure, i.e., NAV plus leverage

67%

73% 70% 70%

68%

73% 76%

70% 70%

65%

33%

27% 30% 30%

32%

27% 24%

30% 30%

35%

0%

10%

20%

30%

40%

50%

60%

70%

80%


External AUM v Internal AUM as a % of the Total Fund (Gross Exposure)

External Internal

Table of Contents

Reporting




Stylized Example

Asset Class Summary



Key Takeaways

Appendix



15

16

IF

Gross Return 10%

Base Fee 1%

Hurdle Rate 6%

Profit Share 20%

THEN

Profit Share = (10% - 1% - 6%) * 20% = 0.6%

Return To Manager

Base Fee 1%

Profit Share 0.6%

Total 1.6%

Return To PSERS

Gross Return less Manager Share 8.4%

Stylized Example

17

Gross Return less Hurdle Rate 4%

Total Investment Expense 1.6% (Goes to Manager)

Alpha 2.4% (Goes to PSERS)

Stylized Example

18

IF

Gross Return 12%

Base Fee 1%

Hurdle Rate 6%

Profit Share 20%

THEN

Profit Share = (10% - 1% - 6%) * 20% = 1%

Return To Manager

Base Fee 1%

Profit Share 1%

Total 2%

Return To PSERS

Gross Return less Manager Share 10%

Stylized Example

19

Gross Return less Hurdle Rate 6%

Total Investment Expense 2% (Goes to Manager)

Alpha 4% (Goes to PSERS)

Better manager earns higher fee

PSERS earns higher alpha

Win-win

Stylized Example

Table of Contents

Reporting




Stylized Example

Asset Class Summary



Key Takeaways

Appendix



20

21


Dollar amounts in millions

“e” represents estimate

Cumulative Total Over 10 years

Total Alpha $5,538

Total Investment Expenses $4,620

$314 $399 $478 $522 $515 $481 $558 $482 $455 $416

$2,360

-$618

-$3,131

$1,754 $1,582

$856

$1,189

$1,444

$440

-$339

-$4,000

-$3,000

-$2,000

-$1,000

$0

$1,000

$2,000

$3,000

FY 2007 FY 2008 FY 2009 FY 2010 FY 2011 FY 2012e FY 2013e FY 2014e FY 2015e FY 2016e

Total Investment Expenses Alpha

22


Alpha calculation is based upon actual performance

“e” represents estimate

Weighted Average Over 10 Years

Alpha 1.07%

Total Investment Expenses 0.89%

0.41% 0.47% 0.70% 0.82% 0.83% 0.80% 0.95% 0.83% 0.75% 0.68%

3.38%

-0.82%

-5.40%

3.13% 2.77%

1.57%

2.04% 2.32%

0.69%

-0.56%

-6.00%

-4.00%

-2.00%

0.00%

2.00%

4.00%

6.00%

FY 2007 FY 2008 FY 2009 FY 2010 FY 2011 FY 2012e FY 2013e FY 2014e FY 2015e FY 2016e

Total Investment Expenses as a % of the Total Fund Alpha as a % of the Total Fund

23

Internal Alpha vs Allocation/External Alpha

Cumulative Total Over 10 Years

Allocation/External Alpha $4,836

Internal Alpha $702

$2,354

-$671

-$3,271

$1,561 $1,526

$806

$1,181 $1,416

$395

-$460

$6 $54 $140 $193 $56 $51 $8 $28 $45 $121

-$4,000

-$3,000

-$2,000

-$1,000

$0

$1,000

$2,000

$3,000


Allocation /External Alpha Internal Alpha

Dollar amounts in millions

24

Alpha “Ecosystem”

Internal Staff Internal Alpha

External Managers External Alpha

Internal Staff interactions Internal Alpha

with External Managers

(at portfolio level and overall Fund level)

Internal Alpha vs Allocation/External Alpha

Table of Contents

Reporting




Stylized Example

Asset Class Summary



Key Takeaways

Appendix



25

26

Asset Class Summary


INVESTMENT EXPENSES BY ASSET CLASS FY 2013 FY 2014 FY 2015 FY 2016

External Management

U.S. Equities $ 2 $ 3 $ 3 $ 3

Non-U.S. Equities $ 28 $ 18 $ 24 $ 24

Master Limited Partnerships $ 5 $ 11 $ 12 $ 8

Fixed Income $ 118 $ 82 $ 84 $ 82

Commodities $ 17 $ 11 $ 8 $ 6

Real Estate $ 75 $ 74 $ 69 $ 52

Private Equity $ 137 $ 117 $ 102 $ 99

Absolute Return $ 150 $ 141 $ 117 $ 102

Risk Parity $ 5 $ 6 $ 13 $ 18

External Management Total $ 538 $ 463 $ 432 $ 396

Internal Management $ 15 $ 12 $ 9 $ 10

Other $ 5 $ 7 $ 14 $ 10

Total Investment Expenses $ 558 $ 482 $ 455 $ 416

27

Asset Class Summary


INVESTMENT EXPENSES BY ASSET CLASS

BASE FEES PROFIT SHARE External Management FY 2014 FY 2015 FY 2016 FY 2014 FY 2015 FY 2016

U.S. Equities $ 3 $ 2 $ 1 $ - $ 0.6 $ 2

Non-U.S. Equities $ 18 $ 18 $ 18 $ 0.2 $ 6 $ 6

Master Limited Partnerships $ 7 $ 9 $ 7 $ 4 $ 3 $ 1

Fixed Income $ 72 $ 77 $ 78 $ 10 $ 8 $ 4

Commodities $ 11 $ 8 $ 6 $ - $ 0.3 $ -

Real Estate $ 74 $ 69 $ 52 $ - $ - $ -

Private Equity $ 117 $ 102 $ 99 $ - $ - $ -

Absolute Return $ 86 $ 83 $ 78 $ 54 $ 34 $ 25

Risk Parity $ 6 $ 13 $ 18 $ - $ - $ -

External Management Total $ 395 $ 380 $ 358 $ 68 $ 52 $ 38

Internal Management $ 12 $ 9 $ 10 $ - $ - $ -

Other $ 7 $ 14 $ 10 $ - $ - $ -

Total Investment Expenses $ 414 $ 403 $ 378 $ 68 $ 52 $ 38

Table of Contents

Reporting




Stylized Example

Asset Class Summary



Key Takeaways

Appendix



28

29

Why use External Managers?

Is the Asset Class Efficient?

Internal Passive Management

Internal Staff has Skill?

Internal Active Management

External Manager has Skill?

External Active Management

Features

Very Low Expenses

Low or Zero Alpha

Very Low Expenses

Attractive Alpha

Higher Expenses

Attractive Alpha

Examples

US Public Equity

Gold

US Core Fixed Income

LIBOR Plus Fund

Private Equity

Absolute Return

Yes Yes Yes

No No

Table of Contents

Reporting




Stylized Example

Asset Class Summary



Key Takeaways

Appendix



30

31

Add staff to bolster and backstop internal management

For external managers in Traditional Investments

Reduce the base fee and create better alignment of interests by moving to a

lower base fee coupled with a profit share

Enter into arrangements for netting of profit shares for managers with multiple

PSERS mandates

For external managers in Non-Traditional Investments

Continue to grow co-investments (lower fee and profit share)

Move away from paying on commitment and towards paying on invested

capital

Continue to push managers to adopt ILPA template

CAVEAT: Ability to negotiate fees downward depends upon supply and demand of

a manager’s services:

High demand and/or low supply gives PSERS limited negotiating leverage


Table of Contents

Reporting




Stylized Example

Asset Class Summary



Key Takeaways

Appendix



32

33

Total Investment Expenses in dollars will be

Higher if

PSERS AUM is larger

Market returns are higher

More external managers

Lower if

PSERS AUM is smaller

Market returns are lower

More internal management

Total Alpha in dollars will be

Higher if use a mix of external and internal managers

Lower if use only internal management

Key Takeaways

Table of Contents

Reporting




Stylized Example

Asset Class Summary



Key Takeaways

Appendix



34

35

Breakdown of Internal and Other Expenses

FY 2016

OTHER EXPENSES INTERNAL MANAGEMENT EXPENSES Investment Consultants Staff Compensation (salary and benefits) $6,719,000

Aksia, LLC $700,000

Courtland Partners LTD $278,750 Specialized Service Providers

CP Cogent Securities LP $2,914,331 BlackRock Solutions (Risk) $605,459

Financial Control Systems (ABOR) $643,256 CBIZ Benefits & Insurance $108,821

Glass Lewis & Co. LLC $174,315 Cornerstone Macro $43,958

Hewitt EnnisKnupp Inc $805,230 Misc Service Providers $103,732

Portfolio Advisors $2,037,542

Misc Consultants $58,009 Overhead $1,029,303

Misc. Legal Service Providers $336,567 Miscellaneous Expenses $1,059,000

BNY Mellon (Custody) $2,331,012

TOTAL OTHER EXPENSES $10,279,012 TOTAL INTERNAL MANAGEMENT EXPENSES $9,669,273

36

U.S. Equity Investment Manager Fees FY 2016 ($ in Thousands)

5 U.S. Equity portfolios in FY 2016 (2 external, 3 internal)

Total fees in dollars increased 20% over the past year

All externally managed U.S. Equity portfolios have been

terminated, with the exception of external management

used for internal portfolio derivative overlays

Internal asset management decreases fees as a percentage of

assets

*Average Month-end NAV used to calculate Alpha $

Fees as a % of Assets

(External Managers)


(with PSERS Internal)

U.S. Large Cap 0.93% 0.11%

U.S. Mid/Small Cap N/A N/A

Total 0.93% 0.08%

U.S. Equity Total

# of Portfolios 5

Average NAV* $3,767,947

Performance

(Net of Fees, unhedged) 3.79%

Benchmark

(unhedged) 2.25%

Alpha $

(Net of Fees)* $18,445

Total Fees $3,198

Base Fees $1,461

Profit Share $1,736

Total Fees as a % of

NAV 0.08%

37

Non-U.S. Equity Investment Manager Fees FY 2016 ($ in Thousands)

Base fees, as a percentage of NAV, decreased by 2 basis points to

0.27%

Total fees in dollars increased 2% over the past year

Base fees paid increased by 2%, while average AUM

increased by 8%

Due to external manager outperformance the program

incurred profit share of $5.9M, which was 2% higher than the

prior fiscal year

Internal asset management decreases fees as a percentage of

assets


Non-U.S. Equity Total

# of Portfolios 11


Performance

(Net of Fees, unhedged) -8.53%

Benchmark

(unhedged) -9.67%

Alpha $


Total Fees $23,331

Base Fees $17,477

Profit Share $5,854

Total Fees as a % of NAV 0.36%


(External Managers)



Non-U.S. Large Cap 0.60% 0.28%

Non-U.S. Small Cap 0.76% 0.76%

Emerging Markets 0.90% 0.90%

Total 0.66% 0.36%

38

MLP Investment Manager Fees FY 2016 ($ in Thousands)

Net of fees ($37 million), MLP managers produced $330 million of

alpha over four years

Fees as a percentage of NAV have remained in the 40-60 bps

range

One account earns a profit share. In periods where that account

substantially outperforms the benchmark, fees as a percentage of

NAV will be impacted

Net asset value has doubled as a result of asset allocation

decisions

MLPs now have a 4% target vs. a 2% target in FY 2013

Internal vs. External Management: Prior to August 2015, 100% of

the allocation was externally managed. PSERS implemented an

internally managed, passive MLP portfolio in August 2015 as a tool

to rebalance quickly if necessary or take advantage of market

volatility


MLP Total

# of Portfolios 4


Performance

(Net of Fees) -18.75%

Benchmark -18.93%

Alpha $


Total Fees $8,333

Base Fees $6,956

Profit Share $1,377


NAV 0.43%

39

Fixed Income Investment Manager Fees FY 2016 ($ in Thousands)

Total fees decreased 20% or $8.8 million over

past fiscal year

Internal asset management decreases fees as a

percentage of assets and represents

approximately one-third of Public Fixed Income

exposure.

Internal asset management was a positive

contributor to alpha generation


^Internally managed

Fixed Income

Public External Internal Total

# of Portfolios 9 3 12

Avg Notional

Exposure/NAV* $6,616,030 $3,308,521 $9,924,550

Performance

(Net of Fees) N/A N/A N/A

Benchmark N/A N/A N/A

Alpha $

(Net of Fees)* -$159,503 $17,734 -$141,769

Total Fees $41,676 $0 $41,676

Base Fees $37,781 $0 $37,781

Profit Share $3,895 $0 $3,895


NAV 0.55% 0.00% 0.38%


(External Managers)



Barclays Aggregate 0.65% 0.31%

TIPS Notional Exp. 0.41% 0.34%

EM Debt 0.56% 0.56%

Global Bonds 0.28% 0.28%

Long Treasuries

Bonds 0.00%^ 0.00%^

Public High Yield 0.77% 0.77%

Multi-Sector 0.67% 0.67%

40

Private High Yield Debt Investment Manager Fees FY 2016 ($ in Thousands)

Private high yield debt has higher fees than

traditional public high yield debt

Attractive expected return/risk profile

Contractual management fees typically range

between 0.75% to 1.5%

PSERS negotiates fee discounts

whenever possible

Some funds offer discounts for

commitment size and/or first closers

FY 2016 management fees of $40.1 million

were $1.2 million more than FY 2015

NAV increased 14.6% from $2.9 billion

to $3.4 billion

Most funds charge on invested capital

Private High

Yield Debt External Internal Total


NAV* $3,384,075 $19,113 $3,403,188

Performance

(Net of Fees) 0.34% -53.48% 0.14%

Benchmark 1.62% 1.62% 1.62%

Alpha $

(Net of Fees)* -$43,316 -$10,531 -$53,847

Total Fees $40,120 $0 $40,120

Base Fees $40,120 $0 $40,120


NAV 1.19% 0.00% 1.18%

*Average FY 2016 4 Quarter-end NAV used to calculate Alpha $

41

Reasons for year to year management fee increases or decreases:

Increases

1st year funds may be charged on partial years

Some funds have discounts for early closers

Fees are typically charged on invested capital, therefore fees will increase throughout the

investment period as capital is invested

Decreases

After the investment period fees will decrease as investments are liquidated

Estimated changes for FY 2017:

6 funds are making new investments which will increase fees by $4.7 million over FY 2016

6 funds will be in the harvest period in FY 2017 which lower fees by approximately $2.1

million

PSERS will make approximately $700 million in new commitments during FY 2017, resulting

in an estimated $3.15 million of new fees

Private High Yield Debt Investment Manager Fees FY 2016 ($ in Thousands)

42

Commodities Investment Manager Fees FY 2016 ($ in Thousands)

Fees down $2.3 million from last year

PSERS added 2% of total fund assets to

commodities utilizing internal asset

management with no additional fees


Commodities External Internal Total


Average NAVs with

Notional* $948,296 $2,815,459 $3,763,755

Performance

(Net of Fees) N/A N/A -1.34%

Benchmark N/A N/A -4.58%

Alpha $

(Net of Fees)* $0 $0 $121,946

Total Fees $5,954 $0 $5,954

Base Fees $5,954 $0 $5,954

Profit Share $0 $0 $0


NAV 0.63% 0.00% 0.16%

0.64% 0.71%

0.77% 0.70%

0.84%

0.64%

0.43%

0.29%

0.16%

$0

$5,000

$10,000

$15,000

$20,000

$25,000

0.00%

0.20%

0.40%

0.60%

0.80%

1.00%

FY2008

FY2009

FY2010

FY2011

FY2012

FY2013

FY2014

FY2015

FY2016

Total Manager Fees and Fees as a % of Assets

Fees $ Fees as a % of Assets

43

Real Estate Investment Manager Fees FY 2016 ($ in Thousands)

FY2016 management fees of $52

million were $16.9 million less

than FY 2015

Sold $1.5 billion in the

secondary market during

FY2016

Most funds charge on the full

commitment during the

investment period and on

invested capital during the

harvest period

Contractual management fees

range from 0.75% to 1.75%

PSERS negotiates fee

discounts whenever

possible

Some funds offer discounts

for commitment size and/or

for first closers

Real Estate Private -

External

Public/PTRES

External

Private

Internal

Public/PTRES

Internal Total

# of Portfolios 108 1 1 1 111

Average NAV* $5,076,126 $193,419 $199,322 $102,973 $5,571,840

Performance

(Net of Fees) 8.44% 23.75% N/A 22.90% 9.37%

Benchmark 5.01% 23.55% N/A 5.70% 5.02%

Alpha $

(Net of Fees)* $174,111 $785 N/A** $17,711 $192,607

Total Fees $52,006 $0 $0 $0 $52,006

Base Fees $52,006 $0 $0 $0 $52,006

Total Fees as a

% of Commit or

Inv Capital

1.02% 0.00% 0.00% 0.00% 0.93%


**FY 2016 performance data not available to calculate Alpha due to less than one year history

44


Increases



There may be less fee offsets from prior year

Fees charged on invested capital during the investment periods will increase as capital is

invested

Decreases

Management fees typically drop after the end of the investment period (invested capital

base decreases as assets are sold)

There may be more fee offsets from the prior year


6 new funds will be charged full year management fees for the 1st time, increasing fees by $5.6

million over FY 2016

PSERS will make approximately $837.5 million in new commitments during FY 2017, resulting


7 funds will complete their investment period in FY 2017 which will lower fees by approximately

$1.1 million

Real Estate Investment Manager Fees FY 2016 ($ in Thousands)

45

Private Equity Investment Manager Fees FY 2016 ($ in Thousands)

FY 2016 management fees of $99.5 million were

$2.7 million less than FY 2015

Most funds charge on the full commitment during

the investment period and on invested capital

during the harvest period

Contractual management fees range from 0.75%

to 2.00%

PSERS negotiates fee discounts whenever

possible

Some funds offer discounts for commitment

size and/or for first closers


Private Equity External Internal Total


Average NAV* $7,464,615 $112,037 $7,576,652

Performance

(Net of Fees) 3.59% 28.17% 3.44%

Benchmark 2.11% 2.11% 2.11%

Alpha $

(Net of Fees)* $110,476 $29,197 $139,673

Total Fees $99,493 $0 $99,493

Base Fees $99,493 $0 $99,493


Commit or Inv

Capital

1.33% 0.00% 1.31%

46


Increases



There may be less fee offsets from prior year

Fees charged on invested capital during investment periods will increase as capital is

invested

Decreases

Management fees typically drop after end of investment period (invested capital base

decreases as assets are sold)

There may be more fee offsets from prior year


13 new funds will be charged full year management fees for the 1st time, increasing fees

by $14.9 million over FY 2016

PSERS will make approximately $1 billion in new commitments during FY 2017, resulting


7 funds will complete their investment periods in FY 2017 which will lower fees by

approximately $1.8 million

Private Equity Investment Manager Fees FY 2016 ($ in Thousands)

47

Absolute Return Investment Manager Fees FY 2016 ($ in Thousands)

The media portrays the typical hedge fund to charge a 2.0% base

fee and 20.0% profit share

The standard fee for our Absolute Return portfolio would be 1.8%

and 19.3% on a NAV-weighted basis **

PSERS partners with top-tier investment managers that often have

limited capacity. PSERS attempts to negotiate fee discounts

whenever possible, however, in some instances our ability to

negotiate fees has been impeded by capacity constraints

Through negotiations with the investment managers, PSERS

actual fee for the Absolute Return portfolio is 1.5% and 15.3%

on a NAV-weighted basis **

The negotiated discount represents a 14.0% discount off the

standard base fee and a 20.6% discount off the standard profit

share **

In dollar terms, the discount represents an annual savings on the

standard base fee of $11 million **

In periods where the individual portfolios’ performance exceeds

their benchmark, the profit shares and the fees as a percentage of

NAVs will increase


**Does not include Ellis Lake, Brevan Howard, or Perry Capital which are all in the process of being liquidated.

Absolute Return Total

# of Portfolios 22

Average NAV*

$4,719,559

Performance

(Net of Fees) -3.43%

Benchmark 4.01%

Alpha $

(Net of Fees)* -$351,135

Total Fees $102,343

Base Fees $77,678

Profit Share $24,664


NAV 2.17%

48

Absolute Return Investment Manager Fees FY 2016 ($ in Thousands)

$137,360 $138,931 $138,992

$149,764

$140,523

$117,236

$102,343

3.40%

2.76%

2.34% 2.54%

2.69%

2.28% 2.17%

$0

$20,000

$40,000

$60,000

$80,000

$100,000

$120,000

$140,000

0.00%

1.00%

2.00%

3.00%

4.00%

5.00%

6.00%

7.00%

8.00%

FY 09-10 FY 10-11 FY 11-12 FY 12-13 FY 13-14 FY 14-15 FY 15-16

Total Manager Fees and Fees as a % of Assets

Fees Fees as a % of Assets

49

Risk Parity Investment Manager Fees FY 2016 ($ in Thousands)

There were 6 Risk Parity portfolios in FY 2016 (5

external, 1 internal).

Bridgewater Optimal Portfolio has been added

for diversification and alpha generation.

PSERS pays a blended base fee of 59 basis points

on 12% target volatility to external managers.

The fee paid in FY 2016 increased by $5.5 million:

The mandate AUM has increased to 10% from

8% of Total Fund.

Allocation was made to active strategies with

expected alpha generation.

The mandate underperformed the benchmark in FY

2016 due to risk management overlay implemented

by external managers and having more exposure to

commodities vs the benchmark.

The internally managed Risk Parity portfolio has

grown to $2 billion as of June 2016 from $100

million in January 2013 (inception).

The internal portfolio has grown from 5% to

40% of the total Risk Parity mandate

*Average Month-end 12% Volatility Adjusted Exposure used to calculate Alpha $

Risk Parity External Internal Total


Average 12%

Volatility Adj

Exposure*

$3,121,587 $1,463,059 $4,584,646

Performance

(Net of Fees) -1.14% 3.44% 0.14%

Benchmark 5.13% 5.13% 5.13%

Alpha $

(Net of Fees)* -$204,108 -$24,667 -$228,774

Total Fees $18,428 $0 $18,428

Base Fees $18,428 $0 $18,428

Profit Share $0 $0 $0


Vol. Adj. Exposure 0.59% 0.00% 0.40%

50

Currency Hedging Investment Manager Fees FY 2016 ($ in Thousands)

Inception of currency mandate: June 2006 with one manager,

Pareto.

After stagnant relative performance combined with on-going

challenge in FX space for alpha generation, PSERS migrated

from an active currency overlay program to a passive risk-

reducing currency hedging program in FY 2015. The same

passive currency hedging continued in FY 2016.

The strategy change significantly reduced the management

fee from 6 bps to 1 bps on notional value in FY 2015.

Results in fee savings of $2 million on a $5 billion

notional hedged exposure.

The fee was negotiated to stabilize at 2 bps of notional

hedged notional exposure starting FY 2016.

Total fees are embedded within the Non-U.S. Equity

Investment Manager Fees category (slides 26 and 27).

*Average Month-end Exposure used to calculate Alpha $

Currency Hedging Everest

# of Portfolios 1

Average Notional

Exposure*

$4,888,981

Performance

(Net of Fees) 0.18%

Benchmark 0.30%

Alpha $

(Net of Fees)* -$5,939

Total Fees $832

Base Fees $832

Profit share $0


Vol. Adj. Exposure 0.02%

COMMONWEALTH OF PENNSYLVANIA

PUBLIC SCHOOL EMPLOYEES’ RETIREMENT SYSTEM

Investment Expenses Report

FY 2016

December 6, 2016

Thomas Bauer, John Kemp, Charles Spiller

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